424B5 1 d409576d424b5.htm PRELIMINARY PROSPECTUS SUPPLEMENT Preliminary Prospectus Supplement
Table of Contents

Filed Pursuant to Rule 424(b)(5)
Registration No. 333-220395

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

PRELIMINARY    PROSPECTUS    SUPPLEMENT    DATED    SEPTEMBER 8, 2017

TO PROSPECTUS DATED SEPTEMBER 8, 2017

 

LOGO

130,434,600 Class B Ordinary Shares, including

Class B Ordinary Shares represented by American Depositary Shares

Grupo Financiero Galicia S.A.

 

 

We, Grupo Financiero Galicia S.A., a sociedad anónima organized under the laws of the Republic of Argentina, are offering 130,434,600 Class B ordinary shares, par value Ps.1.00 per share, including Class B ordinary shares represented by American depositary shares (“ADSs”), each representing 10 of our Class B ordinary shares.

We are offering ADSs and Class B ordinary shares in a global offering, which consists of an international offering of ADSs in the United States and other countries outside Argentina, a concurrent offering of Class B ordinary shares in Argentina, and an offering of Class B ordinary shares in Argentina pursuant to preferential rights of our existing shareholders, as described below. The international offering of the ADSs in the United States and other countries outside Argentina is being underwritten by the underwriters named in this prospectus supplement. In the Argentine offering, Class B ordinary shares are being offered to investors in Argentina through the Argentine placement agent named in this prospectus supplement. The closings of the international offering and the Argentine offering are conditioned upon each other. This prospectus supplement is not complete without, and may not be utilized except in connection with, the accompanying prospectus, including any amendments or supplements thereto.

The ADSs are listed on the Nasdaq Capital Market (the “NASDAQ”) under the symbol “GGAL.” On September 7, 2017, the last reported sale price of the ADSs was US$47.60 per ADS on the NASDAQ. In addition, our Class B ordinary shares are listed on the Bolsas y Mercados Argentinos S.A. (the “BYMA”) and on the Mercado Abierto Electrónico S.A. (the “MAE”) under the symbol “GGAL.” On September 6, 2017, the last reported sale price of our Class B ordinary shares was Ps.82.05 per share on the BYMA.

Our existing shareholders have preferential rights, including preemptive rights and accretion rights, to subscribe to our capital increase resulting from the global offering. The preferential subscription period will expire on or about September 26, 2017. The offering pursuant to the preferential rights has not been and will not be registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”), and, accordingly, the preferential rights may not be offered to our shareholders in the United States and will not be made available to ADS holders. EBA Holding S.A., which owns 100% of our outstanding Class A shares, representing 21.6% of our capital stock, has transferred its preferential rights to our affiliate Galicia Valores S.A. (“Galicia Valores”) and, in order to facilitate the international offering, Galicia Valores, at the discretion of the underwriters, will exercise these rights to purchase Class B ordinary shares, including Class B ordinary shares represented by ADSs, to be sold in the international offering. In addition, the underwriters will be able to acquire from us Class B ordinary shares, if any, including Class B ordinary shares represented by ADSs, relating to preferential rights that are not exercised. See “Underwriting” in this prospectus supplement.

Investing in the ADSs or our Class B ordinary shares involves significant risks. You should carefully read “Item 3.D. Risk Factors” in our 2016 Form 20-F (as defined below), which is incorporated herein by reference as well as the information set forth under the caption “Risk Factors” beginning on page S-17 of this prospectus supplement, for more information.

 

 

 

    

Per ADS

      

Total

 

Public offering price

   US$        US$  

Underwriting discount (1)

   US$        US$  

Proceeds, before expenses, to us

   US$        US$  

 

(1) See “Underwriting” in this prospectus supplement.

The underwriters may also exercise their option to purchase up to an additional 19,565,190 Class B ordinary shares, including Class B ordinary shares represented by ADSs, from us, at the public offering price within 30 days after the date of the underwriting agreement. All of our existing shareholders will have preferential rights with respect to the Class B ordinary shares, including Class B ordinary shares represented by ADSs, offered pursuant to the underwriters’ option to purchase additional Class B ordinary shares, including Class B ordinary shares represented by ADSs; provided, however, that such preferential rights may not be offered to our shareholders in the United States and are not being made available to ADS holders. New shareholders will not have preferential rights with respect to the Class B ordinary shares, including Class B ordinary shares represented by ADSs, offered pursuant to the underwriters’ option to purchase additional Class B ordinary shares.

The offering of our Class B ordinary shares in Argentina has been approved by the Argentine securities regulator (Comisión Nacional de Valores, or the “CNV”). Neither the U.S. Securities and Exchange Commission (the “SEC”) nor any state securities regulators have approved or disapproved these securities, or determined if this prospectus supplement or the accompanying prospectus are truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the ADSs against payment in New York, New York on                 , 2017.

 

 

Joint Book-Running Managers

 

BofA Merrill Lynch   UBS Investment Bank

 

 

The date of this prospectus supplement is                 , 2017.


Table of Contents

TABLE OF CONTENTS

Prospectus Supplement

 

     Page  

ABOUT THIS PROSPECTUS SUPPLEMENT

     S-ii  

GENERAL INFORMATION

     S-ii  

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

     S-iv  

FORWARD-LOOKING STATEMENTS

     S-v  

PROSPECTUS SUPPLEMENT SUMMARY

     S-1  

SUMMARY FINANCIAL INFORMATION

     S-9  

THE OFFERING

     S-13  

RISK FACTORS

     S-17  

EXCHANGE RATES AND EXCHANGE CONTROLS

     S-24  

USE OF PROCEEDS

     S-28  

CAPITALIZATION

     S-29  

DILUTION

     S-31  

MARKET PRICE OF OUR CLASS B ORDINARY SHARES AND AMERICAN DEPOSITARY SHARES

     S-32  

SELECTED STATISTICAL INFORMATION

     S-34  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     S-47  

LEGAL PROCEEDINGS

     S-79  

ARGENTINE BANKING REGULATION

     S-80  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     S-84  

PRINCIPAL SHAREHOLDERS

     S-87  

TAXATION

     S-89  

UNDERWRITING

     S-99  

LEGAL MATTERS

     S-110  

Prospectus

 

     Page  

ABOUT THIS PROSPECTUS

     ii  

WHERE YOU CAN FIND MORE INFORMATION

     ii  

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

     ii  

FORWARD-LOOKING STATEMENTS

     iv  

ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES

     v  

SUMMARY

     1  

REASONS FOR THE OFFERING AND USE OF PROCEEDS

     3  

PROSPECTUS SUPPLEMENT

     3  

DESCRIPTION OF SHARE CAPITAL

     4  

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

     4  

DESCRIPTION OF RIGHTS TO PURCHASE CLASS B ORDINARY SHARES

     4  

PLAN OF DISTRIBUTION

     6  

LEGAL MATTERS

     7  

EXPERTS

     7  

 

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ABOUT THIS PROSPECTUS SUPPLEMENT

This prospectus supplement is a supplement to the accompanying prospectus. This prospectus supplement and the accompanying prospectus are parts of a registration statement that we filed with the SEC using a shelf registration process. Under this shelf registration process, we may sell from time to time an unspecified amount of any combination of securities described in the accompanying prospectus in one or more offers such as this offering. The accompanying prospectus provides you with a general description of the securities we may offer. This prospectus supplement provides you with specific information about the ADSs and the underlying Class B ordinary shares we are offering in the international offering. Both this prospectus supplement and the accompanying prospectus include important information about us and other information you should know before investing. Generally, when we refer only to the “prospectus,” we are referring to both parts combined, and when we refer to the “accompanying prospectus” we are referring to the accompanying prospectus.

This prospectus supplement also adds to, updates and changes information contained in the accompanying prospectus. To the extent the information in this prospectus supplement is different from that in the accompanying prospectus, you should rely on the information in this prospectus supplement. You should read both this prospectus supplement and the accompanying prospectus, together with the additional information described under the caption “Incorporation of Certain Information by Reference” in this prospectus supplement and the accompanying prospectus, before investing in the ADSs.

GENERAL INFORMATION

Grupo Financiero Galicia S.A. is a financial services holding company incorporated in Argentina as a sociedad anónima (stock corporation). As used in this prospectus supplement, references to “we,” “our,” “us” and “Grupo Galicia” are to Grupo Financiero Galicia S.A. and its consolidated subsidiaries, except where otherwise noted or the context otherwise requires. We maintain our financial books and records and publish our financial statements in pesos. In this prospectus supplement, references to “pesos” and “Ps.” are to Argentine pesos, and references to “U.S. dollars” and “US$” are to United States dollars and references to the “Central Bank” and the “BCRA” are to Banco Central de la República Argentina (the Argentine Central Bank).

This prospectus supplement contains conversions of certain peso amounts into U.S. dollars at specified exchange rates solely for the convenience of the reader. These conversions should not be construed as representations that the peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the exchange rate indicated. Unless otherwise indicated, U.S. dollar amounts that have been converted from pesos have been converted at an exchange rate of Ps.16.5985 per U.S. dollar, the exchange rate in effect on June 30, 2017, as published by the Argentine Central Bank.

The average balances of assets, including the related interest that is due, average shareholder’s equity and average loans, each as presented in this prospectus supplement are calculated on a daily basis for Banco de Galicia y Buenos Aires S.A., as well as for Tarjetas Regionales S.A. consolidated with its operating subsidiaries, and on a monthly basis for Grupo Galicia and its non-banking subsidiaries.

We are responsible for the information contained in this prospectus supplement, the accompanying prospectus and the documents incorporated by reference herein and therein. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We have not authorized any other person to provide you with different information. We are not making an offer to sell our Class B ordinary shares or ADSs in any jurisdiction where the offer or sale is not permitted. The information appearing in this prospectus supplement, the accompanying prospectus and the documents incorporated by reference herein and therein may only be accurate as of their respective dates. Our business, financial condition, results of operations and prospects may have changed since such dates. The information in the accompanying prospectus is supplemented by, and to the extent inconsistent therewith replaced and superseded by, the information in this prospectus supplement.

 

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Our principal executive offices are located at Tte. Gral. Juan D. Perón 430, 25th floor, City of Buenos Aires, Argentina, and our telephone number is +54 11-4343-7528. We maintain an internet site at www.gfgsa.com and our website is available in Spanish and English. Information contained on our website is not incorporated by reference in, and shall not be considered a part of, this prospectus supplement.

 

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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

The SEC allows us to “incorporate by reference” the information we submit to it, which means that we can disclose important information to you by referring you to those documents that are considered part of this prospectus supplement and the accompanying prospectus. Information contained in this prospectus supplement and the accompanying prospectus and information that we submit to the SEC in the future and incorporate by reference will automatically update and supersede the previously submitted information. We incorporate herein by reference the document listed below that we have furnished to the SEC:

 

    our annual report on Form 20-F for the fiscal year ended December 31, 2016 filed with the SEC on May 1, 2017 (our “2016 Form 20-F”); and

 

    our report on Form 6-K furnished to the SEC on September 6, 2017 containing our unaudited interim consolidated financial statements as of June 30, 2017 and for the six months ended June 30, 2017 and 2016 and a reconciliation to U.S. generally accepted accounting principles (“GAAP”) of certain financial information as of June 30, 2017 and for the six months ended June 30, 2017 and 2016.

As you read the above documents or other documents incorporated by reference, you may find inconsistencies in information from one document to another. If you find inconsistencies, you should rely on the statements made in this prospectus supplement or in the most recent document incorporated by reference herein.

To obtain copies of documents incorporated by reference herein or in the accompanying prospectus, see “Where You Can Find More Information” in the accompanying prospectus. In addition, upon written or oral request, we will provide to any person, at no cost to such person, including any beneficial owner to whom a copy of this prospectus supplement is delivered, a copy of any or all of the information that has been incorporated by reference in this prospectus supplement or the accompanying prospectus. You may make such a request by writing or telephoning us at the following address or telephone number:

Grupo Financiero Galicia S.A.

Tte. Gral. Juan D. Perón 430, 25th floor

Buenos Aires, Argentina

Tel: +54 11-4343-7528

 

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FORWARD-LOOKING STATEMENTS

This prospectus supplement, the accompanying prospectus and the documents incorporated herein and therein by reference, contain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus (including any statements regarding our future financial performance, business strategy, budgets, projected costs and macroeconomic or financial sector forecasts) are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of such words as “may,” “will,” “aim,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “continue” or other similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, no assurance can be provided with respect to these statements. Because these statements are subject to risks and uncertainties, actual results may differ materially and adversely from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially and adversely from those contemplated in such forward-looking statements include but are not limited to:

 

    changes in Argentine government regulations applicable to financial institutions, including tax regulations and changes in or failures to comply with banking or other regulations;

 

    changes in general political, legal, social or other conditions in Argentina, Latin America or abroad;

 

    changes in the macroeconomic situation at the regional, national or international levels, and the influence of these changes on the microeconomic conditions of the financial markets in Argentina;

 

    fluctuations in the Argentine rate of inflation;

 

    volatility of the peso and the exchange rates between the peso and foreign currencies;

 

    changes in capital markets in general that may affect policies or attitudes toward lending to Argentina or Argentine companies, including expected or unexpected turbulence or volatility in domestic or international financial markets;

 

    increased competition in the banking, financial services, credit card services, insurance, asset management, mutual funds and related industries, from both traditional players as well as financial technology (fintech) companies;

 

    changes in interest rates which may, among other things, adversely affect margins;

 

    the inability of any of Grupo Galicia’s businesses to sustain or improve their performance, or a loss of market share by any of Grupo Galicia’s businesses;

 

    a change in the credit cycle, increased borrower defaults and/or a decrease in the fees charged to clients;

 

    changes in the saving and consumption habits of its customers and other structural changes in the general demand for financial products;

 

    the ability of any of Grupo Galicia’s businesses to obtain additional debt or equity financing on attractive conditions or at all, which may limit their ability to fund existing operations and to finance new activities;

 

    technological changes and difficulties in any of Grupo Galicia’s businesses’ ability to implement new technologies; and

 

    other factors discussed under “Item 3.D. Risk Factors” in our 2016 Form 20-F, which is incorporated herein by reference.

 

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You should not place undue reliance on forward-looking statements, which speak only as of the date that they were made. Moreover, you should consider these cautionary statements in connection with any written or oral forward-looking statements that we may issue in the future. We do not undertake any obligation to release publicly any revisions to forward-looking statements after completion of this prospectus supplement to reflect later events or circumstances or to reflect the occurrence of unanticipated events. In light of the risks and uncertainties described above, the forward-looking events and circumstances discussed in this prospectus supplement and the documents incorporated by reference might not occur, and are not guarantees of future performance.

 

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PROSPECTUS SUPPLEMENT SUMMARY

The following summary highlights information contained elsewhere in this prospectus supplement or the documents incorporated by reference herein. This summary is not complete and does not contain all of the information you should consider before investing in our securities. You should read the entire prospectus supplement and the accompanying prospectus, including each of the documents incorporated by reference herein or therein, carefully, including the “Risk Factors” and “Forward-Looking Information” sections of this prospectus supplement, and “Item 3.D. Risk Factors” in our 2016 Form 20-F which is incorporated herein by reference.

Overview

Our Business

We are one of Argentina’s largest financial services groups with consolidated assets of Ps.253,173 million (US$15,252.7 million) as of June 30, 2017. As a holding company, we do not have operations of our own and conduct our business through our subsidiaries. Banco de Galicia y Buenos Aires S.A. (“Banco Galicia” or the “Bank”) is our main subsidiary and one of Argentina’s largest full-service banks. In addition, through Banco Galicia’s subsidiary Tarjetas Regionales S.A. (“Tarjetas Regionales”), we provide proprietary brand credit cards mainly outside the Buenos Aires region, and through our other subsidiaries we provide consumer finance services and insurance products throughout Argentina.

Banco Galicia is a leading provider of financial services in Argentina. According to information published by the Argentine Central Bank, as of May 31, 2017, Banco Galicia ranked second in terms of assets, deposits and loan portfolio within private-sector banks in Argentina. The Bank’s market share of private sector deposits and of loans to the private sector was 9.51% and 10.38%, respectively, as of June 30, 2017. As of June 30, 2017, Banco Galicia and its subsidiaries on a consolidated basis had total assets of Ps.250,395 million (US$15,085.3 million), total loans of Ps.159,923 million (US$9,634.7 million), total deposits of Ps.158,211 million (US$9,531.6 million), and its shareholders’ equity amounted to Ps.22,049 million (US$1,328.3 million).

Banco Galicia provides a full range of financial services through one of the most extensive and diversified distribution platforms among private-sector banks in Argentina. This distribution platform, as of June 30, 2017, was comprised of 279 full service banking branches and 1,870 ATMs and self-service terminals located throughout the country, as well as phone banking and internet banking platforms. Banco Galicia’s customer base was comprised of approximately 3.7 million customers, which were mostly individuals but also included more than 97,500 companies. Banco Galicia has a strong competitive position in retail banking, both with respect to individuals and small- and medium-sized companies. It also has a solid market position in providing service to large corporations and institutional investors.

The Bank’s Wholesale Banking Division provides products and services to medium and large businesses (i.e., those businesses with annual revenues above Ps.100 million) in the Corporate Banking, Mid-Sized Companies, Agricultural and Livestock sectors. This Division also provides foreign trade, capital markets and investment banking services. Within the Wholesale Banking Division, the Bank provides services targeted to the needs of these clients, including a Galicia Rural credit card for its clients in the agricultural and livestock sector and underwriting and placement agent services through its capital markets department. Through its Retail Banking Division, Banco Galicia provides products and services to individuals from across most income brackets, micro and small businesses (i.e., those businesses with annual revenues below Ps.100 million) and small retailers and professionals.

The companies devoted to the issuance of regional credit cards are subsidiaries of Banco Galicia through Tarjetas Regionales, which include Tarjeta Naranja S.A. and Tarjetas Cuyanas S.A. Tarjetas Regionales has a

 



 

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distinctive business model that we believe is well-suited to developing economies in Latin America and to the cultural background of its clients. Its business model of credit card issuance and related credit services focuses on the specific needs of lower- and lower-middle-income clients through personalized and attentive services using its extensive network of branches. Tarjetas Regionales’ client base is primarily located outside the Buenos Aires area, where its brands have a leading presence.

Tarjetas Regionales is the largest non-bank credit card issuer in Argentina and one of the largest in Latin America, in each case, based on the number of credit cards issued as of June 30, 2017. It is also one of the two largest merchant acquirers in Argentina and one of the largest credit card processors in Argentina. As of June 30, 2017, Tarjetas Regionales had more than 3.5 million active accounts, 9.5 million credit cards issued and approximately 250,000 affiliated merchants. Based on numbers from “ATACyC Cámara de Tarjetas de Créditos y Compra”, an Argentine industry group, we estimate that, as of the same date, Tarjetas Regionales’ market share of issued credit cards in Argentina was approximately 17.9%. As the credit card processor for all of its credit card operations, Tarjetas Regionales processed approximately 163 million transactions during 2016.

Our goal is to consolidate our position as one of Argentina’s leading comprehensive financial services providers while continuing to strengthen Banco Galicia’s position as one of Argentina’s leading banks. We seek to broaden and complement the operations and businesses of Banco Galicia, through holdings in companies and undertakings whose objectives are related to and/or can produce synergies with financial activities. Our non-banking subsidiaries operate in financial and related activities in which Banco Galicia either cannot participate or in which it can participate only on a limited basis due to restrictive banking regulations.

 



 

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The following table shows certain of Grupo Galicia’s key financial and operational statistics as of and for the periods indicated.

 

     As of and for the
Six Months Ended
June 30,
 
    

2017

    

2016

 
    

(in millions of pesos,

except percentages
and share data)

 

For the Fiscal Period

     

Net Income

     3,436        2,723  

Average Shares Outstanding (in millions)

     1,300        1,300  

Earnings per Share

     2.64        2.09  

At Period-End

     

Assets

     253,173        199,850  

Loans, Net

     159,873        109,334  

Deposits

     158,152        118,114  

Shareholders’ Equity

     23,549        17,058  

Shares Outstanding (in millions)

     1,300        1,300  

Book Value per Share

     18.11        13.12  

Selected Ratios (%)

     

Return on Average Shareholders’ Equity (1)

     31.35        34.60  

Return on Average Assets (2)

     3.09        3.38  

Financial Margin (3)

     12.79        11.36  

Shareholders’ Equity to Total Assets

     9.30        8.54  

Market Share (%) (4)

     

Deposits from Private Sector

     9.51        9.60  

Loans to the Private Sector

     10.38        9.53  

Exchange Rate (4)

     

Pesos per U.S. dollar

     16.5985        14.9200  

 

(1) Net income as a percentage of average shareholders’ equity.
(2) Net Income plus Minority Interests, divided by average Total Assets.
(3) Net Financial Income divided by average interest-earning assets.
(4) Source: Argentine Central Bank.

Our Competitive Strengths

We believe that the following characteristics enable us to maintain our competitiveness in the Argentine financial institutions sector and to continue to achieve our strategic objectives:

Nationwide Presence and Strong Brand Recognition. Grupo Galicia has a nationwide reach through a network, as of June 2017, of 581 branches strategically located in all of Argentina’s 23 provinces and in the Autonomous City of Buenos Aires, serving a consolidated total of 9,225,000 clients. This network is one of the most extensive and diversified networks in the financial system in Argentina and it allows Grupo Galicia to provide targeted customer service to various retail and corporate segments throughout the country. Our subsidiary Banco Galicia has operated as a bank in Argentina for over 110 years and as such has a long and established history as a leading private-banking institution in Argentina, and a well-established and highly-regarded reputation in the Argentine market. The Bank is particularly strongly represented among individual clients, the agricultural and small and medium enterprise segments, which are three of the sectors that we believe are well positioned for economic growth. Using the Net Promoter Score (“NPS”) management tool, an index

 



 

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generated by an external consultant in which several banks participate, Banco Galicia is able to measure its customers’ satisfaction and likelihood of being recommended by its customers to friends or colleagues. In 2016 using the NPS, Banco Galicia was ranked first in micro-and small-sized companies, with an 18% and a 14% NPS Index, respectively. In the micro-sized companies category, Banco Galicia was five percentage points above the second place company, and in the small-sized companies category it was two percentage points above the second place company.

We also believe that Tarjetas Regionales’ business has a leading position in the Argentine credit card market. Tarjetas Regionales has a nationwide reach through a network of 262 branches, customer service centers and other points of sale strategically located in most major Argentine cities. This extensive network allows Tarjetas Regionales to provide targeted customer service and form close relationships with its clients and the local merchants that accept its credit cards. We believe that Tarjetas Regionales’ extensive network and the close attention it pays to the needs of its clients in each particular location have allowed it to rank first in “top of mind” recognition (as determined by an external consultant) in every province in which it operates, except Buenos Aires.

Innovative, Specialized and Comprehensive Product Offerings. We offer our clients a broad range of financial services and solutions through our different subsidiaries. Banco Galicia offers a wide variety of innovative, specialized and comprehensive products both with respect to transactional banking and online banking. For example, with respect to transactional banking, Banco Galicia offers its clients a wide variety of products including deposit accounts, credit cards, debit cards and personal loans. With respect to online banking, the Bank’s website allows for customers to request both customary and specialized products, such as the payment of balances, obtaining information about credit cards with the assistance of an interactive advisor, obtaining information on promotions in an innovative benefits catalogue and obtaining information about products and services offered by the Bank. In addition, the Bank’s Galicia Servicios Móviles (mobile) business provides cell phone services that allow the Bank’s customers to inquire about their accounts, pay balances, subscribe for alerts and obtain information regarding their credit cards from their cell phones. The Bank continues to focus its efforts on developing its online banking and mobile capabilities so as to ensure a better experience for its customers.

At the same time, Tarjetas Regionales offers its clients a wide variety of innovative, specialized and comprehensive products, including the Tarjeta Naranja Clásica credit card, a Tarjeta Naranja credit card targeted at teenagers whose parents hold a Tarjeta Naranja credit card, the Tarjeta Naranja Visa, the Tarjeta Naranja MasterCard and the Tarjeta Naranja American Express credit cards, as well as the Tarjeta Nevada credit cards. Tarjetas Regionales additionally provides other products and services to its clients, including an e-commerce platform or Tienda Naranja, insurance policies, magazine subscriptions and mobile services. We believe these other products and services help us to develop and maintain customer contacts and brand recognition, which supports the distribution of our financial services. It also offers its clients various payment plans and discounts that are tailored for its particular customer base and the characteristics of each significant market in which Tarjetas Regionales operates. In addition, the sales force of Tarjetas Regionales adapts its marketing strategies based on the relative maturity of each market in order to offer products which best target the position of Tarjetas Regionales in the applicable market.

Conservative and Robust Credit Review Procedures at Banco Galicia. We have a thorough and conservative approach to overall credit risk which, as of June 30, 2017, resulted in only 1.7% of Banco Galicia’s private sector loans being classified as non-performing. On a consolidated basis (including Tarjetas Regionales), this ratio was 3.3% as of June 30, 2017. The Bank has created committees for each division and department which meet periodically to review and discuss credit procedures related to their applicable area. Due to the Bank’s strict credit review procedures, almost 72% of Banco Galicia’s portfolio is rated as low risk, while 22% is rated as medium low risk in the Bank’s own internal system. This internal system is divided into large company’s ratings, small and medium companies’ scorings, and individual scorings. Large companies’ ratings are based on

 



 

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the analysis of their financial statements, relating financial ratios with observed defaults through statistical analysis. Small and medium companies’ scorings are behavioral scorings based on the use of bank’s products by the company. Payments delays, intensity of use, average amounts and quantity of movements are some of the variables used to build these statistical models. Individual scorings are behavioral scorings based on the use of the bank’s products by the individual clients. Payments delays, use of credit cards, loans’ aging and quantity of movements are some of the variables used to build these statistical models. Furthermore, the Bank’s exposure to any single customer’s credit risk is limited with the Bank’s top ten loan accounts by an amount outstanding representing less than 8% of its total loan portfolio as of June 30, 2017.

Highly Trained, Motivated and Effective Work Force. Banco Galicia prides itself on its highly trained, motivated and effective work force and its overall positive work place culture. On average, its employees remain with the Bank for more than ten years, which demonstrates a low turn-over rate and the loyalty of its employees. Banco Galicia has implemented a corporate culture that is premised on providing the very best customer service to its clients in a motivated, positive and cooperative manner. This culture and work force have allowed the Bank to successfully interact with a wide variety of diverse clients and to tailor its products and solutions to address each customer segment’s needs.

Tarjetas Regionales has implemented a corporate culture that is premised on providing the very best service to the client. It has repeatedly been ranked as one of the best places to work in Argentina by the Argentine Great Place to Work Institute. Tarjetas Regionales interacts with both clients and merchants in a positive and cooperative manner and creates solutions to address each group’s needs. For example, Tarjetas Regionales, as an essential part of its distribution network, often sets up points of sale physically located in stores. Such arrangements have proven to be very effective in both marketing to existing and future clients and strengthening the relationships between Tarjetas Regionales and its merchant base.

Experienced Management Team. Banco Galicia’s senior management team has approximately 25 years of aggregate financial experience on average, while Tarjetas Regionales senior management team also has more than 25 years of aggregate financial, marketing and credit card industry experience. The diverse experience of both companies’ senior management has contributed significantly to their success in the recent past and is expected to play a significant role in their future.

Our Strategy

We are one of the leading companies offering comprehensive financial services in Argentina. Our principal objective is to create value for our shareholders, while also establishing sustainable management practices and considering our impact on the environment and society. To achieve this objective, we intend to continue to develop our presence in a range of financial services businesses and sectors, while at the same time continuing to consolidate Banco Galicia’s position as one of the principal banks in Argentina. Our strategy includes:

 

    Leveraging our established platform to provide aggregate value to our shareholders and clients. Through the creation of autonomous businesses, we have established a platform which we believe will allow us to leverage the experience and market knowledge of our different companies. We believe our platform provides us significant flexibility that we can use to react to market trends, respond rapidly to our client’s changing needs and facilitate our entry into new markets, products and distribution channels.

 

   

Obtain high participation levels in certain high growth businesses and take advantage of cross-selling opportunities. The Argentine Central Bank limits the capacity of financial entities to carry out investments in subsidiaries that perform activities which are considered “non-complementary”

 



 

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to the banking activity, such as insurance. Grupo Galicia, however, is not limited to investments in complementary businesses, and therefore is well positioned to take advantage of future growth potential in Argentina. Grupo Galicia has established, and in the future intends to establish, controlling participations in businesses that can cross-sell services to the clients of Banco Galicia and other companies.

 

    Maintain a favorable corporate structure. We intend to keep a favorable corporate structure that supports our different business lines. Our separate subsidiary structure helps us to distribute capital in an effective way, allowing us to minimize required capital investment in specific businesses, thereby freeing capital for investment and growth in other business lines. We also believe our corporate structure allows us to effectively assess sources of income and costs, facilitating analysis of our businesses’ patterns, and provides commercial effectiveness and efficiency in the use of resources.

 



 

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Organizational Structure

The following table illustrates our organizational structure as of June 30, 2017. Percentages indicate the ownership interests held. See “Recent Developments” below for pending and potential changes to the organizational structure.

 

 

LOGO

 



 

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Recent Developments

Compañía Financiera Argentina

On January 12, 2017, Grupo Galicia together with its main subsidiary, Banco Galicia, accepted an offer by Mr. Julio A. Fraomeni and Galeno Capital S.A.U. to sell 100% of Banco Galicia’s shares of Compañía Financiera Argentina S.A. (“CFA”) and Cobranzas y Servicios S.A. The closing of the transaction is subject to the fulfillment of the conditions contained in the offer, including the prior approval of the Argentine Central Bank, which are still pending as of the date of this prospectus supplement. Banco Galicia believes that the transaction will not have a material adverse consequence for its shareholders.

We believe the transaction will be beneficial for Banco Galicia because we expect it will: (i) improve Banco Galicia’s regulatory capital base by increasing the amount of ordinary capital Level 1, as calculated according to the BCRA’s regulatory framework, (ii) reallocate capital in order to provide credit support to priority segments, such as the commercial and investment portfolio, in line with the overall growth of the Argentine economy, and (iii) rebalance the credit exposure of Banco Galicia as between companies and individuals in accordance with acceptable risk levels, as determined by Banco Galicia’s board of directors.

Tarjetas Regionales

On August 9, 2017, Grupo Galicia accepted an irrevocable offer to sell shares of Tarjetas Regionales made by Mr. Juan Carlos Angulo, Mr. Miguel Angel Innocenti and Mr. José Luis Innocenti (the “Tarjetas Regionales Minority Purchase”). Each seller individually holds 5,658,315 Class A common shares, with five votes per share, and 10,508,299 Class B common shares, with one vote per share. The shares in the aggregate represent a total of 4.5% of the issued and outstanding share capital of Tarjetas Regionales. The total purchase price for the shares is US$36.8 million. We expect the purchase to close on or before January 5, 2018.

On August 10, 2017, the Boards of Directors of our subsidiaries Tarjeta Naranja and Tarjetas Cuyanas resolved to initiate the steps leading to a merger of both companies, by which Tarjetas Cuyanas would be absorbed into Tarjeta Naranja. On September 5, 2017, Tarjetas Naranja, as the absorbing company and Tarjetas Cuyanas, as the absorbed company, have signed a supplemental agreement to the merger.

On August 14, 2017, Grupo Galicia accepted an irrevocable offer to sell shares of Tarjetas Regionales made by Mr. Alejandro Pedro Angulo. The seller holds 5,658,315 Class A common shares, with five votes per share, and 10,508,299 Class B common shares, with one vote per share. The shares in the aggregate represent a total of 1.5% of the issued and outstanding share capital of Tarjetas Regionales. The total purchase price for the shares is US$12.25 million. We expect the purchase to close on or before January 5, 2018. This transaction complements that of August 10, 2017, and, taken together, the irrevocable offers to sell accepted by Grupo Galicia amount to a total of 6% of the issued and outstanding share capital of Tarjetas Regionales.

Net Investment S.A.

Net Investment S.A. was established in February 2000 as a holding company (87.5% owned by Grupo Galicia and 12.5% owned by Banco Galicia) whose purpose was to invest in and develop businesses related to technology, communications, internet connectivity and web contents. On May 16, 2017, Net Investment S.A. shareholders, Grupo Galicia and Banco Galicia, agreed to dissolve and liquidate the company.

 



 

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SUMMARY FINANCIAL INFORMATION

The historical financial information set forth below as of and for the years ended December 31, 2016, 2015 and 2014, as of June 30, 2017 and for the six months ended June 30, 2017 and 2016 has been derived from, and should be read together with, our consolidated financial statements incorporated herein by reference. For information concerning the preparation and presentation of our consolidated financial statements, see “Presentation of Financial Information” in our 2016 Form 20-F.

Our consolidated financial statements, from which the below information has been derived, are prepared in conformity with Central Bank rules, which differ in certain respects from U.S. GAAP. For a reconciliation of certain of our financial information to U.S. GAAP, see “Item 5.A. U.S. GAAP to Argentine Banking GAAP Reconciliation” in our 2016 Form 20-F and our Form 6-K furnished on September 6, 2017, each of which is incorporated herein by reference. See “Presentation of Financial Information” in our 2016 Form 20-F for a definition of Argentine Banking GAAP.

For the periods presented below, inflation adjustments have not been applied to our consolidated financial statements under Central Bank rules. In reviewing our financial information, investors should consider that, in recent years, there have been significant changes in the prevailing prices of certain inputs and economic indicators, such as salary cost, interest and exchange rates, however, local regulations have not required the application of inflation adjustments to our consolidated financial statements. For more information on inflation, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Inflation” in this prospectus supplement.

As a result of Central Bank requirements, we expect to prepare our consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”), with certain criteria of measurement and exposure specifically established by the Central Bank, commencing on January 1, 2018. Following our adoption of IFRS, our results of operation may differ significantly from previous amounts reported under Central Bank rules. For a reconciliation of certain of our financial information as of June 30, 2017 from Argentine Banking GAAP to IFRS, see Note 1.16 to our unaudited interim consolidated financial statements as of June 30, 2017 and for the six months ended June 30, 2017 and 2016, which are incorporated herein by reference to our Form 6-K furnished on September 6, 2017.

 

     As of and for the Six
Months Ended
June 30,
    As of and for the
Year Ended December 31,
 
    

2017

   

2016

   

2016

   

2015

   

2014

 
     (in millions of pesos, except as noted)  

Consolidated Income Statement in Accordance with Argentine Banking GAAP

          

Financial Income

     20,713       17,890       36,608       25,844       19,860  

Financial Expenses

     9,894       10,538       20,239       13,402       10,321  

Net Financial Income (1)

     10,819       7,352       16,369       12,442       9,539  

Provision for Losses on Loans and Other Receivables

     2,606       1,341       3,533       2,214       2,411  

Income before Taxes

     5,501       4,244       9,371       7,139       5,330  

Income Tax

     (2,065     (1,521     (3,353     (2,801     (1,992

Net Income

     3,436       2,723       6,018       4,338       3,338  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic Earnings per Share (in pesos)

     2.64       2.09       4.63       3.34       2.57  

Diluted Earnings per Share (in pesos)

     2.64       2.09       4.63       3.34       2.57  

Cash Dividends per Share (in pesos)

     —         —         0.18       0.12       0.08  

Book Value per Share (in pesos)

     18.11       13.12       15.66       11.14       7.88  

Amounts in Accordance with U.S. GAAP

      

Net Income

     3,627       3,336       6,037       4,336       3,504  

 



 

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     As of and for the Six
Months Ended
June 30,
     As of and for the
Year Ended December 31,
 
    

2017

    

2016

    

2016

    

2015

    

2014

 
     (in millions of pesos, except as noted)  

Basic and Diluted Earnings per Share (in pesos)

     2.79        2.57        4.64        3.33        2.70  

Book Value per Share (in pesos)

     17.91        13.27        15.45        11.06        7.88  

Financial Income

     19,382        17,241        34,549        24,252        18,166  

Financial Expenses

     9,374        10,207        19,410        12,826        9,663  

Net Financial Income

     10,008        7,034        15,139        11,426        8,503  

Provision for Losses on Loans and Other Receivables

     2,298        810        3,192        1,985        1,992  

Income Tax

     1,971        1,602        3,195        2,644        1,890  

Consolidated Balance Sheet in Accordance with Argentine Banking GAAP

        

Cash and Due from Banks

     33,334        28,439        61,166        30,835        16,959  

Government Securities, Net

     29,717        29,804        13,701        15,525        10,010  

Loans, Net

     159,873        109,334        137,452        98,345        66,608  

Total Assets

     253,173        199,850        242,251        161,748        107,314  

Deposits

     158,152        118,114        151,688        100,039        64,666  

Other Funds (2)

     71,472        64,678        70,210        47,224        32,402  

Total Shareholders’ Equity

     23,549        17,058        20,353        14,485        10,246  

Average Total Assets (3)

     240,193        170,794        184,395        122,684        92,510  

Percentage of Period-end Balance Sheet Items Denominated in U.S. dollars:

        

Loans, Net of Allowances

     19.93        10.69        12.77        3.26        4.20  

Total Assets

     23.43        16.85        27.56        16.88        12.11  

Deposits

     30.38        17.91        33.63        14.37        7.46  

Total Liabilities

     25.91        18.86        30.82        18.86        13.61  

Amounts in Accordance with U.S. GAAP

        

Trading Securities

     31,076        31,482        17,196        16,148        10,199  

Available-for-Sale Securities

     4,514        3,548        5,423        4,385        4,627  

Total Assets

     276,354        218,213        260,403        180,142        120,393  

Total Liabilities

     253,069        200,956        240,316        165,759        110,150  

Shareholders’ Equity

     23,285        17,257        20,087        14,383        10,243  

 



 

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     As of and for the
Six Months Ended
June 30,
    As of and for the
Year Ended December 31,
 
     2017     2016     2016     2015     2014  
     (in millions of pesos, except as noted)  

Selected Ratios in Accordance with Argentine Banking GAAP

          

Profitability and in Efficiency

          

Net Yield on Interest Earning Assets (4)

     14.02     12.45     13.26     14.18     14.42

Financial Margin (5)

     12.79       11.36       12.10       13.12       13.56  

Return on Average Assets (6)

     3.09       3.38       3.48       3.83       3.85  

Return on Average Shareholders’ Equity (7)

     31.35       34.60       35.03       35.54       39.07  

Net Income from Services as a Percentage of Operating Income (8)

     39.47       38.71       39.63       38.65       37.40  

Efficiency ratio (9)

     60.79       66.79       64.98       63.64       60.51  

Capital

          

Shareholders’ Equity as a Percentage of Total Assets

     9.30     8.54     8.40     8.96     9.55

Total Liabilities as a Multiple of Shareholders’ Equity

     9.75     10.72     10.90     10.17     9.47

Total Capital Ratio

     11.80     10.98     15.04     13.38     15.91

Liquidity

          

Cash and Due from Banks as a Percentage of Total Deposits

     21.08     24.08     40.32     30.82     26.23

Loans, Net as a Percentage of Total Assets

     63.15       54.71       56.74       60.80       62.07  

Credit Quality

      

Past Due Loans (10) as a Percentage of Total Loans

     2.61     2.66     2.43     2.46     2.61

Non-Accrual Loans (11) as a Percentage of Total Loans

     3.59       3.44       3.31       3.11       3.57  

Allowance for Loan Losses as a Percentage of Non-accrual Loans (12)

     100.02       103.26       100.06       112.41       105.78  

Net Charge-Offs (12) as a Percentage of Average Loans

     1.58       1.40       1.67       1.26       2.81  

Ratios in Accordance with U.S. GAAP

          

Capital

          

Shareholders’ Equity (deficit) as a Percentage of Total Assets

     8.43       7.91       7.71       7.98       8.51  

Total Liabilities as a Multiple of Total Shareholders’ Equity

     10.87       11.64       11.96x       11.52x       10.75x  

Liquidity

      

Loans, Net as a Percentage of Total Assets

     57.79       50.31       52.76     54.55     55.29

Credit Quality

          

Allowance for Loan Losses as a Percentage of Non-Accrual Loans

     125.95       110.20       128.53       135.35       129.78  

Inflation and Exchange Rate

          

Wholesale Inflation (13)

     7.62     26.81     34.59     12.65     28.27

Consumer Inflation (14)

     11.85     29.22     41.05     26.90     23.91

Exchange Rate Variation (15) (%)

     4.72       14.73       21.88       52.07       31.21  

CER (16)

     11.98       21.03       35.79       15.05       24.34  

The ratios disclosed above are considered significant by the management of Grupo Galicia despite of the fact that they are not a specific requirement of any GAAP.

 

(1)

Net financial income primarily represents income from interest on loans and other receivables resulting from financial brokerage plus net income from government and corporate debt securities, including gains

 



 

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  and losses, minus interest on deposits and other liabilities from financial intermediation. It also includes the CER adjustment.
(2) Primarily includes debt with merchants and liabilities with other banks and international entities.
(3) The average balances of assets, including the related interest that is due, are calculated on a daily basis for Banco Galicia, as well as for Tarjetas Regionales, and on a monthly basis for Grupo Financiero Galicia and its non-banking subsidiaries.
(4) Net interest earned divided by average interest-earning assets. For a description of net interest earned, see Item 4. “Information on the Company- Selected Statistical Information-Interest-Earning Assets-Net Yield on Interest-Earning Assets” in our 2016 Form 20-F, incorporated herein by reference.
(5) Financial margin represents net financial income divided by average interest-earning assets.
(6) Net income plus minority interest, divided by average total assets.
(7) Net income as a percentage of average shareholders’ equity.
(8) Operating income is defined as net financial income plus net income from services.
(9) Administrative expenses as a percentage of operating income as defined above.
(10) Past-due loans are defined as the aggregate principal amount of a loan plus any accrued interest that is due and payable for which either the principal or any interest payment is 91 days or more past due.
(11) Non-Accrual loans are defined as those loans in the categories of: (a) Consumer portfolio: “Medium Risk,” “High Risk,” “Uncollectible,” and “Uncollectible Due to Technical Reasons,” and (b) Commercial portfolio: “With problems,” Risk of Insolvency,” “Uncollectible,” and “Uncollectible Due to Technical Reasons.”
(12) Charge-offs minus bad debts recovered.
(13) As of December 31, 2015 as measured by the interannual change between October 2014 and October 2015 Wholesale Price Index (“WPI”), published by INDEC (as defined herein), because the measurement of this index was discontinued. In 2016 the measure was normalized.
(14) In 2015, annual variation of the Consumer Price Index (“CPI”) was calculated using the Consumer Price Index of the City of Buenos Aires, an alternative measure of inflation proposed by INDEC after it suspended its index.
(15) Change in the end-of-period exchange rate expressed in pesos per U.S. dollar.
(16) The “CER” is the “Coeficiente de Estabilización de Referencia,” an adjustment coefficient based on changes in the CPI.

 



 

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THE OFFERING

 

Issuer

Grupo Financiero Galicia S.A.

 

Global Offering

The global offering of 130,434,600 Class B ordinary shares, par value Ps.1.00 per share, including Class B ordinary shares represented by ADSs, consists of the international offering, the concurrent Argentine offering, and the preferential offering to our existing shareholders in Argentina.

 

  Class B ordinary shares in the international offering will be represented by             ADSs and are being offered through the underwriters in the United States and in other countries outside the United States and Argentina. Concurrently with the international offering,             Class B ordinary shares in the Argentine offering are being offered through the Argentine placement agent to investors in Argentina. The Class B ordinary shares being offered in the global offering may be reallocated between the international offering and the concurrent Argentine offering depending upon demand and related factors in the Argentine and international markets. The closings of the international offering and the Argentine offering are conditioned upon each other. The Company has included in the prospectus for the Argentine offering an indicative price range for the Class B ordinary shares to be sold in such offering of US$3.90 to US$5.60 per share (or Ps.67.14 to Ps.96.41 per share). Such range is non-binding and subject to change without notice.

 

  The Class B ordinary shares offered in the international offering, including Class B ordinary shares that may be offered pursuant to the underwriters’ option to purchase additional Class B ordinary shares, are (i) Class B ordinary shares that became available as a result of the decision of one of our shareholders not to exercise its preemptive and accretion rights to subscribe to our capital increase underlying the global offering and the transfer of such rights to Galicia Valores and (ii) additional Class B ordinary shares, if any, that the underwriters may acquire from us relating to preemptive and accretion rights not exercised by our other existing shareholders.

 

  The total amount of Class B ordinary shares to be sold in the international offering will depend on the amount of Class B ordinary shares that are subscribed by our shareholders through their exercise of preemptive and accretion rights. See “—Preferential Rights.” Class B ordinary shares subscribed for by our existing shareholders in the preferential rights offering will reduce the amount of Class B ordinary shares that may be offered in the international offering.

 

ADSs

Each ADS represents 10 Class B ordinary shares. The ADSs will be issued from time to time under the amended and restated deposit agreement, dated as of July 12, 2011, among us, The Bank of New York Mellon, as depositary (the “Depositary”), and all owners and holders from time to time of American Depositary Shares issued thereunder (the “Deposit Agreement”).

 



 

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Preferential Rights

Our existing shareholders have preemptive rights to subscribe for any capital increase by us, including in connection with the international offering and the concurrent Argentine offering, in a number sufficient to maintain their proportionate holdings in our total capital. In addition, our existing shareholders have accretion rights, which will permit them to subscribe for Class B ordinary shares that are not subscribed by other existing shareholders in the preemptive rights offering in proportion to the percentage of shares for which such subscribing existing shareholders have exercised their preemptive rights.

 

  The preferential rights have not been and will not be registered under the Securities Act and, accordingly the preferential rights may not be offered to our shareholders in the United States and will not be made available to holders of the ADSs. In order to facilitate the global offering, EBA Holding S.A., which owns 100% of our outstanding Class A shares representing 21.6% of our capital stock, has transferred its preferential rights to subscribe for Class B ordinary shares with respect to the capital increase to our affiliate Galicia Valores and, in order to facilitate the international offering, Galicia Valores, at the discretion of the underwriters, will exercise these rights to purchase Class B ordinary shares, including Class B ordinary shares represented by ADSs, to be sold by us in the international offering. Subject to closing conditions set forth in the underwriting agreement, the underwriters will exercise such rights in order to acquire the Class B ordinary shares, including Class B ordinary shares represented by ADSs, to be offered in the international offering and deposit such shares for delivery of ADSs. In addition, as described above, the underwriters will be able to acquire from us Class B ordinary shares, if any, including Class B ordinary shares represented by ADSs, relating to preferential rights that are not exercised and deposit such shares for delivery of ADSs. See “Underwriting” in this prospectus supplement.

 

  The preferential subscription period will expire on or about September 26, 2017.

 

  New shareholders will not have such preferential rights in respect of the capital increase represented by the international offering and the concurrent Argentine offering (including in respect of Class B ordinary shares underlying the ADSs that may be issued in connection with the underwriters’ option to purchase additional Class B ordinary shares, including Class B ordinary shares represented by ADSs) but may have such rights in respect of any subsequent capital increase.

 

Option to Purchase

The underwriters may also exercise their option to purchase up to an additional 19,565,190 Class B ordinary shares, including Class B ordinary shares represented by ADSs, from us, at the public offering

 



 

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price within 30 days after the date of the underwriting agreement. The amount of Class B ordinary shares that may be purchased pursuant to the underwriters’ option to purchase additional shares will depend on the amount of Class B ordinary shares that are purchased by holders of preferential rights. All of our existing shareholders will have preferential rights with respect to the Class B ordinary shares, including Class B ordinary shares represented by ADSs, offered pursuant to the underwriters’ option to purchase additional Class B ordinary shares, including Class B ordinary shares represented by ADSs; provided, however, that the preferential rights may not be offered to our shareholders in the United States and are not being made available to ADS holders. New shareholders will not have preferential rights with respect to the Class B ordinary shares, including Class B ordinary shares represented by ADSs, offered pursuant to the underwriters’ option to purchase additional Class B ordinary shares, including Class B ordinary shares represented by ADSs.

 

Lock-up

We have agreed, subject to certain exceptions, not to sell, offer or otherwise dispose of or transfer, directly or indirectly, any of our capital stock (including Class B ordinary shares) or any securities convertible into or exchangeable for our capital stock, during a period commencing on the date of this prospectus supplement and ending 90 days after execution of the underwriting agreement for the offering without the prior approval of the underwriters’ representatives. EBA Holding S.A. and our directors and executive officers have agreed to similar restrictions. For more information, see “Underwriting” in this prospectus supplement.

 

Listing

The ADSs are listed on the NASDAQ under the symbol “GGAL.” Our Class B ordinary shares are listed on the BYMA and the MAE under the symbol “GGAL.”

 

Class B Ordinary Shares Outstanding Immediately Prior to and Following the Offering

As of September 7, 2017, our issued and outstanding capital stock consisted of 281,221,650 Class A ordinary shares and 1,019,042,947 Class B ordinary shares, including Class B ordinary shares represented by ADSs. After giving effect to the global offering, assuming that we sell the total number of Class B ordinary shares set forth on the cover of this prospectus supplement, we will have 1,149,477,547 Class B ordinary shares outstanding (assuming the underwriters do not exercise their option to purchase additional shares) or 1,169,042,737 Class B ordinary shares outstanding (assuming the underwriters do exercise their option to purchase additional shares). See “Capitalization” in this prospectus supplement.

 

Voting Rights

Under our bylaws, each Class A ordinary share entitles the holder thereof to five votes at any meeting of our shareholders, except in certain matters, and Class B ordinary shares entitle the holders thereof

 



 

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to one vote per share. Subject to Argentine Corporate Law, our by-laws and the terms of the Deposit Agreement, holders of ADSs will be entitled to instruct the Depositary to vote or cause to be voted the number of shares represented by such ADSs. Non-Argentine entities that directly own Class B ordinary shares are required to register in Argentina in order to exercise voting rights. See “Item 10. Additional Information—Description of our Bylaws” in our 2016 Form 20-F, which is incorporated herein by reference.

 

Use of Proceeds

We intend to use the net proceeds from the offering to foster the evolution and growth of the businesses of our subsidiaries, to undertake an investment plan that contemplates new capital injections in corporations we control (including to provide additional capital to Banco Galicia, subject to any required approvals from shareholders or others), to finance the Tarjetas Regionales Minority Purchase, and to take advantage of possible investment opportunities.

 

Taxation

For a discussion of the material U.S. and Argentine tax considerations relating to an investment in our Class B ordinary shares or the ADSs, see “Taxation” in this prospectus supplement.

 

Charges of the Depositary

We will pay all transfer and other taxes and governmental charges arising solely from the issuance and deposit of the offered shares as ADSs. We will also pay all charges of the Depositary in connection with the initial deposit of Class B ordinary shares offered in the international offering. However, holders of ADSs will be required to pay any other transfer and other taxes and governmental charges and any other charges expressly provided in the Deposit Agreement to be for their account. See “Item 12.D. American Depositary Shares—Fees and Charges Applicable to ADS Holders” in our 2016 Form 20-F, which is incorporated herein by reference.

 

Mandatory Tender Offer

We are subject to the Argentine mandatory tender offer regime. See “Risk Factors—We are subject to the Argentine mandatory tender offer regime relating to change of control offers, which may affect your ability to purchase or sell our Class B ordinary shares.”

 

Risk Factors

Before deciding to invest in our Class B ordinary shares or the ADSs, you should carefully review Item 3. “Item 3.D. Risk Factors” in our 2016 Form 20-F, which is incorporated herein by reference. “Risk Factors” in this prospectus supplement and other information included and incorporated by reference in this prospectus supplement and the accompanying prospectus.

 



 

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RISK FACTORS

Investing in our Class B ordinary shares involves risks. In consultation with your own financial and legal advisors, you should consider carefully, among other matters, the supplemental risk factors set forth below as well as the risk factors discussed under the caption “Item 3.D. Risk Factors” in our 2016 Form 20-F, which is incorporated herein by reference, before deciding whether an investment in our Class B ordinary shares or the ADSs is suitable for you. See “Incorporation of Certain Information by Reference” in this prospectus supplement and in the accompanying prospectus. In general, investing in the securities of issuers in emerging market countries such as Argentina involves certain risks not typically associated with investing in securities of U.S. companies. The risks and uncertainties described below and in our 2016 Form 20-F are not the only risks and uncertainties that we face. Additional risks and uncertainties that are unknown to us or that we currently think are immaterial also may impair our business operations or the market price of our Class B ordinary shares or the ADSs. This prospectus supplement and the accompanying prospectus also contain forward-looking statements that involve risks. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including risks described in this prospectus supplement, the accompanying prospectus and the documents incorporated by reference herein and therein.

Additional Risks Related to Argentina

Volatility in the regulatory environment applicable in Argentina could have a material and adverse effect on Argentina’s economy in general, and our financial position, specifically.

From time to time, the Argentine government has enacted several laws amending the regulatory framework applicable in Argentina for the purposes of stimulating the economy, some of which have had adverse effects on our business and our main subsidiary, Banco Galicia. As an example, in 2012, the Argentine Central Bank passed a number of regulations that required financial entities, including Banco Galicia, to provide loans with interest rates that were below the then-prevailing market interest rates and, in 2014, the Argentine Central Bank passed new regulations limiting the interest rates and fees that could be charged by financial entities for certain types of loans to individuals. Overall, between 2001 and 2015, several new regulations were enacted, mainly to regulate the foreign exchange market, minimum capital and liquidity requirements, lending activity, limits to interest rates, and dividend distribution by financial entities. We expect that additional developments in the next few years, such as the adoption in Argentina of the regulatory framework on bank capital adequacy, stress testing and market liquidity risk known as “Basel III”, established by the Basel Committee on Banking Supervision in December, 2010, will continue to have an impact on Grupo Galicia and Banco Galicia.

Moreover, since January 2016, Communique “A” 5827 of the Argentine Central Bank (as implemented), established additional capital margins known as capital conservation margin and counter-cyclical margin. The capital conservation margin is 2.5% of the amount of weighted-risk assets (“RWA”), and for entities deemed financial entities of systemic importance, such as Banco Galicia, the margin is an additional 3.5% of RWA. The counter-cyclical margin must be within a range of 0% to 2.5% of RWA, and was established at 0% on April 1, 2016, by Communique “A” 5938 of the Argentine Central Bank. The Argentine Central Bank may determine to increase or decrease this latter margin when it deems the systemic risk to have heightened or diminished.

Since June 2012, the Argentine Central Bank has established a regime to finance productive investment by means of which certain financial entities, including Banco Galicia, are required to assign a portion of their deposits in pesos from the non-financial private sector to finance investment projects at a fixed interest rate determined by the Argentine Central Bank. These projects may include (i) the acquisition of capital assets; (ii) plant construction; (iii) asset commercialization or the acquisition of real estate (subject in this last case to additional requirements). The Argentine Central Bank extended the validity of this regime for years 2013, 2014, 2015 and 2016. At this time, the Argentine Central Bank has kept the regime and set an applicable minimum of 18% of the average deposits in pesos for the non-financial private sector for the second semester of 2017.

 

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Although the current administration has eliminated some of these regulations, political and social pressures could inhibit the Argentine government’s implementation of policies designed to generate growth and enhance consumer and investor confidence.

In addition, judicial liquidation or bankruptcy procedures of a financial entity would be subject to Argentine Central Bank intervention, which may limit the available resources and extend the duration of procedures. Special rules that regulate the subordination of Argentine financial institutions’ debt provide holders of deposits in pesos and foreign currency a general priority right to obtain repayment of their deposits, with priority over most other creditors, which may negatively affect certain of our shareholders in case of judicial liquidation or bankruptcy.

No assurance can be provided that future regulations, and especially those related to the financial system, will not materially and adversely affect the assets, revenues and operating income of private sector companies, including Grupo Galicia, the rights of holders of securities issued by those entities, or the value of those securities. The lack of regulatory foresight could impose significant limitations on activities of the financial system and our business, and would generate uncertainty regarding our future financial position and result of operations and trading price for our Class B ordinary shares and ADSs.

A potential additional devaluation of the peso may hinder or potentially prevent us from being able to honor our foreign currency denominated obligations.

If the peso depreciated significantly against the U.S. dollar, as has recently occurred and which could occur again in the future, it could have an adverse effect on the ability of Argentine companies to make timely payments on their debts denominated in or indexed or otherwise connected to a foreign currency, generate very high inflation rates, reduce real salaries significantly, and have an adverse effect on companies focused on the domestic market, such as public utilities and the financial industry. Such a potential devaluation could also adversely affect the Argentine government’s capacity to honor its foreign debt, with adverse consequences for Grupo Galicia’s and Banco Galicia’s businesses, which could affect Grupo Galicia’s capacity to meet obligations denominated in a foreign currency which, in turn, could have a material adverse effect on the trading prices for Grupo Galicia’s ADSs.

At the same time, a significant appreciation of the peso against the U.S. dollar may increase risk for the Argentine economy if it results in a reduction of exports due to loss of external competitiveness, which could adversely impact the Argentine economy, employment levels, and government income.

At the end of 2014, the exchange rate was Ps.8.552 per U.S. dollar, and remained relatively stable through the end of 2015. Following the removal of various restrictions on the foreign exchange market, in December 2015, the peso devaluated 52%, reaching an exchange rate of Ps.13.005 per U.S. dollar as of December 31, 2015. The peso continued to fluctuate during 2016, reaching Ps.15.850 per U.S. dollar as of December 31, 2016. During 2017, the peso accumulated a depreciation of 11% as of the month of July, which against reduced inflation rates had as a result an improvement in competitiveness. In particular, the real multilateral exchange rate returned to levels observed in September, 2016, recovering from losses during the beginning of 2017 in a context of elevated inflation and relative foreign exchange stability.

Any further depreciation of the peso may have an adverse impact on the business of Grupo Galicia and on the trading prices of the ADSs.

Additional Risk Factors Relating to the Argentine Financial System

We operate in a highly regulated environment and our operations are subject to the rules and measures enacted by different regulatory entities.

Financial institutions in Argentina are subject to significant regulatory oversight, including by the Argentine Central Bank, the CNV, the UIF (the Unidad de Informacion Financiera or financial information

 

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unit), and the Superintendency of Financial and Exchange Entities. These entities may sanction Grupo Galicia or Banco Galicia if they determine there has been a violation of the applicable regulations, and in some cases can extend those sanctions to members of our board, among others.

The absence of a stable regulatory environment or the imposition of measures that may affect Argentine financial entities’ profitability and limit their possibility to hedge positions against currency fluctuations may significantly restrict their decisions and adversely affect their operation, and hence, their economic and financial situation. This includes Grupo Galicia and Banco Galicia.

In addition to the regulations of the financial sector, Grupo Galicia and Banco Galicia are subjected to an extensive regulatory framework at a national, provincial and municipal level, which includes laws and regulations related to labor matters, social security, health, consumer defense, environment, competition and price controls.

These and other possible future regulatory measures may adversely affect our business, and would generate uncertainty regarding our future financial position and result of operations and trading price for our ADSs.

Risks Related to the ADSs and the International Offering

We will have broad discretion in the use of proceeds from the global offering and may use them in ways that may not enhance our operating results or the price of the ADSs.

We will have broad discretion over the use of proceeds from the global offering. You may not agree with our decisions, and our use of the proceeds may not yield a favorable return, if any, on your investment. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of the global offering. If we do not invest or apply the proceeds of the global offering in ways that improve our operating results, we may fail to achieve expected financial results, which could cause the price of the ADSs to decline. See “Use of Proceeds.”

Investors may not be able to effect service of process within the United States, and enforcement of judgments against us and our respective directors and executive officers may be difficult.

We are a publicly held stock corporation (sociedad anónima) organized under the laws of Argentina. Most of our directors, senior managers and assets are located in Argentina. As a result, it may not be possible for investors to effect service of process within the United States (and generally outside Argentina) upon us or our directors and senior management, or to enforce against us or them judgments obtained in United States (or other non-Argentine) courts predicated upon the civil liability provisions of the U.S. federal securities laws or the securities laws of countries other than Argentina. There is no certainty that Argentine courts will enforce, to the same extent and in as timely a manner as a U.S. or foreign court, an action predicated solely upon the civil liability provisions of the U.S. federal securities laws or other foreign regulations brought against such persons or against us.

You may not receive distributions on the Class B ordinary shares represented by the ADSs or any value for them if it is illegal or impractical to make them available to holders of ADSs.

The Depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on the Class B ordinary shares after deducting its fees and expenses. You will receive these distributions in proportion to the number of the Class B ordinary shares your ADSs represent. However, in accordance with the limitations set forth in the Deposit Agreement, it may be unlawful or not feasible to make a distribution available to holders of ADSs. We have no obligation to take any other action to permit the distribution of the

 

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ADSs, Class B ordinary shares, rights or anything else to holders of the ADSs. This means that you may not receive the distributions we make on the Class B ordinary shares or any value from them if it is unlawful or not feasible to make them available to you. These restrictions may have a material adverse effect on the value of your ADSs.

Substantial sales of our Class B ordinary shares or the ADSs after the global offering could cause the price of the Class B ordinary shares or of the ADSs to decrease.

We have agreed, subject to certain exceptions, not to sell, offer or otherwise dispose, any Class B ordinary shares or ADSs during a period commencing on the date of this prospectus supplement and ending 90 days after execution of the underwriting agreement for the offering without the prior approval of the representatives of the underwriters. EBA Holding S.A. and our directors and executive officers have agreed to similar restrictions. After these lock-up agreements expire, these securities will be eligible for sale in the public market. The market price of our Class B ordinary shares or the ADSs could drop significantly if we or these persons sell our or their Class B ordinary shares or ADSs or the market perceives that we or they intend to sell them.

Foreign exchange risks may adversely affect our results, and the U.S. dollar value of dividends payable to ADS holders.

Trading of our Class B ordinary shares underlying the ADSs is conducted in pesos. Our Depositary will receive cash distributions that we make with respect to the Class B ordinary shares underlying the ADSs in pesos. The Depositary will convert such pesos to U.S. dollars at the then prevailing exchange rate to make dividend and other distribution payments in respect of ADSs. If the peso depreciates against the U.S. dollar, the value of the ADSs and any U.S. dollar distributions ADS holders receive will decrease.

Future preemptive and accretion rights may be unavailable to ADS holders.

Argentine securities laws require that whenever we issue new ordinary shares for cash, we are required by law to grant preemptive and accretion rights to all holders of our ordinary shares (including to the Depositary), giving them the right to purchase a sufficient number of ordinary shares to maintain their existing ownership percentage and to subscribe for any new ordinary shares that are not subscribed for by other shareholders, in proportion with the percentage of ordinary shares for which the subscribing shareholder has exercised rights. We have elected not to offer ordinary shares to holders of ADSs pursuant to preemptive and accretion rights granted to our shareholders in connection with the rights offering and we may make a similar election in connection with any future issuance of ordinary shares. We intend to evaluate at the time of any future rights offering the costs and potential liabilities associated with any such offering including with respect to the filing of a registration statement, as well as the indirect benefits to us of enabling holders of ADSs to exercise rights and any other factors that we consider appropriate at the time, and then make a decision as to whether to file such registration statement.

To the extent holders of ADSs are unable to exercise preemptive rights issued in the future, the Depositary will, in accordance with the terms and conditions set forth in the Deposit Agreement, attempt to sell such holders’ preemptive rights and distribute the resulting net proceeds if a secondary market for such rights exists and a premium can be recognized over the cost of any such sale. If such rights cannot be sold, they will expire and holders of ADSs will not realize any value from the grant of such preemptive rights. In any such case, such holder’s equity interest in our company would be diluted proportionately.

You may suffer dilution, and trading prices for our Class B ordinary shares or the ADSs may decline.

Purchasers of our Class B ordinary shares or the ADSs offered by this prospectus may suffer immediate and substantial dilution of their investment to the extent the price per Class B ordinary share or ADS offered hereunder is higher than the net tangible book value per Class B ordinary share or ADS, as applicable.

 

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Additionally, we may issue additional shares of our capital stock for financing future acquisitions or new projects or for other general corporate purposes. Any such issuance could result in a dilution of your ownership stake or the perception of any such issuances could have an adverse impact on the market price of the Class B ordinary shares or ADSs.

Your voting rights with respect to the ADSs are limited by the terms of the Deposit Agreement.

Holders may exercise voting rights with respect to the Class B ordinary shares underlying ADSs only in accordance with the provisions of the Deposit Agreement. There are no provisions under Argentine law or under our bylaws that limit ADS holders’ ability to exercise their voting rights through the Depositary with respect to the underlying Class B ordinary shares, except if the depositary is a foreign entity and it is not registered with the Inspección General de Justicia (Superintendency of Legal Entities, or the “IGJ”), although in this case, the Depositary is registered with the IGJ. There are practical limitations upon the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with such holders. For example, Argentine Law No. 26,831 requires us to notify our shareholders by publication in certain official and private newspapers at least 20 and no more than 45 days in advance of any shareholders’ meeting. ADS holders will not receive any notice of a shareholders’ meeting directly from us. In accordance with the Deposit Agreement, we will provide the notice to the Depositary, which will in turn, if we so request, as soon as practicable thereafter provide to each ADS holder:

 

    the notice of such meeting;

 

    voting instruction forms; and

 

    a statement as to the manner in which instructions may be given by holders.

To exercise their voting rights, ADS holders must instruct the Depositary on how to vote the underlying shares. Because of the additional procedural step involving the Depositary, the process for exercising voting rights will take longer for ADS holders than for holders of Class B ordinary shares.

We are subject to the Argentine mandatory tender offer regime relating to change of control offers, which may affect your ability to purchase or sell our Class B ordinary shares.

Under the Argentine mandatory tender offer regime, investors who intend to purchase for cash, either directly or indirectly, individually or collectively, either in one transaction or in a series of successive transactions within a period of 90 consecutive days, a number of our voting shares or other securities or voting rights, that directly or indirectly, when combined with such investor’s existing holdings of our securities, may entitle such person to subscribe for or purchase, a significant holding (i.e., more than 35% or more than 50%, as applicable) in our voting capital stock or our votes, must launch a mandatory tender offer (“OPA”).

The obligation to launch an OPA is not applicable in certain circumstances, including cases where the acquisition does not imply the acquisition of control over us. The regulations specify whether such investor must launch the OPA with respect to some or all of the outstanding voting shares or other securities which may, directly or indirectly, entitle holders to voting rights, according to the capital stock and voting percentage intended to be obtained. The price per share to be offered will be the fair market value of the shares as determined by the bidder, in compliance with certain criteria set forth by the CNV rules (as implemented through Resolution 622/2013, as amended, the “CNV Rules”), which may be challenged by the CNV and any offeree shareholder.

Our shareholders may be subject to liability for certain votes of their securities.

Our shareholders are not liable for our obligations. Shareholders’ liability is limited to the payment of the shares for which they subscribe. However, shareholders who have a conflict of interest with us and do not

 

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abstain from voting may be held liable for damages to us. Also, shareholders who willfully or negligently vote in favor of a resolution that is subsequently declared void by a court as contrary to Argentine law or our bylaws may be held liable for damages to us or to third parties, including other shareholders, resulting from such resolutions.

The tax treatment of capital gains received by non-resident holders is uncertain under Argentine law.

Capital gains derived by non-Argentine resident individuals or non-Argentine entities from the sale, exchange or other disposition of equity interests in Argentine companies are subject to income tax at a rate of 15% either (i) on the net amount resulting from deducting from the sale price the cost and the expenses incurred in Argentina necessary for obtaining, maintaining and conserving this asset, as well as any deductions permitted by the Argentine income tax law or (ii) on the presumed net income determined under the Argentine income tax law (i.e., 90%), which results in an effective rate of 13.5% of the sale price.

On July 18, 2017, General Resolution No. 4094-E was published, which regulated the determination and payment of the capital gains withholding tax from the sale of shares in which non-residents from Argentina participate. It established that (i) in case securities are sold by a non-resident of Argentina through a stock market or exchange authorized by the CNV, the clearing and settlement agent that participates on behalf of the non-resident seller shall act as withholding agent of the capital gains tax; (ii) in case the securities are sold by a non-resident of Argentina to an Argentine resident, but the sale is not carried out through a stock market or exchange authorized by the CNV, the acquirer shall act as withholding agent of the capital gains tax; and (iii) in case of operations in which both seller and buyer are non-residents of Argentina, the acquirer of the securities shall be charged with paying the capital gains tax. The application of General Resolution No. 4094-E has been suspended by General Resolution No. 4095-E, for a period of 180 calendar days counted from its original publication day (July 18, 2017), based on a need to implement the respective systems and information processes. Because of statements from government officials that the suspension was decided in order to assess the impact of the new measures, it is unclear if at the end of the suspension period General Resolution No. 4094-E will be applied in its current form, or if it will be modified, replaced, or left without effect.

According to Argentine Income Tax Law No. 20,628, non-residents are subject to Argentine capital gains tax only with respect to those gains obtained from Argentine source. With regard to the ADSs or Class B ordinary shares, at the time of this prospectus supplement, there are no administrative or judicial decisions clarifying whether the disposal of ADSs should be regarded as Argentine source or not. As a consequence, if it were decided that capital gains from the disposal of ADSs should be regarded as Argentine source, the gains obtained by a non-resident from the disposal of ADSs should be subject to Argentine capital gains tax. Notwithstanding the foregoing, there is support for the position that any such disposal should not result in Argentine source gains. Holders of ADSs are advised to consult with their own tax advisors with regards to the tax consequences that may arise from holding ADSs.

Holders of our ordinary shares and the ADSs may not receive any dividends if we are unable to obtain dividends from Banco Galicia.

Dividend distributions by our subsidiary Banco Galicia are subject to prior approval by the Superintendency of Financial and Exchange Entities (Superintendencia de Entidades Financieras y Cambiarias, or “Superintendency”). The Superintendency will review the ability of a financial institution to distribute dividends upon request for approval. The Superintendency may authorize the distribution of dividends if during the month preceding the request, the following requirements were met: the financial institution (i) is not subject to a liquidation procedure; (ii) is not receiving financial assistance from the Central Bank; (iii) is in compliance with its reporting obligations with the Central Bank; (iv) is in compliance with minimum capital and cash requirements, among others; and (v) the financial institution is not subject to any significant fines—exceeding 25% of the last RPC informed by such financial institution—, debarment, suspension, revocation or prohibition imposed in the last five years by the Central Bank, the UIF, the CNV, and/or the National Superintendency of

 

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Insurance (Superintendencia de Seguros de la Nación), except when such financial institution has implemented corrective measures that are satisfactory to the Superintendency (such corrective measures would also be brought to the attention of the regulatory body that originally imposed the sanction). The Superintendency also takes into consideration information that it receives from, and/or sanctions imposed by, equivalent foreign agencies or authorities. When weighing the significance of the sanctions, the Superintendency takes into account the type of sanctions, the underlying reason for such sanctions and the amount of sanctions imposed on the financial institution. Additionally, the Superintendency factors in the degree of participation in the events leading up to the sanction, the economic effects of the violation, the degree of damage caused to third parties, the economic benefit that the sanctioned party received from the violation, the sanctioned party’s operating volume, its liability and the title or function of the persons involved.

Although distribution of dividends by Banco Galicia has been authorized by the Central Bank in the past, it is possible that in the future the Central Bank may not continue to grant Banco Galicia the authorization to distribute dividends approved by its shareholders at the annual ordinary shareholders’ meeting or such authorization may not be for the full amount of distributable dividends.

We and one or more of our subsidiaries could be treated as passive foreign investment companies for U.S. federal income tax purposes, which could result in adverse U.S. federal income tax consequences for U.S. investors in our ADSs or Class B ordinary shares.

Based on estimates of our gross income and gross assets, the nature of our business, and our current business plans, we believe that we should not be treated as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for the current taxable year, and we do not anticipate becoming a PFIC in the future. However, the determination of whether we are a PFIC is made on an annual basis and will depend on the composition and nature of our income and the composition, nature and value of our assets from time to time. In addition, the law regarding the determination of whether we are a PFIC is unclear. As a result, there can be no assurance that we will not be treated as a PFIC for the current taxable year or that we will not become one in the future. If we are treated as a PFIC, then one or more of our subsidiaries may also be treated as PFICs. Such characterization could result in adverse U.S. tax consequences to you if you are a U.S. investor, which include being required to pay tax at rates applicable to ordinary income rather than capital gains on sales of our ADSs or Class B ordinary shares and being subject to an interest charge on such gain to the extent attributable to taxable years prior to the year of sale and, in the case of one or more of our subsidiaries being treated as a PFIC, incurring a tax liability without a corresponding distribution of income. Although certain elections may be available to mitigate these consequences if we or one or more of our subsidiaries is treated as a PFIC for U.S. federal income tax purposes, we cannot guarantee that such elections will be available to you. See “Taxation—Material United States Federal Income Tax Consequences—Passive Foreign Investment Company Considerations” in this prospectus supplement.

 

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EXCHANGE RATES AND EXCHANGE CONTROLS

From 1991 until the end of 2001, Argentine Law No. 23,928 (the “Convertibility Law”) established a regime under which the Central Bank was obliged to sell U.S. dollars at a fixed rate of one peso per U.S. dollar and had to maintain a reserve in foreign currencies, gold and other instruments in an aggregate amount at least equal to the monetary base, which consists of currency in circulation and peso deposits of the financial sector with the Central Bank.

On January 6, 2002, the Argentine Congress enacted Law No. 25,561 (as amended and supplemented, the “Public Emergency Law”), formally ending the regime of the Convertibility Law, abandoning over ten years of U.S. dollar-peso parity and eliminating the Central Bank’s reserves requirement mentioned above.

The Public Emergency Law, which has been extended on an annual basis and is in effect until December 31, 2017, granted the Argentine government the power to set the exchange rate between the peso and foreign currencies and to issue regulations related to the foreign exchange market. Following a brief period during which the Argentine government established a temporary dual exchange rate system, pursuant to the Public Emergency Law, the peso was allowed to float freely against other currencies beginning in February 2002. However, the Central Bank has had the power to intervene in the exchange rate market by buying and selling foreign currency for its own account, a practice in which it engaged on a regular basis. In recent years and particularly since 2011, the Argentine government has increased controls on exchange rates and the transfer of funds into and out of Argentina.

With the tightening of exchange controls beginning in late 2011, in particular with the introduction of measures that allowed limited access to foreign currency by private companies and individuals (such as requiring authorization from tax authorities to access the foreign currency exchange market), the implied exchange rate, as reflected in the quotations for Argentine securities that trade in foreign markets, compared to the corresponding quotations in the local market, increased significantly over the official exchange rate. Most foreign exchange restrictions were lifted in December 2015, May 2016 and August 2016, reestablishing Argentine residents’ rights to purchase and remit outside of Argentina foreign currency with no maximum amount and without specific allocation or the need to obtain prior approval. As a result, the substantial spread between the official exchange rate and the implicit exchange rate derived from securities transactions has substantially decreased. On December 30, 2016, the Central Bank further eased foreign exchange controls by eliminating the mandatory repatriation of proceeds from the export of services. On January 4, 2017, the Ministry of the Treasury reduced to zero days the mandatory minimum stay period applicable to (i) the inflow of funds to the local foreign exchange market arising from certain foreign indebtedness and (ii) any entry of funds to the foreign exchange market by non-residents. Continuing its normalization process, the Argentine Central Bank established through Communiqué “A” 6244 an integral reorganization of foreign exchange rules, eliminating all restrictions for access to the foreign exchange market for both inbound and outbound transfers in any currency. This reorganization became effective July 1, 2017.

After several years of relatively moderate variations in the nominal exchange rate, in 2012 the peso depreciated 14% with respect to the U.S. dollar. This was followed in 2013 by a 33% depreciation, in 2014 by a 31% depreciation, including a loss of 24% in the month of January, and in 2015 by a 52% depreciation, primarily after the lifting of restrictions in the month of December and a 22% depreciation in 2016. From January 1, 2017 through August 31, 2017, the peso depreciated 10% with respect to the U.S. dollar. We cannot assure you that the peso will not continue to depreciate or that it will appreciate again in the future.

Unless otherwise indicated, U.S. dollar amounts that have been converted from pesos have been converted at an exchange rate of Ps.16.5985 per U.S. dollar, the exchange rate in effect on June 30, 2017, as published by the Central Bank.

The following table sets forth the annual high, low, average and period-end exchange rates for the periods indicated, expressed in pesos per U.S. dollar and not adjusted for inflation.

 

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The Federal Reserve Bank of New York does not report a noon buying rate for pesos.

 

    

High

    

Low

    

Average (1)

    

Period End

 

Year ended December 31,

           

2012

     4.9173        4.3048        4.5515        4.9173  

2013

     6.5180        4.9228        5.4789        6.5180  

2014

     8.5555        6.5430        8.1188        8.5520  

2015

     13.7633        8.5537        9.2689        13.0050  

2016

     16.0392        13.0692        14.7794        15.8502  

Month

           

January 2017

     16.0533        15.8083        15.9065        15.9117  

February 2017

     15.8350        15.3675        15.5983        15.4550  

March 2017

     15.6687        15.3818        15.5237        15.3818  

April 2017

     15.4532        15.1742        15.3600        15.4268  

May 2017

     16.1420        15.2687        15.6981        16.1420  

June 2017

     16.5985        15.8510        16.1166        16.5985  

July 2017

     17.7642        16.6817        17.1690        17.6700  

August 2017

     17.7833        17.0583        17.4165        17.3650  

September 2017 (2)

     17.2583        17.2165        17.2345        17.2165  

 

Notes:—

(1) Based on daily closing price.
(2) Through September 7, 2017.

Source: Central Bank

Foreign Exchange Market

In January 2002, through the Public Emergency Law, Argentina declared a public emergency situation in respect of its social, economic, administrative, financial and foreign exchange matters and authorized the Argentine Executive Branch to establish a system to determine the foreign exchange rate between the Argentine peso and foreign currencies and to issue foreign exchange-related rules and regulations. Within this context, on February 8, 2002, through Decree No. 260/2002, the Argentine Executive Branch established (i) a single and free-floating foreign exchange market (a “MULC”, or “Mercado Único y Libre de Cambios”) through which all foreign exchange transactions in a foreign currency must be conducted, and (ii) that foreign exchange transactions in a foreign currency must be conducted at the foreign exchange rate to be freely agreed upon among the contracting parties, subject to the requirements and regulations imposed by the Argentine Central Bank (please see below for a summary of the main regulations).

On June 9, 2005, through Decree No. 616/2005, the Argentine Executive Branch mandated that:

(a) all inflows of funds into the local foreign exchange market arising from foreign debts incurred by residents, both individuals or legal entities in the Argentine private sector, except for those concerning foreign trade financing and primary issuances of debt securities admitted to public offering and listed on self-regulated markets; and

(b) all inflows of funds of non-residents channeled through the MULC and (i) held in the local currency, (ii) used to acquire any type of financial asset or liability in the financial and/or non-financial private sector, with the exception of foreign direct investments and primary issuances of debt securities and shares admitted to public offering and listed on self-regulated markets, and (iii) investments in securities issued by the public sector and acquired in secondary markets;

 

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must meet the following requirements:

(i) Such inflows of funds may only be transferred outside the local foreign exchange market at the expiration of a term of 365 calendar days as from the date of settlement of such funds into Argentine pesos (the “Minimum Stay Period”);

(ii) The proceeds of such inflows of funds must be credited to an account in the local banking system;

(iii) A non-transferable and non-interest-bearing deposit for 30% of the amount of the transaction must be kept in Argentina for a period of 365 calendar days, in accordance with the terms and conditions laid down in the applicable regulations (the “Deposit”); and

(iv) The Deposit is to be denominated in U.S. dollars and held in Argentine financial institutions and it may not be used to guarantee or as collateral for any type of credit transactions.

The requirements of Decree 616/2005 were subsequently eased. On December 28, 2015, the Argentine Central Bank issued Communiqué “A” 5861 and Communiqué “A” 5864 which specifically abrogated both Communiqué “A” 4864 and Communiqué “A” 4882. In addition, on December 29, 2015, the CNV issued Resolution No. 651, by which it abrogated the prior CNV regulations that complemented the restrictions issued by Communiqué “A” 4864 and “A” 4882.

On December 18, 2015, through Resolution No. 3/2015, the Ministry of Treasury and Public Finance amended Executive Decree No. 616/2005 as follows: (i) the Deposit percentage was reduced from 30% to 0% and (ii) the Minimum Stay Period was reduced from 365 days to 120 days. Resolution No. 1-E/2017 of the Ministry of Treasury further reduced such Minimum Stay Period to 0 days.

On May 19, 2017, the Argentine Central Bank issued Communiqué “A” 6244 (as amended and implemented), which substantially modified foreign exchange regulations by significantly easing access to the MULC, entering into effect on July 1, 2017.

Below is a description of the main aspects of the Central Bank regulations with respect to the income and outflow of funds from Argentina.

1. Automatic crediting into local accounts of funds received from abroad: when transfers from abroad specify the beneficiary’s account, the receiving entity shall credit the funds received directly and without intervention on the part of the client, unless the client has so expressly and previously instructed otherwise.

2. All natural or legal persons, assets and other universals (residents and non-residents of Argentina) may freely operate in the MULC.

3. Financial and exchange entities may freely determine the level and use of their general exchange position.

4. Foreign exchange transactions have been simplified, requiring only proper identification of the client (through Argentine identification documents CUIT, CUIL, CDI, CIE or DNI). Transactions do not need to be formalized through contracts nor do they require codes, which may nonetheless be required for information purposes by the financial entities.

5. With the exception of the repatriation and settlement (liquidation) of funds from operations related to Argentine exports of goods, there are currently no minimum or maximum terms for carrying out foreign exchange transactions.

 

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6. The obligation to repatriate and settle (liquidate) through the MULC currency from operations related to Argentine exports of goods remains in force, and shall be effected within ten years from the shipping of the respective goods.

7. Financial and exchange entities subject to the system may voluntarily make available quotations of retail exchange rates offered in the Autonomous City of Buenos Aires, through the Argentine Central Bank’s webpage.

8. The types of financing that may be paid abroad through the direct use of income from exports have been increased.

Survey of Foreign Liabilities and Debt Issuances

Through Communiqué “A” 3602, dated May 7, 2002 (as amended and complemented), all natural or legal persons from the private financial and non-financial sectors must report their liabilities to foreign residents at the end of each quarter. Liabilities which originate and are cancelled during the same quarter do not have to be reported.

Survey of Direct Investment

Communiqué “A” 4237 established information requirements regarding direct investments carried out in Argentina (by non-residents) and abroad (by Argentine residents). Direct investments are considered to be those that reflect the interest of an economy’s resident (the direct investor) in an entity resident in another economy, such as participating in the corporate capital with voting rights of not less than 10%. The Communiqué “A” 4237 information regime is bi-annual.

This information regime is mandatory for a non-resident of Argentina only insofar as the total value of the direct investments, taking into account such person’s participation in a company’s net accounting equity and/or the sum of the fiscal valuations of real estate, amounts to or exceeds US$500,000. In case the respective holdings do not reach said amount, declaration through this regime is optional.

For direct investments abroad from Argentine residents, the survey is mandatory if the total value of the direct investment, considering the sum of the participations in companies’ net accounting equity abroad, and/or the sum of the fiscal valuations of real estate abroad, amounts to or exceeds US$1,000,000.

Criminal Foreign Exchange Regime

As established by Communiqué “A” 6244, exchange operations may only be carried out through entities authorized for that purpose by the Argentine Central Bank (such as currency exchanges and financial entities). That same regulation states that transactions which do not conform to applicable regulations will be subject to sanctions established by the criminal foreign exchange regime (Law No. 19,359, Decree No. 480/95 and complementary regulations), which establish fines of up to ten times the amount of the transaction.

For a detailed description of all exchange restrictions and controls on inflows and outflows of funds in effect as of the date hereof, investors are advised to consult with their legal advisors and read Decree No. 616/2005, Resolution No. 637/2005, Communiqué “A” 6244 and Criminal Foreign Exchange Law No. 19,359, and complementary regulations, for which interested parties may consult the website of legislative information of the Ministry of Justice (http://www.infoleg.gov.ar) or the Argentine Central Bank (http://www.bcra.gov.ar). Information on these websites is not incorporated into or considered part of this prospectus supplement.

 

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USE OF PROCEEDS

We estimate that the net proceeds that we will receive from the global offering will be approximately US$             million, after deducting commissions payable to the underwriters and the Argentine placement agent, as well as estimated expenses payable by us. We intend to use the net proceeds from the offering to foster the evolution and growth of the businesses of our subsidiaries, to undertake an investment plan that contemplates new capital injections in corporations we control (including to provide additional capital to Banco Galicia, subject to any required approvals from shareholders or others), to finance the Tarjetas Regionales Minority Purchase, and to take advantage of possible investment opportunities.

 

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CAPITALIZATION

The following table sets forth our consolidated capitalization as of June 30, 2017, in pesos:

 

    on an actual basis; and

 

    as adjusted to reflect the issuance of 130,434,600 Class B ordinary shares (including Class B ordinary shares represented by ADSs) in the global offering, assuming the underwriters do not exercise their right to purchase additional Class B ordinary shares, and the expected use of proceeds.

This table is qualified in its entirety by reference to, and should be read together with, the information set forth under the captions “Presentation of Financial Information” in our 2016 Form 20-F, which is incorporated herein by reference, “Use of Proceeds” in this prospectus supplement and our unaudited interim consolidated financial statements as of June 30, 2017 and for the six months ended June 30, 2017 and 2016, which are incorporated herein by reference.

 

    

As of June 30, 2017

 
    

Historical

    

Adjusted

 
     (in millions of pesos)  

Deposits and Short-Term debt (1)

     

Deposits

     157,112     

Credit Lines

     3,633     

—Local Banks (2)

     1,400     

—BCRA

     24     

—Banks and international entities (3)

     2,209     

Debt Securities

     652     

—Unsubordinated Debt

     499     

—Subordinated Debt

     153     
  

 

 

    

 

 

 

Total Deposits and Short-Term Debt

     161,397     
  

 

 

    

 

 

 

Deposits and Long-Term Debt (4)

     

Deposits

     1,040     

Credit Lines

     2,399     

—Local Banks (5)

     1,867     

—Banks and international entities (6)

     532     

Debt Securities

     18,997     

—Unsubordinated Debt

     14,890     

—Subordinated Debt

     4,107     
  

 

 

    

 

 

 

Other

     128     
  

 

 

    

 

 

 

Total Deposits and Long-Term Debt

     22,564     
  

 

 

    

 

 

 

Total Deposits and Debt

     183,961     
  

 

 

    

 

 

 

Shareholders’ Equity

     

Capital Stock

     1,300     

Non-Capitalized Contributions

     

—Issuance Premiums

     220     

Adjustments to Shareholders’ Equity

     278     

Profit Reserves

     

—Legal Reserve

     316     

—Others

     17,999     

Net Income

     3,436     
  

 

 

    

 

 

 

Total Shareholders’ Equity

     23,549     
  

 

 

    

 

 

 

Total Capitalization

     207,510     
  

 

 

    

 

 

 

 

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(1) Includes other liabilities with a contractual maturity of less than one year. Includes accrued interest from long-term debt.
(2) Mainly comprised of principal, interest of loans granted by multiple banks to Tarjetas Regionales and CFA, amounting to Ps.1,266 million.
(3) Includes, among others, credit lines for the prefinancing of exports for Ps.2,104 million.
(4) Includes liabilities with a contractual maturity longer than one year.
(5) Comprised mainly by loans granted by the Banco de Inversión y Comercio Exterior (“BICE”) of Ps.1,753 million.
(6) IFC credit lines of Ps.498 million and Proparco Lines of Ps.34 million.

 

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DILUTION

At June 30, 2017, we had a net tangible book value of Ps.20,967 million (our total tangible assets minus our total liabilities), corresponding to a net tangible book value of Ps.15.92 per Class B ordinary share or Ps.159.2 per ADS (US$0.96 per Class B ordinary share or US$9.59 per ADS, using the reference exchange rate published by the Central Bank at June 30, 2017 for pesos into U.S. dollars of Ps.16.5985 to US$1.00 and the ratio of 10 Class B ordinary shares to one ADS). Net tangible book value per share represents the amount of our total tangible assets, minus our total liabilities, divided by the total number of our shares outstanding at June 30, 2017.

After giving effect to the sale by us of 130,434,600 Class B ordinary shares in the global offering, and assuming (i) an offering price of US$         per Class B ordinary share and US$         per ADS and (ii) that the underwriters have not exercised the option to purchase additional Class B ordinary shares, and after deducting the estimated underwriting discounts and estimated offering expenses payable by us of US$         million or US$         per Class B ordinary share, which represents     % of the gross proceeds to us, our estimated book value at June 30, 2017 would have been approximately Ps.        million, representing US$         per Class B ordinary share, or US$         per ADS. This represents an immediate increase in net tangible book value of US$         per Class B ordinary share, or US$         per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$         per Class B ordinary share, or US$         per ADS, to new investors purchasing Class B ordinary shares or ADSs in the global offering. Dilution for this purpose represents the difference between the price per Class B ordinary share or ADS paid by these purchasers and net tangible book value per Class B ordinary share or ADS immediately after the completion of the global offering. Amounts in this paragraph are calculated using the reference exchange rate published by the Central Bank at June 30, 2017 for pesos into U.S. dollars of Ps.16.5985 to US$1.00.

The following table illustrates this dilution to new investors purchasing Class B ordinary shares, including Class B ordinary shares represented by ADSs, in the global offering:

 

    

As of June 30, 2017

 
     Class B
Ordinary
Shares
(in Ps.)
     ADSs
(in US$)
 

Net tangible book value per Class B ordinary share or ADS

     15.92        9.59  

Increase in net tangible book value per Class B ordinary share or ADS attributable to new investors

     

Pro forma net tangible book value per Class B ordinary share or ADS after the global offering

     

Dilution per Class B ordinary share or ADS to new investors

     

Percentage of dilution in net tangible book value per Class B ordinary share or ADS for new investors (1)

     

 

Note:—

(1) Percentage of dilution for new investors is calculated by dividing the dilution in net tangible book value for new investors by the price of the global offering.

If the underwriters exercise their option to purchase additional Class B ordinary shares including Class B ordinary shares represented by ADSs, in full, the number of shares of Class B ordinary shares held by existing shareholders will be reduced to         % of the total number of shares of Class B ordinary shares to be outstanding after the global offering, and the number of shares of Class B ordinary shares held by the new investors will be increased to         Class B ordinary shares or         % of the total number of shares of Class B ordinary shares outstanding after the global offering.

 

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MARKET PRICE OF OUR CLASS B ORDINARY SHARES AND AMERICAN DEPOSITARY SHARES

The table below shows the high and low market prices in pesos for our Class B ordinary shares on the BYMA for the periods indicated:

 

    

Ps.per Class B
Ordinary Share

 
    

High

    

Low

 

2012

     4.61        2.70  

2013

     10.95        3.86  

2014

     21.40        8.30  

2015

     43.45        17.60  

2016

     49.50        31.60  

2015

     

1st quarter

     31.40        17.60  

2nd quarter

     28.85        22.50  

3rd quarter

     29.60        22.00  

4th quarter

     43.45        23.25  

2016

     

1st quarter

     47.70        31.60  

2nd quarter

     46.50        36.00  

3rd quarter

     49.50        42.00  

4th quarter

     49.30        37.30  

2017:

     

January

     54.20        42.80  

February

     55.50        49.45  

March

     60.90        49.05  

April

     62.15        58.85  

May

     73.20        60.70  

June

     75.75        65.00  

July

     73.90        64.00  

August

     80.30        64.00  

September (through September 6, 2017)

     82.05        78.50  

 

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The ADSs issued under the Deposit Agreement, trade on the NASDAQ. Each ADS represents 10 Class B ordinary shares. The table below shows the high and low market prices of the ADSs in U.S. dollars on the NASDAQ for the periods indicated.

 

    

US$per ADS

 
    

High

    

Low

 

2012

     8.51        4.14  

2013

     13.05        4.96  

2014

     18.50        7.30  

2015

     29.25        14.99  

2016

     33.08        22.77  

2015

     

1st quarter

     26.13        14.99  

2nd quarter

     24.10        17.84  

3rd quarter

     22.22        15.30  

4th quarter

     29.25        16.62  

2016

     

1st quarter

     30.92        22.77  

2nd quarter

     32.05        25.34  

3rd quarter

     33.08        28.04  

4th quarter

     32.74        23.23  

2017:

     

January

     34.12        27.50  

February

     35.80        30.83  

March

     39.20        31.99  

April

     40.41        38.09  

May

     44.95        39.06  

June

     47.34        37.94  

July

     44.20        36.09  

August

     46.40        36.14  

September (through September 7, 2017)

     47.90        44.17  

 

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SELECTED STATISTICAL INFORMATION

The following information should be read in conjunction with the other information provided in “Item 4. Information on the Company—Selected Statistical Information” in our 2016 Form 20-F, which is incorporated herein by reference, including our unaudited interim consolidated financial statements as of June 30, 2017 and for the six months ended June 30, 2017 and 2016, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus supplement. We prepared this information from our financial records, which are maintained under accounting methods established by the Argentine Central Bank under Argentine Banking GAAP, and do not reflect adjustments necessary to reflect the information in accordance with U.S. GAAP.

Average Balance Sheet and Income from Interest-Earning Assets and Expenses from Interest-Bearing Liabilities

The following table shows our consolidated average balances, accrued interest and nominal interest rates for interest-earning assets and interest-bearing liabilities for the six month period ended June 30, 2017.

 

    For the Six Months Ended June 30, 2017  
  Pesos     U.S. dollars     Total  
 

Average
Balance

   

Accrued
Interest

   

Average
Yield/
Rate

   

Average
Balance

   

Accrued
Interest

   

Average
Yield/
Rate

   

Average
Balance

   

Accrued
Interest

   

Average
Yield/
Rate

 
    (in millions of pesos, except rates)  

Assets

                 

Government Securities

    16,235       1,959       24.13       2,781       72       5.18       19,016       2,031       21.36  

Loans

                 

Private Sector

    121,965       16,519       27.09       22,999       333       2.90       144,964       16,852       23.25  

Public Sector

    13       2       30.77       —         —         —         13       2       30.77  

Total Loans

    121,978       16,521       27.09       22,999       333       2.90       144,977       16,854       23.25  

Other

    4,904       641       26.14       218       2       1.83       5,122       643       25.11  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest-Earning Assets

    143,117       19,121       26.72       25,998       407       3.13       169,115       19,528       23.09  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and Gold

    19,945           34,046           53,991      

Equity in Other Companies

    3,091           1,062           4,153      

Other Assets

    16,250           1,887           18,137      

Allowances

    (4,962         (241         (5,203    
 

 

 

       

 

 

       

 

 

     

Total Assets

    177,441           62,752           240,193      
 

 

 

       

 

 

       

 

 

     

Liabilities and Equity

                 

Deposits

                 

Checking Accounts

    1,499       —         —         1       —         —         1,500       —         —    

Savings Accounts

    21,320       21       0.20       25,603       —         —         46,923       21       0.09  

Time Deposits

    52,751       5,292       20.06       6,180       17       0.55       58,931       5,309       18.02  

Total Interest-Bearing Deposits

    75,570       5,313       14.06       31,784       17       0.11       107,354       5,330       9.93  

Debt Securities

    11,329       1,352       23.87       7,149       315       8.81       18,478       1,667       18.04  

Other

    5,063       634       25.04       2,597       44       3.39       7,660       678       17.70  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest-Bearing Liabilities

    91,962       7,299       15.87       41,530       376       1.81       133,492       7,675       11.50  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Demand Deposits

    26,666           6,263           32,929      

Other Liabilities

    34,415           16,079           50,494      

Minority Interests

    1,361                     1,361      

Shareholders’ Equity

    21,917                     21,917      
 

 

 

       

 

 

       

 

 

     

Total Liabilities and Equity

    176,321           63,872           240,193      
 

 

 

       

 

 

       

 

 

     

 

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    For the Six Months Ended June 30, 2017  
  Pesos     U.S. dollars     Total  
 

Average
Balance

   

Accrued
Interest

   

Average
Yield/
Rate

   

Average
Balance

   

Accrued
Interest

   

Average
Yield/
Rate

   

Average
Balance

   

Accrued
Interest

   

Average
Yield/
Rate

 
    (in millions of pesos, except rates)  

Spread and Net Yield (%)

                 

Interest Rate Spread

        10.85           1.32           11.59  

Cost of Funds Supporting Interest-Earning Assets

        10.20           2.89           9.08  

Net Yield on Interest-Earning Assets

        16.52           0.24           14.02  

 

Rates include the CER adjustment.

The following table shows our consolidated average balances, accrued interest and nominal interest rates for interest-earning assets and interest-bearing liabilities for the six month period ended June 30, 2016.

 

    For the Six Months Ended June 30, 2016  
  Pesos     U.S. dollars     Total  
 

Average
Balance

   

Accrued
Interest

   

Average
Yield/
Rate

   

Average
Balance

   

Accrued
Interest

   

Average
Yield/
Rate

   

Average
Balance

   

Accrued
Interest

   

Average
Yield/
Rate

 
    (in millions of pesos, except rates)  

Assets

                 

Government Securities

    15,629       2,395       30.65       8,799       120       2.73       24,428       2,515       20.59  

Loans

                 

Private Sector

    95,252       13,960       29.31       6,828       131       3.84       102,080       14,091       27.61  

Public Sector

    —         —         —         —         —         —         —         —         —    

Total Loans

    95,252       13,960       29.31       6,828       131       3.84       102,080       14,091       27.61  

Other

    2,844       506       35.58       92       3       6.52       2,936       509       34.67  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest-Earning Assets

    113,725       16,861       29.65       15,719       254       3.23       129,444       17,115       26.44  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and Gold

    14,198           12,278           26,476      

Equity in Other Companies

    3,129           289           3,418      

Other Assets

    14,024           1,305           15,329      

Allowances

    (3,768         (105         (3,873    
 

 

 

       

 

 

       

 

 

     

Total Assets

    141,308           29,486           170,794      
 

 

 

       

 

 

       

 

 

     

Liabilities and Equity

                 

Deposits

                 

Checking Accounts

    —         —         —         —         —         —         —         —         —    

Savings Accounts

    14,263       25       0.35       8,868       —         —         23,131       25       0.22  

Time Deposits

    48,679       7,129       29.29       6,378       52       1.63       55,057       7,181       26.09  

Total Interest-Bearing Deposits

    62,942       7,154       22.73       15,246       52       0.68       78,188       7,206       18.43  

Debt Securities

    5,169       842       32.58       8,815       541       12.27       13,984       1,383       19.78  

Other

    2,343       432       36.88       1,136       34       5.99       3,479       466       26.79  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest-Bearing Liabilities

    70,454       8,428       23.92       25,197       627       4.98       95,651       9,055       18.93  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Demand Deposits

    22,565           3,152           25,717      

Other Liabilities

    29,094           3,477           32,571      

Minority Interests

    1,113           —             1,113      

Shareholders’ Equity

    15,742           —             15,742      
 

 

 

       

 

 

       

 

 

     

Total Liabilities and Equity

    138,968           31,826           170,794      
 

 

 

       

 

 

       

 

 

     

 

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    For the Six Months Ended June 30, 2016  
  Pesos     U.S. dollars     Total  
 

Average
Balance

   

Accrued
Interest

   

Average
Yield/
Rate

   

Average
Balance

   

Accrued
Interest

   

Average
Yield/
Rate

   

Average
Balance

   

Accrued
Interest

   

Average
Yield/
Rate

 
    (in millions of pesos, except rates)  

Spread and Net Yield (%)

                 

Interest Rate Spread

        5.73           (1.75         7.51  

Cost of Funds Supporting Interest-Earning Assets

        14.82           7.98           13.99  

Net Yield on Interest-Earning Assets

        14.83           (4.75         12.45  

 

Rates include the CER adjustment.

Government Securities—Net Position

The following table shows our net position in government and corporate securities at the balance sheet date, and the breakdown of the portfolio in accordance with the Argentine Central Bank classification system and by the securities’ currency of denomination. The net position is defined as holdings plus forward purchases and spot purchases pending settlement, minus forward sales and spot sales pending settlement.

 

     As of June 30, 2017  
    

Holdings

    

Forward
Purchases (1)

    

Forward
Sales (2)

   

Spot
purchases
to be
settled

    

Spot
sales

to be
settled

   

Net
Position

 
     (in millions of pesos)  

Government Securities

               

Holdings Recorded at Cost plus Yield

               

Pesos

     2,937        —          —         368        —         3,305  

U.S. dollars

     993        —          —         —          (6     987  

Holdings Recorded at Fair Value

               

Pesos

     2,846        —          (100     110        (673     2,183  

U.S. dollars

     1,211        —          —         420        (387     1,244  

Securities issued by the Argentine Central Bank

               

Pesos

     21,708        318        (6,094     111        (588     15,455  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total Government Securities

     29,695        318        (6,194     1,009        (1,654     23,174  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Corporate Equity Securities (Quoted and unquoted)

     22        —          —         —          —         22  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total Government and Corporate Securities

     29,717        318        (6,194     1,009        (1,654     23,196  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Forward purchases include securities granted as collateral.
(2) Forward sales include government securities deposits.

The net position of government securities as of June 30, 2017 amounted to Ps.23,196 million.

The net position of government securities at cost plus yield issued in pesos, for Ps.3,305 million, mainly corresponds to debt securities and treasury bills issued by Argentine provinces. The net position of government securities at cost plus yield issued in U.S. dollars amounts to US$987 million, and is composed mainly of treasury bills due in 2017 and 2018

The net position corresponding to government securities at fair value in pesos, in the amount of Ps.2,183 million, mainly corresponds to discount bonds due in 2033, treasury bonds issued by the Argentine government

 

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due in 2020, and treasury bonds issued by the Argentine government with CER adjustment due in 2021. The net position of government securities at fair value in Dollars amounts to Ps.1,244 million, a key component of which are treasury bills and Argentine bond.

Regarding securities issued by the Argentine Central Bank, the net position of Ps.15,455 million corresponds to our holding of Argentine Central Bank bills (Lebacs) in pesos.

Interest-Earning Assets-Net Yield on Interest-Earning Assets

Our net financial income for the six month period ended June 30, 2017 was Ps.10,819 million, with a corresponding financial margin of 12.79%, as compared to Ps.7,352 million for the six month period ended June 30, 2016, with a corresponding financial margin of 11.36%.

The net financial income for the six month period ended June 30, 2017 (excluding the results from currency quotation differences and the results from foreign-currency forward transactions) amounted to Ps.10,277 million as compared to Ps.6,858 million net financial income for the six month period ended June 30, 2016. This variation was attributable to a higher spread (defined as the difference between the average nominal interest rate on interest-earning assets and the average nominal interest rate on interest-bearing liabilities) and a higher volume of intermediation.

The following table analyzes, by currency of denomination, the levels of our average interest-earning assets and net interest earned, and illustrates the net yields and spreads obtained, for each of the periods indicated.

 

     Six Months Ended
June 30,
    Year Ended December 31,  
    

2017

    

2016

   

2016

   

2015

   

2014

 
     (in millions of pesos, except percentages)  

Total Average Interest-Earning Assets

           

Pesos

     143,117        113,725       118,483       88,107       65,665  

U.S. dollars

     25,998        15,719       16,803       6,698       4,684  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

     169,115        129,444       135,286       94,805       70,349  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Earned

           

Pesos

     11,822        8,433       18,537       13,887       10,687  

U.S. dollars

     31        (373     (602     (443     (540
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

     11,853        8,060       17,935       13,444       10,147  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net Yield on Interest-Earning Assets (%) (1)

           

Pesos

     16.52        14.83       15.65       15.76       16.28  

U.S. dollars

     0.24        (4.75     (3.58     (6.61     (11.53
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-Average Yield

     14.02        12.45       13.26       14.18       14.42  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Interest Spread, Nominal Basis (%) (2)

           

Pesos

     10.85        5.73       7.26       8.44       9.41  

U.S. dollars

     1.32        (1.75     (0.76     (0.91     (2.79
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-Average Yield

     11.59        7.51       9.03       9.13       10.13  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

Interest rates include the CER adjustment.

(1) Net interest earned, divided by average interest-earning assets.
(2) Interest spread, nominal basis is the difference between the average nominal interest rate on interest-earning assets and the average nominal interest rate on interest-bearing liabilities.

 

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Loan Portfolio

Our total loans reflect Banco Galicia’s, Tarjetas Regionales’ and CFA’s loan portfolios including past due principal amounts. Personal loans and credit-card loans are typically loans to individuals granted by Banco Galicia, Tarjetas Regionales or CFA. Tarjetas Regionales’ loans are included under “Credit card loans”, while most of CFA’s loans are included under “Personal loans”. Also, certain amounts related to advances, promissory notes, mortgage loans and pledge loans are extended to individuals. However, advances and promissory notes mostly represent loans to companies. The following table analyzes our loan portfolio, i.e., Banco Galicia’s loan portfolio consolidated with Tarjetas Regionales’ and CFA’s loan portfolio, by type of loan and total loans with guarantees.

 

    

As of
June 30,

2017

     As of December 31,  
       

2016

    

2015

    

2014

 
     (in millions of pesos)  

Principal and Interest

           

Non-Financial Public Sector

     —          —          —          —    

Local Financial Sector

     3,418        2,098        762        193  

Non-Financial Private Sector and Residents Abroad (1)

           

Advances

     8,225        10,063        8,549        3,987  

Promissory Notes

     27,157        25,298        22,752        16,304  

Mortgage Loans

     2,476        2,178        2,099        1,661  

Pledge Loans

     640        678        487        500  

Personal Loans

     20,278        15,312        9,259        6,996  

Credit Card Loans

     75,384        72,766        56,260        37,348  

Placements in Banks Abroad

     613        1,227        232        261  

Other Loans

     26,475        11,405        692        1,337  

Accrued Interest, Adjustment and Quotation Differences Receivable

     1,800        1,775        1,407        969  

Documented Interest

     (580      (642      (597      (348
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Financial Private-Sector and Residents Abroad

     162,468        140,060        101,140        69,015  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Gross Loans

     165,886        142,158        101,902        69,208  
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for Loan Losses

     (5,962      (4,707      (3,560      (2,615
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

     159,924        137,451        98,342        66,593  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans with Guarantees

           

With Preferred Guarantees (2)

     4,764        3,322        2,988        2,695  

Other Guarantees

     19,612        18,984        13,508        9,463  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans with Guarantees

     24,376        22,306        16,496        12,158  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Categories of loans include:
  Advances: short-term obligations drawn on by customers through overdrafts.
  Promissory Notes: endorsed promissory notes, notes and other promises to pay signed by one borrower or group of borrowers and factored loans.
  Mortgage Loans: loans granted to purchase or improve real estate and collateralized by such real estate and commercial loans secured by a real estate mortgage.
  Pledge Loans: loans secured by collateral (such as cars or machinery) other than real estate, where such collateral is an integral part of the loan documents.
  Personal Loans: loans to individuals.
  Credit-Card Loans: loans granted through credit cards to credit card holders.

 

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  Placements in Banks Abroad: short-term loans to banks abroad.
  Other Loans: loans not included in other categories.
  Documented Interest: discount on notes and bills.
(2) Preferred guarantees include mortgages on real estate property or pledges on movable property, such as cars or machinery, where Banco Galicia has priority, endorsements of the Federal Office of the Secretary of Finance, pledges of Government securities, or gold or cash as collateral.

For the fiscal period ended June 30, 2017, Banco Galicia’s loan portfolio before allowances for loan losses amounted to Ps.165,886 million, a 17% increase as compared to the fiscal year ended December 31, 2016.

Loans by Type of Borrower

The following table shows the breakdown of our total loan portfolio, by type of borrower as of June 30, 2017, and at December 31, 2016, 2015 and 2014. The middle-market companies’ category includes Banco Galicia’s loans to small and medium-sized companies and the agricultural and livestock sectors while the individuals’ category includes loans granted by Banco Galicia, Tarjetas Regionales and CFA. Loans to individuals comprise both consumer loans and commercial loans extended to individuals with a commercial activity.

 

     As of June 30,      As of December 31,  
    

2017

    

2016

    

2015

    

2014

 
    

Ps. in
millions

    

%

    

Ps. in
millions

    

%

    

Ps. in
millions

    

%

    

Ps. in
millions

    

%

 

Corporate

     32,456        19.6        22,434        15.8        13,619        13.4        8,590        12.4  

Middle-Market Companies

     39,140        23.6        34,411        24.2        29,022        28.4        20,514        29.6  

Commercial Loans

     71,596        43.2        56,845        40.0        42,641        41.8        29,104        42.0  

Individuals

     90,247        54.4        81,978        57.7        58,267        57.2        39,649        57.3  

Financial Sector (1)

     4,043        2.4        3,335        2.3        994        1.0        455        0.7  

Non-Financial Public Sector

     —          —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (2)

     165,886        100.0        142,158        100.0        101,902        100.0        69,208        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes local and international financial sector. Financial Sector loans are primarily composed of interbank loans (call money loans), overnight deposits at international money center banks and loans to provincial banks.
(2) Before the allowance for loan losses.

As of June 30, 2017, the private sector loans before allowances increased 17% relative to the fiscal year ended December 31, 2016, as a result of the increase in Corporate (45%), Middle-Market Companies (14%) and Individuals (10%).

 

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Loans by Economic Activity

The following table sets forth as of the dates indicated an analysis of our loan portfolio according to the borrower’s main economic activity. Figures include principal and interest.

 

     As of June 30,      As of December 31,  
    

2017

    

2016

    

2015

    

2014

 
    

Ps. in
millions

    

%

    

Ps. in
millions

    

%

    

Ps. in
millions

    

%

    

Ps. in
millions

    

%

 

Financial Sector (1)

     4,043        2.4        3,335        2.3        994        1.0        455        0.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Services

                       

Communications, Transportation Health and Others

     4,899        3.0        4,272        3.0        5,084        5.0        2,886        4.2  

Electricity, Gas, Water Supply and Sewage Services

     2,879        1.8        2,658        1.9        160        0.2        216        0.3  

Other Financial Services

     2,638        1.6        1,663        1.2        553        0.5        366        0.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     10,416        6.4        8,593        6.1        5,797        5.7        3,468        5.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Primary Products

                       

Agriculture and Livestock

     14,442        8.7        11,921        8.4        11,342        11.1        8,178        11.8  

Fishing, Forestry and Mining

     4,080        2.5        1,810        1.3        1,956        1.9        1,459        2.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     18,522        11.2        13,731        9.7        13,298        13.0        9,637        13.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer

     90,291        54.4        82,730        58.2        59,012        57.9        39,747        57.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Retail Trade

     6,798        4.1        6,641        4.7        3,287        3.3        2,237        3.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Wholesale Trade

     9,467        5.7        6,499        4.6        5,450        5.3        3,699        5.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Construction

     1,878        1.1        1,177        0.8        1,035        1.0        709        1.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Manufacturing

                       

Foodstuffs

     8,363        5.0        6,316        4.4        3,499        3.4        2,943        4.3  

Transportation Materials

     2,758        1.7        2,307        1.6        2,783        2.7        996        1.4  

Chemicals and Oil

     4,648        2.8        4,320        3.0        2,712        2.7        2,269        3.3  

Other Manufacturing Industries

     8,329        5.0        6,509        4.6        4,035        4.0        3,048        4.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     24,098        14.5        19,452        13.6        13,029        12.8        9,256        13.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Loans

     373        0.2        —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (2)

     165,886        100.0        142,158        100.0        101,902        100.0        69,208        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes local and international financial sectors.
(2) Before the allowance for loan losses.

Consumer loans account for the majority of the loan portfolio, which as of June 30, 2017, represented 54.4% of our total loan portfolio, as compared to 58.2% for fiscal year 2016, 57.9% for fiscal year 2015 and 57.4% for fiscal year 2014.

As for business activities, the most significant categories for the fiscal year ended December 31, 2016 were those of the manufacturing industry, the primary production sector and trade (wholesale and retail), with a total portfolio share of 14.5%, 11.2% and 9.8%, respectively.

The most significant growth relative to the fiscal year ended December 31, 2016 occurred in the primary products and manufacturing industry, with increases of 35% and 24%, respectively.

 

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Classification of the Loan Portfolio based on Argentine Central Bank Regulations

The following tables set forth the amounts of our loans past due and the amounts not yet due of the loan portfolio, including the loan portfolios of Banco Galicia, Tarjetas Regionales and CFA, applying the Argentine Central Bank’s loan classification criteria in effect at the dates indicated.

 

     As of June 30, 2017      As of December 31, 2016  
     Amounts
Not Yet
Due
     Amounts
Past Due
     Total      Amounts
Not Yet
Due
     Amounts
Past Due
     Total  
     (in millions of pesos)  

Loan Portfolio Classification

                 

1. Normal and Normal Performance

     156,834        —          156,834        134,730        —          134,730  

2. With Special Follow-up—Under observation and Low Risk

     3,091        —          3,091        2,724        —          2,724  

3. With Problems and Medium Risk

     938        1,199        2,137        721        1,043        1,764  

4. High Risk of Insolvency and High Risk

     697        1,995        2,692        528        1,552        2,080  

5. Uncollectible

     —          1,124        1,124        —          853        853  

6. Uncollectible Due to Technical Reasons

     —          8        8        —          7        7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans (1)

     161,560        4,326        165,886        138,703        3,455        142,158  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Accrual Loans (2)

     1,635        4,326        5,961        1,249        3,455        4,704  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Before allowances.
(2) Non-Accrual Loans is defined as the last four categories of the classification.

 

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Amounts Past Due and Non-Accrual Loans

The following table analyzes amounts past due by 90 days or more in our loan portfolio, by type of loan and by type of guarantee as of the dates indicated, as well as our non-accrual loan portfolio, by type of guarantee, our allowance for loan losses and the main asset quality ratios as of the dates indicated.

 

     As of June 30,
2017
     As of December 31,  
       

2016

    

2015

    

2014

 
     (in millions of pesos, except ratios)  

Total Loans (1)

     165,886        142,158        101,902        69,208  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Accrual Loans

           

With Preferred Guarantees

     106        96        106        50  

With Other Guarantees

     106        88        103        59  

Without Guarantees

     5,749        4,520        2,958        2,363  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Accrual Loans (2)

     5,961        4,704        3,167        2,472  
  

 

 

    

 

 

    

 

 

    

 

 

 

Past Due Loan Portfolio

           

Non-Financial Public Sector

     —          —          —          —    

Local Financial Sector

     —          —          —          —    

Non-Financial Private Sector and Residents Abroad

           

Advances

     359        189        188        169  

Promissory Notes

     203        144        192        121  

Mortgage Loans

     45        79        45        12  

Pledge Loans

     4        3        8        9  

Personal Loans

     409        274        304        262  

Credit-Card Loans

     3,213        2,673        1,693        1,200  

Other Loans

     93        93        74        33  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Past Due Loans

     4,326        3,455        2,504        1,806  
  

 

 

    

 

 

    

 

 

    

 

 

 

Past Due Loans

           

With Preferred Guarantees

     41        60        59        42  

With Other Guarantees

     74        60        97        38  

Without Guarantees

     4,211        3,335        2,348        1,726  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Past Due Loans

     4,326        3,455        2,504        1,806  
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for Loan Losses

     5,962        4,707        3,560        2,615  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ratios (%)

           

As a % of Total Loans:

           

—Total Past Due Loans

     2.61        2.43        2.46        2.61  

—Past Due Loans with Preferred Guarantees

     0.02        0.04        0.06        0.06  

—Past Due Loans with Other Guarantees

     0.05        0.04        0.10        0.05  

—Past Due Unsecured Amounts

     2.54        2.35        2.30        2.50  

—Non-Accrual Loans (2)

     3.59        3.31        3.11        3.57  

—Non-Accrual Loans (2) (Excluding Interbank Loans)

     3.63        3.36        3.12        3.59  

Non-Accrual Loans (2) as a Percentage of Loans to the Private Sector

     3.59        3.31        3.11        3.57  

Allowance for Loan Losses as a % of:

     3.59        3.31        3.49        3.78  

—Total Loans

     3.63        3.36        3.50        3.79  

—Total Loans Excluding Interbank Loans

     100.02        100.06        112.41        105.78  

—Total Non-Accrual Loans (2)

     3.56        3.91        6.60        4.41  

Non-Accrual Loans with Guarantees as a Percentage of Non-Accrual Loans (2)

     137.79        136.15        126.48        136.88  

 

(1) Before the allowance for loan losses.

 

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(2) Non-Accrual loans are defined as those loans in the categories of: (a) Consumer portfolio: “Medium Risk”, “High Risk”, “Uncollectible”, and “Uncollectible Due to Technical Reasons”, and (b) Commercial portfolio: “With problems”, “High Risk of Insolvency”, “Uncollectible”, and “Uncollectible Due to Technical Reasons”.

The Total Non-Accrual Loans amounted to Ps.5,961 as of June 30, 2017, representing 3.59% of the Total Loans, showing a decrease of 28 b.p during the first six months of 2017.

Total Loans Excluding Interbank Loans decreased to 100.02% as of June 30, 2017 from 100.06% as of the end of the fiscal year.

Financings

 

     As of June 30,
2017
     As of December 31  
       

2016

    

2015

    

2014

 
     (in millions of pesos except ratios)  

Loan Portfolio Classification

           

Normal and Normal Performance

     173,338        150,224        110,503        74,900  

With Special Follow-Up and Under observation Low Risk

     3,119        2,745        1,528        1,507  

With Problems and Medium Risk

     2,151        1,776        894        792  

High Risk of Insolvency and High Risk

     2,712        2,098        1,172        1,392  

Uncollectible

     1,142        862        1,131        318  

Uncollectible due to Technical Reasons

     8        7        5        3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Financing (1)

     182,470        157,712        115,233        78,912  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Accrual Loans (2)

           

With Preferred Guarantees

     109        98        110        57  

With Other Guarantees

     109        90        108        61  

Without Guarantees

     5,795        4,555        2,984        2,387  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Accrual Loans

     6,013        4,743        3,202        2,505  
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for Loan Losses

     6,052        4,798        3,648        2,675  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ratios (%)

           

Allowance for Loan Losses as a Percentage of Total Financing

     3.32        3.04        3.17        3.39  

Non-Accrual Loans as a Percentage of Total Financing

     3.30        3.01        2.78        3.17  

Allowance for Loan Losses as a Percentage of Non-Accrual Loans

     100.65        101.16        113.93        106.79  

Non-Accrual Loans with Guarantees as a Percentage of Non-Accrual Loans

     3.63        3.96        6.81        4.71  

 

(1) Before the allowance for loan losses.
(2) Non-Accrual loans are defined as those loans in the categories of: “With Problems and Medium Risk”, “High Risk of Insolvency and High Risk”, “Uncollectible”, and “Uncollectible due to Technical Reasons”.

According to the method established by the Argentine Central Bank, total financing is defined as the sum of the loans, certain accounts under “Other Receivables Resulting from Financial Brokerage” representing financial transactions (such as unlisted notes and debt securities), the “Receivables from Financial Leases,” “Guarantees Granted” and “Loans Granted (Unused Balances).” As defined, the loan portfolio of Banco Galicia, including the portfolio of Tarjetas Regionales and CFA, as of June 30, 2017 was Ps.182,470 million and as of December 31, 2016, Ps.157,712 million.

As of June 30, 2017, Non-Accrual Loans as a Percentage of Total Loans ratio was 3.30%, representing a decrease with respect to 3.01% registered as of December 31, 2016. The Allowance for Loan Losses as a

 

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Percentage of Non-Accrual Loans ratio amounted to 100,65% as of June 30, 2017 while as of December 31, 2016, the ratio was 101.16%.

Loan Loss Experience

The following table presents an analysis of our allowance for loan losses and of our credit losses as of and for the periods indicated. Certain loans are charged off directly to income statement (such charge offs are immaterial amounts charged to income before any allowances for loan losses are recorded) and, therefore, are not reflected in the allowance.

 

    

As of
June 30,
2017

    As of December 31,  
       2016     2015     2014  
     (in millions of pesos, except ratios)  

Total Loans, Average (1)

     144,990       111,166       77,832       59,094  
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Loan Losses at Beginning of Period

     4,707       3,560       2,615       2,129  
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes in the Allowance for Loan Losses During the Period

        

Provisions Charged to Income

     2,436       3,389       2,148       2,327  

Prior Allowances Reversed

     —         (117     —         (1

Charge-Offs (A)

     (1,181     (2,125     (1,203     (1,840
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Loan Losses at End of Period

     5,962       4,707       3.560       2,615  
  

 

 

   

 

 

   

 

 

   

 

 

 

Charge to the Income Statement during the Period

        

Provisions Charged to Income (2)

     2,436       3,389       2,128       2,339  

Direct Charge-Offs, Net of Recoveries (B)

     (35     (272     (226     (181

Recoveries of Provisions

     —         (117     —         (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Charge (Benefit) to the Income Statement

     2,401       3,000       1,902       2,157  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ratios (%)

        

Charge-Offs Net of Recoveries (A+B) to Average Loans (3)

     1.58       1.67       1.26       2.81  

Net Charge to the Income Statement to Average Loans (3)

     3.31       2.70       2.44       3.65  

 

(1) Before the allowance for loan losses.
(2) Includes quotation differences for Galicia Uruguay.
(3) Charge-offs plus direct charge-offs minus bad debts recovered.

During the first six months of 2017, the Bank established allowances for loan losses in an amount of Ps.2,436 million. The Direct Charge-Offs, Net of Recoveries amounted to an increase of Ps.35 million. The Net Charge to the Income Statement amounted to Ps.2,401 million, representing 3.31% of the average loans of the period.

The Charge-Offs as of June 30, 2017 amounted to Ps.1,181 million.

During fiscal year 2016, Provisions Charged to Income amounted to Ps.3,389 million.

Direct Charge-Offs, Net of Recoveries represented Ps.272 million. The Net Charge to the Income Statement amounted to Ps.3,000 million, representing 2.70% of the average loans of the period.

The Charge-Offs amounted to Ps.2,125 million.

Allocation of the Allowance for Loan Losses

The following table presents the allocation of our allowance for loan losses among the various loan categories and shows such allowances as a percentage of our total loan portfolio before deducting the allowance

 

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for loan losses, in each case for the periods indicated. The table also shows each loan category as a percentage of our total loan portfolio before deducting the allowance for loan losses at the dates indicated.

 

     As of June 30, 2017      As of December 31, 2016  
     Amount      % (1)      % (2)      Amount      % (1)      % (2)  
     (in millions of pesos, except percentages)  

Non-Financial Public Sector

     —          —          —          —          —          —       

Local Financial Sector

     —          —          2.06        —          —          1.48  

Non-Financial Private Sector and Residents Abroad

           

Advances

     368        0.22        4.96        161        0.11        7.08  

Promissory Notes

     146        0.09        16.37        103        0.07        17.80  

Mortgage Loans

     32        0.02        1.49        43        0.03        1.53  

Pledge Loans

     3        —          0.39        3        —          0.48  

Personal Loans

     457        0.28        12.22        324        0.23        10.77  

Credit-Card Loans

     2,126        1.28        45.44        1,808        1.27        51.19  

Placements in Correspondent Banks

     —          —          0.37        —          —          0,86  

Other

     55        0.03        16.70        51        0.04        8.81  

Unallocated

     2,775        1.67        —          2,214        1.56        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5,962        3.59        100.00        4,707        3.31        100.00  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Allowances over Total Loans.
(2) Loans considered in each line over Total Loans.

Deposits

The following table(1) provides a breakdown of our consolidated deposits as of June 30, 2017, by contractual term and currency of denomination.

 

    Peso-Denominated     U.S.
Dollar-Denominated
    Total  
 

Amount

   

% of Total

   

Amount

   

% of Total

   

Amount

   

% of Total

 
    (in millions of pesos, except percentages)  

Checking Accounts and Demand Deposits

    29,110       26.7       —         —         29,110       18.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Savings Accounts

    30,513       28.0       40,937       85.2       71,450       45.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Time Deposits

    48,344       44.3       6,522       13.6       54,866       34.9  

Maturing Within 30 Days

    9,062       8.3       1,800       3.7       10,862       6.9  

Maturing After 31 Days but Within 59 Days

    21,879       20.1       1,919       4.0       23,798       15.1  

Maturing After 60 Days but Within 89 Days

    6,124       5.6       324       0.7       6,448       4.1  

Maturing After 90 Days but Within 179 Days

    5,695       5.2       1,420       3.0       7,115       4.5  

Maturing After 180 Days but Within 365 Days

    4,683       4.3       922       1.9       5,605       3.6  

Maturing After 365 Days

    901       0.8       137       0.3       1,038       0.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Deposits

    1,046       1.0       580       1.2       1,626       1.1  

Maturing Within 30 Days

    874       0.8       580       1.2       1,454       0.9  

Maturing After 31 Days but Within 59 Days

    —         —         —         —         —         —    

Maturing After 60 Days but Within 89 Days

    —         —         —         —         —         —    

Maturing After 90 Days but Within 179 Days

    88       0.1       —         —         88       0.1  

Maturing After 180 Days but Within 365 Days

    84       0.1       —         —         84       0.1  

Maturing After 365 Days

    —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    109,013       100.0       48,039       100.0       157,052       100.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Only principal. Excludes the CER adjustment.

The categories with the highest concentration of maturities per their original term are those within the segments “within 30 Days” and “after 31 days but within 59 days” (pesos and U.S. dollars), which accounted for

 

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22% of the total and corresponded mainly to peso-denominated time deposits. The rest of the terms represent a lower percentage of the total portfolio and have a homogeneous usage rate. As of June 30, 2017, the average original term for non-adjusted peso-denominated time deposits was approximately 46 days and dollar-denominated deposits was approximately 45 days. Dollar-denominated deposits, equal to Ps.48,039 million (only principal), represented 30.6% of total deposits.

Regulatory Capital

In the table(1) below, Banco Galicia’s information on regulatory capital and compliance with minimum capital requirements regulations is consolidated with Tarjetas Regionales and its subsidiaries, including CFA.

 

    

As of

June 30,

2017

    

As of December 31,

 
       

2016

    

2015

    

2014

 
     (in millions of pesos, except ratios)  

Shareholders’ Equity—Computable Regulatory Capital

     22,050        18,906        13,812        9,899  
  

 

 

    

 

 

    

 

 

    

 

 

 

Minimum capital required (A)

     17,684        15,258        11,063        7,077  
  

 

 

    

 

 

    

 

 

    

 

 

 

Allocated to Credit Risk

     13,440        11,511        8,369        5,098  

Allocated to Market Risk

     558        556        296        200  

Allocated to Operational Risk

     3,686        3,191        2,398        1,779  
  

 

 

    

 

 

    

 

 

    

 

 

 

Computable Capital (B)

     25,477        22,010        14,071        10,133  
  

 

 

    

 

 

    

 

 

    

 

 

 

Tier I

     19,384        16,471        11,732        8,041  

Tier II

     6,093        5,539        2,339        2,020  

Additional Capital-Market Variation

     —             —             —             72  
  

 

 

    

 

 

    

 

 

    

 

 

 

Excess over Required Capital (B – A)

     7,793        6,752        3,008        3,056  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Risk Assets

     215,983        186,277        138,272        85,927  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ratios (%)

           

Shareholders’ equity as % of Consolidated Assets

     8.81        7.88        8.60        9.34  

Excess over Required Capital

     44.07        44.25        27.19        43.18  

Ratio Basel

     11.80        11.82        10.18        11.79  

 

(1) According to BCRA regulations applicable at the specific time.

As of June 30, 2017, the Bank’s consolidated computable capital was Ps.7,793 million (44.1%) higher than the Ps.17,684 million minimum capital requirement. As of December 31, 2016, this excess amounted to Ps.6,752 million or 44.3%.

The minimum capital requirement increased Ps.2,426 million for the period ended June 30, 2017 as compared to the year ended December 31, 2016, mainly as a result of higher minimum capital requirements of (i) Ps.1,929 million due to the increase in holdings of the private-sector loan portfolio and (ii) Ps.495 million in connection with certain increased operational risks.

Computable capital increased Ps.3,467 million as compared to December 31, 2016, mainly a consequence of a higher Tier I capital, for Ps.2,913 million, mainly due to the higher net income, partially offset by an increase in deductions, resulting from organization and development expenses. Tier II capital recorded a Ps.554 million increase, mainly as a consequence of (i) the issuance of subordinated notes with a par value of US$250 million on July 19, 2016, which counted 100% toward Tier II Capital, the proceeds of which were used to repay subordinated notes due 2019, which counted 24% toward Tier II Capital, and (ii) the provisions for loan losses for the credit portfolio in normal situation.

Minimum Capital Requirements of Insurance Companies

As of June 30, 2017, the computable capital of the companies controlled by Sudamericana Holding S.A. exceeded the minimum requirement of Ps.547.2 million by Ps.90.9 million.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion is based on, and should be read in conjunction with, our consolidated financial statements incorporated by reference in this prospectus supplement and in the accompanying prospectus and “Item 5. Operating and Financial Review and Prospects,” in our 2016 Form 20-F, which is incorporated herein by reference.

Our consolidated financial statements are prepared in Argentine pesos and in conformity with Argentine Central Bank rules, which differ in certain respects from the U.S. GAAP. Information related to the nature and effect of such differences is presented in note 38 to our unaudited interim consolidated financial statements as of June 30, 2017 and for the six months ended June 30, 2017 and 2016. A list of our critical accounting policies can be found in “Item 5.A Operating Results—Critical Accounting Policies” of our 2016 Form 20-F, which is incorporated herein by reference.

In February 2014, the Argentine Central Bank adopted IFRS for the fiscal year starting on January 1, 2018. A reconciliation of our Balance Sheet and Statements of Income between Central Bank rules and IFRS is presented in note 1.16 to our unaudited interim consolidated financial statements as of June 30, 2017 and for the six months ended June 30, 2017 and 2016.

As of June 30, 2017, the macroeconomic environment does not qualify as a hyperinflationary economy under the Central Bank rules. For a consideration of the effects of inflation on our financial consolidated statements, see Note 1 to our unaudited interim consolidated financial statements as of June 30, 2017 and for the six months ended June 30, 2017 and 2016, incorporated herein by reference.

Overview

In recent years, we have undertaken to expand the volume of our business with the private sector in order to increase our recurrent earnings generation capacity. We have increased our customer base and our fee-based business and financial intermediation activities with the private sector, strengthening our position as a leading domestic private-sector financial institution. As a result, our total deposits and loan origination have increased.

Banco Galicia has increased its regulatory capital through the issuance of subordinated bonds (most recently in July 2016), and through the reinvestment of internally generated funds. The increase in our overall level of activity, which led to the above-mentioned increase in the volume of our fee based business and financial intermediation with the private sector, has had a positive impact on our net financial income and on our net income from services. Loan loss provisions have increased due to the deterioration of individuals’ loan portfolios and also due to adverse changes in economic conditions.

In spite of adverse conditions in the Argentine economy, Banco Galicia has managed to expand its business with the private sector and to improve its income generation, while strengthening its financial condition, maintaining an adequate coverage of its credit risks and maintaining a healthy asset quality.

In summary, in recent years, our operating profitability was positively impacted by the growth of our business—both the financial intermediation and fee-based businesses—with the private sector, in a continued low credit risk environment.

The Global Economy

Politics played a central role in the first months of the year. On January 20, 2017, President Trump took office after winning last year’s presidential elections in the United States. The first weeks of his administration

 

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involved high levels of uncertainty about the timing and nature of U.S. policy changes. President Trump’s protectionist speech and harsh attitude towards key commercial partners (e.g., Mexico and China) caused tensions to rise, with a following concern on whether this issue would affect international trade. At the same time, an ambitious plan of fiscal reform and growth stimulus brought enthusiasm to investors. As weeks went by, and with Trump’s administration focused on other issues (health care reform, immigration reform, conflict in Syria, etc.), the market started to realize that fiscal policy would be less expansionary going forward than previously anticipated and market expectations of pro-growth stimulus also receded. Other key political events took place in Europe in the first semester. Emmanuel Macron’s victory over Marine Le Pen in France’s presidential election eased concerns over the populist anti-European trend.

Likewise, central banks had an important role in the beginning of the year, generating high expectations among investors with each of the meetings they carried out during those months. The U.S. Federal Reserve showed a firm commitment to apply its monetary normalization, after long years of low interest rate levels. The U.S. Federal Reserve decided to increase the reference rates in two instances (March and July 2017) to 1.0% to 1.25%, respectively. The immediate reaction was an increase of the Treasuries yield (up to 2.60% in the 10-year bond). Nonetheless, this behavior was reversed as doubts of President Trump’s capability to carry out his agenda increased, with Treasuries showing a significant rise in their prices.

In this context, stock markets withstood the political uncertainty. In the United States, the most relevant stock markets continued to brake all time historic record levels, with increases of 17.3% for Nasdaq, 9.8% for the S&P500 and 9.4% for the Dow Jones during the first six months of 2017. In Europe, stock markets showed an increase of 6.9% in the EuroStoxx50 index, while in Japan, the Nikkei index rose 4.6% in the same period. The Latin America region also showed positive results with positive performances in each stock market: Mexico (+31.8%), Chile (+23.5%), Argentina (+18.4%), Brazil (+10.7%), Colombia (+8.3%) and Perú (+6.5%).

In general, a weakening U.S. dollar implies strong commodity prices. This expected outcome did not occur during the first six months of 2017. The index comprising the 19 most traded commodities worldwide (Thomson Reuters CRB Index) experienced an overall decrease of 9% during the first half of 2017. The most salient reason for the decrease was the significant decline (-14%) of crude oil prices, with the benchmark WTI reaching the price of US$ 45 per barrel. The rest of the commodities had heterogenic behaviors during the first six months of 2017: industrial metals (aluminum +13%: copper +8%: nickel -4%), and grains (wheat +24%: corn +1%: soybean -1.2%).

In connection with global activity levels and according to the “World Economic Outlook” published by the International Monetary Fund, developed economies grew at an estimated rate of 1.7% rate in 2016 and are expected to grow 2.0% in 2017. In turn, according to the same sources, emerging economies seemed to have returned to a growth path, with a growth rate of 4.3% in 2016 and forecasts of 4.6% in 2017.

The Argentine Economy

At the domestic level, during the first half of 2017, Argentina returned to the path of economic recovery, after the recession in 2016. According to the National Institute of Statistics and Censuses (“INDEC”), GDP grew 1.1% in the first quarter of 2017 as compared to the previous quarter (seasonally adjusted). Moreover, according to the official monthly activity estimator (EMAE), the economy grew an additional 0.8% during the second quarter of 2017. According to the market expectations survey (REM) conducted by the Argentine Central Bank, the economy is expected to grow 2.7% in 2017.

In terms of the labor market, the decline in economic activity during 2016 and the recent recovery have had an impact on employment dynamics. The unemployment rate for the first quarter of 2017—the last available data—reached 9.2% of the economically active population, from 7.6% in the previous quarter. Employment statistics published by INDEC prior to the second quarter of 2016 are under analysis and the new data is not comparable with previous data.

 

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In the monetary area, the main monetary aggregates decelerated their pace, even though they are still increasing at a higher rate than the nominal growth of the economy. The monetary base of the Argentine government expanded of 32.0% between June 30, 2016 and June 30, 2017, after increasing above 40% during February 2017. Particularly, the monetary aggregate increased by Ps.11,441 million, which is mostly due to the increased level of financing provided to the National Treasury (Ps.96,500 million), and the purchase of foreign currency from the National Treasury by the Argentine Central Bank (Ps.77,306 million) and, to a lesser extent, the purchase of foreign currency by the private sector amounting to Ps.27,158 million. This expansion was partly offset by the placement of Argentine Central Bank bills and notes (“Lebacs” and “Nobacs”, respectively) for Ps.134,128 million and a Ps.64,523 million increase in repurchase transactions. To a lesser extent, this trend was also reflected in the performance of the private-sector M2 (money in circulation and deposits in savings and checking accounts that belong to the private sector), which grew 36.2% in June 2017, below the maximum of 38.0% growth reached in February 2017. In contrast, total M2 (including deposits from the public sector) ended June 2017 with a 35.4% increase, accelerating its pace in comparison with its performance during the first months of 2017.

Domestic interest rates evolved in line with expected changes in prices and the foreign exchange market. After adopting a system of inflation targeting in January 2017, and showing commitment to its goal, the Central Bank tightened monetary policy and raised interest rates (7-Day Repo Reference Rate ended June 2017 at 26.25%) during the first half of the year. As a consequence of this policy, interest rates on time deposits ended the first half of 2017 slightly above the levels registered at the end of 2016. In particular, the Badlar (average rate stemming from an Argentine Central Bank survey of fixed term deposit rates for amounts over 1 million pesos with a maturity of 30 to 35 days) ended June 2017 at 20.2%, above the average of 19.8% recorded in December 2016.

The reference exchange rate established by the Argentine Central Bank increased from Ps.15.8502 to Ps.16.5985 per U.S. dollar between December 31, 2016 and June 30, 2017 (reflecting a 4.7% depreciation in the Argentine peso vis-à-vis the U.S. dollar).

According to the Consumer Price Index of the City of Buenos Aires (CPI-BA), during the first six months of 2017, the inflation was 13.0% (23.4% year-on-year), which compares to 41% inflation between December, 31, 2015 and December 31, 2016. As of July (last data available), the CPI-BA showed a year-on-year growth of 22.9%, as compared to 47.2% a year earlier.

In the fiscal area, tax revenues, including social security and an extraordinary revenue of Ps.40,500 million from a tax amnesty program implemented in 2016 and open until March of 2017, increased by 32.0% in the first half of 2017. On the other hand, primary expenditures increased by 32.5% during the same period. Thus, during the first half of 2017, the non-financial domestic public sector incurred a primary deficit of Ps.144,286 million. After interest payments of Ps.111,265 million, the financial deficit amounted to Ps.255,547 million during the first half of 2017.

Regarding the external sector, during the first half of 2017, the foreign exchange balance current account published by the Argentine Central Bank (cash basis) reached a deficit amounting to US$ 5,657 million, lower than the deficit registered during the same period of 2016 which amounted to US$ 8,626 million. Measured in terms of GDP, the current account deficit stood at about 1% in the first half of 2017, marking an increase of 0.5 percentage points (p.p.) against the first half of 2016. This decrease in the deficit is primarily explained by a decrease in net interest payments (US$ 3,704 million in the first half of 2017 against US$ 8,347 million in the same period of 2016) and fewer profits and dividends outflows (US$ 984 million in the first half of 2017 against US$ 1,451 million in the same period of 2016), partly offset by an increase in net outflows for the “Services” account (US$ 5,095 million in the first half of 2017 against US$ 4,749 million in the same period of 2016), and a lower surplus in the “Goods” account (US$ 3,915 million in the first half of 2017 against US$ 5,775 million in the same period of 2016).

 

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In particular, while revenues from exports of goods from the current account (cash basis) in the first half of 2017 remained practically unchanged from the same period of 2016 (US$ 29,876 million in the first half of 2017 against US$ 29,989 million in 2016), lower income from goods in the first half of 2017 compared to 2016 was due to higher payments for imports of goods. These totaled US$ 25,961 million in the first half of 2017, US$ 1,746 million (+7.2% per annum) above the first half of 2016, in the context of an economic recovery.

In this context, the capital and financial account (cash basis) recorded a net foreign exchange income of US$ 14,328 million, compared to a slightly lower net foreign exchange income of US$ 13,245 million in the first half of 2016. As of June 30, 2017, the Central Bank’s international reserves amounted to US$ 47,995 million, US$ 8,686 million higher than at the end of 2016.

The Argentine Financial System

Total loans to the private sector in the financial system reached Ps.1,249,335 million in June 2017, increasing 40.5% as compared to June 2016. The type of private sector loans that increased the most were collateral loans, which grew 52.1% in the twelve months preceding June 30, 2017 (although they only represented 12% of total loans to the private sector). Commercial loans, consisting of overdrafts in checking accounts and notes (promissory notes and purchased/discounted notes), increased by 42.9% as compared to June 2016, amounting to Ps.498,893 million. Consumer credit lines, made up of loans made through credit cards and personal loans, grew 37.1% during the period under consideration, reaching Ps.535,202 million as of June 30, 2017.

The financial system’s total deposits amounted to Ps.2,045,936 million as of June 30, 2017, marking an increase of 37.5% as compared to June 30, 2016. Deposits from the non-financial private sector recorded an increase of 38.7% in the twelve months preceding June 30, 2017, amounting to Ps.1,639,362 million, while deposits from the public sector reached Ps.398,646 million, an increase of 32.5% in June 2017 as compared to June 2016. Within deposits from the private sector, transactional deposits increased 63.1% in June 2017, reaching Ps.945,787 million, while time deposits increased 13.8% in June 2017, reaching Ps.642,201 million as of June 2017.

The average interest rate paid by private banks in June 2017 for time deposits denominated in pesos of between 30 and 44 days was 18.2%, a decline of 885 basis points (b.p.) as compared to June 2016. With regard to lending rates, those applicable to checking account overdrafts were 30.8% (-784 b.p. as compared to June 2016) and to promissory notes, 21.3% (-1078 b.p. as compared to June 2016).

In May 2017, financial institutions increased their liquidity levels (in relation to total deposits) reaching a ratio of 32.1% (+406 b.p. as compared to May 2016). Regarding Lebac holdings, liquidity rose to 48.6% as compared to 46.5% in May 2016. In financial standing terms, the Argentine financial system’s net worth increased by Ps.71,657 million from May 2016 to May 2017 amounting to Ps.327,661 million, thus representing a 28.0% annual growth as of May 2017. The system’s profitability was equivalent to 3.1% of total assets (0.9 p.p. less as compared to May 2016), while the return on shareholders’ equity was 26.6% (5.0 p.p. less as compared to May 2016).

Income from interest and income from services (five months ended May 31, 2017) amounted to 4.6% and 3.7% of total assets, respectively. In turn, administrative expenses remained at 7.4% of total assets, while provisions for loan losses amounted to 0.9% of total assets (above the 0.8% registered in May 2016).

The non-accrual loan portfolio to the non-financial private sector reached 2.0% in May 2017, thereby leading to a slight increase from 1.9% as compared to May 2016. The coverage of the private-sector non-accrual loan portfolio with allowances reached 131%, 8 p.p. less than the coverage levels registered in May 2016.

As of March 31, 2017, the financial system was composed of 78 financial institutions. Of these, 63 were banks, of which 50 were private banks (33 were domestically-owned and 17 were foreign-owned) and 13 were government-owned banks, as well as 15 non-banking financial institutions.

 

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The concentration of the financial system, measured by the market share of private sector deposits of the ten leading banks, reached 77.5% as of March 31, 2017, a similar percentage to the one recorded in the same month of 2016.

Based on information as of March 2017, the Argentine financial system employed 110,115 people, representing a 0.9% increase from March 31, 2016.

The Argentine Insurance Industry

The insurance industry continued to grow during the first half of 2017. Written premiums amounted to Ps.144,838 million, a positive variation of 31.3% for the first six months of 2017. Out of total insurance written premiums, 82% related to property insurance, 16% related to life and personal insurance and 2% related to retirement insurance. Within the 82% corresponding to property insurance, the automotive insurance segment continued to comprise the most significant portion, with 44% of property insurance, followed by the workers’ compensation segment with 36%.

Within the life insurance business, group life insurance represented 67% of the segment, followed by individual life insurance, representing 14%, and personal accident insurance, representing 14% for the first six months of 2017.

Inflation

Historically, inflation has played a significant role in influencing, often negatively, the economic conditions in Argentina and, in turn, the operations and financial results of companies operating in Argentina, such as Grupo Galicia.

In fiscal year 2015, due to changes in INDEC, the WPI and CPI indexes were discontinued beginning in October 2015. The WPI index was republished beginning in January 2016. A new CPI index was launched in May 2016, but did not contain historical information.

The chart below presents a comparison of inflation rates published by INDEC, measured by the WPI and the CPI, for the fiscal years 2016, 2015 and 2014. In 2016, annual variation of the CPI was calculated using the Consumer Price Index of the City of Buenos Aires, an alternative measure of inflation proposed by INDEC after it discontinued its index.

In addition, the chart below presents the evolution of the CER index, published by the Argentine Central Bank, used to adjust the principal of certain of our assets and liabilities, for the periods indicated.

 

     For the Year Ended
December 31,
 
    

2016

    

2015

    

2014

 
     (in percentages)  

Price Indices (1) (2)

        

WPI

     34.59        12.65        28.27  

CPI

     41.05        26.90        23.91  

Adjustment Indices

        

CER

     35.79        15.05        24.34  

 

Source: INDEC/the Argentine Central Bank.

(1) Data for December of each year as compared to December of the immediately preceding year, except for WPI in 2015, which corresponds to the interannual variation between October 2015 and October 2014, and WPI 2016, which corresponds the interannual accumulated variation, because the measurement of this index was discontinued.

 

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(2) The accuracy of the measurements of INDEC has been in the past in doubt, and the CPI and WPI could be substantially higher than those indicated by INDEC, for the fiscal years 2015 and 2014. For example, according to private sector estimates, the CPI approximately increased by 41% (rather than 23.9%) in 2014, 27% (rather than 18.6%) in 2015.

In the first half of 2017, the CPI published by INDEC increased 11.85% and the CER increased 11.98% during the same period.

Results of Operations for the Six Month Period Ended June 30, 2017, Compared to the Six Month Period Ended June 30, 2016

We discuss below our results of operations for the six month period ended June 30, 2017, as compared with our results of operations for the six month period ended June 30, 2016.

Net Income/Loss

 

     Six Months Ended      Change
%
 
     June 30,      June 30,
2017/2016
 
    

2017

    

2016

    
     (in millions of pesos, except
percentages)
 

Consolidated Income Statement

        

Financial Income

     20,713        17,890        16  

Financial Expenses

     (9,894      (10,538      (6

Net financial Income

     10,819        7,352        47  

Provision for Losses on Loans and Other Receivables

     (2,606      (1,341      94  

Net income from Services

     7,055        4,650        52  

Income from Insurance Activities

     1,040        1,226        (15

Administrative Expenses

     (10,866      (8,012      36  

Minority Interest

     (276      (165      67  

Income / (Loss) from Equity Investments

     169        76        122  

Miscellaneous Income / (Loss), Net

     166        458        (64

Income Tax

     (2,065      (1,521      36  

Net income

     3,436        2,723        26  

Earnings per Share (1)

     2.64        2.09        26  

Return on Average Total Assets % (2)

     3.09        3.38        (9

Return on Average Shareholders’ Equity %

     31.35        34.60        (9

 

(1) In pesos, calculated as net income divided by shares.
(2) For the calculation of the return on average assets, profits or losses corresponding to minority interests are excluded from net income.

Grupo Galicia’s net income for the six month period ended June 30, 2017 was Ps.3,436 million, as compared to the Ps.2,723 million net income recorded in the six month period ended June 30, 2016, representing a 26.2% increase.

Earnings per share for the six month period ended June 30, 2017 were Ps.2.64, as compared to Ps.2.09 for the six month period ended June 30, 2016.

The return on average assets and the return on average shareholders’ equity for the six month period ended June 30, 2017 were 3.09% and 31.35%, respectively, as compared to 3.38% and 34.60%, respectively, for the six month period ended June 30, 2016.

 

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The result for the six month period ended June 30, 2017 was mainly attributable to the income derived from its interest in Banco Galicia, for Ps.3,144 million (which includes income derived from Banco Galicia’s 77% and 12.5% participation in Tarjetas Regionales and Sudamericana Holding S.A., respectively), in Sudamericana Holding S.A., for Ps.194 million, and in Galicia Administradora de Fondos S.A., for Ps.183 million, partially offset by administrative and financial expenses of Ps.21 million.

Financial Income

Our financial income was composed of the following:

 

     Six Months Ended      Change
%
 
     June 30,      June 30,
2017/2016
 
    

2017

    

2016

    
     (in millions of pesos, except
percentages)
 

Consolidated Income Statement

        

Income on Loans and Other Receivables Resulting from Financial Brokerage and Premiums Earned on Reverse Repurchases

     17,151        14,115        22  

Income from Government and Corporate Securities, Net

     2,438        3,059        (20

Other (1)

     1,124        716        57  

Total

     20,713        17,890        16  

 

(1) Reflects income from receivables from financial leases, CER adjustment, and results from foreign-exchange differences.

Our financial income for the six month period ended June 30, 2017 was Ps.20,713 million, as compared to Ps.17,890 million for the six month period ended June 30, 2016, representing a 15.8% increase. Such increase was the result of a higher average volume of interest-earning assets despite a decrease in the average interest rate primarily on time deposits.

The following table shows our yields on interest-earning assets and cost of funds:

 

     Six Months Ended June 30,  
     2017      2016  
    

Average
Balance

    

Rate

    

Average
Balance

    

Rate

 
    

(in millions of pesos, except percentages)

 

Interest-Earning Assets

     169,115        23.09        129,444        26.44  

Government Securities

     19,016        21.36        24,428        20.59  

Loans

     144,977        23.25        102,080        27.61  

Other Interest-Earning Assets

     5,122        25.11        2,936        34,67  

Interest-Bearing Liabilities

     133,492        11.50        95,651        18.93  

Current Accounts

     1,500        —          —          —    

Savings Accounts

     46,923        0.09        23,131        0.22  

Time Deposits

     58,931        18.02        55,057        26.09  

Debt Securities

     18,478        18.04        13,984        19.78  

Other Interest-bearing Liabilities

     7,660        17.70        3,478        26.79  

Spread and Net Yield

           

Interest Spread, Nominal Basis (1)

        11.59           7.51  

Net Yield on Interest-earning Assets (2)

        14.02           12.45  

Financial Margin (3)

        12.79           11.36  

 

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(1) Interest spread, nominal basis is the difference between the average nominal interest rate on interest-earning assets and the average nominal interest rate on interest-bearing liabilities. Interest rates include the CER adjustment.
(2) Net interest earned divided by average interest-earning assets. Interest rates include the CER adjustment.

Net interest earned corresponds to the net financial income (“Financial Income” minus “Financial Expenses”, as set forth in the Income Statement), plus (i) financial fees included in “Income from Services—In Relation to Lending Transactions” in the Income Statement, (ii) contributions to the Deposits Insurance Fund included in the item with the same denomination that is part of the “Financial Expenses” caption in the Income Statement, and (iii) contributions and taxes on financial income included in the Income Statement under “Financial Expenses—Others”; minus (i) net income from corporate securities, included under “Financial Income/Expenses—Interest Income and Gains/Losses from Holdings of Government and Corporate Securities”, in the Income Statement, (ii) differences in quotation of gold and foreign currency included in the item with the same denomination that is part of the Financial Expenses/Income caption in the Income Statement, and (iii) the premiums and adjustments on forward transactions in foreign currency, included in the item “Financial Income—Others” in the Income Statement. Net interest earned also includes income from government securities used as security margins in repurchase agreement transactions. This income/loss is included in “Miscellaneous Income/Loss—Others” in the Income Statement. Net income from government securities includes both interest and gains/losses due to the variation of market quotations.

(3) Represents net financial income, divided by average interest-earning assets.

The average interest rate on total loans for the six month period ended June 30, 2017 was 23.25%, as compared to 27.61% for the six month period ended June 30, 2016.

The average interest rate earned on peso-denominated loans to the private sector for the six month period ended June 30, 2017 was 27.09%, as compared to 29.31% for the six month period ended June 30, 2016, representing a 222 b.p. decrease. This interest rate was influenced by, among other things, loans that were undertaken pursuant to the Credit Line for Productive Investment (with nominal annual fixed rates of 17.00% beginning in November 1, 2016 and 19.00% and 18.00% for the first and second part of the 2015 allocation, respectively), and by the regulation issued by the Argentine Central Bank in June 2014 in order to establish caps on interest rates on loans. On December 17, 2015, through its Communication “A” 5853, the Argentine Central Bank removed such limits.

The average position in government securities for the six month period ended June 30, 2017 was Ps.19,016 million, as compared to Ps.24,428 million for the six month period ended June 30, 2016, reflecting a decrease of 22.2%, as a consequence of the decrease of Ps.6,018 million in the average position on U.S. dollar-denominated government securities. Such decrease was partially offset by Ps.606 million in the average position on peso-denominated government securities. The increase in the average position in pesos was due to higher balances in securities issued by the Argentine Central Bank (Lebacs) and, to a lesser extent, in debt securities and treasury bills issued by different provinces.

The average yield on government securities for the six month period ended June 30, 2017 was 21.36%, as compared to 20.59% for the six month period ended June 30, 2016, a 77 b.p. increase, as a consequence of a higher average yield in U.S. dollars. Thus, the average interest rate on government securities denominated in pesos for the six month period ended June 30, 2017 was 24.13%, as compared to 30.65% for the six month period ended June 30, 2016, a 652 b.p. decrease, while the average interest rate on government securities denominated in U.S. dollars for the six month period ended June 30, 2017 was 5.18%, as compared to 2.73% for the six month period ended June 30, 2016, a 245 b.p. increase.

The average “Other Interest-Earning Assets” for the six month period ended June 30, 2017 was Ps.5,122 million, as compared to Ps.2,936 million for the six month period ended June 30, 2016, representing an

 

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increase of 74%. The average rate on this item for the six month period ended June 30, 2017 was 25.11%, as compared to 34.67% for the six month period ended June 30, 2016, representing a 956 b.p. decrease. This decrease was mainly attributable to the variation in the average rate of other peso-denominated assets, which decreased to 26.14% for the six month period ended June 30, 2017 from 35.58% for the six month period ended June 30, 2016.

The line item “Other” recorded an increase of Ps.408 million, mainly due to the higher income from currency quotation differences, which resulted in a Ps.541 million profit for the six month period ended June 30, 2017. For the six month period ended June 30, 2016, such line item included Ps.494 million profit from foreign currency futures transactions. The result for the six month period ended June 30, 2017 is composed of a gain of Ps.803 million from foreign exchange brokerage activities and a Ps.262 million loss from the valuation of the foreign currency net position and the effects of foreign currency forward transactions, as compared to a gain of Ps.529 million and a loss of Ps.35 million, respectively, for the six month period ended June 30, 2016.

For the six month period ended June 30, 2016, the result from currency quotation differences was positive and was disclosed under the item “Other” in the Financial Income table.

The following table (1) indicates our market share in the segments listed below:

 

    

As of June 30,

     As of December 31,  
    

2017

    

2016

    

2016

    

2015

    

2014

 
     (in percentages)  

Total Deposits

     7.69        7.86        7.94        7.42        6.63  

Private-Sector Deposits

     9.51        9.60        9.96        9.40        8.79  

Total Loans

     10.14        8.90        9.79        8.91        8.07  

Private-Sector Loans

     10.38        9.53        10.12        9.68        8.76  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Exclusively Banco Galicia and CFA within the Argentine market, based on daily information on deposits and loans prepared by the Argentine Central Bank. End-of-month balances are used. Deposits and loans include only principal. Tarjetas Regionales’ data is not included.

 

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Financial Expenses

Our financial expenses were composed of the following:

 

    

Six Months
Ended

June 30,

    

Year Ended December 31,

 
    

2017

    

2016

    

2016

    

2015

    

2014

 
     (in millions of pesos)  

Interest on Deposits

     5,312        7,170        13,127        8,694        6,577  

Savings Account Deposits

     3        2        5        3        2  

Time Deposits

     5,211        7,136        13,064        8,508        6,494  

Other

     98        32        58        183        81  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest on Notes

     1,667        1,383        2,899        1,846        1,485  

Unsubordinated

     1,503        1,084        2,366        1,472        1,175  

Subordinated

     164        299        533        374        310  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Contributions and taxes

     1,775        1,453        2,955        2,111        1,480  

Contributions Made to Deposit Insurance Fund

     135        213        315        497        151  

Turnover Tax

     1,640        1,240        2,640        1,614        1,329