20-F 1 d912561d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

¨ Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934

or

 

x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2014

or

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                      to                     

or

 

¨ Shell Company Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of the event requiring this shell company report.                     

Commission file number: 001-32827

BANCO MACRO S.A.

(Exact Name of Registrant as Specified in its Charter)

Macro Bank, Inc.

(Translation of registrant’s name into English)

Argentina

(Jurisdiction of incorporation or organization)

Sarmiento 447, City of Buenos Aires, Argentina

(Address of registrant’s principal executive offices)

 

 

Jorge Scarinci

Finance and Investor Relations Manager

Banco Macro S.A.

401 Sarmiento, 3th Floor

Buenos Aires—C1041AAI, Argentina

Telephone: (+54-11-5222-6730)

Facsimile: (+54-11-5222-7826)

(Name, telephone, e-mail and/or facsimile member and address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange On Which Registered

American Depositary Shares

Class B ordinary shares, par value Ps.1.00 per share

 

New York Stock Exchange

New York Stock Exchange(*)

 

 

 

(*) Ordinary shares of Banco Macro S.A. are not listed for trading but only in connection with the registration of American Depositary Shares which are evidenced by American Depositary Receipts.

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

9.75% Fixed/Floating Rate Non-Cumulative Junior Subordinated Bonds Due 2036
8.50% Notes Due 2017

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

11,235,670 Class A ordinary shares, par value Ps.1.00 per share

573,327,358 Class B ordinary shares, par value Ps.1.00 per share

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x                Accelerated filer  ¨                Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ¨     

International Financial Reporting  ¨

Standards as issued by the International Accounting Standards

Board  ¨

   Other  x

If “Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

Indicate by check mark which financial statement item the registrant has elected to follow:

Item 17  ¨    Item 18  x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No   x

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 23 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court.

Yes  ¨    No  ¨

Please send copies of notices and communications from the Securities and Exchange Commission to:

 

Hugo N. L. Bruzone

Bruchou, Fernández Madero & Lombardi

Ing. Butty 275, 12th Floor

C1001AFA - Buenos Aires, Argentina

 

Jeffrey Cohen

Linklaters LLP

1345 Avenue of the Americas

New York, NY 10105

 

 

 


Table of Contents

Table of Contents

 

PART I   4   
Item 1.

Identity of Directors, Senior Management and Advisers

  4   
Item 2.

Offer Statistics and Expected Timetable

  4   
Item 3.

Key Information

  4   
Item 4.

Information on the Bank

  21   
Item 4A.

Unresolved Staff Comments

  73   
Item 5.

Operating and Financial Review and Prospects

  73   
Item 6.

Directors, Senior Management and Employees

  92   
Item 7.

Major Shareholders and Related Party Transactions

  102   
Item 8.

Financial Information

  104   
Item 9.

The Offer and Listing

  106   
Item 10.

Additional Information

  108   
Item 11.

Quantitative and Qualitative Disclosure About Market Risk

  125   
Item 12.

Description of Securities Other Than Equity Securities

  126   
PART II   127   
Item 13.

Defaults, Dividend Arrearages and Delinquencies

  127   
Item 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds

  127   
Item 15.

Controls and Procedures

  127   
Item 16A.

Audit Committee Financial Expert

  129   
Item 16B.

Code of Ethics

  129   
Item 16C.

Principal Accountant Fees and Services

  129   
Item 16D.

Exemptions from the Listing Standards for Audit Committees

  130   
Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

  130   
Item 16F.

Change in Registrant’s Certifying Accountant

  130   
Item 16G.

Corporate Governance

  130   
PART III   133   
Item 17.

Financial Statements

  133   
Item 18.

Financial Statements

  133   
Item 19.

Exhibits

  133   

 

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Certain defined terms

In this annual report, we use the terms “the registrant,” “we,” “us,” “our” and the “Bank” to refer to Banco Macro S.A. and its subsidiaries, on a consolidated basis. References to “Banco Macro” refer to Banco Macro S.A. on an individual basis. References to “Class B shares refer to shares of our Class B common stock and references to “ADSs” refer to American depositary shares representing our Class B shares, except where the context otherwise requires. References to our “2036 Notes” refer to our 9.75% Fixed/Floating Rate Non-Cumulative Junior Subordinated Bonds due 2036. References to our “2017 Notes” refer to our 8.50% Notes due 2017. Except where the context otherwise requires, reference to our “notes” refer to our 2036 Notes and our 2017 Notes.

The term “Argentina” refers to the Republic of Argentina. The terms “Argentine government” or the “government” refer to the federal government of Argentina, the term “Argentine Congress” refer to Argentine National Congress, the legislative branch of the government of Argentina, the term “Central Bank” refers to the Banco Central de la República Argentina, or the Argentine Central Bank, the term “Superintendency” refers to the Superintendencia de Entidades Financieras y Cambiarias or the Superintendency of Financial and Exchange Entities, the term “CNV” refers to the Comisión Nacional de Valores, or the Argentine Securities Commission, the term “BCBA” refers to the Bolsa de Comercio de Buenos Aires, or the Buenos Aires Stock Exchange, the term “NYSE” refers to the New York Stock Exchange, the term “IGJ” refers to the Inspección General de Justicia, or Public Registry of Commerce and the term “ANSES” refers to the Administración Nacional de la Seguridad Social or National Social Security Agency.

The terms “U.S. dollar” and “U.S. dollars” and the symbol “US$” refer to the legal currency of the United States. The terms “Peso” and “Pesos” and the symbol “Ps.” refer to the legal currency of Argentina. “U.S. GAAP” refers to generally accepted accounting principles in the United States, “Argentine GAAP” refers to generally accepted accounting principles in Argentina and “Central Bank Rules” refers to the accounting and other regulations of the Central Bank. The term “INDEC” refers to the National Statistics Institute (Instituto Nacional de Estadísticas y Censos, “INDEC”).

The term “GDP” refers to gross domestic product and all references in this annual report to GDP growth are to real GDP growth. The term “CER,” or benchmark stabilization coefficient, is an index issued by the Argentine government which is used to adjust value of credits and deposits. Assets and liabilities indexed by CER are adjusted according to the National Urban Consumer Price Index (Índice de Precios al Consumidor Nacional Urbano, the “IPCNU”), the new Argentine consumer price index that replaces the prior measurement and will be used on a going forward basis to calculate CER indexation.

Presentation of certain financial and other information

We maintain our financial books and records in Pesos and prepare and publish our consolidated financial statements in Argentina in conformity with Central Bank Rules, which differ in certain significant respects from U.S. GAAP and, to a certain extent, from Argentine GAAP. Our consolidated financial statements contain a description of the principal differences between Central Bank Rules and Argentine GAAP. Under Central Bank Rules, our consolidated financial statements were adjusted to account for the effects of wholesale-price inflation in Argentina for the periods through February 28, 2003. For the periods subsequent to February 28, 2003, the inflation adjustments were no longer applied to our consolidated financial statements under Central Bank Rules. However, in reviewing our consolidated financial statements, investors should consider that, in recent years, there have been significant changes in the prices for relevant economic variables, such as salary cost, interest and exchange rates, which are not required to be reflected by adjustments to such financial statements pursuant to local regulations.

Our consolidated financial statements consolidate the financial statements of the following companies:

 

  Banco del Tucumán S.A. (“Banco del Tucumán”)

 

  Macro Bank Limited (an entity organized under the laws of Bahamas)

 

  Macro Securities S.A.

 

  Macro Fiducia S.A.

 

  Macro Fondos S.G.F.C.I. S.A.

Our audited consolidated financial statements as of and for the three years ended December 31, 2014 included in this annual report have been reconciled to U.S. GAAP. See note 35 to our audited consolidated financial statements as of and for the three years ended December 31, 2014 for a reconciliation of our consolidated financial statements to U.S. GAAP. See also Item 5.A “Operating and Financial Review and Prospects” for a reconciliation of Central Bank Rules to U.S. GAAP.

Due to the modification of certain disclosure methods for certain items on the consolidated balance sheets and the consolidated statements of income, which did not affect the shareholders’ equity of the Bank, the consolidated financial statements as of December 31, 2012 were modified for the sole purpose of comparability with the consolidated financial statements as of December 31, 2013 and 2014.

Our financial information in conformity with Central Bank Rules is sent on a monthly basis to the Central Bank and is published on its website www.bcra.gob.ar. In addition, we also file quarterly and annual financial statements with the Central Bank, the CNV and the BCBA.

 

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Rounding

Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.

Market position

We make statements in this annual report about our competitive position and market share in, and the market size of, the Argentine banking industry. We have made these statements on the basis of statistics and other information from third-party sources that we believe are reliable. Although we have no reason to believe any of this information or these reports are inaccurate in any material respect, we have not independently verified the competitive position, market share and market size or market growth data provided by third parties or by industry or general publications.

Our internet site is not part of this annual report

We maintain an internet site at www.macro.com.ar. Information contained in or otherwise accessible through this website is not a part of this annual report. All references in this annual report to this Internet site are inactive textual references to this URL, or “uniform resource locator” and are for your informational reference only.

Cautionary statement concerning forward-looking statements

This annual report contains certain statements that we consider to be “forward-looking statements”. We have based these forward-looking statements largely on our current beliefs, expectations and projections about future events and financial trends affecting our business. Many important factors, in addition to those discussed elsewhere in this annual report, could cause our actual results to differ substantially from those anticipated in our forward-looking statements, including, among other things:

 

    changes in general economic, business, political, legal, social or other conditions in Argentina and worldwide;

 

    effects of the global financial markets and economic crisis;

 

    deterioration in regional business and economic conditions;

 

    inflation;

 

    fluctuations and declines in the exchange rate of the Peso;

 

    changes in interest rates which may adversely affect financial margins;

 

    governmental intervention and regulation (including banking and tax regulations);

 

    adverse legal or regulatory disputes or proceedings;

 

    credit and other risks of lending, such as increases in defaults by borrowers and other delinquencies;

 

    increase in the provisions for loan losses;

 

    fluctuations and declines in the value of Argentine public debt;

 

    decrease in deposits, customers loss and revenue losses;

 

    competition in banking, financial services and related industries and the loss of market share;

 

    cost and availability of funding;

 

    technological changes, changes in consumer spending and saving habits, and inability to implement new technologies; and

 

    the risk factors discussed under Item 3.D “Risk factors”.

The words “believe,” “may,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “forecast” and similar words are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation and the effects of competition. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update publicly or to revise any forward-looking statements after we distribute this annual report because of new information, future events or other factors. In light of the risks and uncertainties described above, the forward-looking events and circumstances discussed in this annual report might not occur and are not guarantees of future performance.

 

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Sections of this annual report that by their nature contain forward-looking statements include, but are not limited to, Item 3. “Key Information,” Item 4. “Information on the Bank,” Item 5. “Operating and Financial Review and Prospects” and Item 11. “Quantitative and Qualitative Disclosure About Market Risk”.

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A. Selected Financial Data

The following tables present summary historical consolidated financial data for each of the periods indicated. You should read this information in conjunction with our consolidated financial statements and related notes, and the information under Item 5. “Operating and Financial Review and Prospects” included elsewhere in this annual report.

We have derived our selected consolidated financial data as of and for the three years ended December 31, 2014 from our audited consolidated financial statements included in this annual report. We have derived our selected consolidated financial data for the years ended December 31, 2010, 2011 and 2012 from our audited consolidated financial statements not included in this annual report. Such financial information has been restated mainly due to the modification of certain disclosure methods for certain accounts and items on the consolidated balance sheets and consolidated statements of income, which did not affect the shareholders’ equity of the Bank. Solely for the convenience of the reader, the reference exchange rate for U.S. dollars as of December 31, 2014, as reported by the Central Bank was Ps.8.552 to US$1.00. See Item 10. “Additional Information-Exchange Controls” for additional information regarding Peso/U.S. dollar exchange ratios.

 

     Year Ended December 31,  
     2010 (1)     2011 (1)     2012 (1)     2013     2014  
    

(in thousands of Pesos, except for number of shares,

net income per share and dividends per share)

 

Selected Consolidated Income Statement

          

Central Bank Rules:

          

Financial income

     3,728,438        4,698,648        6,904,370        9,753,531        14,682,649   

Financial expense

     (1,330,170     (1,718,721     (2,827,590     (4,021,540     (6,582,561

Gross intermediation margin

     2,398,268        2,979,927        4,076,780        5,731,991        8,100,088   

Provision for loan losses

     (215,040     (273,224     (600,424     (540,032     (664,882

Service charge income

     1,324,541        1,969,173        2,644,731        3,426,324        4,655,788   

Service charge expense

     (285,271     (427,954     (685,392     (917,807     (1,215,759

Administrative expenses

     (1,917,408     (2,488,577     (3,115,385     (4,015,356     (5,498,879

Other income

     167,523        190,560        196,662        253,214        351,203   

Other expense

     (89,540     (105,839     (156,089     (143,688     (262,350

Minority Interest in subsidiaries

     (6,868     (10,111     (13,790     (18,173     (23,492

Income Tax

     (365,775     (657,858     (853,475     (1,332,909     (1,962,186

Net income

     1,010,430        1,176,097        1,493,618        2,443,564        3,479,531   

Net income per share (2)

     1.70        1.98        2.56        4.18        5.95   

Dividends per share (3)

     0.85        0.00        0.00        1.02        1.02   

Dividends per share in US$ (3)

     0.21        0.00        0.00        0.16        0.12   

Number of outstanding shares (in thousands)

     594,485        584,485        584,485        584,485        584,563   

U.S. GAAP: (4)

          

Net income before extraordinary items

     865,215        1,198,411        1,551,994        2,479,680        3,572,933   

Extraordinary Gain

          

Less: Net income attributable to the non-controlling interest

     (5,943     (8,380     (14,159     (18,521     (25,424

Net income attributable to the controlling interest

     859,272        1,190,031        1,537,835        2,461,159        3,547,509   

Net income per share before extraordinary item(s)

     1.45        2.02        2.66        4.24        6.11   

Total net income per share (5)

     1.45        2.01        2.63        4.21        6.07   

Weighted average number of outstanding shares (in thousands)

     594,485        593,220        584,485        584,485        584,537   

 

(1) Due to the modification of certain disclosure methods defined for certain items in the consolidated balance sheets and consolidated statements of income, figures have been restated for comparability purposes. See “Presentation of certain financial and other information.”
(2) Net income in accordance with Central Bank Rules divided by weighted average number of outstanding shares.
(3) Includes cash dividends approved by the shareholders’ meetings for each of such fiscal years, if any.
(4) See note 35 to our audited consolidated financial statements as of and for the three years ended December 31, 2014 for a summary of significant differences between Central Bank Rules and U.S. GAAP.
(5) Net income in accordance with U.S. GAAP divided by weighted average number of outstanding shares.

 

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     As of December 31,  
     2010 (1)     2011 (1)     2012 (1)     2013     2014  
     (in thousands of Pesos)  

Selected Consolidated Balance Sheet

          

Central Bank Rules:

          

Assets

          

Cash and due from banks and correspondents

     5,202,004        6,172,446        10,047,048        12,860,529        15,434,202   

Government and private securities

     7,030,074        4,396,862        2,343,078        2,441,316        10,312,498   

Loans:

          

to the non-financial government sector

     336,430        336,189        586,557        640,158        604,417   

to the financial sector

     155,701        343,282        299,250        364,897        213,867   

to the non-financial private sector and foreign residents

     15,932,882        24,238,011        31,203,946        39,023,795        44,108,055   

Allowances for loan losses

     (514,910     (599,224     (887,156     (1,006,495     (1,186,044

Other assets

     5,040,342        6,291,633        4,301,342        4,970,834        5,508,639   

Total assets

     33,182,523        41,179,199        47,894,065        59,295,034        74,995,634   

Average assets

     27,871,603        34,839,066        44,792,602        53,268,656        67,852,744   

Liabilities and shareholders’ equity

          

Deposits:

          

from the non-financial government sector

     5,216,109        5,836,211        8,318,383        6,580,041        8,570,055   

from the financial sector

     15,776        17,731        24,222        26,874        38,683   

from the non-financial private sector and foreign residents

     18,175,508        23,313,136        27,846,067        36,820,103        46,107,816   

Other liabilities from financial intermediation and other liabilities

     4,883,090        6,487,435        4,575,660        6,023,432        7,228,056   

Provisions

     105,830        112,816        131,683        159,381        171,923   

Subordinated corporate bonds

     598,470        647,753        740,192        981,142        1,287,317   

Items pending allocation

     7,399        6,981        7,408        7,128        6,966   

Minority interest in subsidiaries

     27,499        37,584        51,355        69,502        93,001   

Total liabilities

     29,029,681        36,459,647        41,694,970        50,667,603        63,503,817   

Shareholders’ equity

     4,152,842        4,719,552        6,199,095        8,627,431        11,491,817   

Average shareholders’ equity

     3,733,181        4,400,739        5,510,363        7,344,336        10,425,703   

U.S. GAAP: (2)

          

Shareholders’ equity attributable to the controlling interest

     3,754,434        4,325,759        5,876,589        8,332,414        11,323,047   

Non-controlling interests

     28,995        37,375        51,534        70,055        95,479   

Shareholders’ equity

     3,783,429        4,363,134        5,928,123        8,402,469        11,418,526   

 

(1) Due to the modification of certain disclosure methods defined for certain items in the consolidated balance sheets and consolidated statements of income, figures have been restated for comparability purposes. See “Presentation of certain financial and other information.”
(2) See note 35 to our audited consolidated financial statements as of and for the three years ended December 31, 2014 for a summary of significant differences between Central Bank Rules and U.S. GAAP.

 

     As of and for the year ended December 31,  
Selected consolidated ratios:    2010     2011     2012     2013     2014  

Profitability and performance

          

Net interest margin (%) (1)

     11.15        10.93        12.07        13.70        15.74   

Fee income ratio (%) (2)

     35.58        39.79        39.35        37.41        36.50   

Efficiency ratio (%) (3)

     51.50        50.28        46.35        43.84        43.11   

Ratio of earnings to fixed charges (excluding interest on deposits) (4)

     11.42     14.37     17.63     20.70     25.04

Ratio of earnings to fixed charges (including interest on deposits) (5)

     2.24     2.32     2.00     2.14     2.01

Fee income as a percentage of administrative expense (%)

     69.08        79.13        84.89        85.33        84.67   

Return on average equity (%)

     27.07        26.72        27.11        33.27        33.37   

Return on average assets (%)

     3.63        3.38        3.33        4.59        5.13   

Liquidity

          

Loans as a percentage of total deposits (%)

     70.17        85.43        88.67        92.17        82.11   

Liquid assets as a percentage of total deposits (%) (6)

     50.96        34.74        31.75        33.34        40.57   

Capital

          

Total equity as a percentage of total assets (%)

     12.52        11.46        12.94        14.55        15.32   

Regulatory capital as a percentage of risk-weighted assets (%)

     24.74        18.26        19.01        25.29        24.02   

Asset Quality

          

Non-performing loans as a percentage of total loans (%) (7)

     2.11        1.51        1.78        1.66        1.95   

Allowances for loan losses as a percentage of total loans

     3.13        2.40        2.76        2.51        2.64   

Allowances for loan losses as a percentage of non-performing loans (%) (7)

     148.90        159.16        155.39        151.67        135.29   

Differences due to court orders (Amparos) as a percentage of equity (%)

     1.32        1.08        0.00        0.00        0.00   

Operations

          

Number of branches

     404        414        428        430        434   

Number of employees (8)

     8,197        8,452        8,500        8,613        8,693   

 

(1) Net interest income divided by average interest earning assets.
(2) Service charge income divided by the sum of gross intermediation margin and service charge income.
(3) Administrative expenses divided by the sum of gross intermediation margin and service charge income.
(4) For the purpose of computing the ratio of earnings to fixed charges excluding interest on deposits, earnings consist of income before income taxes plus fixed charges; fixed charges excluding interest on deposits consist of gross interest expense minus interest on deposits.
(5) For the purpose of computing the ratio of earnings to fixed charges including interest on deposits, earnings consist of income before income taxes plus fixed charges; fixed charges including interest on deposits is equal to gross interest expense.
(6) Liquid assets include cash, cash collateral, repos, Lebacs and Nobacs and interfinancing loans.
(7) Non-performing loans include all loans to borrowers classified as “3- troubled/medium risk,” “4-with high risk of insolvency/high risk,” “5-irrecoverable” and “6-irrecoverable according to Central Bank’s Rules” under the Central Bank loan classification system.
(8) Were workers performing their duties pursuant to the “Acciones de entrenamiento para el trabajo” program of the Ministry of Labor, Employment and Social Security and other casual workers included, the number of employees of the Bank would have been 8,209, 8,459, 8,534, 8,708 and 8,728 for 2010, 2011, 2012, 2013 and 2014 respectively. We do not account for such workers as employees, as the Bank does not remunerate them for their services, which are paid directly by the Argentine province where they work.

 

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B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

You should carefully consider the risks described below with all of the other information included in the annual report before deciding to invest in our Class B shares or our ADSs or our notes. If any of the following risks actually occurs, it may materially harm our business and our financial condition and results of operations. As a result, the market price of our Class B shares, our ADSs or our notes could decline and you could lose part or all of your investment.

Investors should carefully read this annual report in its entirety. They should also take into account and evaluate, among other things, their own financial circumstances, their investment goals, and the following risk factors.

Risks relating to Argentina

Argentina’s economic performance may not be sustainable.

The Argentine economy has experienced significant volatility in recent decades, with periods of low or negative growth, high inflation and currency devaluation. Since the 2001 economic crisis, Argentina recovered significantly by increasing at a substantial level its real GDP, at an average of 8.5% on annual basis between 2003 and 2008. As a result of the 2008 world economic crisis, Argentina GDP´s growth rate decreased up to 0.9% in 2009, but it returned to 9.2% growth in 2010 and 8.9% growth in 2011. During 2012, the Argentine economy experienced a slowdown with GDP increasing at a rate of 1.9%. In March 2014, the Argentine government announced a new method of calculating GDP as requested by the International Monetary Fund (“IMF”) (using 2004 as the base year instead of 1993, which was the base reference year used in the prior method of GDP calculation).

Following changes in the methodology used in calculating GDP, INDEC reported that Argentina´s GDP´s growth rate for 2013 was 3% and 0.5% for 2014. This decrease was principally due to the deceleration of the global economy and macroeconomic conditions in Argentina during 2014.

A less favorable international economic environment, a lack of stability, competitiveness of the Peso against other foreign currencies, the low level of confidence among consumers and foreign and domestic investors, a higher inflation rate and future political uncertainties, among other factors, may affect the development of the Argentine economy and cause volatility in the local capital markets

Substantially all our operations, properties and customers are located in Argentina. As a result, our business is to a very large extent dependent upon the economic, social and political conditions prevailing in Argentina. No assurance can be given that future economic, social and political developments in Argentina, over which we have no control, will not have a material adverse effect on our business, financial condition and results of operations.

The Argentine economy could be adversely affected by economic developments in the global markets.

Financial and securities markets in Argentina are influenced by economic and market conditions in other markets worldwide. The international scenario shows contradictory signals of global growth, as well as high financial and exchange uncertainty. The global financial crisis that commenced in the last quarter of 2008 negatively affected the economies of several countries around the world, including Argentina and certain of its trading partners. In late 2011, the global financial system experienced unprecedented volatility and disruption. The resulting financial turmoil caused greater restrictions on access to credit, low liquidity, extreme volatility in foreign exchange markets and securities, and capital flight from emerging markets, including Argentina. In this context, and for the first time in history, on August 5, 2011, Standard & Poor’s Financial Services downgraded the debt instruments issued by the United States from “AAA” to “AA+”. On January 13, 2012, Standard & Poor’s Rating Services downgraded the instruments of nine European countries including France and Italy. Financial markets reacted adversely to the crisis, curtailing the ability of certain of these countries to refinance their outstanding debt.

 

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Moreover, emerging economies have been affected by the change in the U.S. monetary policy, resulting in the sharp unwinding of speculative asset positions, depreciations and increased volatility in the value of their currencies and higher interest rates. The general appreciation of the U.S. dollar resulting from a more restrictive U.S. monetary policy contributed to the fall of the international price of raw materials, increasing the difficulties of emerging countries which are exporters of these products.

Although economic conditions vary from country to country, investors’ perceptions of events occurring in other countries have in the past and may continue to substantially affect capital flows into and investments in securities from issuers in other countries, including Argentina. A prolonged slowdown in economic activity in Argentina or negative effects on the Argentine financial system or the securities markets would adversely affect our business, financial condition and results of operations.

Argentina’s economy is vulnerable to external shocks that could be caused by significant economic difficulties of its major regional trading partners or by more general “contagion” effects.

Argentina’s economy is vulnerable to adverse developments affecting its principal trading partners. A significant decline in the economic growth of any of Argentina’s major trading partners, such as Brazil, China or the United States, could have a material adverse impact on Argentina’s trade balance and adversely affect Argentina’s economic growth. The economic performance of other trading partners such as Chile, Spain and Canada may also affect Argentina’s trade balance.

Recent economic slowdowns have led to declines in exports in 2014 of 27% with Chile, 18% with China, 14% with MERCOSUR (Brazil) and 10% with NAFTA (USA and Canada), each as compared to 2013. Declining demand for Argentine exports could have a material adverse effect on Argentina’s economic growth.

Because international investors’ reactions to the events occurring in one market sometimes demonstrate a “contagion” effect in which an entire region or class of investment is disfavored by international investors, Argentina could be adversely affected by negative economic or financial developments in other countries. This “contagion” effect, in turn, may have an adverse effect on our business, financial condition and results of operations.

Argentina’s ability to obtain financing from international markets is limited, which may impair its ability to implement reforms and public policies and foster economic growth.

Argentina’s 2001 default and its failure to fully restructure its sovereign debt and negotiate with the holdout creditors has limited and may continue to limit Argentina’s ability to access international capital markets. In 2005, Argentina completed the restructuring of a substantial portion of its indebtedness and settled all of its debt with the IMF. Additionally, in June 2010, Argentina completed the renegotiation of approximately 67% of the defaulted bonds that were not swapped in the 2005 restructuring. As a result of the 2005 and 2010 debt swaps, Argentina has restructured approximately 91% of its defaulted debt that was eligible for restructuring. Holdout creditors that declined to participate in the exchanges commenced numerous lawsuits against Argentina in several countries, including the United States, Italy, Germany, and Japan. Additionally, on May 29, 2014, the Argentine government and representatives of the Paris Club creditors reached an agreement to clear Argentina’s debt due to the Paris Club creditors, in arrears, in the total amount of US$9.7 billion as of April 30, 2014.

In related cases brought before the U.S. District Court for the Southern District of New York (the “District Court”), the plaintiffs argued that allowing Argentina to make payments under the new bonds issued pursuant to the debt swaps while it remained in default on its pre-2002 bonds violates the pari passu clause in the original bonds and entitles the plaintiffs to injunctive relief barring Argentina from making payments on the new bonds without making comparable payments on the original bonds. In late October 2012, the U.S. Court of Appeals for the Second Circuit in New York affirmed the District Court’s ruling that the pari passu clause in the pre-2002 bonds prevents Argentina from making payments unless it makes ratable payments to the holdout creditors at the same time. On November 21, 2012, the District Court specified that ratable payments to the holdout creditors would be the full amount owed on the bonds (including interest) and ordered Argentina to pay approximately US$1.3 billion plus interest owed to the holdout creditors party to such proceedings.

On appeal, the U.S. Court of Appeals for the Second Circuit ordered Argentina to submit a payment plan proposal for the holdout creditors, which Argentina did on March 29, 2013. On August 23, 2013, the U.S. Court of Appeals for the Second Circuit rejected Argentina’s payment proposal and affirmed the District Court’s November 21, 2012 injunctions (the “Injunction”). However, in the same ruling, the U.S. Court of Appeals for the Second Circuit stayed the enforcement of the injunctions pending the resolution by the U.S. Supreme Court of any timely petition for a writ of certiorari. In this regard, Argentina filed a petition for a writ of certiorari on June 24, 2013, which was denied as premature. Later, on February 18, 2014, Argentina and certain holders of the new bonds timely filed petitions for a writ of certiorari. On June 16, 2014, the U.S. Supreme Court denied Argentina’s petition for a writ of certiorari in connection therewith and, subsequently, on June 18, 2014, the U.S. Court of Appeals for the Second Circuit lifted its stay on the District Court’s Injunction. Separately, on June 16, 2014, the U.S. Supreme Court affirmed a District Court ruling to compel discovery from certain financial institutions concerning, among other things, Argentina’s assets.

On June 23, 2014, the District Court appointed a special master to mediate settlement negotiations between Argentina and the litigating bondholders. On June 26, 2014, the District Court denied Argentina’s request for a further stay of the Injunction. In addition, on or about June 27, 2014, Argentina transferred to The Bank of New York Mellon, in its capacity as trustee, amounts due June 30, 2014 in respect of certain of its restructured bonds. The District Court, however, prohibited such payment and ordered Argentina and the holders of its non-restructured bonds to agree on a payment schedule. Following negotiations between Argentina and the litigating bondholders, Argentina

 

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and such bondholders failed to reach an agreement in respect of its defaulted debt. By July 30, 2014, the end of the grace period provided under Argentina’s relevant restructured bonds for the payment of debt service thereunder, Argentina and the holdout creditors had not arrived on an agreement and The Bank of New York Mellon complied with the order of the District Court to not deliver the funds previously deposited by Argentina for payment to the holders of the restructured bonds under foreign law. While Argentina asserted that it complied with its obligation to the holders of the restructured bonds by making such deposit, and that the indenture trustee had the obligation to deliver such payment, on such date Standard & Poor’s Rating Services downgraded Argentina’s foreign currency credit rating to “selective default”, or “SD”, while on July 31, 2014, Fitch Ratings Inc. downgraded Argentina’s foreign currency issuer default rating to “restricted default”, or “RD”.

On September 11, 2014, the Argentine Congress enacted Law No. 26,984, with the purpose of implementing legal mechanisms to allow restructured bondholders to collect payments under such bonds. Law No. 26,984 established a new account in the name of Nación Fideicomisos S.A. with the Central Bank in order to make payments to restructured bondholders. Furthermore, Law No. 26,984 set forth that the executive branch could implement an exchange of restructured bonds for Argentine law-governed bonds and for French law-governed bonds. As of the date of this annual report, no such mechanism has been implemented by the Argentine government. Separately, during August 2014 the Central Bank revoked The Bank of New York Mellon’s authorization to operate in Argentina. In connection with these and other actions taken by the Argentine government, the District Court held Argentina in contempt on September 29, 2014.

The District Court authorized limited exceptions to the Injunction allowing certain custodians of Argentine law-governed bonds to process payments in August 2014, September 2014 and December 2014. Payments on the remaining restructured bonds have not been processed as a consequence of the Injunction and various restructured bondholders have been seeking the release of such payments in court. As of the date of this annual report, the District Court has not authorized any other such releases or payments.

The continuation and outcome of this litigation may continue to prevent Argentina from obtaining favorable terms or interest rates when accessing international capital markets. Litigation initiated by holdout creditors or other parties may result in material judgments against the Argentine government and could result in attachments of, or injunctions relating to, Argentina’s assets, which could have a material adverse effect on the country’s economy and affect our ability to access international financing. In addition, litigation initiated by holdouts could eventually bring Argentina to be considered in default of its obligations and cause acceleration of the existing exchange debt due to cross default clauses which could have a material adverse effect on the on the country’s economy, and consequently, our business, financial condition and results of operations.

Argentina is subject to litigation by foreign shareholders of Argentine companies and holders of Argentina’s defaulted bonds, which have resulted and may result in adverse judgments or injunctions against Argentina’s assets and limit its financial resources.

Foreign shareholders of several Argentine companies, including public utilities, and bondholders that did not participate in the exchange offers described above, have filed claims in excess of US$20 billion in the aggregate with the International Centre for Settlement of Investment Disputes (the “ICSID”) alleging that the emergency measures adopted by the government differ from the just and equal treatment standards set forth in several bilateral investment treaties to which Argentina is a party. During 2013, Argentina agreed to settle five separate investment treaty arbitration claims at a cost of around US$500 million. As of December 31, 2014, there were ICSID judgments outstanding against Argentina for approximately US$64 million, plus interest and expenses. On April 9, 2015, the ICSID held that Argentina must pay US$405 million in damages for prejudices suffered in relation to the termination of the Aguas Argentinas water and waste water management concession contract in Buenos Aires. Furthermore, the United Nations Commission on International Trade Law (“UNCITRAL”) has issued rulings against Argentina for approximately US$280 million, plus interest and expenses.

Litigation, as well as ICSID and UNCITRAL claims against the Argentine government, have resulted in material judgments and may result in new material judgments against the government, and could result in attachments of or injunctions relating to assets of Argentina that the government intended for other uses. As a result, the Argentine government may not have all the necessary financial resources to honor its obligations, implement reforms and foster growth, which could have a material adverse effect on the country’s economy, and consequently, our business, financial condition and results of operations.

Government intervention could adversely affect the Argentine economy.

Substantially all our operations, properties and customers are located in Argentina. As a result, our business is to a very large extent dependent upon the political, social and economic conditions prevailing in Argentina. In recent years, the Argentine government has increased its direct intervention in the economy and in private sector operations and companies, limiting certain aspects of private sector businesses.

In May 2013, the Argentine Congress passed a law providing for the expropriation of 51% of the share capital of YPF (Yacimientos Petroliferos Fiscales S.A.), the principal Argentine oil company, which shares were owned by Repsol, S.A. and its affiliates. In February 2015, the Argentine government sent a bill to the Congress in order to revoke certain train concessions, return the national rail network to state control and provide powers to review all concessions currently in force.

In addition, Supply Law No. 26,991 (the “Supply Law”) became effective on September 28, 2014. The Supply Law applies to all economic processes linked to goods, facilities and services which, either directly or indirectly, satisfy basic needs of the population and grants broad delegations of powers to the enforcement authority to interfere in such processes. The Supply Law also provides that in a situation of shortage or scarcity of goods or services which satisfy basic needs destined to the general welfare of the population, the enforcement authority may order their sale, production, distribution and delivery throughout Argentina.

 

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Furthermore, financial institutions operate in a highly regulated environment. See “—The amendment of the Central Bank’s Charter and the Convertibility Law may adversely affect the Argentine economy” and “—Governmental measures and regulatory framework affecting financial entities could have a material adverse effect on the operations of financial entities”. As of the date of this annual report, three different bills to amend the Financial Institutions Law No. 21,526 as amended (the “Financial Institution Law”) have been put forth for review in the Argentine Congress, seeking to amend different aspects of the Financial Institutions Law. A thorough amendment of the Financial Institutions Law would have a substantial effect on the banking system as a whole.

Moreover, the Argentine government has in the past enacted laws and regulations requiring private sector companies to maintain certain salary levels and provide their employees with additional benefits. Employers, both in the public and private sector, have also been experiencing intense pressures from their personnel, or from the labor unions representing them, demanding salary increases and certain benefits for the workers, given the high inflation rates.

Actions taken by the Argentine government concerning the economy, including decisions with respect to interest rates, taxes, price controls, salary increases, provision of additional employee benefits foreign exchange controls and potential changes in the foreign exchange market, have had and could continue to have a material adverse effect on Argentina´s economic growth and in turn affect our financial condition and results of operations. In addition, any additional Argentine government policies to preempt, or in response to, social unrest could adversely and materially affect the economy, and thereby our business.

Expropriations, interventions and other direct involvement by the Argentine government in the economy may have an adverse impact on the level of foreign investment in Argentina, the access of Argentine companies to the international capital markets and Argentina’s commercial and diplomatic relations with other countries.

Argentina’s foreign trade measures may lead to a decrease in exports and retaliation by trading partners.

In 2012, the Argentine government introduced a procedure pursuant to which local authorities must pre-approve the import of products and services to Argentina as a pre-condition to permit such import and the consequent access to the foreign exchange market for the payment of the imported products or services. Members of Mercosur and other countries have complained against these measures, and some have filed claims against Argentina with the World Trade Organization.

In addition, during recent years, the Argentine government has increasingly issued regulations and taken certain actions seeking to control the value of the Peso and offset mismatches on the country’s balance of payments. Such measures, among others, may affect diplomatic commercial relations among Argentina and its trading partners, affecting the trade balance.

Repeated complaints from various countries against import restrictions implemented by Argentina, suspension of export preferences or retaliations by trading partners may have an adverse effect on Argentine exports, affect the trade balance and, consequently, adversely impact Argentina’s economy. Diminished foreign trade would also adversely impact our business, financial condition and results of operations.

Exchange controls and capital inflow and outflow restrictions have limited, and can be expected to continue to limit, the availability of international credit and may impair our ability to make payments on our obligations.

Since 2002, Argentina has imposed exchange controls and transfer restrictions substantially limiting the ability of companies to retain foreign currency or make payments abroad. In June 2005, the government issued Decree No. 616/2005, which established additional controls on capital inflows and outflows. In addition, since 2011, the Argentine government has increased controls on the incurrence of foreign currency-denominated indebtedness, the sale of foreign currency and the acquisition of foreign assets by local residents, limiting the possibility of transferring funds abroad. Furthermore, new regulations have been issued since 2012 pursuant to which certain foreign exchange transactions are subject to prior approval by Argentine tax authorities. For more information, see Item 10.D “Exchange Controls”.

Since the enhancement of exchange controls in November 2011, it is widely reported that in the countries where the Peso (bill) is traded, the Peso/U.S. dollar exchange rate differs substantially from the official foreign exchange rate in Argentina. Additionally, the level of international reserves deposited with the Central Bank significantly decreased from US$47.4 billion as of November 1, 2011 to US$31.5 billion as of March 31, 2015, resulting in a reduced capacity of the Argentine government to intervene in the foreign exchange market and to provide access to such markets to private sector entities like us.

Additional controls could have a negative effect on the economy and on private sector companies, including our business, and may adversely affect Argentine entities’ ability to access the international capital markets for credit. Furthermore, in such event, the imposition of future restrictions on the transfers of funds abroad may impede our ability to transfer dividends to ADS holders or interest or principal payments to the holders of our notes.

A decline in the international prices for Argentina’s main commodity exports or a climate disaster could have an adverse effect on Argentina’s economic growth.

High commodity prices have contributed significantly to the increase in Argentine exports since the third quarter of 2002 as well as in governmental revenues from export taxes (witholdings). However, this reliance on the export of certain commodities, such as soy, has made the Argentine economy more vulnerable to fluctuations in their prices.

 

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If international commodity prices decline, the Argentine government’s revenues would decrease significantly affecting Argentina’s economic activity. Accordingly, a decline in international commodity prices could adversely affect Argentina’s economy, which in turn would produce a negative impact on our financial condition and results of operations.

In addition, adverse weather conditions can affect production of commodities by the agricultural sector, which account for a significant portion of Argentina’s export revenues. These circumstances would have a negative impact on the levels of government revenues, availability of foreign exchange and the government’s ability to service its sovereign debt, and could either generate recessionary or inflationary pressures, depending on the government’s reaction. Either of these results would adversely impact Argentina’s economy growth and, therefore, our business, financial condition and results of operations.

An increase in inflation could have a material adverse effect on Argentina’s economic prospects.

In recent years, Argentina has confronted inflationary pressure, as evidenced by significantly higher fuel, energy and food prices. According to inflation data published by the INDEC, the Argentine consumer price index (“CPI”) increased 10.8% in 2012 and 10.9% in 2013. The wholesale price index increased 13.1% and 14.8%, respectively. These amounts differed with private estimates during such periods.

Since 2007, INDEC, which is the only institution in Argentina with the statutory authority to produce official nationwide statistics, experienced a controversial process of institutional reforms. The accuracy of the statistical information released by the INDEC has been called into question by numerous private sectors and the IMF. In February 2014, after a long period of analysis, the INDEC created a new index, the National Urban Consumer Price Index (Índice de Precios al Consumidor Nacional Urbano, the “IPCNU”), that aims to more broadly reflect changes in consumer prices by measuring 520 products and services in all of Argentina’s 23 provincial capitals, the City of Buenos Aires and major cities in the country, which total 40 urban areas. This new index shows an inflation rate of 23.9% in 2014, 1.1% in January 2015, 0.9% in February 2015 and 1.3% in March 2015.

In the past, inflation has materially undermined the Argentine economy and Argentina’s ability to create conditions that would permit growth. High inflation may also undermine Argentina’s competitiveness abroad and lead to a decline in private consumption that also affects employment levels, salaries and interest rates. Moreover, a high inflation rate could undermine confidence in the Argentine financial system, reducing the Peso deposit base and negatively impacting long-term credit markets.

There can be no assurance that inflation rates will not continue to escalate in the future or that the measures adopted or that may be adopted by the Argentine government to control inflation will be effective or successful. Inflation remains a challenge for Argentina. Significant inflation could have a material adverse effect on Argentina’s economy and in turn could increase our costs of operation, in particular labor costs, and may negatively impact our financial condition and results of operations. See “—Failure by the Argentine government to follow the International Monetary Fund’s recommendations could further strain relations with the IMF”.

Failure by the Argentine government to follow the International Monetary Fund’s recommendations could further strain relations with the IMF.

During the past years, Argentina’s relations with the IMF have been strained. Due to generalized complaints against INDEC’s quality of official data, in December 2010, Argentina accepted to begin working with the IMF for technical assistance in order to prepare a new CPI with the aim of modernizing the current statistical system. During the first quarter of 2011, a team from the IMF started working in conjunction with the INDEC. In addition, on February 1, 2013 the IMF issued a declaration of censure against Argentina in connection with its failure to address the quality of the official data reported to the IMF for CPI and Gross Domestic Product (GDP). Furthermore, on December 9, 2013 the IMF recognized Argentina’s ongoing work and intention to introduce a new national CPI in early 2014. The IMF also noted that Argentina was working to address shortcomings in its GDP data.

As a result, the IMF adopted a decision calling on Argentina to implement specified actions to address the quality of its official CPI and GDP data according to a specified timetable. Such specified actions include the public release of a new national CPI and revised GDP estimates, by the end of March 2014. On February 13, 2014, the INDEC published the IPCNU, agreed by the IMF. Moreover, in March 2014, the Argentine government announced a new method of calculating GDP (using 2004 as the base year instead of 1993, which was the base reference year used in the prior method of GDP calculation).

In December 15, 2014, the IMF recognized the progress of Argentine authorities to remedy the inaccurate provision of data, but has delayed the definitive evaluation of the new index.

If the IMF finds that the methodology of INDEC for calculating a new national CPI or GDP is inaccurate, or concludes that its methodology shall be adjusted, that could derive in financial and economic hazards for Argentina, including lack of financing from such organization. If these measures are adopted, the Argentine economy could suffer adverse effects, either by limiting access to international financial markets or increasing the financing cost associated therewith, which in turn would adversely affect our financial condition and results of operations.

Significant devaluation of the Peso against the U.S. dollar may adversely affect the Argentine economy.

Despite the positive effects of the real depreciation of the Peso on the competitiveness of certain sectors of the Argentine economy, it also had a far-reaching negative impact on the Argentine economy and on the financial condition of businesses and individuals. The devaluation of the Peso had a negative impact on the ability of Argentine businesses to honor their foreign currency-denominated debt, led to very high inflation initially, significantly reduced real wages, had a negative impact on businesses whose success is dependent on domestic market demand, such as utilities and the financial industry.

 

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During 2013, the stock of the international reserves of the Central Bank decreased from US$44.3 billion in 2012 to US$30.6 billion in 2013, mainly due to financing private deficit and payment of Argentine external indebtedness, in spite of the restrictions imposed by the Argentine government on the foreign exchange market since 2011.

In order to contain the fall in reserves, the Central Bank accelerated the rate of nominal devaluation of the Peso. During the first quarter of 2014, the Peso-U.S. dollar exchange rate has significantly increased, resulting in a strong devaluation of the Peso from Ps.6.9120 per dollar to Ps.8.0183 per dollar in two days. The value of Peso gradually depreciated during 2014. See Item 10.D “Exchange Controls—Exchange rates”. The stock of international reserves of the Central Bank was US$31.4 billion as of December 31, 2014 and US$31.5 billion as of March 31, 2015.

The Argentine macroeconomic environment, in which we operate, was affected by such devaluation which had an impact on our financial and economic position. If the Peso devalues significantly, all of the negative effects on the Argentine economy related to such devaluation could recur, with adverse consequences to our business, financial condition and results of operations.

Significant appreciation of the Peso against the U.S. dollar may adversely affect the Argentine economy.

A substantial increase in the value of the Peso against the U.S. dollar presents risks for the Argentine economy. A significant real appreciation of the Peso could affect Argentina’s competitiveness abroad and adversely affect exports and employment level. This could have a negative effect on GDP growth as well as reduce the Argentine public sector’s revenues by reducing tax collection in real terms. A contraction of the Argentine economy may have a material adverse effect in our business, our financial condition and results of operations.

In addition, the appreciation of the Peso against the U.S. dollar would negatively impact the financial condition of entities whose foreign currency-denominated assets exceed their foreign currency-denominated liabilities.

Our primary assets and revenues are denominated in Pesos while approximately 13% of our total assets and 12% of our total liabilities are denominated in foreign currencies.

High public expenditure could result in long lasting adverse consequences for the Argentine economy.

During the last few years, the Argentine government has substantially increased public expenditure. In 2014, public sector expenditure increased by 43% year over year and the government reported primary fiscal deficit. During recent years, the Argentine government has resorted to the Central Bank and to the ANSES to source part of its funding requirements.

In light of increasingly tight public finances, the Argentine government has commenced revising its subsidy policies, particularly those related to energy, electricity and gas, water and public transportation. Changes in these policies could materially and adversely impact consumer purchase capacity and economic activity and lead to an increase in prices, because they occur in a context of high inflation and high interest rates.

We cannot assure you that the government will not seek to finance its deficit by gaining access to the liquidity available in the local financial institutions. In that case, government initiatives that increase the exposure of local financial institutions to the public sector would affect our liquidity and assets quality and impact negatively on clients’ confidence.

In addition, a further deterioration in fiscal accounts could negatively affect the government’s ability to access the international financing markets and could result in increased pressure on the Argentine private sector to cover the government’s financial needs. This would adversely impact the Argentine economy and our financial condition and results of operations.

The amendment of the Central Bank’s Charter and the Convertibility Law may adversely affect the Argentine economy.

On March 22, 2012, the Argentine Congress passed Law No. 26,739, which amended the charter of the Central Bank (the “Central Bank’s Charter”) and Law No. 23,298 (the “Convertibility Law”). This new law amends the objectives of the Central Bank (established in its charter) and removes certain provisions previously in force. Pursuant to the amendment, the Central Bank focuses on promoting monetary and financial stability as well as development with social equity.

The key component of the amendment of the Central Bank Charter relates to the use of the international reserves and the implementation of polices by the Central Bank in order to interfere in the fixing of interest rates and terms of loans to financial institutions.

Pursuant to this amendment, Central Bank reserves may be made available to the government for the repayment of debt or to finance public expenses. During 2013, the currency reserves in U.S. dollars held by the Argentine government in the Central Bank have significantly decreased, from US$44.3 billion in 2012 to US$30.6 billion in 2013, while during 2014 the reserves slightly increased up to US$31.4 billion as of December 31, 2014. The stock of the international reserves of the Central Bank was US$31.5 billion as of March 31, 2015.

The use of Central Bank reserves for the expanded purposes may result in Argentina being more vulnerable to inflation or external shocks, affecting the country’s capacity to overcome the effects of an external crisis.

 

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Increased uncertainty due to the upcoming Presidential and Congressional elections could have an adverse effect on the Argentine economy.

Presidential and Congressional elections in Argentina are scheduled to take place on October 25, 2015. There is a general uncertainty as to who will win the elections and what impact the outcome could produce on the Argentine economy. The uncertainty about the probable outcomes of the general elections and the measures to be subsequently taken could have an adverse effect on financial institutions and the Argentine economy as a whole.

Risks relating to the Argentine financial system

The health of Argentina’s financial system depends on the growth of long-term credit market.

In recent years, the loan portfolio of the Argentine financial system grew significantly. Loans to the private sector grew by approximately 32% in 2012, 31% in 2013 and 20% in 2014 for the financial system as a whole. In spite of the recovery of credit activity, the long-term loans market (pledged loans and mortgage loans) did not grow at the same pace and grew only 7% to the private sector in 2014.

Since most deposits are short-term deposits, a substantial portion of the loans must have the same maturity, and there is a small portion of long-term credit lines.

The uncertainty of the level of inflation for future years is a principal obstacle preventing a faster recovery of Argentina’s private sector long-term lending. This uncertainty has had and may continue to have a significant impact on both the supply of and demand for long-term loans as borrowers try to hedge against inflation risk by borrowing at fixed rates while lenders hedge against inflation risk by offering loans at floating rates.

If longer-term financial intermediation activity does not grow, the ability of financial institutions, including us, to generate profits will be negatively affected.

The health of the financial system depends upon the ability of financial institutions, including us, to retain the confidence of depositors.

As a consequence of the 2008 global economic crisis, the banking industry in Argentina suffered a significant slowdown. This trend was reversed by the end of 2009. Total deposits with the financial system increased by 29% in 2012, 26% in 2013 and 30% in 2014 but the ratio of total financial system deposits to GDP is still low when compared to international levels and lower than the periods prior to the crisis. The average total deposits of the Argentine financial system represented 20% of GDP during 2014.

In spite of the increasing trend showed during previous years, the deposit base of the Argentine financial system, including ours, may be affected in the future by adverse economic, social and political events. If there were a loss of confidence upon these events and, therefore, depositors withdraw significant holdings from banks, there will be a substantial negative impact on the manner in which financial institutions, including us, conduct their business and on their ability to operate as financial intermediaries. International loss of confidence in the financial institutions may also affect sensibility of Argentine depositors.

The asset quality of financial institutions, including us, may be affected by the exposure to public sector debt.

Financial institutions have bonds of, and loans to, the Argentine federal and provincial governments as part of their portfolios. Exposure to public sector of the financial system has decreased year after year, from 48.9% in 2002 to 9.1% in 2014.

As of December 31, 2014, our exposure to the public sector, not including Lebacs (Letras del Banco Central) and Nobacs (Notas del Banco Central), totaled approximately Ps.3.5 billion, representing 4.7% of our total assets.

To some extent, the value of the assets held by Argentine banks, as well as their income generation capacity, is dependent on the Argentine public sector’s creditworthiness, which is in turn dependent on the government’s ability to promote sustainable long-term economic growth, generate tax revenues and control public spending.

Our asset quality and that of other financial institutions may deteriorate if the Argentine private sector is affected by economic events in Argentina or the international financial crisis.

The capacity of many Argentine private sector debtors to repay their loans has deteriorated as a result of certain economic events in Argentina or the international economic crisis, materially affecting the asset quality of financial institutions, including us. From the end of 2008, we had consistently established large allowances for loan losses to cover the risks inherent to our private sector loan portfolio.

From 2009 to 2011, the ratio of non-performing private sector lending showed a great decline, with a record minimum ratio of 1.4% as of December 31, 2011 for the financial system as a whole. Such improvements were reflected in both the consumer loan portfolio and the commercial portfolio. During 2012 and 2013, the ratio of non-performing private sector lending increased, standing at 1.7% as of December 31, 2012 and 2013. During 2014, the ratio of non-performing private sector lending increased to 2.0% for the financial system as a whole.

 

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Our credit portfolio quality ratio followed the financial system trend standing at 1.9% for our entire portfolio, as of December 31, 2014. During 2014 our coverage ratio reached 135.3%.

Despite of the good quality of our portfolio we may not succeed in recovering substantial portions of loans that were provisioned. If Argentina’s economic growth slows down and the financial condition of the private sector deteriorates, the financial system, including us, will experience an increase in the incidence of non-performing loans.

Class actions against financial entities for an indeterminate amount may adversely affect the profitability of the financial system.

Certain public and private organizations have initiated class actions against financial institutions in Argentina. The Argentine National Constitution and Law No. 24,240 (the “Consumer Protection Law”) contain certain provisions regarding class actions. However, their guidance with respect to procedural rules for instituting and trying class action cases is limited. Nonetheless, by means of an ad hoc doctrine construction, Argentine courts have admitted class actions in some cases, including various lawsuits against financial entities related to “collective interests” such as alleged overcharging on products, applied interest rates, advice in the sale of public securities, etc. If class action plaintiffs were to prevail against financial institutions, their success could have an adverse effect on the financial industry and on our business.

The application of the Consumer Protection Law may prevent or limit the collection of payments with respect to services rendered by us.

The Consumer Protection Law sets forth certain rules and principles designed to protect consumers, which include our customers. The Consumer Protection Law was amended on March 12, 2008 by Law No. 26,361 to expand its applicability and the penalties associated with violations thereof.

Additionally, Law No. 25,065 (as amended by Law No. 26,010 and Law No. 26,361, the “Credit Card Law”) also sets forth several mandatory regulations designed to protect credit card holders.

Both the involvement of the applicable administrative authorities at the federal, provincial and local levels, and the enforcement of the Consumer Protection Law and the Credit Card Law by the courts are increasing. This trend has increased general consumer protection levels. We cannot provide any assurance that judicial and administrative rulings based on the applicable regulation, or measures adopted by the enforcement authorities, will not increase the consumer protection given to debtors and other clients in the future, or that they will not favor the claims initiated by consumer groups or associations, and in such event, certain penalties and remedies could prevent or limit the collection of payments due from services and financing provided by banks engaged in such practices and materially adversely affect the financial condition and results of those entities.

Limitations on enforcement of creditors’ rights in Argentina may adversely affect financial institutions.

To protect debtors affected by the economic crisis, beginning in 2002, the Argentine government has adopted measures that temporarily suspended proceedings to enforce creditors’ rights, including mortgage foreclosures and bankruptcy petitions. Such limitations have restricted creditors’ ability to collect defaulted loans. Most of these measures have been rescinded. However, we cannot assure you that in an adverse economic environment the government will not adopt new measures in the future, restricting the ability of creditors to enforce their rights, which could have a material adverse effect on the financial system and our business.

Governmental measures and regulatory framework affecting financial entities could have a material adverse effect on the operations of financial entities.

The Argentine government has historically exercised significant influence over the economy. Financial institutions, in particular, have operated in a highly regulated environment. Between 2001 and 2014, a series of new regulations were issued, mainly regulating the foreign exchange market, capital and minimum cash requirements, lending activity, interest rate limits and dividend distribution for financial institutions. In this regard, in 2012 the Central Bank increased the capital requirements for financial institutions carrying out activities in Argentina, establishing a minimum capital level to mitigate operational risk. The Central Bank has stated that this requirement is based on the credit risk policies under Basel II.

Moreover, the Central Bank imposed new restrictions on the distribution of dividends, including a limitation on the maximum distributable amount of dividends which cannot exceed the excess in minimum regulatory capital, exclusively considering, to such end, a 75% incremental adjustment to the capital requirement; requiring that the capital remaining after the distribution of dividends must be sufficient to meet the regulatory capital requirement increased by 75%. This limitation prevented us from distributing dividends for fiscal years 2011 and 2012. In January 2015, Communication “A” 5694 of the Central Bank, established that those entities considered as domestic systemically important (D-SIB), like us, must take into account an extra minimum capital requirement equivalent to 1% of the total risk-weighted assets (RWA) which they must comply with using exclusively ordinary capital level 1 (Con1), according the schedule described in Item 4.B “Business—Argentine banking regulation—Liquidity and Solvency Requirements—Requirements Applicable to Dividend Distribution”. Pursuant to the Central Bank Communication “A” 5707, if dividends were to be distributed, this requirement becomes immediately effective. We have met the regulatory threshold for dividend distribution for fiscal year 2014 and we are currently awaiting Central Bank approval to pay dividends for that fiscal year.

Since January 2015, and pursuant to Central Bank Communication “A” 5707, financial entities must make an accounting entry of any administrative and/or disciplinary penalties and adverse criminal judgments held by courts, provisioning 100% of the respective penalty

 

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provided under each such action. Such provisions must be maintained until payment is made or a final judgment is passed. According to Central Bank Communication “A” 5707, if dividends were to be distributed, this provisioned amount must also be deducted from the distributable amount. In January 2015, according to such regulations, the Bank created provisions for administrative and/or disciplinary sanctions, which were applied or initiated by the Central Bank, UIF and CNV. Such provisions totaled Ps.11.4 million.

Since June 2012, the Central Bank has established a new regime to finance productive investment by which certain financial entities, including us, must allocate an amount equal to at least 5.0% of the monthly average of the daily balance of the deposits held with such entities by the non-financial private sector, at a fixed interest rate in Pesos determined by the Central Bank, to fund investment projects for the acquisition of capital goods; the construction of plants; the marketing of goods or the acquisition of property (subject in this case to certain additional requirements). The Central Bank extended the term of this ruling in December 2012, December 2013 and December 2014. In December 2014, the Central Bank increased the required monthly average of the daily balance of deposits held and assigned to such credit lines from 5.0% to 6.5%.

Furthermore, the Central Bank has set certain regulations granting broad protections to consumers of financial services that provide more control over the relationship between them and their customers. In 2014, the Central Bank established (i) a scheme of maximum active benchmark rates for consumer loans and secured loans, (ii) new mechanism of regulation by setting a minimum deposit rate for certain deposits of natural persons and (iii) that prior authorization will be required to implement new fees for new products and/or services offered and to increase existing fees, whether or not the products are considered basic.

In addition, in February 2014, the Central Bank established that the net global position in foreign currency of financial institutions cannot exceed the lesser of 30% of the RPC or the liquid funds of the institution and, in September 2014, such threshold was decreased to 20%. For more information, see Item 4.B “Argentine banking regulation”. As a result, financial entities, including us, sold part of their position in U.S. dollars to comply with such rule. We cannot assure that laws and regulations currently governing the economy or the financial sector will not continue to change in the future or that any changes will not adversely affect our business, financial condition and results of operations.

Moreover, any insolvency proceeding against financial institutions would be subject to the powers of and intervention by the Central Bank, which may limit remedies otherwise available and extend the duration of the proceedings. Finally, special rules that govern subordinations of credits in case of financial institutions in Argentina, which give priority to depositors with respect to most other creditors, may negatively affect other shareholders in case of judicial liquidation or bankruptcy of the Bank.

Such and future changes in the regulatory framework could limit the ability of financial institutions, including us, to make long-term decisions, such as asset allocation decisions, that could cause uncertainty with respect to the future financial condition and results of operations. We cannot assure that laws and regulations currently governing the economy or the financial sector will not continue to change in the future or that any changes will not adversely affect our business, financial condition and results of operations. For more information, see Item 4.B “Argentine banking regulation”.

Argentina’s insufficient or incorrect implementation of certain anti-money laundering and combating the financing of terrorism (“AML/CFT”) recommendations may result in difficulties to obtain international financing and attract direct foreign investments.

In October 2010, the Financial Action Task Force (“FATF”) issued a Mutual Evaluation Report (the “Mutual Report”) on Anti-Money Laundering and Combating the Financing of Terrorism in Argentina, including the evaluation of Argentina as of the time of the on-site visit which took place in November 2009. This report stated that since the latest evaluation, finalized in June 2004, Argentina had not made adequate progress in addressing a number of deficiencies identified at the time, and the FATF has since placed Argentina on an enhanced monitoring process.

Moreover, in February 2011, Argentina, represented by the Minister of Justice, attended the FATF Plenary, in Paris, in order to present a preliminary action plan. FATF granted an extension to implement changes. In June, 2011 Argentina made a high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies. In compliance with recommendations made by the FATF on money laundering prevention, on June 1, 2011 the Congress enacted Law No. 26,683. Under this law, money laundering is now a crime per se, and self-laundering money is also considered a crime.

Additionally, in June 2012, the Plenary meeting of the FATF held in Rome highlighted the progress made by Argentina but also urged the country to make further progress regarding its AML/CFT deficiencies.

Notwithstanding the improvements that Argentina made, in October 2012 the FATF determined that certain strategic AML/CFT deficiencies continued, and that Argentina would be subject to continued monitoring.

Since October 2013, Argentina has taken steps towards improving its AML/CFT regime, including by issuing new regulations strengthening suspicious transaction reporting requirements and the financial sector regulator’s existing powers to apply sanctions for AML/CFT deficiencies. Such progress has been recognized by the FATF. In this regard, the FATF (pursuant to its report dated June 27, 2014) stated that Argentina had made significant progress in addressing the deficiencies in its AML/CFT measures as identified in the Mutual Report, and that subsequent to the adoption of such measures, Argentina had strengthened its legal and regulatory framework, including (i) reforming and strengthening money laundering penalties by enhancing the scope of reporting parties covered and transferring AML/CFT supervision to the Financial Intelligence Unit (the “UIF”); (ii) enhancing terrorist financing penalties, in particular by criminalizing the financing of terrorist acts, terrorists, and terrorist organizations; (iii) issuing, through the UIF, a series of resolutions concerning customer due diligence (CDD) and record-keeping requirements as well as other AML/CFT measures to be taken by reporting

 

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parties; and (iv) creating a framework to comply with United Nations Security Council Resolutions 1267 and 1373. As a result of such progress, the FATF Plenary decided that Argentina had taken sufficient steps in addressing technical compliance with the core and key recommendations to be removed from the monitoring process. In addition, on October 24, 2014 the FATF welcomed Argentina’s significant progress in improving its AML/CFT regime and noted that Argentina had established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had previously identified in June 2011 and stated that Argentina would no longer be subject to the FATF’s AML/CFT compliance monitoring process and that Argentina would work with the FATF and the Financial Action Task Force of Latin America (Grupo de Acción Financiera de América del Sur, or “GAFISUD”) as it continued to address the full range of AML/CFT issues identified in its Mutual Report.

Although Argentina has made significant improvements in its AML/CFT regulations, and is no longer subject to the FATF’s on-going global AML/CFT compliance process, no assurance can be given that Argentina will continue to comply with AML/CFT international standards, or that Argentina will not be subject to the FATF’s on-going global AML/CFT compliance process in the future, circumstances which could adversely affect Argentina’s ability to obtain financing from international markets and attract foreign investments.

Risks relating to us

Our target market may be the most adversely affected by economic recessions.

Our business strategy is to increase fee income and loan origination in our target market, low- and middle-income individuals and small- and medium-sized businesses.

This target market is particularly vulnerable to economic recessions and, in the event of such a recession, growth in our target market may slow and consequently adversely affect our business. The Argentine economy as a whole, and our target market in particular, have not stabilized enough for us to be certain that demand will continue to grow. Therefore, we cannot assure you that our business strategy will in fact be successful.

Our controlling shareholders have the ability to direct our business and their interests could conflict with yours.

As of March 31, 2015, our controlling shareholders directly or beneficially owned 10,551,332 Class A shares and 220,829,718 Class B shares in the aggregate. Although currently there is no formal agreement among them, together our controlling shareholders control virtually all decisions with respect to our company made by shareholders. They may, without the concurrence of the remaining shareholders, elect a majority of our directors, effect or prevent a merger, sale of assets or other business acquisition or disposition, cause us to issue additional equity securities, effect a related party transaction and determine the timing and amounts of dividends, if any. Their interests may conflict with your interests as a holder of Class B shares, ADSs or notes, and they may take actions that might be desirable to the controlling shareholders but not to other shareholders or holders of our notes.

We will continue to consider acquisition opportunities, which may not be successful.

We have historically expanded our business primarily through acquisitions. We will continue to consider attractive acquisition opportunities that we believe may offer additional value and are consistent with our business strategy. We cannot assure you, however, that we will be able to identify suitable acquisition candidates or that we will be able to acquire promising target financial institutions on favorable terms or that the Central Bank will approve any such transaction. Additionally, our ability to obtain the desired effects of any such acquisitions will depend in part on our ability to successfully complete the integration of those businesses. The integration of acquired businesses entails significant risks, including customer retention, integration and the liability assumption risks.

Increased competition in the banking industry may adversely affect our operations.

We expect that competition with respect to small- and medium-sized businesses is likely to increase. As a result, even if the demand for financial products and services from these markets continues to grow, competition may adversely affect our results of operations by decreasing the net margins we are able to generate.

Reduced spreads between interest rates received on loans and those paid on deposits without corresponding increases in lending volumes could adversely affect our profitability.

The spread for Argentina’s financial system between the interest rates on loans and deposits could be affected as a result of increased competition in the banking sector and the government’s tightening of monetary policy in response to inflation concerns.

Since 2009, the interest rate spreads throughout the financial system have increased. This increase was sustained by a steady demand for consumer loans in recent years. In 2013 and 2014, borrowing and lending rates increased significantly. However, the net interest margin of the financial system remained stable due to a substantial growth both in the loan and deposit portfolios.

In June 2014, the Central Bank established a scheme of maximum active benchmark rates for consumer loans and secured loans and additionally, in October 2014, established a new mechanism of regulation by setting a minimum deposit rate for certain deposits of natural persons. For more information, see Item 4.B “Argentine banking regulation”.

We cannot guarantee that interest rate spreads will remain unless increases in lending or additional cost-cutting takes place. A reversal of this trend could adversely affect our profitability.

 

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Our estimates and established reserves for credit risk and potential credit losses may prove to be inaccurate and/or insufficient, which may materially and adversely affect our financial condition and results of operations.

A number of our products expose us to credit risk, including consumer loans, commercial loans and other receivables. Changes in the income levels of our borrowers, increases in the inflation rate or an increase in interest rates could have a negative effect on the quality of our loan portfolio, causing us to increase provisions for loan losses and resulting in reduced profits or in losses.

We estimate and establish reserves for credit risk and potential credit losses. This process involves subjective and complex judgments, including projections of economic conditions and assumptions on the ability of our borrowers to repay their loans. We may not be able to timely detect these risks before they occur, or due to limited resources or available tools, our employees may not be able to effectively implement our credit risk management system, which may increase our exposure to credit risk.

Overall, if we are unable to effectively control the level of non-performing or poor credit quality loans in the future, or if our loan loss reserves are insufficient to cover future loan losses, our financial condition and results of operations may be materially and adversely affected.

Changes in market conditions, and any risks associated therewith, could materially and adversely affect our financial condition and results of operations.

We are directly and indirectly affected by changes in market conditions. Market risk, or the risk that values of assets and liabilities or revenues will be adversely affected by variation in market conditions, is inherent in the products and instruments associated with our operations, including loans, deposits, securities, bonds, long-term debt and short-term borrowings. Changes in market conditions that may affect our financial condition and results of operations include fluctuations in interest and currency exchange rates, securities prices, changes in the implied volatility of interest rates and foreign exchange rates, among others.

Cybersecurity events could negatively affect our reputation, our financial condition and our results of operations.

We depend on the efficient and uninterrupted operation of internet-based data processing, communication and information exchange platforms and networks, including those systems related to the operation of our ATM network. We have access to large amounts of confidential financial information and control substantial financial assets belonging to our customers as well as to us. In addition, we provide our customers with continuous remote access to their accounts and the possibility of transferring substantial financial assets by electronic means. Accordingly, cybersecurity is a material risk for us. Cybersecurity incidents, such as computer break-ins, phishing, identity theft and other disruptions could negatively affect the security of information stored in and transmitted through our computer systems and network infrastructure and may cause existing and potential customers to refrain from doing business with us.

In addition, contingency plans in place may not be sufficient to cover liabilities associated with any such events and, therefore, applicable insurance coverage may be deemed inadequate, preventing us from receiving full compensation for the losses sustained as a result of such a disruption.

Although we intend to continue to implement security technology devices and establish operational procedures to prevent such damage, we cannot assure you that all of our systems are entirely free from vulnerability and these security measures will be successful. If any of these events occur, it could damage our reputation, entail serious costs and affect our transactions, as well as our results of operations and financial condition.

If we should fail to comply with all applicable banking and securities laws and regulations or detect money laundering and other illegal or inappropriate activities in a comprehensive or timely manner, the business interests and reputation of the Bank may be harmed.

We must be in compliance with all applicable banking and securities laws and regulations. In recent years, the Argentine government and relevant governmental agencies have modified policies and mechanisms of control over financial activity, as well as the parameters surrounding monetary and disciplinary penalties that may affect our results of operations and reputation.

For example, on November 29, 2012, the Argentine Congress passed the “Capital Markets Law”, which modified the public offer regime set forth by Law No.17,811, as amended. One of the most significant amendments introduced by such law refers to the powers of the CNV. The incorporation of Section 20 raises concern in the market, especially among listed companies, since it entitles the CNV to (i) appoint supervisors with powers of veto on resolutions adopted by a company’s board of directors and (ii) disqualify a company’s board of directors for a period of 180 days when, as determined by the CNV, the interests of the minority shareholders and/or security holders are infringed. In addition, pursuant to section 51 of the Capital Markets Law, the CNV may suspend registered broker agents on a preventive basis, as ocurred during the first quarter of 2015 to several financial system entities, including with Banco Macro and our subsidiary Macro Securities. For more information see Item 8. “Legal Proceedings”.

In addition, anti-money laundering laws and regulations require, among other things, that we adopt and implement control policies and procedures which involve “know your customer” principles that comply with the applicable regulations and reporting suspicious or unusual transactions to the applicable regulatory authorities. While we have adopted policies and procedures intended to detect and prevent the use of our network for money laundering activities and by terrorists, terrorist organizations and other types of organizations, those policies and procedures may fail to fully eliminate the risk that we have been or are currently being used by other parties, without our knowledge, to engage in activities related to money laundering or other illegal activities.

 

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To the extent that we do not comply with banking and securities laws and regulations or we don’t detect illegal activities from an anti-money laundering or other standpoint, the relevant governmental agencies (including the Central Bank, the CNV and the UIF) are authorized and empowered to impose fines, suspensions and other penalties on the Bank.

We cannot assure you that relevant governmental agencies will not continue to impose penalties or that such penalties will not adversely affect our business, reputation, financial condition and results of operations.

Argentine corporate disclosure and governance requirements differ from those regulating highly-developed capital markets, such as the United States, and differences in the accounting standards applicable in Argentina and the United States may make it difficult to compare our financial statements and reported earnings with companies in other countries, such as the United States.

As a foreign private issuer, the Bank applies disclosure policies and requirements that differ from those governing U.S. domestic registrants. The securities laws of Argentina that govern publicly listed companies, such us, impose disclosure requirements that are more limited than those in the United States. In addition, publicly available corporate information about us in Argentina is different from and may be more difficult to obtain than the information available for registered public companies in certain countries with highly developed capital markets, such as the United States. See Item 16.G “Corporate Governance”.

Moreover, there are important differences between accounting and financial reporting standards applicable to financial institutions in Argentina and to those in the U.S. Except as otherwise described herein, we prepare our financial statements in accordance with Central Bank Rules, which differ in certain significant respects from U.S. GAAP and, to a certain extent, from Argentine GAAP. As a result, our financial statements and reported earnings are not directly comparable to those of banks in the United States. See Item 5. “Operating and Financial Review and Prospects-U.S. GAAP and Central Bank Rules Reconciliation” for a description of the principal differences between Central Bank Rules and U.S. GAAP and how they affect our financial statements and note 35 to our audited consolidated financial statements as of and for the three years ended December 31, 2014 for a summary of significant differences between Central Bank Rules and U.S. GAAP.

On February 12, 2014, the Central Bank, through Communication “A” 5541, established the general guidelines towards conversion to the IFRS issued by the International Accounting Standards Board (IASB) for preparing financial statements of the entities under its supervision, for the annual fiscal years beginning on January 1, 2018, as well as those of interim-periods. The Bank is in the process of implementing such IFRS conversion process. See note 7 to our audited consolidated financial statements as of and for the three years ended December 31, 2014.

Risks relating to our Class B shares and the ADSs

Holders of our Class B shares and the ADSs may not receive any dividends.

In 2003, the Central Bank prohibited financial institutions from distributing dividends. In 2004, the Central Bank amended the restriction to require the Central Bank’s prior authorization for the distribution of dividends. We have consistently obtained authorization from the Central Bank to distribute dividends corresponding to fiscal years 2003 through 2010. Under new Central Bank Rules on distribution of dividends, the capital remaining after the distribution of dividends must be sufficient to meet the regulatory capital increased by 75%. See “Risks relating to the Argentine financial system—Governmental measures and regulatory framework affecting financial entities could have a material adverse effect on the operations of financial entities”. In January 2015, Communication “A” 5694 of the Central Bank, established that those entities considered as domestic systemically important (D-SIB), like us, must take into account an extra minimum capital requirement equivalent to 1% of the total risk-weighted assets (RWA) which they must comply with using exclusively ordinary capital level 1 (Con1), according the schedule described under section “Argentine banking regulation—Liquidity and Solvency Requirements—Requirements Applicable to Dividend Distribution”.

Since January 2015, Central Bank Communication “A” 5707 has required that financial entities must make an accounting entry of any administrative and/or disciplinary penalties and adverse criminal judgments held by courts, provisioning 100% of the respective penalty provided under each such action. Such provisions must be maintained until payment is made or a final judgment is passed. Pursuant to Central Bank Communication “A” 5707, if dividends were to be distributed, this provisioned amount must also be deducted from the distributable amount.

For fiscal years ended December 31, 2011 and 2012, we were not able to distribute dividends because we did not reach the regulatory threshold for dividend distribution under Central Bank regulations. For fiscal years ended December 31, 2013 and 2014, we reached such regulatory threshold and, in compliance with current regulations, in March 2015 we requested approval from the Central Bank for the payment of dividends for fiscal year 2014. Authorization for such payment was pending as of the date of this annual report.

No assurance can be given that in the future we will be able to reach the regulatory threshold or that if so, the Central Bank will continue to grant us the authorization to distribute dividends by our shareholders at the annual ordinary shareholders’ meeting or that such authorization shall be for the full amount of distributable dividends.

Additional regulatory and contractual restrictions exist which could affect the distribution of earnings and are included in note 16 to our audited consolidated financial statements as of and for the three years ended December 31, 2014.

 

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Holders of our Class B shares and the ADSs located in the United States may not be able to exercise preemptive rights.

Under Argentine Corporate Law No. 19,550 (the “Argentine Corporate Law”), if we issue new shares as part of a capital increase, our shareholders may have the right to subscribe to a proportional number of shares to maintain their existing ownership percentage. Rights to subscribe for shares in these circumstances are known as preemptive rights. In addition, shareholders are entitled to the right to subscribe for the unsubscribed shares remaining at the end of a preemptive rights offering on a pro rata basis, known as accretion rights. Upon the occurrence of any future increase in our capital stock, United States holders of Class B shares or ADSs will not be able to exercise the preemptive and related accretion rights for such Class B shares or ADSs unless a registration statement under the Securities Act is effective with respect to such Class B shares or ADSs or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to those Class B shares or ADSs. We cannot assure you that we will file such a registration statement or that an exemption from registration will be available. Unless those Class B shares or ADSs are registered or an exemption from registration applies, a U.S. holder of our Class B shares or ADSs may receive only the net proceeds from those preemptive rights and accretion rights if those rights can be sold by the depositary; if they cannot be sold, they will be allowed to lapse. Furthermore, the equity interest of holders of Class B shares or ADSs located in the United States may be diluted proportionately upon future capital increases.

Changes in the Argentine tax laws may adversely affect the results of our operations and the tax treatment of our Class B shares and/or ADSs.

On September 23, 2013, Law No. 26,893 amending the Income Tax Law was enacted. According to the amendments, the distribution of dividends is subject to income tax at a rate of 10.0%, unless they are distributed to Argentine corporate entities, and the sale, exchange or disposition of shares and other securities not traded in or listed on capital markets and securities exchanges is subject to income tax at a rate of 15.0% when the income is obtained by Argentine resident individuals or by foreign beneficiaries. These amendments were recently regulated by Decree 2334/2013. See “Taxation—Material Argentine tax considerations relating to our Class B shares and ADSs”. However, as of today, many aspects of both taxes currently remain unclear. Pursuant to certain announcements made by Argentine tax authorities, both new taxes would be subject to further regulation and interpretation, which may adversely affect the results of the Bank and our subsidiaries, as well as the tax treatment of our Class B shares and/or ADSs.

Non-Argentine companies that own our Class B shares directly and not as ADSs may not be able to exercise their rights as shareholders unless they are registered in Argentina.

Under Argentine law, foreign companies that own shares in an Argentine corporation incorporated within the City of Buenos Aires, are required to register with IGJ, in order to exercise certain shareholder rights, including voting rights. If you own Class B shares directly (rather than in the form of ADSs) and you are a non-Argentine company and you fail to register with IGJ, your ability to exercise your rights as a holder of our Class B shares may be limited.

You may not be able to sell your ADSs at the time or the price you desire because an active or liquid market may not develop.

Prior to March 24, 2006, there has not been a public market for the ADSs or, in the case of our Class B shares, a market outside of Argentina. We cannot assure you that any market for our Class B shares or for the ADSs will be available or liquid or the price at which the Class B shares or the ADSs may be sold in that market.

The relative volatility and illiquidity of the Argentine securities markets may substantially limit your ability to sell Class B shares underlying the ADSs at the price and time you desire.

Investing in securities that trade in emerging markets, such as Argentina, often involves greater risk than investing in securities of issuers in the United States, and such investments are generally considered to be more speculative in nature. The Argentine securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets in the United States, and is not as highly regulated or supervised as some of these other markets. There is also significantly greater concentration in the Argentine securities market than in major securities markets in the United States. The ten largest companies in terms of market capitalization represented more than 90% of the aggregate market capitalization of the BCBA as of December 31, 2014. Accordingly, although you are entitled to withdraw the Class B shares underlying the ADSs from the depositary at any time, your ability to sell such shares at a price and time at which you wish to do so may be substantially limited. Furthermore, new capital controls imposed by the Central Bank could have the effect of further impairing the liquidity of the BCBA by making it unattractive for non-Argentines to buy shares in the secondary market in Argentina.

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

Our shareholders are not liable for our obligations. Instead, shareholders are generally liable only for the payment of the shares they subscribe. However, shareholders who have a conflict of interest with us and who do not abstain from voting may be held liable for damages to us, but only if the transaction would not have been approved without such shareholders’ votes. Furthermore, shareholders who willfully or negligently vote in favor of a resolution that is subsequently declared void by a court as contrary to Argentine Corporate Law or our bylaws may be held jointly and severally liable for damages to us or to other third parties, including other shareholders.

 

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Our Class B shares or the ADSs may have been characterized as stock in a “passive foreign investment company” in the past, or may be so characterized in the future, for U.S. federal income tax purposes.

The application of the “passive foreign investment company” rules to equity interests in banks such as us is unclear under current U.S. federal income tax law. While we do not believe that we are currently a passive foreign investment company, the test for determining our “passive foreign investment company” status is a factual one based upon a periodic evaluation of our assets and income and is unclear when applied to banking businesses such as our own. In addition, we may have been a PFIC in the past. It is therefore possible that our Class B shares or the ADSs could be characterized as stock in a “passive foreign investment company” for U.S. federal income tax purposes, which could have adverse tax consequences to U.S. holders (as defined in Item 10.E “Taxation—Material U.S. Federal Income Tax Considerations”) in some circumstances. If we were classified as a passive foreign investment company in the past, U.S. holders of our Class B shares or the ADSs that held such Class B shares or ADSs at that time generally would be subject to special rules and adverse U.S. tax consequences with respect to certain distributions made by us and on any gain recognized on the sale or other disposition of our Class B shares or the ADSs. In addition, if we are treated as a passive foreign investment company in future tax years, U.S. holders of our Class B shares or the ADSs in such future periods may be subject to these same rules. In either case, U.S. holders might be subject to a greater U.S. tax liability than might otherwise apply and incur tax on amounts in advance of when U.S. federal income tax would otherwise be imposed. A U.S. holder of our Class B shares or the ADSs might be able to avoid these rules and consequences by making an election to mark such shares to market (although it is not clear if this election is available for the Class B shares). U.S. holders should carefully read Item 10.E “Taxation—Material U.S. Federal Income Tax Considerations—Passive Foreign Investment Companies” and consult their tax advisors regarding the “passive foreign investment company” rules.

Risks relating to our notes

The notes are effectively subordinated to our secured creditors and our depositors.

Unless otherwise specified, the notes rank at least pari passu in right of payment with all of our existing and future unsecured and unsubordinated indebtedness, other than obligations preferred by statute or by operation of law, including, without limitation, tax and labor-related claims and our obligations to depositors.

In particular, under Financial Institutions Law, all of our existing and future depositors will have a general priority right over holders of notes issued under our medium-term note program. The Financial Institutions Law provides that in the event of judicial liquidation or insolvency, all depositors would have priority over all of our other creditors (including holders of notes), except certain labor creditors and secured creditors. Moreover, depositors would have priority over all other creditors, with the exception of certain labor creditors, to funds held by the Central Bank as reserves, any other funds at the time of any revocation of our banking license and proceeds from any mandatory transfer of our assets by the Central Bank.

We have issued and may also issue additional subordinated notes. In that case, in addition to the priority of certain other creditors described in the preceding paragraphs, subordinated notes will also rank at all times junior in right of payment to certain of our unsecured and unsubordinated indebtedness.

Exchange controls and restrictions on transfers abroad may impair your ability to receive payments on the notes.

In 2001 and 2002, Argentina imposed exchange controls and transfer restrictions, substantially limiting the ability of companies to retain foreign currency or make payments abroad. Since then, these restrictions have been substantially eased, including those requiring the Central Bank’s prior authorization for the transfer of funds abroad in order to pay principal and interest on debt obligations. Furthermore, new regulations were issued in 2012 and 2013, which are still in place, pursuant to which certain foreign exchange transactions cannot be effected unless they are previously approved by Argentine tax authorities. Argentina may impose exchange controls and transfer restrictions in the future, among other things, in response to capital flight or a significant depreciation of the peso.

In such event, your ability to receive payments on the notes may be impaired.

We may redeem the notes prior to maturity.

The notes are redeemable at our option in the event of certain changes in Argentine taxes and, if so specified, the notes may also be redeemable at our option for any other reason. We may choose to redeem those notes at times when prevailing interest rates may be relatively low. Accordingly, an investor may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as that of the notes.

As a financial institution, any bankruptcy proceeding against us would be subject to intervention by the Central Bank, which may limit remedies otherwise available and extend the duration of proceedings.

If we are unable to pay our debts as they come due, the Central Bank would typically intervene by appointing a reviewer, request us to file a reorganization plan, transfer certain of our assets and liabilities and possibly revoke our banking license and file a liquidation petition before a local court. Upon any such intervention, noteholders’ remedies may be restricted and the claims and interests of our depositors and other creditors may be prioritized over those of noteholders. As a result, the noteholders may realize substantially less on their claims than they would in a bankruptcy proceeding in Argentina, the United States or any other country.

Holders of notes may find it difficult to enforce civil liabilities against us or our directors, officers and controlling persons.

We are organized under the laws of Argentina and our principal place of business (domicilio social) is in the City of Buenos Aires, Argentina. Most of our directors, officers and controlling persons reside outside the United States. In addition, all or a substantial portion of

 

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our assets and their assets are located outside of the United States. As a result, it may be difficult for holders of notes to effect service of process within the United States on such persons or to enforce judgments against them, including any action based on civil liabilities under the U.S. federal securities laws. Based on the opinion of our Argentine counsel, there is doubt as to the enforceability against such persons in Argentina, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws.

The ratings of the notes may be lowered or withdrawn depending on various factors, including the rating agency’s assessment of our financial strength and Argentine sovereign risk.

Independent credit rating agencies may assign credit ratings to the notes. The ratings of the notes reflect the relevant rating agency’s assessment of our ability to make timely payment of principal and interest on the notes. Moreover, the methods of assigning ratings used by Argentine rating agencies may differ in important aspects from those used by the rating agencies in the United States or other countries. The ratings of the notes are not a recommendation to buy, sell or hold the notes, and the ratings do not comment on market prices or suitability for a particular investor. We cannot assure you that the ratings of the notes will remain for any given period of time or that the ratings will not be lowered or withdrawn. A downgrade in ratings will not be an event of default with respect to the notes. The assigned ratings may be raised or lowered depending, among other things, on the rating agency’s assessment of our financial strength as well as its assessment of Argentine sovereign risk generally, and any change to these may affect the market price or liquidity of the notes.

Risks relating to our 2036 Notes

Interest on the 2036 Notes may be limited to the extent we do not have sufficient Distributable Amounts.

No interest on the 2036 Notes will be due and payable in the event that the payment of such interest, together with any other payments or distributions (other than payments in respect of redemptions or repurchases) on or in respect of our parity obligations (including the notes) previously made or scheduled to be made during the distribution period in which such interest payment date falls, would exceed our distributable amounts for such distribution period. Interest payments on the notes are non-cumulative such that if an interest payment is not made in full as a result of the limitation described in the preceding sentence, such unpaid interest will not accrue or be due and payable at any time and, accordingly, holders of 2036 Notes will not have any claim thereon, whether or not interest is paid with respect to any other interest period.

The distributable amount available for payments of interest on the 2036 Notes on an interest payment date is based principally on our unappropriated retained earnings from the prior year. Subject to certain limited exceptions, Argentine law does not restrict our shareholders from approving the payment of dividends to themselves out of our unappropriated retained earnings, and the indenture relating to the notes does not restrict our ability to pay dividends unless interest on the notes has not been paid in full as scheduled. In addition, distributable amounts available for payment of interest on the 2036 Notes depends on the amount of payments or other distributions on or in respect of our parity obligations previously made or schedule to be made during the relevant distribution period. Although we do not currently have any parity obligations outstanding, the indenture relating to the notes will not restrict our ability to issue parity obligations in the future. Accordingly, we cannot assure you that we will have sufficient distributable amounts to make interest payments on the 2036 Notes.

We may be prevented by the Central Bank or Argentine banking regulations from making interest or other payments on or in respect of the 2036 Notes.

No interest on the 2036 Notes will be due and payable on an interest payment date in the event that we would be prevented from paying interest on the Notes on such interest payment date as a result of (X) a general prohibition by the Central Bank on paying interest or making other payments or distributions on or in respect of our parity obligations (including the notes) or (Y) as provided in Communications “A” 5485 of the Central Bank or any successor regulations thereto, if (a) we are subject to a liquidation procedure or the mandatory transfer of our assets by the Central Bank in accordance with Sections 34 or 35 bis of the Financial Institutions Law or successors thereto; (b) we are receiving financial assistance from the Central Bank (except liquidity assistance under the pesification rules pursuant to Decree No. 739/2003); (c) we are not in compliance with or have failed to comply on a timely basis with our reporting obligations to the Central Bank; (d) we are not in compliance with minimum capital requirements (both on an individual and consolidated basis) or with minimum cash reserves (on average); or (e) we are subject to significant penalties imposed by the UIF unless certain corrective actions have been implemented by the Superintendency or if a risk mitigation plan has been required.

As a result of the 2001 Argentine crisis, all banks were prohibited by the Central Bank from paying dividends in 2002 and 2003. As the economy recovered, the Central Bank eased the prohibition but still requires prior authorization for the distribution of dividends by banks. Although the prohibition is no longer in effect, we cannot assure you that, if confronted with a similar crisis, the Central Bank will not prevent banks from making interest payments on parity obligations, including the 2036 Notes.

The 2036 Notes are unsecured and subordinated and, in the event of our bankruptcy, the 2036 Notes will rank junior to our unsubordinated obligations and certain of our subordinated obligations.

The 2036 Notes constitute our unsecured and subordinated obligations. In the event of our bankruptcy, the 2036 Notes will rank junior to all claims of our unsubordinated creditors and certain of our subordinated creditors. By reason of the subordination of the notes, in the case of our bankruptcy, although the notes would become immediately due and payable at their principal amount together with accrued interest thereon, our assets would be available to pay such amounts only after all such creditors have been paid in full. We expect to incur from time to time additional obligations that rank senior to the notes, and the indenture relating to the notes does not prohibit or limit the incurrence of such obligations.

 

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Under Argentine law, our obligations under the 2036 Notes will also be subordinated to certain statutory preferences such as tax and labor-related claims and our obligations to depositors. In particular, under the Financial Institutions Law, all of our existing and future depositors will have a general priority right over holders of notes. The Financial Institutions Law provides that in the event of our bankruptcy or insolvency, all depositors would have priority over all of our other creditors (including holders of notes), except certain labor creditors and secured creditors. Moreover, depositors would have priority over all other creditors, with the exception of certain labor creditors, to funds held by the Central Bank as reserves, any other funds at the time of any revocation of our banking license and proceeds from any mandatory transfer of our assets by the Central Bank.

If we do not satisfy our obligations under the 2036 Notes, your remedies will be limited.

Payment of principal on the 2036 Notes may be accelerated only in certain events involving our bankruptcy. There is no right of acceleration in the case of a default in the performance of any of our covenants, including a default in the payment of principal, premium or interest.

The U.S. federal income tax treatment of the 2036 Notes is unclear.

Because of certain features of the 2036 Notes, the U.S. federal income tax treatment applicable to the 2036 Notes is uncertain. While we do not intend to treat the 2036 Notes as subject to the “contingent payment debt instrument” rules under U.S. federal income tax regulations, it is possible that the U.S. Internal Revenue Service (“IRS”) could assert such treatment. If this assertion were successful, U.S. holders (as defined in Item 10.E “Taxation—Material U.S. Federal Income Tax Considerations”) generally would be required to include interest income on a constant yield basis at a rate that could differ from, and could at certain times be in excess of, the stated interest on the 2036 Notes. In addition, any gain on the sale of 2036 Notes derived by a U.S. holder would be treated as ordinary income rather than capital gain.

It is also possible that the IRS could assert that the 2036 Notes should be treated as equity for U.S. federal income tax purposes. If this assertion were successful, U.S. holders could also be subject to adverse tax rules (including an interest charge on and ordinary income treatment of any gain derived with respect to the notes) if it were also determined that we are a “passive foreign investment company” for U.S. federal income tax purposes. While we do not believe that we are currently a passive foreign investment company, the test for determining “passive foreign investment company” status is a factual one based upon a periodic evaluation of our assets and income and is unclear when applied to banking businesses such as our own. Thus we cannot provide any assurance that we will not be determined to be a “passive foreign investment company” as of the issuance of the 2036 Notes or in any future period.

Certain definitions.

“Parity Obligations” means (i) all claims in respect of our obligations, or our guarantees of liabilities, that are eligible to be computed as part of our Tier 1 capital under Argentine banking regulations (without taking into account any limitation placed on the amount of such capital); and (ii) all claims in respect of any of our other obligations (including guarantees) that rank, or are expressed to rank, pari passu with the 2036 Notes.

“Distribution Period” means, with respect to an Interest Payment Date, the period from and including the date of our annual ordinary shareholders’ meeting immediately preceding such Interest Payment Date to but excluding the date of our annual ordinary shareholders’ meeting immediately following such Interest Payment Date.

“Distributable Amounts” for a Distribution Period means the aggregate amount, as set out in our audited financial statements for our fiscal year immediately preceding the beginning of such Distribution Period, prepared in accordance with Central Bank Rules and approved by our shareholders, of our unappropriated retained earnings minus: (i) required legal and statutory reserves; (ii) asset valuation adjustments as determined and notified by the Superintendency, whether or not agreed to by us, and the asset valuation adjustments indicated by our external auditor, in each case to the extent not recorded in such financial statements; and (iii) any amounts resulting from loan loss or other asset valuation allowances permitted by the Superintendency including adjustments arising from the failure to put into effect an agreed upon compliance plan. For the avoidance of doubt, the calculation of Distributable Amounts in respect of a particular Distribution Period shall be made prior to the appropriation or allocation of any amounts to any voluntary or contingent reserves and any dividends or distributions on any Junior Obligations or Parity Obligations during such Distribution Period.

Item 4. Information on the Bank

A. History and development of the Bank

Our legal and commercial name is Banco Macro S.A. We are a financial institution incorporated on November 21, 1966 as a sociedad anónima, a stock corporation, duly incorporated under the laws of Argentina for a 99-year period and registered on March 8, 1967 with the Public Registry of Commerce of the City of Bahía Blanca, in the Province of Buenos Aires, Argentina under No. 1154 of Book 2, Volume 75 of Estatutos. We subsequently changed our legal address to the City of Buenos Aires and registered it with the IGJ on October 8, 1996 under No. 9777 of Book 119, Volume A of Sociedades Anónimas.

Our principal executive offices are located at Sarmiento 447, City of Buenos Aires, Argentina, and our telephone number is (+ 54-11-5222-6500). We have appointed CT Corporation System as our agent for service of process in the United States, located at 111 Eight Avenue, New York, New York, 10011.

 

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Our history – Banco Macro S.A.

Banco Macro commenced operations as a non-banking financial institution in 1985, through the acquisition of Macro Compañía Financiera S.A. (created in 1977). In May 1988, it received the authorization to operate as a commercial bank and it was incorporated as Banco Macro S.A. Subsequently, as a result of the merger process with other entities, it adopted other names (among them, Banco Macro Bansud S.A.) and since August 2006, the name of “Banco Macro S.A.”

From then onwards and up to 1995, Banco Macro operated as a wholesale bank, being a pioneer in corporate bonds issuances. It mainly acted in the areas of money market, trading of government and corporate bonds and financial services for medium and big companies.

Since 1994, Banco Macro has substantially changed its business strategy, focusing on retail banking in market areas with a low level of banking transactions and high growth potential and the Bank has focused on the regional areas outside the City of Buenos Aires. Following this strategy, in 1996, we started to acquire entities as well as assets and liabilities resulting from the privatization of provincial and other banks, including Banco Misiones, Banco Salta and Banco Jujuy.

In 2001, 2004, 2006 and 2010, Banco Macro acquired control of Banco Bansud S.A., Nuevo Banco Suquía S.A., Nuevo Banco Bisel S.A. and Banco Privado de Inversiones S.A., respectively, expanding through these acquisitions its presence in the south and center of the country. Such entities merged with us on December 2003, October 2007, August 2009 and December 2013, respectively. In addition, during 2006, Banco Macro acquired control of Banco del Tucumán S.A.

The Bank currently offers traditional bank products and services to companies, including those operating in regional economies, as well as to individuals, thus reinforcing the Bank’s objective to be a multi-service bank.

In addition, Banco Macro performs certain transactions through its subsidiaries, including mainly Banco del Tucumán, Macro Bank Limited, Macro Securities S.A., Macro Fiducia S.A. and Macro Fondos S.G.F.C.I. S.A.

Our shares have been publicly listed on the BCBA since November 1994, and since March 24, 2006 on the NYSE.

Investment in property

In 2011 we acquired from the Government of the City of Buenos Aires a site located at Av. Eduardo Madero No. 1180, in the City of Buenos Aires, for an aggregate amount of Ps.110 million. The Bank has developed a project to build its new corporate offices on this site. Works were initiated in 2012 and are expected to be completed by 2017. As of December 31, 2014 the total aggregate amount invested in the project was Ps.292.7 million (approximately US$40.8 million at the applicable exchange rates as of the respective dates of such investments). The total cost of this project, is estimated at approximately US$160 million.

For more information, see Item 4.D “Property, plants and equipment”.

B. Business Overview

We are one of the leading banks in Argentina. With the most extensive private-sector branch network in the country, we provide standard banking products and services to a nationwide customer base. We distinguish ourselves from our competitors by our strong financial position and by our focus on low- and middle-income individuals and small- and medium-sized businesses, generally located outside of the City of Buenos Aires. We believe this strategy offers significant opportunity for continued growth in our banking business. According to the Central Bank, as of November 30, 2014, we were ranked first in terms of branches, second in terms of equity and third in terms of total loans and total deposits among private banks in Argentina.

As of December 31, 2014, on a consolidated basis, we had:

 

    Ps.74,995.6 million (US$8,769.4 million) in total assets;

 

    Ps.44,108.1 million (US$5,157.6 million) in loans to the non-financial private sector and foreign residents;

 

    Ps.54,716.6 million (US$6,398.1 million) in total deposits;

 

    approximately 3.0 million retail customer accounts and 0.1 million corporate customers; and

 

    approximately 1.2 million employee payroll accounts for private sector customers and provincial governments and 0.7 million retiree accounts.

Our consolidated net income for the year ended December 31, 2014 was Ps.3,479.5 million (US$406.9 million), representing a return on average equity of 33.4% and a return on average assets of 5.1%.

In general, given the relatively low level of banking intermediation in Argentina currently, there are limited products and services being offered. We are focusing on the overall growth of our loan portfolio by expanding our customer base and encouraging them to make use of our lending products. We have a holistic approach to our banking business; we do not manage the Bank by segments or divisions or by

 

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customer categories, by products and services, by regions, or by any other segmentation for the purpose of allocating resources and assessing profitability. We offer savings and checking accounts, credit and debit cards, consumer finance loans and other credit-related products and transactional services available to our individual customers and small- and medium-sized businesses through our branch network. We also offer Plan Sueldo payroll services, lending, corporate credit cards, mortgage finance, transaction processing and foreign exchange. In addition, our Plan Sueldo payroll processing services for private companies and the public sector give us a large and stable customer deposit base.

Our competitive strengths

We believe we are well positioned to benefit from opportunities created by the economic and business environment in Argentina. Our competitive strengths include the following:

 

    Strong financial position. As of December 31, 2014 we had excess capital of Ps.5,922.8 million (24.0% capitalization ratio). Our excess capital is aimed at supporting growth, and consequently, a higher leverage of our balance sheet.

 

    Consistent profitability. As of December 31, 2014, we had obtained profitability for the last 52 consecutive quarters, the only bank with such a track record in Argentina, with a return on average equity of 27.1%, 33.3% and 33.4% for 2012, 2013 and 2014 compared to 25.7%, 29.5% and 32.7% respectively, for the Argentine banking system as a whole.

 

    Our shareholders’ equity as of December 31, 2012, 2013 and 2014 as calculated under Central Bank Rules, was Ps.6,199.1 million, Ps.8,627.4 million and Ps.11,491.8 million, respectively, and our shareholders’ equity under U.S. GAAP at December 31, 2012, 2013 and 2014 was Ps.5,928.1 million, Ps.8,402.5 million and Ps.11,418.5 million, respectively.

 

    Strong presence in fast-growing target customer market. We have achieved a leading position with low- and middle-income individuals and among small- and medium-sized businesses, generally located outside the City of Buenos Aires, which have been relatively underserved by the banking system. Based on our experience, this target market offers significant growth opportunities and a stable base of depositors.

 

    High exposure to export-led growth. Given the geographical location of the customers we target, we have acquired banks with a large number of branches outside of the City of Buenos Aires with the aim of completing our national coverage. The Bank´s focus is particularly on some export oriented provinces. Most of these provinces engage in economic activities primarily concentrated in areas such as agriculture, mining, cargo transportation, edible oils, ranching and tourism, which have benefited from the export-driven growth in the Argentine economy.

 

    Largest private-sector branch network in Argentina. With 434 branches, we have the most extensive branch network among private-sector banks in Argentina. We consider our branch network to be our key distribution channel for marketing our products and services to our entire customer base with a personalized approach. In line with our strategy, approximately 93% of these branches are located outside of the City of Buenos Aires.

 

    Loyal customer base. We believe that our customers are loyal to us due to our presence in traditionally underserved markets and our Plan Sueldo payroll services. We have benefited from Argentine regulations that require all employees to maintain Plan Sueldo accounts for the direct deposit of their wages. In addition, we emphasize face-to-face relationships with our customers and offer them personalized advice.

 

    Exclusive financial agent for four Argentine provinces. We perform financial agency services for the governments of the provinces of Salta, Jujuy, Misiones and Tucumán in northern Argentina. As a result, each provincial government’s bank accounts are held in our bank and we provide all their employees with Plan Sueldo accounts, giving us access to substantial low cost funding and a large number of loyal customers.

 

    Strong and experienced management team and committed shareholders. We are led by a committed group of shareholders who have transformed the Bank from a small wholesale bank to one of the strongest and largest banks in Argentina, with senior executive roles in our management and more than 30 years of experience in the banking industry.

Our strategy

Our competitive strengths position us to better participate in the future development of the Argentine financial system.

For the last three years, we have been operating in accordance with our sustainability policy based on five business-related strategic pillars that impact all our clients, establishing a short-, medium- and long-term sustainability strategy. Our strategic sustainability pillars are:

 

    Transparency in all our actions: in order to create a framework of trust and credibility for all our interest groups, in compliance with the main national and international transparency and management responsibility standards and best practices.

 

    Responsibility for the wellbeing and inclusion of people: aiming to improve the quality of life of individuals, we support the professional development of our staff and encourage diversity and inclusion.

 

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    Financial inclusion and education: encouraging the use of banking products and accessibility, focused on lower income sectors and the financial education of all communities.

 

    Development of small- and medium-sized companies (“PYMEs”) and enterprises: accompanying our clients in the development of their businesses, offering customized products services and providing knowledge, advice and the best customer service.

 

    Direct and indirect environmental impact: encouraging the protection of the environment and society, both internally and in our value chain.

Our goal is to promote the overall growth of the Bank by increasing our customer base, expanding our loan portfolio and generating more fee income from transactional services. We achieve this goal by managing the Bank on a holistic basis, focusing our growth strategy on the marketing and promotion of our standard banking products and services. We have pursued our growth strategy by acquiring banks throughout Argentina, which has enabled us to significantly expand our branch network and customer base. We have taken advantage of the opportunities presented by the Argentine financial system to move into new locations by acquiring banks or absorbing branches from banks liquidated by the Central Bank.

We intend to continue enhancing our position as a leading Argentine bank. The key elements of our strategy include:

 

    Focus on underserved markets with strong growth potential. We intend to continue focusing on both low- and middle-income individuals and small- and medium-sized businesses, most of which have traditionally been underserved by the Argentine banking system and are generally located outside the City of Buenos Aires, where competition is relatively weaker and where we have achieved a leading presence. We believe that these markets offer attractive opportunities given the low penetration of banking services and limited competition.

 

    Further expand our customer base. We intend to continue growing our customer base, which is essential to increasing interest and fee-based revenues. To attract new customers we intend to:

 

    Utilize our extensive branch network. We intend to utilize our extensive branch network, which we consider our key distribution channel, to market our products and services to our entire customer base. We utilize a personalized approach to attract new customers by providing convenient and personalized banking services close to their homes and facilities.

 

    Offer medium- and long-term credit. We intend to capitalize on the increased demand for long-term credit that we believe will accompany the expected economic growth in Argentina. We intend to use our strong liquidity and our capital base to offer a more readily available range of medium- and long-term credit products than our competitors.

 

    Focus on corporate banking customers, strengthening financing to the small business segment and expanding our market share in the agricultural and livestock industry and those export-related activities.

 

    Expand Plan Sueldo payroll services. We will continue to actively market our Plan Sueldo payroll services, emphasizing the benefits of our extensive network for companies with nationwide or regional needs.

 

    Offer personalized service and increase cross-selling. We offer our clients a menu of products and personalized, face-to-face advice to help them select the banking services that best correspond to their needs.

 

    Strengthen our market share in credit cards by increasing promotional activity and benefits for clients.

 

    Improve our clients’ satisfaction with the services provided as our main tool to increase loyalty, while consolidating the development of alternative service channels for convenience, simplicity and safety in operations.

 

    Further develop our branch management model, opening new branches and improving their operating efficiency.

 

    Extend existing corporate relationships to their distributors and suppliers. We have established relationships with major corporations in Argentina and will focus our marketing efforts on providing services to their distributors, suppliers, customers and employees, including providing working capital financing and Plan Sueldo payroll services.

Our products and services

We provide our customers with a combination of standard products and services that are designed to suit individual needs. We have two broad categories of customers: (i) retail customers, which include individuals and entrepreneurs and (ii) corporate customers, which include small, medium and large companies and major corporations. In addition, we provide services to four provincial governments. We offer a relatively narrow range of standard products, which are generally available to both our retail and corporate customers. We have a holistic approach to our banking business; we do not manage the Bank by segments or divisions or by customer categories, products and services, regions, or any other segmentation for the purpose of allocating resources or assessing profitability. Our strategy is to grow our business, as demand for credit in Argentina increases by focusing on cross-selling opportunities among our broad customer base. The following discussion of our business follows the broad customer categories of retail and corporate as a way to understand who our customers are and the products and services that we provide.

 

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Retail customers

Overview

Retail customers are individuals and entrepreneurs. We provide services to them throughout Argentina, in particular outside the City of Buenos Aires, which has higher concentrations of low- and middle-income individuals who are traditionally underserved by large private banks. We serve our retail customers through our extensive, nationwide branch network. Approximately 93% of our branches are located outside the City of Buenos Aires.

We offer our retail customers traditional banking products and services, such as savings and checking accounts, time deposits, credit and debit cards, consumer finance loans (including personal loans), mortgage loans, automobile loans, overdrafts, credit-related services, home and car insurance coverage, tax collection, utility payments, automatic teller machines (“ATMs”) and money transfers.

Our retail customers provide us with a key source of funding as well as a significant interest and fee income. We believe that our large retail customer client base provides us with an excellent opportunity to expand the volume of our lending business. For example, of our retail customers, only 26% currently have a personal loan from us and only 41% currently have a credit card, and we believe there is strong potential to increase these percentages.

Our efforts have been aimed at strengthening relationships with our customers by offering them the products that are best suited to their needs and circumstances, through our individualized, professional advice, which we believe is an important feature that distinguishes us in our target markets.

Our main goals for the retail bank are to keep the leading and competitive position of our personal loans portfolio, increase our market share in the credit cards business, using this product as a tool to strengthen relations with the various customer segments, improve credit quality ratios and promote a diversified time deposit portfolio and to generate a strong and stable fee base.

In this regard, and aiming to continue growing in the credit card market, we intensified efforts to increase consumption and total assets. In 2014, we also improved the use of our clients’ information as a tool to implement better cross selling, client retention and default prevention commercial actions.

In 2014, the market share of our consumer financing product lines remained stable, maintaining a sustained leading position, competitive position of our personal loan portfolio and significant growth of our credit card products.

Savings and checking accounts and time deposits

We generate fees from providing savings and checking account maintenance, account statements, check processing and other direct banking transactions, direct debits, fund transfers, payment orders and bank debit cards. In addition, our time deposits provide us with a strong and stable funding base.

During 2012, we continued fostering the diversified development of our funding sources and established a solid commission base. Our commercial and customer bonding actions enabled us to achieve growth in the deposit portfolio above market levels, mainly due to an increase in time deposits of retail customers (less than 1 million) which intensified funding diversification. In 2013, the portfolio showed significant growth of 33.5%, driven by a significant increase in demand deposits. In 2014, the deposit portfolio increased by 29% with an increase in demand deposits of 20% and time deposits of 35%. Our growth is mainly driven by funds from Plan Sueldo and retirement accounts.

In 2012 the government established that all payments made to pensioners by the ANSES must take place through financial institutions, which in our case resulted in the opening of over 200,000 accounts. Likewise, in 2013 the payment of governmental family credits into bank accounts was implemented, resulting in the opening of over 45,000 accounts and the issuance of the associated debit cards. In 2014 we recorded an increase of approximately 180,000 accounts.

Our “Debit Card” product is critical within the framework of our strategies to increase customer transactions by encouraging the use of accounts. Its secondary purpose is to develop account balances due to increased deposits into transactional accounts, thus expanding our demand deposits base. With respect to transactional accounts, the monetary volume of purchase transactions increased by 49%, 40% and 45% in 2012, 2013 and 2014, respectively, while the number of debit card purchases increased by 31%, 27% and 15% in the same respective periods.

 

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The following table reflects the number of retail accounts as of December 31, 2012, 2013 and 2014:

 

    

Approximate number of retail accounts

(as of December 31, of each year)

 
Product    2012      2013      2014  

Savings

        

Total savings accounts

     2,125,687         2,231,442         2,340,533  

Plan Sueldo (private and public sector)

     1,116,131         1,138,655         1,209,496  

Retirees

     689,218         696,858         700,340  

Open market, professionals and business

     320,338         395,929         430,697  

Checking

        

Checking accounts

     424,086         538,407         610,184  

Electronic account access

        

Debit cards

     1,906,384         2,174,140         2,327,188   

Lending products and services

We offer personal loans, document discounts, (housing) mortgages, overdrafts, pledged loans and credit card loans to our retail customers.

We intend to continue to increase our retail lending by focusing our marketing efforts on underserved target markets such as low- and middle-income individuals and to cross-sell our retail lending products to our existing customers, particularly those who have savings and checking accounts with us because we provide payroll and pension services to their employers.

In 2012, the Bank increased its market share in consumer loans, consolidating the Bank´s leadership and competitiveness in the personal loans market. In this context and focused on our continuous growth in the credit card market, we have reinforced our actions aiming to increase credit card consumption and total assets. The credit quality of the portfolio remained strong, improving the balance of risk assumed and benefits obtained from this portfolio. The efficiency of our marketing efforts was improved by implementing new channels (external marketing agencies and sales force).

In 2013, our retail loan portfolio grew by 30% as compared to December 31, 2012, which allowed us to maintain our market share and leadership in consumer loans. During 2013 our growth in personal loans reached 28%. This growth was accompanied by a substantial increase in profitability, which allowed us to maintain our leading position with a market share of 14% in 2013. Growth during 2013 was closely related to direct and mass communication campaigns launched in mid-2012 through highly efficient and low-cost and innovative communication channels. Text, voice and multimedia messaging actions were added to those already implemented.

In addition, aiming to strengthen our relationship with our customers and generating automatic loan extension mechanisms, two new personal loan extension channels were added in 2013: “pronto cash on line” whereby customers can obtain a loan in seconds directly through Home Banking and “pronto cash telefónico”, which allows customers to call our toll-free number and obtain cash immediately, to the extent they are pre-qualified.

To continue growing in the credit card market, actions aiming to increase consumption and total assets were strengthened. An aggressive new accounts and client acquisition plan was developed, supplemented with direct marketing campaigns to promote consumption and use of credit cards by phone. We maintained our point-of-sale promotion strategy, offering discounts and interest free payment installments, resulting in increased additional card consumption and automatic debits on credit cards. As a result of our actions, the credit card portfolio grew by 41% in 2013 as compared to 2012, attaining a market share of 8% in 2013.

During 2014, our retail loan portfolio increased by 21%, as compared to 2013, maintaining the second position among other institutions in the financial system in terms of volume of personal loan and credit card portfolios.

Our growth in personal loans during 2014 reached 16%, which allowed us to maintain our leading position with a market share of 14% in 2014, achieved as a result of our continuing with the mass communication strategy started in 2013. In addition to the communication tools already used by the Bank, mainly based on mobile devices, we included the “pre-approved loan notice”, through an alert on the Bank’s homebanking page. With the aim of improving the service and streamlining the granting of loans, we developed internal campaigns to encourage lending through automatic channels.

Our credit card business grew significantly in 2014, with the portfolio balance increasing by 35% and the consumption increasing by 43% as compared to the values reported as of December 31, 2013. During the year, an aggressive telemarketing program was executed aiming to improve benchmarks, including product activation, increased consumption and higher limits. Efforts were made to improve efficiency and reduce service costs, resulting in a material increase in the number of accounts subscribing to our e-account statement service. During the year we observed a significant increase in the profitability of these products, due to the implementation of a strategy aimed at increasing fees and reducing funding costs while not affecting business volumes.

We are a major credit card issuer in Argentina, with approximately 2.5 million credit cards in circulation as of November 30, 2014. One of our initiatives to expand lending is to encourage low- and middle-income customers to use credit cards for larger purchases.

 

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As of December 31, 2012, 2013 and 2014, our consumer loan portfolio was as follows:

 

    

Consumer loan portfolio

(as of December 31, of each year)

(in millions of Pesos and as percentage of retail loan portfolio)

 
     2012     2013     2014  

Overdrafts

     204.5         1.2     245.4         1.1     251.1         0.9

Documents

     312.5         1.8     371.3         1.7     443.7         1.6

Mortgage and pledged loans

     734.1         4.3     874.6         3.9     959.3         3.6

Credit card loans

     4,502.7         26.4     6,358.4         28.5     8,554.9         31.8

Personal loans

     10,993.4         64.5     14,109.7         63.2     16,401.5         61.0

Other

     310.3         1.8     355.5         1.6     289.7         1.1

Total

     17,057.5         100.0     22,314.9         100.0     26,900.2         100.0

As of December 31, 2014, personal loans, the most representative share of our portfolio, carried an annual average interest rate of 38.6% and an average maturity of 40.1 months. Interest rates and maturities vary across products.

Plan Sueldo payroll services

Since 2001, Argentine labor law has provided for the mandatory payment of wages through accounts opened by employers in the name of each employee at financial institutions within two kilometers of the workplace, in the case of urban areas, and ten kilometers of the workplace, in the case of rural areas. There are similar requirements in place for pension payments.

We handle payroll processing for private sector companies and the public sector, which require employers to maintain an account with us for the direct deposit of employee wages. Currently, we provide payroll services for the governments of the Argentine provinces of Misiones, Salta, Jujuy and Tucumán and in the private sector for a total aggregate of 1.9 million retail clients (including retirees). Our Plan Sueldo payroll services provide us with a large and diversified deposit base with significant cross-selling potential.

Corporate customers

Overview

We provide our corporate customers with traditional banking products and services such as deposits, lending (including overdraft facilities), check cashing advances and factoring, guaranteed loans and credit lines for financing foreign trade and cash management services. We also provide them trust, payroll and financial agency services, corporate credit cards and other specialty products.

The corporate business is focused on the classification by sizes and sectors. We have four categories for our corporate customers: small-sized companies, which register up to Ps.100 million in sales per year; medium-sized companies, which register more than Ps.100 million and less than Ps.150 million in sales per year; large-sized companies, which register more than Ps.150 million in sales per year; and agro companies, which include individuals and companies who operate in agriculture or in the commerce of agricultural products.

As in previous years, the Bank continued developing its decentralized segment-specific service strategy aimed at improving customer service. At present, the Bank has a network of branches with business officials specialized in each category, offering a wide range of products, including working capital facilities, investment projects, leasings and foreign trade transactions.

Our corporate customer base also acts as a source of demand for our excess liquidity through overnight and short-term loans to large-sized corporate customers. See Item 5.B “Operating and Financial Review and Prospects - Liquidity and Capital Resources”.

Lending products and services

Most of our current lending activity consists of working capital loans to small- and medium-sized businesses. Our historic focus on small- and medium-sized businesses has enabled us to diversify our credit risk exposure, by granting smaller-sized loans to clients in diverse business sectors. As of December 31, 2014, our 20 largest private sector loans accounted for 9% of our total corporate loans.

We offer short-term and medium- to long-term corporate lending products.

Short-term: Products include credit lines for up to 180 days and consist mainly of overdraft facilities, corporate credit and debit cards and factoring, as well as foreign trade related financing, such as pre-export, post-shipment and import financing. These products also include contingency lines, such as short-term guarantees (performance guarantees and bid bonds) and import letters of credit. The credit risk assigned to these kinds of transactions is the debtor rating described below, unless increased as a result of a pledge or a guarantee.

Medium- to long-term: Products include credit lines and specific lending facilities of more than 180 days. Credits are usually asset-based, such as leasing, whereby a credit enhancement is achieved by means of the underlying asset.

Medium- to long-term facility risks are mitigated through different mechanisms that range from pledges and mortgages to structured deals through financial trusts whereby the debtor pledges the underlying asset, mostly future income flows. Regardless of the term and based on the fact that these credit lines are devoted to small to medium-sized companies, our policy is to require personal guarantees from the owners, although the underlying debtor rating remains unchanged.

 

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In 2012, our corporate loan portfolio recorded a 32% increase as compared to 2011, driven mainly by increases in pledged loans, document discounts and, to a lesser extent, overdrafts. Loans to agrocompanies and small-sized companies grew by 31% and 25%, respectively, in 2012 as compared to 2011, contributing to the increased diversification and stability of our corporate loan portfolio. In 2012, the credit portfolio for the small-sized companies increased mainly as a consequence of an increase in medium- and long-term loans. The Bank’s strategy was essential to reach more clients, offering them a wide range of products subject to a fast approval process. Medium- and large-sized companies’ portfolio increased 22% and 20%, respectively, as compared to 2011.

In 2012, we began providing financing through Credit Facilities for Productive Investments (Linea de Créditos para la Inversión Productiva) extending credit to certain of our clients in an aggregate amount of Ps.1.0 billion throughout the year.

In 2013, our corporate loan portfolio recorded a 19% increase compared to 2012. This development was driven by an increase in long term facilities, mainly pledge loans and mortgage loans. As in 2012, the contribution of the agribusiness and small- and medium-sized companies, which were once again the most dynamic, was critical in 2013. Loans to agrocompanies and small-sized companies, grew by 36% and 44%, respectively, in 2013 as compared to 2012. Medium- and large-sized companies’ loan portfolio increased 9% and 4%, respectively, as compared to 2012.

During 2013, we provided a total of Ps.2.5 billion in financing through our Credit Facilities for Productive Investments, an amount above the mandatory minimum amount required by Central Bank regulations, supporting the Bank’s commitment to finance productive activities. The total outstanding amount as of December 31, 2013 was Ps.3.0 billion.

In 2014, our corporate loan portfolio (without loans to large-sized companies) increased by 17%, driven by an increase in pledge loans, discounted checks, work progress certificates and credit cards. This increase was offset by a 28% decrease in the large-sized companies’ loan portfolio.

In respect of agribusiness banking, the weather in 2014 was not as harsh as in 2013, resulting in increased yields of traditional crops. In areas with higher productive potential, yields were in line with historical average values and in certain areas poor yields recorded in the two previous years were reversed. However, the general profitability of the sector is still affected by taxation and export controls, resulting in stagnation of business activity.

During 2014 we covered the financial needs of more than 15,000 agricultural producers, such as working capital financing, including approximately 1,000 investment projects totaling over Ps.578 million through the Credit Facilities for Productive Investments. Additionally, measures adopted in connection with Macro Agro Cards were especially important, resulting in a more effective activation of accounts and an increase in consumption volumes and portfolio balances of 51% and 62%, respectively, in 2014 mainly as a result of the new alliances. Loans to agribusiness companies grew by 14% in 2014 as compared to 2013.

In 2014, the loan portfolio for Pymes increased 22%, mainly due to the increase in discounted checks, pledged loans and other advances. Through our Credit Facilities for Productive Investments, the Bank funded venture projects for over 1,500 companies in an aggregate amount of Ps.935 million. In this regard, the Bank’s strategy was essential to reach more clients, offering them a wide range of products subject to a fast approval process.

In 2014, the medium-sized companies’ loan portfolio increased 14%, as compared to 2013.

During 2014 we provided Ps.3.6 billion in financing through our Credit Facilities for Productive Investments. As of December 31, 2014, the total amount outstanding was Ps.4.5 billion.

As of December 31, 2012, 2013 and 2014, our commercial loan portfolio was as follows:

 

    

Commercial loan portfolio (1)

(as of December 31, of each year)

(in millions of Pesos and as percentage of corporate loan portfolio)

 
     2012     2013     2014  

Overdrafts

     4,266.0         28.4     4,371.6         24.7     3,261.9         18.1

Documents

     3,329.1         22.1     3,896.4         22.0     4,115.6         22.8

Mortgage and pledged loans

     1,758.6         11.7     2,957.7         16.7     3,483.6         19.3

Credit cards

     222.4         1.5     483.0         2.7     634.6         3.5

Personal loans

     13.3         0.1     16.4         0.1     14.2         0.1

Other

     5,442.8         36.2     5,988.8         33.8     6,516.2         36.2

Total

     15,032.2         100.0     17,713.9         100.0     18,026.1         100.0

 

(1) Including loans to micro credit institutions and commercial loans that for the consolidated statements of debtors was included as consumer portfolio following the criteria described in “-Argentine banking regulation – credit portfolio”.

Transaction services

We offer transaction services to our corporate customers, such as cash management, customer collections, payments to suppliers, payroll administration, foreign exchange transactions, foreign trade services, corporate credit cards, and information services, such as our Datanet and Interpymes services. There are usually no credit risks involved in these transactions, except for intra-day gapping (payments done against incoming collections), as well as settlement and pre-settlement related to foreign exchange transactions which, in general, are approved following the debtor rating process.

 

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Payments to suppliers. Our payments to suppliers service enable our customers to meet their payment obligations to their suppliers on a timely basis through a simple and efficient system. This service also provides payment liquidations, tax payment receipts, invoices and any other documents required by the payer.

Collection services. Our collection services include cash or check deposits at our 434 branches, automatic and direct debits from checking or savings accounts and the transportation of funds collected from corporate customers to our branches for deposit. Our extensive branch network enables us to offer fast and efficient collection services throughout Argentina, which is of critical importance to both regional and nationwide companies.

Datanet and Interpymes. We provide our corporate clients with access to the Datanet service, which is an electronic banking network linking member banks in Argentina. These services permit our clients to obtain reliable on-line information on a real-time basis from their bank accounts in Datanet as well as, to perform certain transactions.

Interpymes is an electronic banking system designed to meet the needs of small businesses. It does not require special installation procedures and is easily accessible through the Internet, helping to simplify day-to-day operations for our customers.

Tax collection and financial agency services. We also have exclusive, long-term arrangements to provide tax collection and financial agency services to four provinces.

Payroll services. We provide payroll services to four provinces and to the private sector. See “Our products and services – Retail customers”.

Our distribution network

As of December 31, 2014, we had the largest private sector branch network in the country, with 434 branches spread throughout Argentina. In particular, in line with our strategy of expanding nationally, we have extensive coverage in the provinces of Argentina with 93% of our branches located outside the City of Buenos Aires. Furthermore, as of December 31, 2014 we had 1,272 ATMs, 891 self-service terminals (“SSTs”), 68 service points used for social security benefit payments and servicing of checking and savings accounts and an internet banking service (home banking).

The following table breaks down the distribution of our branches per province as of December 31, 2014:

 

     As of December 31, 2014  
Province    Branches    % of total  

City of Buenos Aires

   32      7.4

Buenos Aires (Province)

   60      13.8

Catamarca

   1      0.2

Chaco

   1      0.2

Chubut

   5      1.1

Cordoba

   66      15.2

Corrientes

   3      0.7

Entre Rios

   10      2.3

Formosa

   0      0.0

Jujuy

   15      3.5

La Pampa

   2      0.5

La Rioja

   2      0.5

Mendoza

   15      3.5

Misiones

   33      7.6

Neuquen

   5      1.1

Rio Negro

   6      1.4

Salta

   30      6.9

San Juan

   1      0.2

San Luis

   1      0.2

Santa Cruz

   2      0.5

Santa Fe

   106      24.4

Santiago del Estero

   1      0.2

Tierra del Fuego

   2      0.5

Tucuman

   35      8.1

TOTAL

   434      100.0

Source:Central Bank

Technology and automated channels

The Bank’s technological development is continuous and the number of alternative methods to perform banking transactions is increasing. Automated channels allow our clients to perform banking transactions with enhanced speed, comfort and safety, offering a wide variety of available transactions.

During the last three years we have focused on automatic channels, giving customers more accessible and flexible services. As a result, the use of automated channels continued expanding, in terms of volume of transactions and number of users.

 

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New actions were implemented in 2014 to maintain high security, service quality and availability standards in our ATM network through preventive management and training strategies. This placed the Bank in a leading position as to service quality, which is especially important considering the number and geographical dispersion of ATMs installed by us. The transactions performed through the ATMs increased by 16% in 2012, 10% in 2013 and 15% in 2014, as compared with the previous year.

In addition, the Bank continued implementing technological improvements and updates to its ATMs. In 2014, the Bank installed 435 ATMs, of which 44% were replacements, 37% were new units and 19% were reinforcements. We have increased the number of access points in our branches, reaching a total of 1,272 operating ATMs, representing one of the widest reaching networks in the country. At present, 33% of ATMs have voice guidance for people who are blind or vision impaired and we expect to have this functionality available in all ATMs supporting the technology in 2015.

We have self-service terminals distributed in our branch network across the country, offering an ample variety of operations, including the possibility of making deposits 24x7 all year long.

In 2014, new SSTs were installed, totaling 891 SSTs and incorporating the smart check deposit functionality. This development has been beneficial both to the Bank (increased efficiency) and to clients (safety and reduced transaction times).

In respect of the use of home banking, we have implemented a collections service for companies, offering the following benefits: security (no cash or checks are transported to the branch), practicality (easy and safe, backup of receipts in a PDF file, possibility to review the history of payments and receipts), accessibility (from any PC) and no additional cost. The transactions performed through home banking increased by 17% in 2013 and continued to grow during 2014.

Our “Macro Banca Móvil” channel has developed significantly in the last three years. In 2014 the number of users increased from 50,000 to 90,000 and the number of total transactions and the amounts involved doubled.

In line with the characteristics of the users and the technological trends supporting the development of the service, the “Macro Banca Móvil” application is available in the main virtual stores.

The significant and sustained increase in the number of users and transactions performed by authomated channels evidences the effectiveness and level of acceptance of these services in the market. Our challenge for 2015 is to continue developing new client offerings like investment products, including mutual funds, and the purchase and sale of securities through automated channels.

In 2014, the Bank implemented various technological developments, including the following:

(i) Post sale customer relationship management (“CMR”), a process which allows us to record contacts made by our clients through various channels, such as call centers and through our branches, and monitor service requests;

(ii) Claim CMR, a process which allows us to efficiently resolve client claims improve data quality, reduce back-log and identify any issues;

(iii) Business unit modelling, a system that allows us to hold a register of the commercial capabilities of each of our branches, thus allowing us to ensure that our standards are met and identify deviations;

(iv) Interactive voice response, an update to our earlier system, which has allowed us to increase customer service and integrate online capabilities; and

(v) Server virtualization, a process which during 2015 will allow increase the capabilities and availability of our servers.

The total amount that we plan to invest in technology in 2015 is approximately US$50 million.

Risk management policies

To comply with the “Risk Management Guidelines for Financial Institutions” set forth under Communication “A” 5203, as amended, we have adopted various measures at our organizational structure level and have implemented procedures to ensure the establishment of an independent risk management process.

As to the Bank’s organizational structure, the board of directors has created a Risk Management Committee responsible for coordinating the application of risk management policies and the relevant responsible officers. For more information, see Item 6.C “Board Practices”. The Committee includes the heads of financial risk, credit risk and operational risk, who are in charge of implementing the guidelines contained in the risk management framework policy.

Our risk management framework policy establishes the environment for the risk management process under the notions of risk identification, measurement, monitoring and mitigation. In addition, it lays out the duties of each organizational level in the process.

Our risk management process includes the setting of acceptable risk levels by the board of directors, monitoring of the Bank’s compliance with such levels by responsible officers, the issuance of regular reports for the Risk Management Committee, the follow up on alerts and the application of action plans in connection with such alerts and the guidelines for the development of stress tests, which commenced in 2013 based on an action plan approved by the Risk Management Committee.

The development of the stress test program was established and planned. The process includes documenting and formalizing the program, including selecting the persons in charge of carrying out the program, the frequency of testing and validation of the system. It also contemplates the contingency plan based on test results. The Risk Management Committee leads and coordinates these tasks.

 

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Additionally, the system is supplemented with policies and procedures specific to each risk (financial, credit, operational, counterparty credit, country risk, securitization, reputational, compliance, strategic risks, among others).

Economic capital estimate

Economic capital is the estimated amount of unexpected losses identified for each one of the individual risks (financial, credit, counterparty credit, concentration, operational, securitization, strategic and reputational) determined for the Bank on a consolidated basis.

In January 2014, we implemented a formal procedure for quantitifying economic capital, both current and prospective, and it is a tool used in the day-to-day management of risks, in preparing the “business plan” and in the “stress tests”.

The methods used to measure the economic capital of each risk were documented and approved by management, pursuant to the internal rules on corporate governance and risk management.

The most significant risks managed by the Bank are financial risk, credit risk and operational risk.

Financial risk

Financial risk is understood to be comprised of liquidity, market and interest rate risks, which, independently or in an interrelated manner, can affect the Bank’s liquidity and solvency.

The Bank has strategies, policies and limits defined for each exposure which have been approved by the board of directors within the framework of market, liquidity and interest rate risk management. This process is reviewed periodically by the Risk Management Committee in accordance with the guidelines set forth by Central Bank.

The purpose of the financial risk policy is to ensure that the Risk Management Committee and senior management have the proper procedures, tools and information to enable them to measure, manage and control the applicable risks.

For more information on financial risk definition and management processes see note 18 “Risk management policies” to our audited consolidated financial statements as of and for the three years ended December 31, 2014.

Credit risk

Credit policy and credit risk management

Credit risk results from the possibility of loss derived from customers or counterparties from fully or partially breaching financial obligations they have undertaken with the Bank.

The Bank has counterparty and credit risk policies and strategies, the purpose of which is to ensure that risks fall within a risk tolerance level decided by the board of directors, which is responsible for approving our strategy, significant credit policies and practices and level of risk tolerance.

The Credit Risk Management Committee is responsible for establishing the policies and procedures for risk management and monitoring our senior management’s activities involving the management of credit risks, among others. It advises the board of directors on the Bank’s risks.

The Credit Risk Department is responsible for the implementation of policies and procedures for managing and monitoring our credit risk exposure, enabling us to a clear identification, evaluation, control, follow up and mitigation of such risk.

Procedure manuals and tools (information systems, rating and follow-up systems, risk models, and deliquency recovery policies) are used to manage risk efficiently based on the type of client. One of the credit risk management tools used involves evaluation or score models (for admission, behavior and collections), which are used at different stages of the credit cycle, assigning an internal risk rating to customers, according to which the assigned credit limits are managed and according to which the portfolio is monitored.

We are also developing models to use in relation to expected losses, forecasts and capital adequacy assessments, which are currently at different stages of progress and form part of our action plan to adjust to local regulations (Communications “A” 5394 and “A” 5398), the Basel principles and best practices for risk management In addition, we continuously monitor compliance with credit regulations of the Central Bank.

Credit risk rating and approval process

In order to determine the credit risk, our Credit Risk Department qualifies each individual or company by means of a risk rating model, assigning a rating to each debtor, taking into consideration quantitative as well as qualitative concepts. The Credit Risk Department has focused its actions on increasing the quality and efficiency of the credit risk rating process.

 

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There are specific policies and procedures for loan granting for Corporate and Retail customers, which differ according to the segment to which they belong.

Credit risk assessment for retail customers includes the use of risk applications based on screening and scoring methods related to an arrears level. There is also a mass-scale and centralized qualification process for clients and credit prequalification models for the assessment of potential customers from different sales campaigns.

Various credit committees, composed of members of the business and risk areas are responsible for reviewing and determining whether to approve certain loans, depending upon relevant market targeted and the amount involved. These include a senior credit committee, a junior credit committee, a credit committee by business, a credit committee by region and a small agribusiness committee. The senior credit committee consists of members of the board of directors and senior management and considers loan proposals in excess of Ps.25 million.

In Corporate Banking, approval by credit committees is required and specific risk reports are prepared by the customer or by the group of companies to support credit decisions. To streamline this process of approving pre-defined products and smaller amounts, there are decentralized assessment methods in place for agribusinesses, PYMEs and microprojects. There is an individual and joint powers system in place for managers and business officers which is applied exclusively to short-term transactions involving small amounts or which have self-liquidating collateral.

The Bank has a Management Information System according to the magnitude of its operations. Its components include an automated tool for the calculation of key performance indicators, for which alert and limit values have been determined in order to monitor business changes according to the risk appetite defined by the board of directors. Other credit risk management tools used are evaluation or score models, which are used at different stages of the credit cycle, attributing an internal risk rating to customers, according to which the assigned credit limits are managed and according to which the portfolio is monitored. Those tools are complemented with expected losses, forecast and capital adequacy assessment models, which are in different development and implementation stages, to adjust to local requirements (Communiqués “A” 5394 and “A” 5398), the Basel principles and best practices for risk management.

For more information on the credit risk management process see note 18 “Risk management policies” to our audited consolidated financial statements as of and for the three years ended December 31, 2014.

Operational risk

Operational risk, which we define pursuant to the Basel II Accord and Communication “A” 5398 of the Central Bank, consists of the risk of suffering losses due to inadequate or failed in the internal processes, systems or persons, or due to external events. This definition includes legal risk but excludes strategic and reputational risk.

The Bank has policies, procedures and structures, appointing a head of operational risk and an operational risk committee, whose main objective is to secure an operational risk management plan which includes policies, programs, measurements and competencies for identifying, assessing and managing risks, with the purpose of assisting area managers and the Bank’s board of directors, in an environment of rapidly changing and significant risks.

In this context, the Evolutionary Comprehensive Operational Risk Management Model was developed, which involves the identification, measurement, management and monitoring of operational risks. A training plan was designed to begin conveying the concepts inherent to Operational Risk and the cultural change that this generates, and an implementation plan of the model was put into practice to achieve full implementation of all of its stages.

A quantitative approach is used to measure operational risk and technological risk. In respect of risk management related to the IT and information systems, we have contingency and business continuity plans in place to minimize the risks that could affect the Bank’s continuity of operations.

We have an incentives system to manage operational risk in such a way that it would encourage involvement and risk assessment. The risk assessment policy has also been reinforced for new products and in modifications to existing products.

In addition, in 2014 we continued to implement improvements on different functions of our risk management system also continued.

For more information on operational risk management processes see note 18 “Risk management policies” to our audited consolidated financial statements as of and for the three years ended December 31, 2014.

Competition

We believe that we have an important advantage over our competitors in providing banking products and services to small communities in the provinces of Argentina as a result of the close community relationships and strong loyalty we have developed over time with our customers in these areas.

We consider Banco Santander Río S.A., Banco de Galicia y Buenos Aires S.A., BBVA Banco Francés S.A., HSBC Bank Argentina S.A. and Banco Patagonia S.A. to be our main competitors among private banks. We also compete with regional banks.

 

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In the future, we expect competition to increase in corporate transactions products, long-term lending, mortgage lending and other secured financings, credit cards, personal loans, payroll services and investment management services.

Competitive landscape

We are ranked as the third private bank and the fifth bank overall in Argentina in terms of total loans and total deposits as of November 30, 2014. In terms of equity we are ranked as the second private bank and the third bank overall in Argentina as of November 30, 2014. Below are the rankings of banks across these metrics:

 

Total Loans

(As of November 30, 2014)

 

Ps.

Thousands

    Market Share
(% share of total private
sector loans for the
Argentine
financial system)
 
1  

BANCO DE LA NACION ARGENTINA(1)

    119,253,163        19.0
2  

BANCO DE LA PROVINCIA DE BUENOS AIRES(1)

    54,275,942        8.7
3  

BANCO SANTANDER RIO S.A.

    52,525,416        8.4
4  

BANCO DE GALICIA Y BUENOS AIRES S.A.

    48,623,197        7.8
5  

BANCO MACRO S.A. (2)

    42,746,875        6.8
6  

BBVA BANCO FRANCES S.A.

    39,348,977        6.3
7  

BANCO DE LA CIUDAD DE BUENOS AIRES(1)

    26,691,317        4.2
8  

HSBC BANK ARGENTINA S.A.

    25,719,370        4.1
9  

BANCO PATAGONIA S.A.

    21,808,668        3.5
10  

BANCO CREDICOOP COOPERATIVO LIMITADO

    19,772,612        3.1
 

OTHERS

    176,613,842        28.1
 

TOTAL

    627,379,379        100.0

Source: Central Bank

 

(1) Public sector banks.
(2) Figures from Banco Macro on a consolidated basis.

 

Total Deposits

(As of November 30, 2014)

 

Ps.

Thousands

   

Market Share
(% share of total
deposits for the
Argentine financial

system)

 
1  

BANCO DE LA NACION ARGENTINA(1)

    271,162,670        29.0
2  

BANCO DE LA PROVINCIA DE BUENOS AIRES(1)

    87,495,992        9.3
3  

BANCO SANTANDER RIO S.A.

    63,974,820        6.8
4  

BANCO DE GALICIA Y BUENOS AIRES S.A.

    61,283,626        6.5
5  

BANCO MACRO S.A. (2)

    54,032,699        5.8
6  

BBVA BANCO FRANCES S.A.

    49,311,998        5.3
7  

BANCO CREDICOOP COOPERATIVO LIMITADO

    36,482,249        3.9
8  

HSBC BANK ARGENTINA S.A.

    35,250,047        3.8
9  

BANCO DE LA CIUDAD DE BUENOS AIRES(1)

    34,795,457        3.7
10  

BANCO PATAGONIA S.A.

    27,910,976        3.0
 

OTHERS

    213,872,043        22.9
 

TOTAL

    935,572,577        100.0

Source: Central Bank

 

(1) Public sector banks.
(2) Figures from Banco Macro on a consolidated basis.

 

Equity

(As of November 30, 2014)

 

Ps.

Thousands

    Market Share
(% share of equity for the
Argentine financial
system)
 
1  

BANCO DE LA NACION ARGENTINA(1)

    38,502,921        23.4
2  

BANCO SANTANDER RIO S.A.

    11,660,323        7.1
3  

BANCO MACRO S.A.(2)

    11,288,589        6.9
4  

BBVA BANCO FRANCES S.A.

    9,977,149        6.1
5  

BANCO DE GALICIA Y BUENOS AIRES S.A.

    9,509,374        5.8
6  

BANCO DE LA PROVINCIA DE BUENOS AIRES(1)

    7,941,238        4.8
7  

HSBC BANK ARGENTINA S.A.

    6,584,269        4.0
8  

CITIBANK N.A.

    6,303,803        3.8
9  

BANCO PATAGONIA S.A.

    6,118,904        3.7
10  

BANCO DE LA CIUDAD DE BUENOS AIRES(1)

    5,517,813        3.3
 

OTHERS

    51,296,908        31.1
 

TOTAL

    164,701,291        100.0

Source: Central Bank

 

(1) Public sector banks.
(2) Figures from Banco Macro.

There is a large concentration of branches in the City and province of Buenos Aires in the financial system as a whole, as shown by the following table. However, we have the most extensive private-sector branch network in Argentina, and a leading regional presence holding 71% of our total branches in nine provinces including Santa Fe, Córdoba, Mendoza, Río Negro, and Tierra del Fuego, in addition to Misiones, Salta, Tucumán and Jujuy.

 

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     As of November 30, 2014  
     Banking system     Banco Macro (1)    

Market Share

(% share of

total of

branches in

each province)

 
Province    Branches      % of total     Branches      % of total        

City of Buenos Aires

     809         18.4     32         7.4     4.0

Buenos Aires (Province)

     1,346         30.6     60         13.9     4.5

Catamarca

     25         0.6     1         0.2     4.0

Chaco

     62         1.4     1         0.2     1.6

Chubut

     98         2.2     5         1.1     5.1

Cordoba

     441         10.0     66         15.2     15.0

Corrientes

     86         2.0     3         0.7     3.5

Entre Rios

     139         3.2     10         2.3     7.2

Formosa

     19         0.4     0         0.0     0.0

Jujuy

     32         0.7     15         3.5     46.9

La Pampa

     108         2.5     2         0.5     1.9

La Rioja

     27         0.6     2         0.5     7.4

Mendoza

     160         3.7     15         3.5     9.4

Misiones

     63         1.4     33         7.6     52.4

Neuquen

     96         2.2     5         1.1     5.2

Rio Negro

     72         1.7     6         1.4     8.3

Salta

     61         1.4     29         6.7     47.5

San Juan

     37         0.8     1         0.2     2.7

San Luis

     52         1.2     1         0.2     1.9

Santa Cruz

     46         1.0     2         0.5     4.3

Santa Fe

     459         10.5     106         24.5     23.1

Santiago del Estero

     53         1.2     1         0.2     1.9

Tierra del Fuego

     23         0.5     2         0.5     8.7

Tucuman

     81         1.8     35         8.1     43.2

TOTAL

     4,395         100.0     433         100.0     9.9

Source: Central Bank

 

(1) Includes branches of Banco Macro and Banco del Tucumán.

Approximately 82% of the branches in the Argentine financial system are located outside the City of Buenos Aires; in our case, approximately 93% of our branches are outside the City of Buenos Aires. The ten largest banks, in terms of branches, account for 70% of the total number of branches in the Argentine financial system. As of November 30, 2014 we were second to Banco de la Nación Argentina in terms of market share outside the City of Buenos Aires, with a market share of 11.2%. The following ranking is based on financial institutions with a relevant number of branches as of November 30, 2014:

 

    As of November 30, 2014  
Entity   Total
Number of
Branches
    Market
Share of
Branches in
Argentina
    Branches
in City of
Buenos
Aires
    Market
Share of
Branches in
City of
Buenos Aires
    Branches
in the Rest
of Country
    Market
Share of
Branches in
Rest of
Country
    % of
Branches in
the Rest of
Country
 

BANCO DE LA NACION ARGENTINA (1)

    632        14.4     64        7.9     568        15.8     89.9

BANCO MACRO S.A. (2)

    433        9.9     32        4.0     401        11.2     92.6

BANCO DE LA PROVINCIA DE BUENOS AIRES (1)

    342        7.8     39        4.8     303        8.4     88.6

BANCO SANTANDER RIO S.A.

    352        8.0     99        12.2     253        7.1     71.9

BANCO DE GALICIA Y BUENOS AIRES S.A.

    320        7.3     94        11.6     226        6.3     70.6

BANCO CREDICOOP COOPERATIVO LIMITADO

    256        5.8     40        4.9     216        6.0     84.4

BBVA BANCO FRANCES S.A.

    252        5.7     83        10.3     169        4.7     67.1

BANCO DE LA PROVINCIA DE CORDOBA S.A.(1)

    172        3.9     1        0.1     171        4.8     99.4

BANCO PATAGONIA S.A.

    174        4.0     43        5.3     131        3.7     75.3

HSBC BANK ARGENTINA S.A.

    139        3.2     46        5.7     93        2.6     66.9

OTHERS

    1,323        30.0     268        33.2     1,055        29.4     79.7

TOTAL

    4,395        100.0     809        100.0     3,586        100.0     81.6

Source: Central Bank

 

(1) Public sector bank.
(2) Includes branches of Banco Macro and Banco del Tucumán.

Argentine banking regulation

Overview

Founded in 1935, the Central Bank is the principal monetary and financial authority in Argentina. Its mission is to promote monetary and financial stability, employment and economic development with social equity.

It operates pursuant to its charter, which was amended on March 22, 2012 by Law No. 26,739 and the provisions of the Financial Institutions Law. Under the terms of its charter, the Central Bank must operate independently from the Argentine government.

 

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Since 1977, banking activities in Argentina have been regulated primarily by the Financial Institutions Law, which empowers the Central Bank to regulate the financial sector. The Central Bank regulates and supervises the Argentine banking system through the Superintendency. The Superintendency is responsible for enforcing Argentina’s banking laws, establishing accounting and financial reporting requirements for the banking sector, monitoring and regulating the lending practices of financial institutions and establishing rules for participation of financial institutions in the foreign exchange market and the issuance of bonds and other securities, among other functions.

The powers of the Central Bank include the authority to fix monetary base, interest rate, minimum capital, liquidity and solvency requirements, regulate credit, approve bank mergers, approve certain capital increases and transfers of stock, grant and revoke banking licenses, and to authorize the establishment of branches of foreign financial institutions in Argentina and the extension of financial assistance to financial institutions in cases of temporary liquidity or solvency problems.

The Central Bank establishes certain “technical ratios” that must be observed by financial entities, such as ratios related to levels of solvency, liquidity, the maximum credits that may be granted per customer and foreign exchange assets and liability positions.

In addition, financial entities need the authorization of the Central Bank for the disposition of their assets, such as opening or changing branches or ATMs, acquiring share interests in other financial or non-financial corporations and establishing liens over their assets, among others.

As supervisor of the financial system, the Central Bank requires financial institutions to submit information on a daily, monthly, quarterly, semi-annual and annual basis. These reports, which include balance sheets and income statements, information relating to reserve funds, use of deposits, classifications of portfolio quality (including details on principal debtors and any allowances for loan losses), compliance with capital requirements and any other relevant information, allow the Central Bank to monitor the business practices of financial entities. In order to confirm the accuracy of the information provided, the Central Bank is authorized to carry out inspections.

If the Central Bank’s rules are not complied with, various sanctions may be imposed by the Superintendency, depending on the level of infringement. These sanctions range from a notice of non-compliance to the imposition of fines or, in extreme cases, the revocation of the financial entity’s operating license. Additionally, non-compliance with certain rules may result in the compulsory filing of specific adequacy or restructuring plans with the Central Bank. These plans must be approved by the Central Bank in order to permit the financial institution to remain in business.

The Central Bank fulfills the function of lender of last resort, and is allowed to provide financial assistance to financial institutions with liquidity or solvency problems.

Central Bank supervision

Since September 1994, the Central Bank has supervised the Argentine financial entities on a consolidated basis. Such entities must file periodic consolidated financial statements that reflect the operations of head offices or headquarters as well as those of their branches in Argentina and abroad, and of their significant subsidiaries, whether domestic or foreign. Accordingly, requirements in relation to liquidity and solvency, minimum capital, risk concentration and loan loss provisions, among others, should be calculated on a consolidated basis.

Permitted activities and investments

The Financial Institutions Law governs any individuals and entities that perform habitual financial intermediation and, as such, are part of the financial system, including commercial banks, investment banks, mortgage banks, financial companies, savings and loan companies for residential purposes and credit unions. Except for commercial banks, which are authorized to conduct all financial activities and services that are specifically established by law or by regulations of the Central Bank, the activities that may be carried out by Argentine financial entities are set forth in the Financial Institutions Law and related Central Bank Rules. Commercial banks are allowed to perform any and all financial activities inasmuch as such activities are not forbidden by law. Some of the activities permitted for commercial banks include the ability to (i) receive deposits from the public in both local and foreign currency; (ii) underwrite, acquire, place or negotiate debt securities, including government securities, in both exchange and over-the-counter markets (subject to prior approval by the CNV, if applicable); (iii) grant and receive loans; (iv) guarantee customers’ debts; (v) conduct foreign currency exchange transactions; (vi) issue credit cards; (vii) act, subject to certain conditions, as brokers in real estate transactions; (viii) carry out commercial financing transactions; (ix) act as registrars of mortgage bonds; (x) participate in foreign exchange transactions; and (xi) act as fiduciary in financial trusts.

In addition, pursuant to the Financial Institutions Law and Central Bank Communication “A” 3086, as amended, commercial banks are authorized to operate commercial, industrial, agricultural and other types of companies that do not provide supplemental services to the banking services (as defined by applicable Central Bank Rules) to the extent that the commercial bank’s interest in such companies does not exceed 12.5% of its voting stock or 12.5% of its capital stock. Nonetheless, if the aforementioned limits were to be exceeded, the bank should (i) request Central Bank’s authorization; or (ii) give notice of such situation to the Central Bank, in certain circumstances. However, even when commercial banks’ interests do not reach such percentages, they are not allowed to operate such companies if (i) such interest allows them to control a majority of votes at a shareholders’ or board of directors’ meeting, or (ii) the Central Bank does not authorize the acquisition.

Furthermore, in respect of supplementary services, pursuant to Communication “A” 5700, commercial banks are authorized to operate in local or foreign companies that have one or two of the exclusive corporate purposes listed in section 2.2 of Communication “A” 5700, in

 

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which the commercial bank’s interest either exceeds 12.5% of such companies’ voting stock or allows the commercial bank to control a majority of votes at a shareholders’ or board of directors’ meeting. If the corporate purposes of such companies include two of the corporate purposes listed in section 2.2 of Communication “A” 5700, the authorization of the Central Bank is required.

Under Central Bank Rules, the total amount of the investments of a commercial bank in the capital stock of third parties, including interests in Argentine mutual investment funds, may not exceed 50% of such bank’s regulatory capital (Responsabilidad Patrimonial Computable, or “RPC”). In addition, the total amount of a commercial bank’s investments in the following: (i) unlisted stock, excluding interests in companies that provide services that are supplementary to the finance business and interests in state-owned companies that provide public services, (ii) listed stock and interests in mutual funds that do not give rise to minimum capital requirements on the basis of market risk, and (iii) listed stock that does not have a “largely publicly available market price,” taken as a whole, is limited to 15% of such bank’s RPC.

To this effect, a given stock’s market price is considered to be “largely publicly available” when daily quotations of significant transactions are available, and the sale of such stock held by the bank would not significantly affect the stock’s quotation.

Operations and activities that banks are not permitted to perform

The Financial Institutions Law prohibits commercial banks from: (a) creating liens on their assets without prior approval from the Central Bank, (b) accepting their own shares as security, (c) conducting transactions with their own directors or managers and with companies or persons related thereto under terms that are more favorable than those regularly offered in transactions with other clients, and (d) carrying out commercial, industrial, agricultural or other activities without prior approval of the Central Bank, except those considered financially related activities under Central Bank Rules. Notwithstanding the foregoing, banks may own shares in other financial institutions with the prior approval of the Central Bank, and may own shares or debt of public services companies, if necessary to obtain those services.

Liquidity and solvency requirements

As of 1994, the Central Bank supervision of financial institutions is carried out on a consolidated basis. Therefore, all of the documentation and information filed with the Central Bank, including financial statements, must show the operations of each entity’s headquarters and all of its branches (in Argentina and abroad), the operations of significant subsidiaries and, as the case may be, of other companies in which such entity holds stock. Accordingly, all requirements relating to liquidity, minimum capital, risk concentration and bad debts’ reserves, among others, are calculated on a consolidated basis.

Legal reserve

According to Section 33 of the Financial Institutions Law, financial institutions are required to maintain a legal reserve which shall be funded with no more than 20% and no less than 10% of their yearly income. This reserve can only be used during periods in which a financial institution has incurred losses and has exhausted all other reserves. If a financial institution does not comply with the required legal reserve, it is not allowed to pay dividends to its shareholders.

Non-liquid assets

Since February 2004, non-liquid assets (computed on the basis of their closing balance at the end of each month, and net of those assets that are deducted to compute the regulatory capital, such as equity investments in financial institutions and goodwill) plus the financings granted to a financial institution’s related parties (computed on the basis of the highest balance during each month for each customer) cannot exceed 100% of the Argentine regulatory capital of the financial institution, except for certain particular cases in which it may exceed such limitation, although it shall not exceed 150% of the financial institution’s RPC of the relevant financial institution.

Non-liquid assets consist of miscellaneous receivables, bank property and equipment, miscellaneous assets, assets securing obligations, except for swap, futures and derivative transactions, certain intangible assets and equity investments in unlisted companies or listed shares, if the holding exceeds 2.5% of the issuing company’s equity.

Non-compliance with the ratio produces an increase in the minimum capital requirements equal to 100% of the excess on the ratio.

Minimum capital requirements

The Central Bank requires that financial institutions maintain minimum capital amounts measured as of each month’s closing. The minimum capital is defined as the greater of (i) the basic minimum capital requirement, which is explained below, or (ii) the sum of the credit risk, market risk and operational risk. Financial institutions (including their domestic Argentine and international branches) must comply with the minimum capital requirements on an individual and a consolidated basis.

Minimum capital requirements of commercial banks acting as custodians of securities representing investments of the Fondo de Garantía de Sustentabilidad del Sistema Integrado Previsional Argentino and/or as registrar of mortgage securities must comply with an extra 0.25% of the value of securities in custody and/or mortgage securities and must be invested in Argentine public bonds or monetary regulation instruments.

The capital composition to be considered in order to determine the compliance with minimum capital requirements is the financial institution’s RPC (Communication “A” 5580).

 

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In addition, pursuant to Communication “A” 5694 of the Central Bank, those entities considered as domestic systemically important (D-SIB), must consider an extra minimum capital requirement, equivalent to 1% of the total risk-weighted assets (RWA), which they must comply with using exclusively ordinary capital level 1 (Con1), as described below, according to the following schedule (currently, RWA arises from multiplying by 12.5 the minimum capital requirements):

 

     January/March      April/June      July/September      October/December  

2016

     0.075         0.15         0.225         0.30   

2017

     0.375         0.45         0.525         0.60   

2018

     0.675         0.75         0.825         0.90   

From January 2019

           1      

Basic minimum capital

The basic minimum capital requirement varies depending on the type of financial institution and the jurisdiction in which the financial institution’s headquarter is registered, with Ps.26 million for banks under category I and II (Ps.12 million for other financial entities under this category), and Ps.15 million for banks under category III to VI (Ps.8 million for other financial entities under this category).

 

Category

 

Banks

 

Other financial entities

(except Credit Unions)

I and II

  26 millions   12 millions

III to VI

  15 millions   8 millions

Additionally, financial entities located in ports and airports must comply with category I requirements and those entities engaged in foreign trade transactions must comply with the requirements applicable to banks under said category.

On the other hand, the regulatory capital of commercial banks acting as custodians of securities representing investments of the Fondo de Garantía de Sustentabilidad del Sistema Integrado Previsional Argentino must be equal to or exceed the higher of Ps.400 million or an amount equivalent to 1% of the total book value of the securities in custody.

Regulatory Capital of Financial Institution: Level 1 and Level 2 capital regulations

Argentine financial institutions must comply with guidelines similar to those adopted by the Basel Committee on Banking Regulations and Supervisory Practices, as amended in 1995 (the “Basel Rules”). In certain respects, however, Argentine banking regulations require higher ratios than those set forth under the Basel Rules.

The Central Bank takes into consideration the RPC in order to determine compliance with capital requirements. Pursuant to Communication “A” 5580 issued by the Central Bank on May 7, 2015, the RPC consists of Level 1 capital (Basic Net Worth-NWb) and Level 2 capital (Complementary Net Worth-NWc).

 

    RPC = NWb + NWc  

Basic Net Worth (NWb): Level 1 capital

Level 1 capital consists of (i) ordinary capital level 1 (COn1), (ii) deductible concepts from ordinary capital level 1 (CDCOn1), (iii) additional capital level 1 (CAn1), (iv) deductible items from additional capital level 1 (CDCAn1):

 

NWb = COn1 – CDCOn1 + CAn1 – CDCAn1

Ordinary capital level 1 includes the following net worth items: (i) capital stock (excluding preferred stock), (ii) non-capitalized capital contributions (excluding share premium), (iii) adjustments to shareholders’ equity, (iv) earnings reserves (excluding the special reserve for debt instruments), (v) unappropriated retained earnings, (vi) other results either positive or negative, in the following terms:

 

    with respect to results at prior fiscal years, 100% of net earnings or losses recorded until the last quarterly financial statements with limited review report, corresponding to the last closed fiscal year and in respect of which the auditor has not issued the audit report;

 

    100% of net earnings or losses for the current year as of the date of the most recent audited quarterly financial statement;

 

    50% of profits or 100% of losses for the most recent audited quarterly or annual financial statements; and

 

    100% of losses not shown in the financial statements, arising from quantification of any facts and circumstances reported by the auditor;

(vii) share premiums of the instruments included in COn1, and, in consolidation cases, (viii) minority shareholdings (common shares issued by subsidiaries subject to consolidated supervision and belonging to third parties, if certain criteria are met).

In order for the shares to fall under COn1, at the time of issuance, the financial entity must not generate any expectation that such shares will be re-acquired, rescued or amortized, and the contractual terms must not contain any clause that might generate such an expectation.

The above-mentioned items will be considered without certain deductions pursuant to subsection 8.4.1. and 8.4.2 (as applicable) of the Central Bank Communication “A” 5580.

 

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Deductible Items

Items deductible from COn1 include, among others: (a) positive balances resulting from the application of income tax withholdings above 10% of the previous months of NWb; (b) deposits maintained in a corresponding account with a foreign financial institutions that are not rated as “investment grade,” (c) debt securities not held by the relevant financial institutions, except in the case of securities registered by or in custody of the Central Bank (CRYL), Caja de Valores S.A., Clearstream, Euroclear, Depository Trust Company or Deutsche Bank, New York, (d) securities issued by foreign governments whose credit rating is at least ‘investment grade’ according to Communication “A” 5671; (e) subordinated debt instruments issued by other financial institutions; (f) certain credits related to the application of tax deferrals; (g) shareholders; (h) real property added to the assets of the financial entity and with respect to which the title deed is not duly recorded at the pertinent Argentine real property registry, except where such assets shall have been acquired in a court-ordered auction sale; (i) goodwill; (j) organization and development costs; (k) items pending allocation, debtor balances and other; (l) certain assets, as required by the Superintendency resulting from differences between carry amount and the fair value of assets or actions taken to distort or disguise the true nature or scope of operations; (m) any deficiency relating to the minimum loan loss provisions required by the Superintendency; (n) equity interests in companies that have the following activities: (i) financial assistance through leasing or factoring agreements, (ii) transitory equity acquisitions in other companies in order to further their development to the extent the ultimate purpose is selling such interest after development is accomplished and (iii) the issuance of credit or debit cards as provided by Communication “A” 5700; (o) excess in the granting of asset-backed guaranties, according to Central Bank’s regulations; (p) the highest balance of that month’s financial assistance to the public sector, when certain conditions are met; (q) earnings from sales related to securitizations under certain circumstances; r) gains and losses related to derivate transactions due to changes in the credit risk of the financial institution; (s) losses from derivatives under certain circumstances and (t) equity interests in other Argentine or foreign financial institutions subject to a consolidated supervision.

CAn1 includes certain debt instruments of financial entities which are not included under COn1 and meet the regulatory criteria established in section 8.3.2 of Communication “A” 5580 (as amended and supplemented), and share premiums resulting from instruments included in CAn1. Furthermore, in consolidation cases, it includes instruments issued by subsidiaries subject to a consolidated supervision and belonging to third parties, pursuant to applicable regulatory requirements.

Moreover, debt instruments included under CAn1 must comply with the following requirements:

 

    Must be totally subscribed and paid in full.

 

    Subordinated to depositors, unsecured creditors and to the subordinated debt of the financial entity. The instruments must contemplate that in case of the entity’s bankruptcy and once all debts with all the other creditors are satisfied, its creditors shall have priority in the distributions of funds only and exclusively with respect to the shareholders (irrespectively of their class), with the express waiver of any general or special privilege.

 

    Not insured or guaranteed by the issuer or a related entity, and with no agreement improving, either legally or economically, the payment priority in case of the entity’s bankruptcy.

 

    They shall not contemplate any type of capital payment, except in case of liquidation of the financial entity. Provisions gradually increasing remuneration or other incentives for anticipated amortization are not allowed.

 

    After 5 years as from the issuance date, the financial entity can buy back the debt instruments if: (i) it has the previous authorization of the Superintendency, (b) the entity does not create any expectations regarding the exercise of the purchase option, and (c) the debt instrument is replaced by an RPC of equal or greater value sustained by its revenue capacity, or if it is demonstrated that once the purchase option is exercised its RPC significantly exceeds at least by 20% of the minimum capital requirements.

 

    Any capital repayment requires previous authorization from the Superintendency. In this sense, the financial entity must not create any market expectations regarding the granting of such authorization.

 

    The financial entity can pay dividends/interest coupon at any time. The included dividends/interest coupon shall not have periodic adjustments because of the financial entity’s credit risk.

 

    They should not have been bought by the financial entity or any other entity over which the financial entity has control or significant influence.

 

    They should not have been bought with direct or indirect financing from the financial entity and they shall not contain elements that make re-capitalization difficult.

Instruments considered as liabilities must absorb losses once a pre-established triggering event takes place. The instruments must do so through their conversion in common shares and a mechanism assigning losses to the instrument.

The regulatory provisions regarding the RPC issued by Communication “A” 5369 became effective on February 1, 2013. Pursuant to such communication, capital instruments that do not comply with the new regulatory requirements (including our 2036 Notes) will be excluded from the RPC’s calculations as of the aforementioned date. Thus, as long as those instruments maintain the same conditions that previously allowed them to be included in the RPC’s determination, the value to be computed shall be the accounting values of the instruments at the end of each month, using the methodology applied at that time. Its recognition as RPC will be limited to 90% to the value so obtain, and it will be reduced by 10% every twelve months.

 

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Complementary Net Worth (NWc): Level 2 capital

Level 2 capital includes (i) certain debt instruments of financial entities which are not included in Level 1 capital, and meet the regulatory criteria established in section 8.3.3 of Communication “A” 5580 (as amended and supplemented), (ii) share premium from instruments included in Level 2 capital, and (iii) loan loss provisions on the loan portfolio of debtors classified as being in a “normal situation” pursuant to Central Bank Rules on debtor classification and of financing with preferred security “A” not exceeding 1.25% of the assets measured for credit risk. Additionally, in consolidation cases, it includes (iv) debt instruments issued by subsidiaries subject to a consolidated supervision and belonging to third parties, if they meet the criteria in order to be included under complementary net worth.

The above-mentioned items will be considered minus deductible items pursuant to section 8.4.2. of Communication “A” 5580 (as amended and supplemented) issued by the Central Bank, which will be described hereunder.

Moreover, debt instruments included under NWc must comply with the following requirements:

 

    Must be totally subscribed and paid in full.

 

    Subordinated to depositors, unsecured creditors and to the subordinated debt of the financial entity.

 

    Not insured or guaranteed by the issuer or a related entity, and with no agreement improving either legally or economically the payment priority in case of the entity’s bankruptcy.

 

    Maturity: (i) original maturity date within no less than 5 years, (ii) clauses considering gradually increasing remuneration or other incentives for anticipated amortization are not allowed, and (iii) from the beginning of the last five years of life of the indebtedness, the computable amount will be diminished by 20% of its nominal issuance value. After 5 years as from the issuance date, the financial entity can buy back the debt instruments with the previous authorization of the Superintendency, and if the entity does not create any expectations regarding the exercise of the purchase option. The debt instrument must be replaced by an RPC of equal or greater value sustained by its revenue capacity, or if it is demonstrated that once the purchase option is exercised its RPC significantly exceeds at least in a 20% of the minimum capital requirements.

 

    The investor shall not be entitled to accelerate the repayment of future projected payments, except in the case of bankruptcy or liquidation.

 

    They cannot incorporate dividends/coupon with periodic adjustments linked to the financial entity’s credit risk.

 

    They should not have been bought by the financial entity or any other entity over which the financial entity has control or significant influence.

 

    They should not have been bought with direct or indirect financing from the financial entity.

Additionally, instruments included in Level 2 capital and CAn1, shall present the following conditions in order to assure their loss-absorbency capacity:

 

  a) Their terms and conditions must include a provision pursuant to which the instruments must absorb losses – either through a release on debt or its conversion into ordinary capital- once a triggering event has occurred, as described hereunder.

 

  b) If the holders receive compensation for the debt release performed, it should be carried out immediately and only with common shares, pursuant to applicable regulations.

 

  c) The financial entity must have been granted the authorization required for the immediate issuance of the corresponding common shares in case a triggering event, as described hereunder, takes place.

 

  d) Triggering events of regulatory provisions described in item (a) are: (i) solvency or liquidity of the financial entity is threatened and the Central Banks rejects the regularization plan submitted or revokes its authorization to function or authorizes restructuring protecting depositors (whatever happens first) or (ii) the decision to capitalize the financial entity with public funds.

Further criteria regarding the eligibility of items included in the RPC calculation are pursuant to the regulatory requirements of minority shareholdings and other computable instruments issued by subsidiaries, and are subject to consolidated supervision by third parties. A minority shareholding may be included in COn1 of the financial entity if the original instrument complies with the requirements established for its qualification as common shares regarding the RPC.

Deductible items applied to the different capital levels:

 

    Investments in computable instruments under the financial entity’s RPC are not subject to consolidated supervision when the entity owns up to 10% of the issuer’s ordinary capital according to the following criteria: (i) investments include direct, indirect or synthetic interests; (ii) investments include the acquired net position; (iii) securities issued are placed within 5 business days. When those participations in other financial entity’s capital (individually representing less than 10% of each issuer’s COn1) exceeds 10% of the COn1 of the financial entity, net of deductions, the amount above said 10% must be deducted from each one of the capital levels according to the following methodology:

 

    Amount to be deducted from COn1: the amount exceeding the 10% multiplied by the proportion of the holdings of COn1 over the total capital interests.

 

    Amount to be deducted from CAn1: the amount exceeding the 10% multiplied by the proportion of the holdings of CAn1 over the total capital interests.

 

    Amount to be deducted from NWc: the amount exceeding the 10% multiplied by the proportion of the holdings of the NWc over the total capital interests.

 

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    Investments in computable instruments under the financial entity’s RPC are not subject to consolidated supervision, when the entity owns up to 10% of the issuer’s ordinary capital or when the issuer is a subsidiary of financial entity according to the following criteria: (i) investments include direct, indirect or synthetic interests; (ii) investments include the acquired net position; and (iii) securities issued are placed within 5 business days.

Limitations

Communication “A” 5580 (as amended and supplemented) establishes minimum thresholds regarding the capital integration: (i) for COn1 the amount resulting from multiplying 4.5% by the capital risk weighted assets (activos ponderados por riesgos or APR, as for its acronym in Spanish language); (ii) for the NWb, the amount resulting from multiplying 6% by the APR and (iii) for the RPC the amount resulting from multiplying 8% by the APR. Please note that the APR calculation results from multiplying by 12.5% the minimum capital requirement. The lack of compliance with any of these limitations is considered as an infringement to minimum capital integration requirements.

Economic Capital

Communication “A” 5398 of the Central Bank requires that financial institutions must have an integrated global internal process in place to assess the adequacy of their economic capital based on their risk profile (the “Internal Capital Adequacy Assessment Process” or “ICAAP”) as well as a strategy aiming to maintain their regulatory capital. If as a result of this internal process, it is found that the regulatory capital is insufficient, financial institutions must increase it based on their own estimates to meet the regulatory requirement.

The economic capital of financial institutions is the amount of capital required to pay not only unexpected losses arising from exposure to credit, operational and market risks, but also those arising from other risks to which the financial institution may be exposed.

Financial institutions must demonstrate that their internal capital targets are well funded and adequate to their general risk profile and operations. The ICAAP should take into consideration all the material risks to which the institution is exposed; to such end, institutions must define an integral process for the management of: credit, operational, market, interest rate, liquidity, securitization, graduation, reputational and strategic risks, using stress tests to assess potential adverse scenarios that may affect their regulatory capital.

The ICAAP must include stress tests supplementing and validating any other quantitative or qualitative approach employed by the institution in order to provide the board of directors and senior management with a deeper understanding of the interaction among the various types of risk under stress conditions. In addition, the ICAAP must consider the short- and long-term capital needs of the institution and ensure the prudent accumulation of excess capital during positive periods of the economic cycle.

The required amount of capital of each institution shall be determined based on its risk profile, taking into consideration other external factors such as the effects of the economic cycle and the economic scenario.

Requirements applicable to dividend distribution

The Central Bank imposed certain restrictions on the payment of dividends, limiting the ability of financial institutions to distribute dividends without its prior consent.

Pursuant to Communication “A” 5072 (as amended and supplemented), the Central Bank amended and restated the regulations governing dividend distribution by financial institutions. The Superintendency will be in charge of reviewing the ability of a financial entity to distribute dividends upon their request for approval. The request must be filed within 30 business days prior to the shareholders’ meeting that approves the financial institutions’ annual financial statements. Financial institutions may distribute dividends only if each of the following conditions is not met during the month preceding the request:

 

    the financial institution is subject to a liquidation procedure or a mandatory transfer of assets ordered by the Central Bank in accordance with section 34 or 35 bis of the Financial Institutions Law;

 

    the financial institution receives financial assistance from the Central Bank;

 

    the financial institution does not comply with its reporting obligations under Central Bank regulations;

 

    the financial institution breaches the minimum capital requirements (both on an individual and consolidated basis, excluding any individual exemption granted by the Superintendency) or minimum cash reserves (on average), whether in Pesos, foreign currency or securities issued by the public sector; and

 

    the financial institution is subject to significant penalties imposed by the UIF except when certain corrective actions have been implemented by the Superintendency or if a risk mitigation plan has been required and approved.

Financial institutions that do not comply with all of the above-mentioned conditions may distribute dividends up to an amount equal to: (i) the positive balance of the account “unappropriated earnings” (“resultados no asignados”) at the end of the fiscal year, (ii) plus voluntary reserves for future dividend payments and (iii) minus voluntary reserves and mandatory statutory reserves and other items, such as (a) balance of account related to payments made under pesification judicial rulings; (b) the net positive balance of the book-value and the market-value of certain public debt securities and Central Bank notes that the financial institution owns that are not marked to market; (c) unrecorded adjustments of asset value informed by the Superintendency or mentioned by external auditors on their report; (d) individual exemptions for asset valuation granted by the Superintendency; (e) balance of judicial deposits in foreign currency and accounting value of such deposits as required by Law No. 25,561 and Decree No. 214/02; and (f) net results of losses due to application of rules for valuation of securities of the non-financial public sector and monetary regulations of the Central Bank.

 

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Dividends cannot be paid, however, in any of the following circumstances:

 

    if the minimum cash reserve in average is lower than that cash required by the latest reported position or the pro-forma position after making the dividend payment; and/or

 

    if the minimum regulatory capital after making the dividend payment is lower than the minimum capital required increased by 75%; and/or

 

    if the financial institution received any kind of financial assistance from the Central Bank due to liquidity problems, pursuant to Section 17 of the Central Bank’s charter.

In addition, for financial institutions that are branches of foreign financial institutions, the Superintendency will consider the liquidity and solvency of their headquarters and the markets in which they operate.

Pursuant to Communication “A” 5580 the minimum regulatory capital has to account for the requirement of counterparty risk capital for securitizations for every ongoing transaction at the time of determination.

BCRA Communication “A” 5689, dated January 8, 2015, set forth that financial entities shall make an accounting entry of and provide information about any administrative and/or disciplinary penalties, and adverse criminal judgments passed by courts, which were applied or filed by the Central Bank, the UIF, the CNV and the National Insurance Superintendence (SSN). Beginning in January 2015, the amount of the accounting entry shall include all of the penalties and a provision for 100% of each one must be made. Such provisions must be maintained until payment is made or a final judgment is passed. In January 2015, according to such regulations, the Bank created provisions for administrative and/or disciplinary sanctions, which were applied or initiated by the Central Bank, UIF and CNV. Such provisions totaled Ps.11.4 million. According to Central Bank Communication “A” 5707, if dividends were to be distributed, this this amount shall also be deducted from the distributable amount.

Also in January 2015, Communication “A” 5694 of the Central Bank established that those entities considered domestic systemically important (D-SIB) must take into account an extra minimum capital requirement equivalent to 1% of the total risk-weighted assets (“RWA”) which they must comply with using exclusively ordinary capital level 1 (Con1) according to the schedule described under “—Liquidity and Solvency Requirements—Requirements Applicable to Dividend Distribution” (currently, RWA arises from multiplying by 12.5 the minimum capital requirements). According to Central Bank Communication “A” 5707, if dividends were to be distributed, this requirement becomes effective immediately.

In January 2015, within the scope of the principles of the Basel Committee on Banking Supervision, the Central Bank graded Banco Macro S.A. a domestic systemically important entity (D-SIB).

For more information, see Item 8.A “Consolidated Statements and Other Financial Information—Amounts available for distribution and distribution approval process”.

Credit risk

The minimum capital requirement due to counterparty (“CRC”) risk must be calculated by dividing the sum of each item’s daily balance by the amount of days corresponding to the month. The capital requirement due to counterparty risk is defined as:

CRC = k * [0.08 * (APRc + no DvP) + DvP + RCD] + INC + IP.

Where “k” is determined by the rating (1 strongest, 5 weakest) assigned to the financial entity by the Superintendency, pursuant to the following scale:

 

Rating

   K Factor  

1

     1   

2

     1.03   

3

     1.08   

4

     1.13   

5

     1.19   

“APRc” stands for capital risk weighted assets calculated by adding the value obtained from applying the following formula:

A * p + PFB * CCF * p

Where “A” is computable assets, “PFB” is computable items which are not registered on the balance sheet (off balance sheet), “CCF” is the conversion credit factor and “p” is risk measure.

Additionally, “no DvP” refers to transactions without delivery against payment; “DvP” refers to failed delivery against payment transactions; “RCD” refers to requirements for counterparty risk in over-the-counter transactions. The “INC” variable amount refers to increases in minimum capital requirements that arise when certain mandatory technical ratios are exceeded (fixed assets, counterparty risk diversification and rating and limitations on transactions with related clients) and resulting credit exposure from the sum of positions not covered by contracts to hedge changes in commodity prices. The variable “IP” refers to increases that arise from the extension of the general limit on negative foreign currency net global position.

 

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Excluded items include: (a) securities granted for the benefit of the Central Bank for direct obligations; (b) deductible items pursuant to RPC regulations; and (c) finance and securities granted by branches and local subsidiaries of foreign financial entities by order and on account of their headquarters or foreign branches or the foreign controlling entity, to the extent (i) the foreign entity has an investment grade rating, (ii) the foreign entity is subject to regulations that entail consolidated audits, (iii) in case of finance operations, they shall be repaid by the local branch or subsidiary exclusively with funds received from the aforementioned foreign intermediaries; and (iv) in case of guarantees granted locally, they are in turn guaranteed by their headquarters or foreign branches or the foreign controlling entity and foreclosure on such guaranty may be carried out immediately and at the sole requirement of the local entity.

Each type of asset is weighted based on its respective accepted risk level. The table below shows the weighted percentage assigned to the most important types of assets:

 

Type of asset    Weighted percentage

Cash and cash equivalents

  

Cash held in treasury, in transit (when the financial institution assumes responsibility and risk for transportation), in ATMs, in current accounts and in special accounts with the Central Bank, gold coins or bars

   0

Cash items in the process of collection, cash in value carriers and in custody at financial institutions.

   20

Exposure to governments and central banks

  

To the BCRA denominated and funded in pesos.

   0

To the public non-financial sector denominated and funded in pesos, including securitized exposures.

   0

To the public non-financial sector arising from financing granted to social security beneficiaries or public employees (with discount code).

   0

To the public non-financial sector and the BCRA. Other.

   100

To other sovereign states or their central banks and other foreign public non-financial sector institutions.

   100

To the Bank for International Settlements, the IMF, the European Central Bank and the European Community.

   0

Exposure to the Multilateral Development Banks (MDB)

  

The International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), the Inter-American Development Bank (IADB), the European Investment Bank (EIB), the Asian Development Bank (ADB), the African Development Bank (AFDB), the European Investment Fund (EIF), the Nordic Investment Bank (NIB), the Caribbean Development Bank (CBD), the Islamic Development Bank (IDB) and the European Council Development Bank (ECDB)

   0

Other.

   100

Exposure to local financial institutions

  

Denominated and funded in pesos arising from transactions with an initial contractual term of up to 3 months

   20

Other

   100

Exposure to foreign financial institutions

   100

Exposure to local and foreign companies and other entities - including national foreign exchange entities, insurance companies, brokerage houses and other companies considered non-financial private sector entities pursuant to the provisions of Section 1 of the regulations governing the “Financing of the non-financial public sector”

   100

Exposures included in the retail portfolio

  

Loans to individuals (provided that installments of loans granted by the institution do not exceed, at the time of the agreements, 30% of borrower’s income) and to Micro, Small- and Medium-Sized Companies (“MiPyMEs”).

   75

Other

   100

Exposures guaranteed by reciprocal guaranty companies (sociedades de garantía recíproca) or public security funds registered with the Registries authorized by the Central Bank

   50

First mortgages and mortgages of any ranking on residential homes, to the extent the entity is the mortgagee

  

If Credit facility not exceeding 75% of the appraised value of such real property

  

- Sole, permanently-occupied family home.

   35

- Other

   50

On the amount exceeding 75% of the appraised value of such real property

   100

First mortgages and mortgages of any ranking other than on residential homes, to the extent the entity is the mortgagee

  

Up to 50% of the real property market value or 60% of the mortgage loan, whichever is lower.

   50

On the remaining portion of the loan.

   100

Delinquent loans over 90 days

  

Weighting varies according to the loan and specific provisions created

   50 – 150

Interests in companies

   150

Exposures to central counterparty entities (CCP)

   0

Other assets and / or items off the balance sheet

   100

Interest rate risk

Until January 1, 2013, financial entities had to comply with minimum capital requirements regarding interest rate risk. Communication “A” 5369 removed all rules and regulations regarding minimum capital requirements for interest rate risk. These requirements are intended to capture the sensitivity of assets and liabilities to changes in the interest rates. Notwithstanding this ruling, financial entities must continue to manage this risk and such management will be subject to the Superintendency’s supervision. The Superintendency may determine the need to maintain more regulatory capital.

 

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Market risk

Minimum capital requirements for market risks are computed as a function of the market risk of financial entities’ portfolios, measured as their value at risk (“VaR”). The regulation includes those assets traded on a regular basis in open markets and excludes those assets held at investment accounts, which must meet counterparty and interest rate risk minimum capital requirements.

There are five categories of assets. Domestic assets are divided into equity and public bonds/Central Bank’s debt instruments, the latter being classified in two categories that, according to whether their modified duration is less than or more than 2.5 years. Foreign equity and foreign bonds make up another two categories classified according to their duration as well, the latter also comprising two separate categories, defined as for domestic assets. The fifth category is comprised of foreign exchange positions, differentiated according to currency involved.

Overall capital requirements in relation to market risk are the sum of the five amounts of capital necessary to cover the risks arising from each category.

Market risk minimum capital requirements must be met daily. Information must be reported to the Central Bank on a monthly basis. As from May 2003, the U.S. dollar has been included as a foreign currency risk factor for the calculation of the market risk requirement, considering all assets and liabilities in that currency.

Consequences of a failure to meet minimum capital requirements

In the event of non-compliance with capital requirements by a financial institution, Central Bank Communication “A” 3171 provides the following:

 

    Non-compliance reported by the institution: the institution must meet the required capital no later than the end of the second month after the date of non-compliance or submit a restructuring plan within 30 days after the end of the month in which such non-compliance was reported. In addition, non-compliance with minimum capital requirements will entail a number of consequences for the financial institution, including a prohibition to open branches in Argentina or in other countries, establish representative offices abroad, or own equity in foreign financial institutions, as well as a prohibition to pay cash dividends. Moreover, the Superintendency may appoint a representative, who shall have the powers set forth by the Financial Institutions Law.

 

    Non-compliance detected by the Superintendency: the institution may challenge the non-compliance determination within 30 days after being served notice by the Superintendency. If no challenge is made, or if the defense is dismissed, the non-compliance determination will be deemed to be final and the procedure described in the previous item will apply.

Furthermore, pursuant to Communication “A” 5282, if a financial institution fails to meet market risk daily minimum capital requirements, except for any failure to meet the requirements on the last day of the month, calculated as a sum of values at risk of included assets (VaR), the financial institution must replace its capital or decrease its financial position until such requirement is met, having up to ten business days from the first day on which the requirement was not met to meet the requirement. If the financial institution fails to meet this requirement after ten business days, it must submit a regularization and reorganization plan within the following five business days and it may become subject to an administrative proceeding initiated by the Superintendency.

Operational risk

The regulation on operational risk (“OR”) recognizes the management of OR as a comprehensive practice, separated from that of other risks given its importance. OR is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The definition includes legal risk but excludes strategic and reputational risk.

Financial institutions must establish a system for the management of OR that includes policies, processes, procedures and the structure for their adequate management. This scheme must also allow the financial entity to evaluate capital sufficiency.

Seven categories of loss events derived from OR types are defined, according to internationally accepted criteria: internal fraud; external fraud; employment practices and workplace safety; clients, products and business practices; damage to physical assets; business disruption and system failures; and execution, delivery and process management.

Financial entities are in charge of implementing an efficient management of OR following the guidelines provided by the Central Bank. A solid system for risk management must have a clear assignment of responsibilities within the organization of financial entities. Thus, the regulation describes the roles of each level of the organization for the management of OR (such as the roles of the board of directors, senior management and the business units of the financial institution).

An “OR unit” is required, adjusted to the financial institution’s size and sophistication and the nature and complexity of its products and processes, and the extent of the transaction. For small institutions, this unit may even consist of a single person. This unit may functionally respond to the senior management (or similar) or a functional level with risk management decision capacity that reports to that senior management.

 

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An effective risk management will contribute to prevent future losses derived from operational events. Consequently, financial entities must manage the inherent OR in their products, activities, processes and systems. The OR management process comprises:

 

a) Identification and assessment: the identification process should consider both internal and external factors that could adversely affect the development of the processes and projections done according to the business strategies defined by the financial institution. Financial entities should use internal data, establishing a process to register frequency, severity, categories and other relevant aspects of the OR loss events. This should be complemented with other tools, such as self-risk assessments, risk mapping and key risk indicators.

 

b) Monitoring: an effective monitoring process is required, for quickly detecting and correcting deficiencies in the policies, processes and procedures for managing OR. In addition to monitoring operational loss events, banks should identify forward-looking indicators that enable them to act upon these risks appropriately.

 

c) Control and mitigation: financial entities must have an appropriate control system for ensuring compliance with a documented set of internal policies, which involves periodic reviews (at least annually) of control strategies and risk mitigation, and should adjust them if necessary.

Pursuant to Communication “A” 5282, the minimum capital requirements regarding OR is equal to 15% of the annual average positive gross income of the last 36 months.

 

LOGO (the “Formula”)

Where:

LOGO : capital requirement for operational risk

a: 15%

n: number of 12-month successive terms with IB positive, based on the last 36 months preceding the month of calculation. The maximum value of n is 3.

IBt: gross income from 12-month successive terms, provided that it is a positive figure, corresponding to the last 36 months preceding the month of calculation. IB is defined as the sum of:

 

(a) Financial and service income minus financial and service expenses; and

 

(b) Other income minus other expenses.

The following items are excluded from the terms (a) and (b):

 

  i) expenses derived from the creation or elimination of reserves during previous fiscal years and recovered credits during the fiscal year which were written-off in previous fiscal years;

 

  ii) profits or losses from holding of equity in other financial institutions or companies, if these were deductible from RPC;

 

  iii) extraordinary or unusual gains –i.e. those arising from unusual and exceptional events which resulted in gains- including income from insurance recovery; and

 

  iv) gains from the sale of financial public sector notes, as set forth under the Central Bank Rules (“Valuación de instrumentos de deuda del sector público no financiero y de regulación monetaria del Banco Central de la República Argentina”).

New financial institutions must comply for the first 36 months with an OR of the 10% of the monthly average positive gross income of the elapsed months. From the thirty seventh month onwards, the monthly requirement is calculated with the Formula.

Minimum cash reserve requirements

The minimum cash reserve requirement requires that a financial institution keep a portion of its deposits or obligations readily available and not allocated to lending transactions. Pursuant to Communication “A” 3498 (as amended and supplemented) as of March 1, 2002, the minimum cash requirement includes deposits and obligations for other financial intermediation transactions (overnight and fix term transactions).

Minimum cash requirements are applicable to demand and time deposits and other liabilities arising from financial intermediation denominated in Pesos, foreign currency, or government and corporate securities, and any unused balances of advances in checking accounts under formal agreements not containing any clauses that permit the bank to discretionally and unilaterally revoke the possibility of using such balances.

Minimum cash reserve obligations exclude (i) amounts owed to the Central Bank, (ii) amounts owed to domestic financial institutions, (iii) amounts owed to foreign banks (including their head offices, entities controlling domestic institutions and their branches) in connection with foreign trade financing facilities, (iv) cash purchases pending settlement and forward purchases, (v) cash sales pending settlement and forward sales (whether or not related to repurchase agreements), (vi) overseas correspondent banking operations, and (vii) demand obligations for money orders and transfers from abroad pending settlement to the extent they do not exceed a 72 business hour term as from their deposit.

 

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The liabilities subject to these requirements are computed on the basis of the effective principal amount of the transactions, excluding interest accrued, past due, or to become due on the aforementioned liabilities, provided they were not credited to the account of, or made available to, third parties, and, where available, the amount accruing upon the adjustment rate (CER) is applied.

The basis on which the minimum cash reserve requirement is computed is the monthly average of the daily balances of the liabilities at the end of each day during each calendar month, except for the period ranging from December of a year to February of the next, period in which it shall be applied on a quarterly average. Such requirement shall be complied with on a separate basis for each currency in which the liabilities are denominated.

The table below shows the percentage rates that should be applied (from April 2014) to determine the required minimum cash reserve requirement, which in the case of transactions in Pesos, will depend on the category under which the jurisdiction of the main office of the financial entity falls (Communication “A” 5569):

 

Item

   Rate (%)  
   Category I      Categories II to VI  
   Pesos      Foreign
Currency
     Pesos      Foreign
Currency
 

1-Checking account deposits

     17            15      

2-Savings account, basic account and free universal account

     17         50         15         50   

3-Legal custody accounts, special accounts for savings clubs, “Unemployment Fund for Construction Industry Workers” (Fondo de Cese Laboral para los Trabajadores de la Industria de la Construcción) and “Salary payment,” special checking accounts for legal entities and social security savings accounts

     17         50         15         50   

4-Other demand deposits and liabilities, pension and social security benefits credited by ANSES pending collection and immobilized reserve funds for liabilities covered by these regulations

     17         50         15         50   

5-Unused balances of advances in checking accounts under executed overdraft agreements

     17            15      

6-Deposits in checking accounts of non-bank financial institutions, computed for purposes of meeting their required minimum cash reserve

     100            100      

7-Time deposits, liabilities under acceptances, repurchase agreements (including responsibilities for sale or transfer of credits to agents different from financial institutions), stock-exchange repos (cautions and stock exchange passive repos), constant-term investments, with an option for early termination or for renewal for a specified term and variable income, and other fixed-term liabilities, except rescheduled deposits included in the following items 11, 12, 13 and 14 of this table:

     

(i) Up to 29 days

     13         50         12         50   

(ii) From 30 days to 59 days

     10         38         9         38   

(iii) From 60 days to 89 days

     6         25         5         25   

(iv) From 90 days to 179 days

     1         14         —           14   

(v) From 180 days to 365 days

     —           5         —           5   

(vi) More than 365 days

     —           —           —           —     

8-Liabilities owed due to foreign facilities (not executed by means of time deposits or debt securities)

     —              —        

9-Securities (including Notes)

     

(i) Up to 29 days

     14         50         14         50   

(ii) From 30 days to 59 days

     11         38         11         38   

(iii) From 60 days to 89 days

     7         25         7         25   

(iv) From 90 days to 179 days

     2         14         2         14   

(v) From 180 days to 365 days

     —           5         —           5   

(vi) From 365 days

     —           —           —           —     

10-Liabilities owing to the Trust Fund for Assistance to Financial and Insurance Institutions

     —              —        

11-Demand and time deposits made upon a court order with funds arising from cases pending before the court, and the related immobilized balances

     10         25         10         25   

12-Deposits as assets of a mutual fund

     19         50         19         50   

13-Special deposits related to inflows of funds. Decree 616/2005

        100            100   

14-Time deposits in nominative, non-transferable Peso-denominated certificates, belonging to public sector holders, with the right to demand early withdrawal in less than 30 days from its setting up

     15            14      

In addition to the above-mentioned requirements, the reserve for any defect in the application of resources in foreign currency for any given month shall be applied to an amount equal to the minimum cash requirement of the corresponding currency for each month.

The minimum cash reserve must be set up in the same currency to which the requirement applies, and eligible items include the following:

 

1. Accounts maintained by financial institutions with the Central Bank in Pesos.

 

2. Accounts of minimum cash maintained by financial institutions with the Central Bank in U.S. dollars, or other foreign currency.

 

3. Special guarantee accounts for the benefit of electronic clearing houses and to cover settlement of credit card and ATM transactions and inmediate transfer of funds.

 

4. Checking accounts maintained by non-bank financial institutions with commercial banks for the purpose of meeting the minimum reserve requirement.

 

5. Special accounts maintained with the Central Bank for transactions involving social security payments by the ANSES.

 

6. Minimum cash sub-account 60, authorized in the Registration and Settlement Central for Public Debt and Financial Trusts – CRYL (“Central de Registro y Liquidación de Pasivos Públicos y Fideicomisos Financieros – CRYL”) for public securities and securities issued by the Central Bank at their market value.

These eligible items are subject to review by the Central Bank and may be changed in the future.

 

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Compliance on public bonds and time deposits must be done with holdings marked to market and of the same type, only in terms of monthly status. Holdings must be deposited on special accounts at the Central Bank.

Compliance with the minimum cash reserve requirement will be measured on the basis of the monthly average of the daily balances of eligible items maintained during the month to which the minimum cash reserve refers by dividing the aggregate of such balances by the total number of days in the relevant period.

The aggregate balances of the eligible items referred to above, maintained as of each daily closing, may not, on any one day during the month, be less than 50% of the total required cash reserve, excluding the requirement for incremental deposits, determined for the next preceding month, recalculated on the basis of the requirements and items in force in the month to which the cash reserves relate. The daily minimum required is 70% when a deficit has occurued in the previous month.

Any deficiencies in meeting the required minimum cash reserve and the daily minimum reserve in Pesos are subject to a penalty equal to two times the private bank’s BADLAR rate for deposits in Pesos for the last business day of the month.

Any deficiencies in meeting the required minimum cash reserve and the daily minimum reserve in foreign currency are subject to a penalty equal to two times the private banks’ BADLAR rate for deposits in U.S. dollars or two times the 30-day U.S. dollar-LIBOR rate for the last business day of the month (whichever is higher).

Minimum cash requirements decrease with (i) the implementation of the Consumer Promotion Program and the Production of Goods and Services named “Ahora 12” created by Resolution 671/2014 of the Ministry of Economy and (ii) payment of social security benefits. Minimum cash requirements increase with (i) defect in the application of credit quotas to clients other than MiPyMEs and (ii) failure to comply with (a) minimum deposit rates (b) maximum active rates. Minimum foreign cash requirements may decrease in the event of a relaunching of Lebac’s (Central Bank bills) subscriptions.

Internal liquidity policies of financial institutions

Pursuant to Communication “A” 5693 financial institutions must adopt policies and management controls to ensure the availability of reasonable levels of liquidity to meet efficiently in different alternative scenarios, deposits and other commitments of a financial nature.

Such policies must provide procedures to assess early on the liquidity conditions of the entity in the context of the market, with the consequent revision of estimates and their adaptation to the new scenarios, taking such steps lead to the removal of liquidity mismatches or taking steps to provide resources to obtaining cost-similar market that pay their competitors-and wisely enough to support the longer-term assets.

The entity must take into account the extent to which their liabilities or assets are concentrated in certain customers, the general state of the economy and the market and its likely evolution, its impact on the availability of credit facilities and the ability to raise funds by selling government securities and / or active portfolio, etc.

The organizational structure of the entity must consider a specific unit or person in charge of managing liquidity and levels of responsibility of those who will be responsible for managing the liquidity coverage ratio (“LCR”) which will require daily monitoring.

The participation and coordination of the highest management authority of the entity (e.g. general manager) will be necessary.

In addition, financial institutions must designate a director or advisor who will receive reports at least weekly, or more frequently if circumstances so require, especially when changes in liquidity conditions require new courses of action to safeguard the entity. In the case of branches of foreign financial institutions, the burden to inform lies on the highest authority in the country.

Appointed officers and managers will be responsible for managing the liquidity policy that, in addition to monitoring the LCR, includes taking the steps to comply with minimum cash requirement.

Financial institutions must report the list of such officers and directors, as well as subsequent changes, to the Superintendency within 10 calendar days from the date of any such change.

Credit risk regulation

The regulations on credit risk prescribe standards in order to reduce such risk without significantly eroding average profitability. There are three types of ratios that limit a lender’s risk exposure, namely: risk concentration limits, limits on transactions with customers on the basis of the institution’s RPC and credit limits on the basis of the customer’s net worth.

Risk concentration: regulations include the concept of risk concentration, defined as the sum of loans that individually exceed 10% of the financial institution’s RPC. Risk concentration cannot be greater than:

 

    Three times the RPC without considering loans to local financial institutions;

 

    Five times the RPC on total financings; and/or

 

    Ten times the RPC of second-tier commercial banks when taking into account transactions with other financial institutions.

 

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The three-time and five-time limits rise to four and six times, respectively, whenever increases are allocated to provide assistance to trusts or fiduciary funds from the non-financial public sector.

Those loans (other than the inter-bank operations) that exceed 2.5% of the financial institution’s RPC must be recommended by senior management and approved by the institution’s board of directors or similar authority.

Diversification of risk: Financial institutions must ensure that their loan portfolio, is diversified among the highest possible number of individuals or companies and across all economic sectors, so as to avoid the concentration of risk due to transactions with a small group of individuals or companies or related to a specific sector, that may significantly affect the institution’s assets.

Degree of risk: In the case of credit limits based on the customers’ net worth, as a general rule the financial assistance cannot exceed 100% of the customer’s net worth. The basic margin may be increased by an additional 200% provided such additional margin does not exceed 2.5% of the financial institution’s RPC as of the last day of the second month prior to the date of the financing and the increase is approved by the board of directors or similar authority of the relevant financial institution.

Limits on credit assistance

Maximum individual limits on credit assistance for non-related clients are established as a percentage of the financial institution’s RPC.

Maximum limits for credit assistance to non-financial public sector are as follows:

 

Transactions with the non-financial public sector    Maximum limit (*)  

i) Transactions with the national public sector

     50

ii) Transactions with each provincial jurisdiction or the City of Buenos Aires

     10

iii) Transactions with each municipal jurisdiction

     3

 

(*) Individual limits will be increased by 15%, when the increase is applied to financial assistance granted to trusts or fiduciary funds subject to certain conditions and related to the financing of public sector or the inclusion of debt instruments issued by them.

Globally, lending to the public sector cannot exceed 75% of the institution’s RPC. As from July 2007, monthly credit assistance to the public sector cannot exceed 35% of a financial institution’s assets.

Maximum limits for credit assistance to non-financial private sector of the country and non-financial sector abroad are as follows:

 

Transactions with the non-financial private sector of the country and non-financial sector
abroad
   Maximum limit  

i) For each borrower

  

a) Unsecured financings

     15

b) Total financings (secured or not) and/or collaterals included in financings guaranteed by other persons

     25

ii) For each Reciprocal Guarantee Company (RGC) (even related) or public guarantee fund

     25

iii) For each export credit insurance company

     15

Maximum limits for credit assistance to the financial sector of the country are as follows:

 

Transactions with the financial sector of the country    Lender    Taker  
      Rated 1, 2 or 3     Rated 4 or 5  

i) Financing by a financial institution that is not a second tier commercial bank to a local financial institution.

   Rated 1, 2 or 3      25 %*      25
   Rated 4 or 5      25     0

ii) Financing by a financial institution that is a second tier commercial bank

   Rated 1, 2 or 3
Rated 4 or 5
    

 

100

100


   

 

100

0


 

* This limit can be divided in two segments, with and without collateral, in each case by 25% subject to compliance with certain requirements.

Maximum limits for credit assistance to the financial sector abroad are as follows:

 

Transactions with the financial sector abroad    Maximum limit  

i) Investment grade banks

     25

ii) Non-investment grade banks

     5

 

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The allocation of margins for exposure to counterparty credit risk in derivative contracts is done on the basis of risk-sensitive measures and the features of each particular type of transaction (type of contract, frequency of marking to market, volatility of the asset). Transactions to be included are forwards, futures and options on shares and public bonds, and Central Bank debt instruments for which volatility is published, purchase and sale options on such assets, and swaps.

Operations with related clients

The regulation imposes limits on the risk arising from lending to persons or companies related to a financial institution. The concept of “relationship” is based on:

A-Control relationship

 

  i) any person, other than from the non-financial public sector of the country, having direct or indirect control over the financial institution;

 

  ii) any individual or entity, other than from the non-financial public sector, directly or indirectly controlled by one or more persons directly controlling the financial institution;

 

  iii) any entity or individual directly or indirectly controlled by the financial institution, pursuant to the provisions of section 28, subsection a) of the Law on Financial Institutions and the regulations on “Services supplementary to the financial activity and permitted activities” and “Credit Grading”;

 

  iv) any financial institution or entity engaged in the provision of services supplementary to the financial activity, other than those referred to in the preceding items, subject to consolidated supervision with the financial institution;

 

  v) any financial institution, other than those referred to in the preceding items, having directors in common with the entity or company, other than from the non-financial public sector of the country, having direct or indirect control over the financial institution or with the financial institution, to the extent such directors represent a simple majority of the respective boards of each such entities or financial institution;

 

  vi) in connection with local branches of foreign financial institutions, the parent company and the other branches; and

 

  vii) as an exception, if so determined by the board of directors of the Central Bank, based on the recommendation of the head of the Superintendency.

Control by one person of another is defined under such regulations as:

 

  i) holding or controlling, directly or indirectly, 25% or more of the total voting stock of the other person;

 

  ii) holding 50% or more of the total voting stock at shareholders’ or board meetings where directors or similar officers are elected;

 

  iii) even if holding less than 25% of the total voting stock, having control over other institutions that may in turn influence the decision making process of the relevant entity; and

 

  iv) when the Central Bank board of directors – pursuant to a proposal from the Superintendency – determines as such.

B- Personal relationship: including

1-Direct relationship with individuals in the following offices:

i) Incumbent directors, incumbent members of the board of directors and the supervisory committee;

ii) Highest local officer of local branches of foreign financial institutions;

iii) General manager or general deputy managers or similar officers;

iv) Officers authorized to make credit decisions, up to manager or similar officer; and

v) Incumbent statutory supervisors.

2- Direct relationship with the following individuals:

 

i) persons employed by financial institutions or companies engaged in the provision of services supplementary to the financial activity, subject to consolidated supervision by the financial institution;

 

ii) spouse or relatives up to the second degree of consanguinity or the first degree of affinity to individuals directly or indirectly related to the financial institution under a control or personal relationship; and

 

iii) sole proprietorships directly or indirectly controlled by individuals directly or indirectly related to the financial institution.

C - Relationship assumed due to lack of, or outdated, sworn statement

Borrowers which are required to file sworn statements as to whether they are related or not to the lending institution or whether the relationship with such institution implies the existence of a controlling influence, and have failed to file such sworn statement or any subsequent update thereof, shall be considered related to the institution and the aggregate credit extended to them shall be subject to the limits applicable to related clients.

 

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Limits for related clients:

Lending limits for related clients are determined in terms of the RPC of the financial institution and its CAMELBIG rating, which rates the categories of capital, assets, market, earnings, liquidity and business of Argentine financial institutions on a scale of 1 through 5, with 1 being the highest, as follows:

a. Financial institutions with a CAMELBIG rating between 1 and 3:

1) To each related client from non-financial private sector:

 

  a) Loans with collateral and without collateral: 10% of RPC.

 

  b) Loans without collateral: 5% of RPC.

2) In the case of financial institutions or service companies with complementary activities, there are various limits that depend on the rating of the granting institution and the taker, and whether the companies are subject to consolidation.

3) Foreign investment grade banks: 10% of RPC.

b. Financial institutions with CAMELBIG ratings 4 or 5:

Lending to related clients is forbidden, except for subsidiaries and companies that provide complementary services subject to consolidation with limits of 5% and 10% of RPC, and loans of up to Ps.50,000 to their directors and managers to meet personal and family needs.

For all related clients, except for financial institutions or companies with complementary activities subject to consolidation: 20% of RPC.

Interest rate and fee regulations

Maximum lending rates

Pursuant to Communication “A” 5590, the Central Bank has established limits to lending rates applicable to consumer financing, mainly personal loans and pledge loans.

To such end, two groups of institutions have been defined: (i) financial entities whose amount of non financial private sector deposits in Pesos, considering the average of the three months prior to April 2014, is equal to or higher than 1% of the total non financial private sector deposits of the financial system (Group I) and (ii) all other financial institutions. We are included in Group I.

In the case of Group I, on a monthly basis, the Central Bank will publish the maximum interest rates that these financial institutions are authorized to apply to each financing disbursed and/or restructured, based on the result of multiplying the most recent “reference interest rate” (as published by the Central Bank based on the simple average of the cut-off rates applicable to Central Bank bills for a term closest to 90 days, two months before the disbursement) by the following factors: (a) pledge loans: 1.25 and (b) personal loans: 1.45

In the case of Group II, the factor is modified as follows (a) pledge loans: 1.40 and (b) personal loans: 1.80

Minimum term deposit rates

Pursuant to Communication “A” 5640, in October 2014, the Central Bank established minimum interest rates applicable to term deposits made by individuals (in a principal amount equal to or lower than the amount currently covered by SEDESA), i.e. deposits not exceeding Ps.350,000.

The interest rate applicable to such deposits shall not be lower than the result of multiplying the most recent “reference borrowing rate” (as published by the Central Bank based on the simple average of the cut-off rates applicable to Central Bank bills for a term closest to 90 days, two months before the taking of the deposits) by the following coefficient, depending on the original term of each deposit: (a) From 30 to 44 days: 0.87, (b) from 45 to 59 days: 0.89 and (c) over 60 days: 0.93

Fees

Pursuant to Communication “A” 5685 of the Central Bank, the prior authorization of the Central Bank will be required to implement new fees for new products and/or services offered and to increase existing fees, whether or not the products are considered basic. Any modification of charges must also be reported.

Mandatory extension of credit facilities for productive investments

On July 5, 2012, the Central Bank issued Communication “A” 5319 mandating financial entities to extend a credit facility directed at productive investments (“quota 2012”), according to the terms and conditions described therein. Subsequently, the Central Bank issued Communication “A” 5380 and “A” 5449 (“quota 2013”), “A” 5516 and “A” 5600 (“quota 2014”) and “A” 5681 (“quota 2015”) establishing new regulations applicable to credit facilities for productive investments. Financial institutions subject to this regime are those operating as financial agents of the national, provincial, City of Buenos Aires and/or municipal governments and/or whose average total deposits during a related three-month period are equal to or greater than 1% of the total deposits in the financial system.

 

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2012 quota

Financial entities included in the 2012 quota must allocate to credit facilities for productive investments an amount equivalent to 5% of the non-financial private sector deposits in Pesos, calculated according to the average balances of June 2012.

The maximum interest rate is 15.01% fixed per annum for at least the first 36 months. After the completion of this period, if the financing continues, institutions may apply a variable rate that may not exceed the total BADLAR rate in Pesos plus 400 basis points.

Quota 2012 must aim at least 50% of the credit facilities rendered to micro, small- and medium-sized enterprises. The credits granted must be denominated in Pesos and, at the time of disbursement of the funds, must have a weighted average life equal to or greater than 24 months and shall mature beyond 36 months. Financing under the 2012 quota must be granted by December 31, 2012.

2013 quota

Financial entities included in the 2013 quota must allocate to credit facilities for productive investments an amount equivalent to 5% of the non-financial private sector deposits in Pesos, calculated according to the balance resulting as of the end of November 2012, for the first tranche, and as of the end of May 2013, for the second tranche.

The maximum interest rate is 15.25% fixed per annum for at least the first 36 months (for both tranches). After the completion of this period, if the financing continues, institutions may apply a variable rate that may not exceed the total BADLAR rate in Pesos plus 400 basis points.

Quota 2013 must aim at least 50% of the credit facilities rendered to micro, small- and medium-sized enterprises. The credits granted must be denominated in Pesos and, at the time of disbursement of the funds, must have a weighted average life equal to or greater than 24 months and shall mature beyond 36 months. Financing under the first tranche must be granted by June 30, 2013. Financing under the second tranche must be granted by December 31, 2013.

2014 quota

Financial entities included in the 2014 quota must allocate to credit facilities for productive investments an amount equivalent to 5% of the non-financial private sector deposits in Pesos, calculated according to the balance resulting as of the end of November 2013, for the first tranche, and as of the end of May 2014, for the second tranche.

The maximum interest rate for the first tranche is 17.50% and for the second tranche is 19.50% fixed per annum for at least the first 36 months. After the completion of this period, if the financing continues, institutions may apply a variable rate that may not exceed the total BADLAR rate in Pesos plus 300 basis points.

Quota 2014 must aim the 100% of the credit facilities rendered to micro, small- and medium-sized enterprises. The credits granted must be denominated in Pesos and, at the time of disbursement of the funds, must have a weighted average life equal to or greater than 24 months and shall mature beyond 36 months. Financing under the first tranche must be granted by June 30, 2014. Financing under the second tranche must be granted by December 31, 2014.

The maximum interest rate for the second semester of 2014 quota is 19.50% fixed per annum for at least the first 36 months. After the completion of this period, if the financing continues, institutions may apply a variable rate that may not exceed the total BADLAR rate in Pesos plus 300 basis points.

2015 quota

Financial entities included in the 2015 quota must allocate at least an amount equivalent to 6.5% of deposits of non-financial private sector deposits in Pesos, calculated according to the average balances of November 2014.

The maximum interest rate for the 2015 quota is 19% fixed per annum for at least the first 36 months. After the completion of this period, if the financing continues, institutions may apply a variable rate that may not exceed the total BADLAR rate in Pesos plus 150 basis points.

Quota 2015 must aim the 100% of the credit facilities rendered to micro, small- and medium-sized enterprises. The credits granted must be denominated in Pesos and, at the time of disbursement of the funds, must have a weighted average life equal to or greater than 24 months and shall mature beyond 36 months. All financing under the 2015 quota must be granted by June 30, 2015.

At March 31, 2015, funding must have been agreed by at least 30% of the total amount of the first tranche of the 2015 quota.

Foreign exchange system

During the first quarter of 2002, the Argentine government established certain foreign exchange controls and restrictions.

 

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On February 8, 2002, Decree No. 260 was issued, establishing as of February 11, 2002 a Local Foreign Exchange Market (“Mercado Único y Libre de Cambios”) system through which all transactions involving the exchange of foreign currency are to be traded at exchange rates to be freely agreed upon.

On such date, the Central Bank issued Communications “A” 3471 and “A” 3473, which stated that the sale and purchase of foreign currency can only be performed with entities authorized by the Central Bank to operate in foreign exchange. Item 4 of Central Bank Communication “A” 3471 stated that the sale of foreign currency in the local exchange market shall be in all cases against Peso bills.

Since January 2, 2003, there have been several modifications to the restrictions imposed by the Central Bank. For further information, see Item 10.D Exchange Controls.”

Foreign currency lending capacity

The Regulations on the allocation of deposits in foreign currencies, Communication “A” 4851 as supplemented by Communication “A” 5275, establish that the lending capacity from foreign currency deposits, including U.S. dollar-denominated deposits to be settled in Pesos, must fall under one of the following categories: (a) pre-financing and financing of exports to be made directly or through principals, trustees or other brokers, acting on behalf of the owner of the merchandise; (b) financing for manufacturers, processors or collectors of goods, provided they refer to non-revocable sales agreements with exporters for foreign currency-denominated prices (irrespective of the currency in which such transaction is settled), and they refer to exchangeable foreign-currency denominated goods listed in local or foreign markets, broadly advertised and easily available to the general public; (c) financing for manufacturers of goods to be exported, as final products or as part of other goods, by third-party purchasers, provided that such transactions are secured or collateralized in foreign currency by third-party purchasers; (d) financing of investment projects, working capital or purchase of any kind of goods –including temporary imports of commodities- that increase or are related to the production of goods to be exported -including syndicated loans, whether granted by local or foreign financial institutions; (e) financing for commercial clients or commercial loans considered as consumer loans, with the purpose of importing capital goods, whenever they help to increase goods production for the domestic market; (f) debt securities or financial trust participation certificates whose underlying assets are loans made by the financial entities in the manners set forth in (a) to (d) above (excluding syndicated loans); (g) foreign currency debt securities or financial trust participation certificates, publicly listed under an authorization by the CNV, whose underlying assets are securities bought by the fiduciary and guaranteed by reciprocal guarantee companies or public guarantee funds, in order to finance export transactions; (h) financings for purposes other than those mentioned in (a) to (d) above, included under the IDB credit program (“Préstamos BID N° 119/OC-AR”), not exceeding 10% of the lending capacity; (i) inter-financing loans (any inter-financing loans granted with such resources must be identified); and (j) Central Bank bills denominated in dollars.

Communication “A” 4851 (as supplemented by Communication “A” 5275) provides a specific formula in order to calculate the financial institution’s capacity to lend money in foreign currency for imports (items (d) and (e), and, as applicable items (f) to (h) of the foregoing paragraph).

The lending capacity shall be determined for each foreign currency raised, such determination being made on the basis of the monthly average of daily balances recorded during each calendar month. Any defect in the application shall give rise to an increase in the minimum cash requirement in the relevant foreign currency.

General exchange position

The general exchange position (“GEP”) includes all the liquid external assets of the institution, such as gold, currency and foreign currency notes reserves, sight deposits in foreign banks, investments in securities issued by OECD member governments with a sovereign debt rating not below “AA”), certificates of time deposits in foreign institutions (rated not less than “AA”), and correspondents’ debit and credit balances. It also includes purchases and sales of these assets already arranged and pending settlement involving foreign exchange purchases and sales performed with customers within a term not exceeding two business days and correspondent balances for third-party transfers pending settlement. It does not include, however, foreign currency notes held in custody, term sales and purchases of foreign currency or securities nor direct investments abroad.

The GEP ceiling is calculated every month and, therefore, updated the first business day of the month. Pursuant to the relevant reporting system regulations this ceiling is set at 15% of the amount equivalent in U.S. dollars to the RPC at the end of the month immediately preceding the last month when filing with the Central Bank has already expired. It will be increased by an amount equivalent in U.S. dollars to 5% of the total amount traded by the institution on account of the purchases and sales of foreign currency in the calendar month prior to the immediately preceding month, and by 2% of the total demand and time deposits locally held and payable in foreign bills, excluding deposits held in custody, recorded by the institution at the end of the calendar month prior to the immediately preceding month. If the ceiling does not exceed US$8.0 million, this figure will be considered its floor.

Institutions authorized to trade in foreign currency failing to comply with the GEP ceilings or the exchange reporting regulations should refrain from trading in foreign currency until they are in compliance with the above.

Although certain exceptions are admitted, institutions authorized to trade in foreign currency require the Central Bank’s prior consent to perform their own purchases when payment is made against delivery of foreign currency or other foreign assets comprising the GEP.

 

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Foreign currency net global position

All assets and liabilities from financial intermediation in foreign currency and securities in foreign currency (deriving from cash and term transactions) are included in the net global position (for ongoing and completed operations).

In addition, forward transactions under master agreements entered within domestic self-regulated markets paid by settlement of the net amount without delivery of the underlying asset are also included. Deductible assets for determining RPC are excluded from the ratio.

Two ratios are considered in the foreign currency net global position:

 

  Negative foreign currency net global position (liabilities exceeding assets): the limit is 15% of the RPC, but it can be extended up to 15 p.p. provided the entity records at the same time: a) medium- and long-term financing in Pesos to non-financial private sector (mid- and long-term financings are those exceeding 4 years, weighting capital maturity without considering CER) under certain conditions for an amount equivalent to the increase of such limit; and b) an increase in the minimum capital requirement equivalent to the increase of the general limit of the negative foreign currency net global position.

 

  Positive foreign currency net global position (assets exceeding liabilities): this position cannot exceed the lesser of:

a) 20% of the RPC; and

b) the liquid funds of the relevant financial institution (which refer to the RPC minus “fixed assets” and loans to related clients).

Such limit should be extended by the amount increased between January 2014 and the month of the net global position, of the credit lines from abroad settled through the MULC. The calculation must be done considering the monthly average of daily balances of the credit lines entered converted to Pesos at the reference exchange rate.

Positive foreign currency net global position limit for term transactions: The positive foreign currency net global position for term transactions must not exceed 10% of the regulatory capital RPC of the previous month.

To determine the foreign currency positive net global position for term transactions should be considered relevant items included in other credits from financial intermediation, other liabilities from financial intermediation and derivatives denominated in foreign currency. To this end, financial entities must not deduct sales transactions entered into with “related parties”.

The excesses of these ratios are subject to a charge equal to 1.5 times the nominal interest rate of the Peso denominated Lebac (Central Bank bill). Charges not paid when due are subject to the charge established for excesses, increased by 50%.

In addition to the above-mentioned charge, sanctions set forth in Section 41 of the Financial Institutions Law shall apply (caution; warning; fine; temporary or permanent disqualification to dispose of a banking current account; temporary or permanent disqualification to act as promoters, founders, directors, administrators, members of surveillance committees, comptrollers, liquidators, managers, auditors, partner or shareholders; and license revocation).

Credit Ratings

Communication “A” 5671 issued on November 28, 2014 supersedes the provisions issued by the Central Bank containing ratings requirements assigned by a local risk rating company, leaving those regulations void. Where provisions require certain international ratings, the criteria set forth by communication “A” 5671 have complementary character.

The provisions of Communication “A” 5671 are basic guidelines to properly assess the credit risk that financial institutions must observe when giving effect to provisions of the Central Bank that include the requirement of a particular qualification, and do not take the credit assessment that each financial institution must make to their counterparts. International credit ratings that allude to these provisions shall be issued by rating agencies that have a code of conduct based on the “Principles of the Code of Conduct for Agents Rate Risk” released by the International Organization of Securities Commissions (“IOSCO”).

Annex II of Communication “A” 5671 provides a table of correspondence for the new qualification requirements for financial institutions. This table classifies the credit ratings for different transactions.

Credit portfolio

The regulations on debt classification are designed to establish clear guidelines for identifying and classifying the quality of assets, as well as evaluating the actual or potential risk of a lender sustaining losses on principal or interest, in order to determine, taking into account any loan security, whether the provisions against such contingencies are adequate. Banks must classify their loan portfolios into two different categories: (i) consumer or housing loans and (ii) commercial loans. Consumer or housing loans include housing loans, consumer loans, credit-card financings, loans of up to Ps.1,250,000 to micro credit institutions and commercial loans of up to Ps.2,500,000 with or without guarantees, when the institution has opted for it. All other loans are considered commercial loans. Consumer or housing loans in excess of Ps.2,500,000, the repayment of which is linked to the evolution of its productive or commercial activity, are classified as commercial loans. If a customer has both kinds of loans (commercial and consumer or housing loans), the consumer or housing loans will be added to the commercial portfolio to determine under which portfolio they should be classified based on the amount indicated. In these cases, the loans secured by preferred guarantees shall be considered to be at 50% of its face value.

 

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Under the current debt classification system, each customer, as well as the customer’s outstanding debts, is included within one of six sub-categories. The debt classification criteria applied to the consumer loan portfolio is primarily based on objective factors related to customers’ performance on their obligations or their legal standing, while the key criterion for classifying the commercial loan portfolio is each borrower’s paying ability based on its future cash flow.

Commercial loans classification

The principal criterion to evaluate a loan pertaining to the commercial portfolio is its borrower’s ability to repay it, whose ability is mainly measured by such borrower’s future cash flow. Pursuant to Central Bank Rules, commercial loans are classified as follows:

 

Classification

 

Criteria

Normal Situation   Borrowers that demonstrate their ability to comply with their payment obligations. High repayment capacity.

Subject to special

Monitoring/Under observation

  Borrowers that, among other criteria, are up to 90 days past due and, although considered to be able to meet all their financial obligations, are sensitive to changes that could compromise their ability to honor debts absent timely corrective measures.

Subject to special Monitoring /

Under negotiation or

refinancing agreement

  Borrowers who are unable to comply with their obligations as agreed with the bank and, therefore, formally state, within 60 calendar days after the maturity date, their intention to refinance such debts. The borrower must enter into a refinancing agreement with the bank within 90 calendar days (if up to two lenders are involved) or 180 calendar days (if more than two lenders are involved) after the payment default date. If no agreement has been reached within the established deadline, the borrower must be reclassified to the next category according to the indicators established for each level.
Troubled   Borrowers with difficulties honoring their financial obligations under the loan on a regular basis, which, if uncorrected, may result in losses to the bank.
With high risk of insolvency   Borrowers who are highly unlikely to honor their financial obligations under the loan.
Irrecoverable   Loans classified as irrecoverable at the time they are reviewed (although the possibility might exist that such loans might be collected in the future). The borrower will not meet its financial obligations with the financial institution
Irrecoverable according to Central Bank’s Rules   (a) Borrower has defaulted on its payment obligations under a loan for more than 180 calendar days according to the corresponding report provided by the Central Bank, which report includes (1) financial institutions liquidated by the Central Bank, (2) residual entities created as a result of the privatization of public financial institutions, or in the privatization or dissolution process, (3) financial institutions whose licenses have been revoked by the Central Bank and find themselves subject to judicial liquidation or bankruptcy proceedings and (4) trusts in which Seguro de Depósitos S.A. (SEDESA) is a beneficiary, or (b) certain kinds of foreign borrowers (including banks or other financial institutions that are not subject to the supervision of the Central Bank or similar authority of the country in which they are incorporated) that are not classified as “investment grade” by any of the rating agencies approved by the Central Bank.

Consumer or housing loans classification

The principal criterion applied to loans in the consumer or housing portfolio is the length of period for which such loans remain overdue. Under the Central Bank Rules, consumer or housing borrowers are classified as follows:

 

Classification

 

Criteria

Normal Situation   If all payments on loans are current or less than 31 calendar days overdue and, in the case of checking account overdrafts, less than 61 calendar days overdue.
Low Risk   Loans upon which payment obligations are overdue for a period of more than 31 and up to 90 calendar days.
Medium Risk   Loans upon which payment obligations are overdue for a period of more than 90 and up to 180 calendar days.
High Risk   Loans in respect of which a legal action seeking collection has been filed or loans having payment obligations overdue for more than 180 calendar days, but less than 365 calendar days.
Irrecoverable   Loans in which payment obligations are more than one year overdue or the debtor is insolvent or in bankruptcy or liquidation.
Irrecoverable according to Central Bank’s Rules   Same criteria as for commercial loans in the Irrecoverable according to Central Bank Rules.

 

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Minimum Credit Provisions

The following minimum credit provisions are required to be made by Argentine banks in relation to the credit portfolio category:

 

Category   With Preferred
Guarantees
    Without Preferred
Guarantees
 

“Normal situation”

    1     1

“Under observation” and “Low risk”

    3     5

“Under negotiation or refinancing agreement”

    6     12

“Troubled” and “Medium Risk”

    12     25

“With high risk of insolvency” and “High Risk”

    25     50

“Irrecoverable”

    50     100

“Irrecoverable according to Central Bank’s Rules”

    100     100

The Superintendency may require additional provisioning if it determines that the current level is inadequate.

Financial institutions are entitled to record allowances for loan losses in amounts larger than those required by Central Bank Rules. In such cases and despite the existence of certain exceptions, recording a larger allowance for a commercial loan, to the extent the recorded allowance amount falls into the next credit portfolio category set forth by Central Bank Rules, shall automatically result in the corresponding debtor being re-categorized accordingly.

Minimum frequency for classification review

In accordance with Central Bank Rules financial institutions are required to develop procedures for the analysis of the credit facilities assuring an appropriate evaluation of a debtor’s financial situation and a periodic revision of its situation concerning objective and subjective conditions of all the risks taken. The procedures established have to be detailed in a manual called “Manual of Procedures for classification and allowances” which shall be permanently available for the Superintendency. The frequency of the review of existing classifications must answer to the importance considering all facilities. The classification analysis shall be duly documented. The classification review must include (i) clients whose credits (in Pesos and in foreign currency) exceed the lower of 1% of the financial institution’s RPC corresponding to prior month and Ps.4 million and (ii) at least 20% of the financial institution’s total active credit portfolio, which, if applicable, shall be completed by incorporating clients (in decreasing order) whose total indebtedness is inferior to the limits described in the preceding point (i).

In the case of commercial loans, applicable regulations require a minimum frequency of review. Such review must take place: (i) quarterly for clients with indebtedness equal or greater than 5% of the financial entity’s RPC for the prior month and (ii) semi-annually for clients whose indebtedness is (x) higher than the lower of 1% of the financial entity’s RPC for the prior month and Ps.4 million, and (y) lower than 5% of the financial entity’s RPC for the prior month. At the end of the first calendar semester, the total review under points (i) and (ii) should have covered no less than 50% of the financial entity’s commercial loan portfolio and, if less, it shall be completed by incorporating clients (in descending order) whose total indebtedness is inferior to the limits described in the preceding point (ii)(x).

In addition, financial institutions have to review the rating assigned to a debtor in certain instances, such as when another financial institution reduces the debtor classification in the “Credit Information Database” and grants 10% or more of the debtor’s total financing in the financial system. Only one-level discrepancy is allowed in relation to the information submitted by financial institutions to the “Credit Information Database” and the lower classification awarded by at least two other banks and total lending from such banks account for 40% or more of the total informed; if there is a greater discrepancy, the financial institution will be required to reclassify the debtor.

Allowances for loan losses

The allowance for loan losses is maintained in accordance with applicable regulatory requirements of the Central Bank. Increases in the allowance are based on the level of growth of the loan portfolio, as well as on the deterioration of the quality of existing loans, while decreases in the allowance are based on regulations requiring the write-off of non-performing loans classified as irrecoverable after a certain period of time and on decisions of the management to write off non-performing loans evidencing a very low probability of recovery.

Priority rights of depositors

Priority of Deposits Law No. 24,485, as amended, sets forth that in case of the judicial liquidation or bankruptcy of a bank, all depositors, irrespective of the type, amount or currency of their deposits, will be senior to the other remaining creditors (such as shareholders of the bank), with exceptions made for certain labor creditors (section 53 paragraphs “a” and “b”) and for those creditors backed by a pledge or mortgage, in the following order of priority: (a) deposits of up to Ps.350,000 per person (including any amount of such person deposited with a financial entity), or their equivalent in foreign currency; (b) any and all deposits higher than Ps.350,000, or their equivalent in foreign currency; and (c) the liabilities originated in commercial lines granted to the Bank and that directly affect international commerce. Furthermore, pursuant to section 53 of the Financial Institutions Law, as amended, Central Bank credits will have absolute priority over other credits, except for pledged or mortgaged credits, certain labor credits, the depositors’ credits as per section 49, paragraph e), points i) and ii), credits granted under section 17, paragraphs (b), (c) and (f) of the Central Bank’s Charter (including discount granted by financial entities due to temporary lack of liquidity, advances in favor of financial entities with security interest, assignment of rights, pledge or special assignment of certain assets) and credits granted by the Banking Liquidity Fund backed by pledge or mortgage. The amendment introduced to art. 35 bis of the Financial Institutions Law by Law No. 25,780 sets forth that if a bank is in a situation where the Central

 

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Bank may revoke its authorization to operate and become subject to dissolution or liquidation by judicial resolution, among the options that the Central Bank’s Board may decide by absolute majority, in the case of excluding assets and liabilities for their transfer in favor of financial trusts or other financial entities, the Central Bank may totally or partially exclude the liabilities mentioned in section 49, paragraph e), as well as its credits defined in section 53, observing the order of priority among its creditors. Regarding the partial exclusion, the order of priority of point e) art. 49 must be followed, without assigning, in any case, a differentiated treatment to liabilities of the same grade.

Mandatory deposit insurance system

Law No. 24,485 passed on April 12, 1995, as amended, created a Deposit Insurance System, or “SSGD,” which is mandatory for bank deposits, and delegated the responsibility for organizing and implementing the system to the Central Bank. The SSGD is a supplemental protection to the privilege granted to depositors by means of Section 49 of the Financial Institutions Law, as mentioned above.

The SSGD has been implemented through the establishment of a Deposit Guarantee Fund, or “FGD,” managed by a private-sector corporation called Seguro de Depósitos Sociedad Anónima, (Deposit Insurance Corporation, or “SEDESA”). According to Decree No. 1292/96, the shareholders of SEDESA are the government through the Central Bank and a trust set up by the participating financial institutions. These institutions must pay into the FGD a monthly contribution determined by Central Bank Rules. The SSGD is financed through regular and additional contributions made by financial institutions, as provided for in Central Bank Communication “A” 4271, dated December 30, 2004.

The SSGD covers deposits made by individuals and legal entities in Argentine or foreign currency and maintained in accounts with the participating financial institutions, including checking accounts, savings accounts, and time deposits up to the amount of Ps.350,000, as set forth by Central Bank Communication “A” 5659, dated October 31, 2014, as amended.

Effective payment on this guaranty will be made within 30 business days after revocation of the license of the financial institution in which the funds are held; such payment is subject to the exercise of the depositor’s priority rights described above.

In view of the circumstances affecting the financial system, Decree No. 214/2002 provided that SEDESA may issue registered securities for the purpose of offering them to depositors in payment of the guarantee in the event it should not have sufficient funds available.

The SSGD does not cover: (i) deposits maintained by financial institutions in other financial institutions, including certificates of deposit bought in the secondary market, (ii) deposits made by persons directly or indirectly affiliated with the institution, (iii) time deposits of securities, acceptances or guarantees, (iv) any transferable time deposits that have been transferred by endorsement, (v) any deposits benefiting from some incentive (e.g., car raffles) in addition to the agreed upon interest rate, and (vi) any deposits in which the agreed-upon interest rate is higher than the reference interest rates periodically released by the Central Bank for time deposits and demand deposit account balances and available amounts from overdue deposits or closed accounts.

Pursuant to Communication “A” 5710, every financial institution is required to contribute to the FGD a monthly amount of 0.06% of the monthly average of daily balances of deposits in local and foreign currency, as determined by the Central Bank. Prompt contribution of such amounts is a condition precedent to the continuing operation of the financial institution. The first contribution was made on May 24, 1995. The Central Bank may require financial institutions to advance the payment of up to the equivalent of two years of monthly contributions and debit the past due contributions from funds of the financial institutions deposited with the Central Bank. The Central Bank may require additional contributions by certain institutions, depending on its evaluation of the financial condition of those institutions.

When the contributions to the FGD reach the greater of Ps.2 billion or 5.0% of the total deposits of the system, the Central Bank may suspend or reduce the monthly contributions, and reinstate them when the contributions subsequently fall below that level.

Other restrictions

Pursuant to the Financial Institutions Law, financial institutions cannot create any kind of rights over their assets without the Central Bank’s authorization, nor enter into transactions with their directors, officers or affiliates in terms more favorable than arms-length transactions.

Capital markets

Law 26,831 (the “Capital Markets Law”), introduced substantial changes in markets, stock exchanges and the various agents operating in capital markets, in addition to certain amendments to the powers conferred to the CNV. On September 9, 2013, the CNV published Resolution No. 622/2013 (the “CNV Rules”) supplementing the Capital Markets Law. The CNV Rules have been in force since September 18, 2013 (i.e., 8 calendar days after its publication in the Official Gazette).

One of the most relevant modifications introduced by the Capital Markets Law and the CNV Rules is that agents and markets must comply with the CNV’s requirements for applying for an authorization to operate, as well as registration. It further provides that each category of agent must meet a minimum net worth and liquidity requirements.

Additionally, under the Capital Markets Law, the self-regulation of markets was eliminated, and authorization, supervision, control, as well as disciplinary and regulatory powers, are conferred to the CNV regarding all capital market players.

 

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Commercial banks may operate as both managers and custodians of Argentine mutual investment funds or fondos comunes de inversión; provided, however, that a bank may not act simultaneously as manager and depositary agent for the same fund.

Financial institutions with economic difficulties

The Financial Institutions Law provides that any financial institution, including a commercial bank, operating at less than certain required technical ratios and minimum net worth levels, in the judgment of the Central Bank adopted by members representing the majority of the board of directors, with impaired solvency or liquidity or in any of the other circumstances listed in Section 44 of the Financial Institutions Law, must (upon request from the Central Bank and in order to avoid the revocation of its license) prepare a restructuring plan or plan de regularización y saneamiento. The plan must be submitted to the Central Bank on a specified date, not later than 30 calendar days from the date on which a request to that effect is made by the Central Bank. Upon the institution’s failure to submit, secure regulatory approval of, or comply with, a restructuring plan, the Central Bank will be empowered to revoke the institution’s license to operate as such.

Furthermore, the Central Bank’s charter authorizes the Superintendency to fully or partially suspend, exclusively subject to the approval of the President of the Central Bank, the operations of a financial institution for a term of 30 days if the liquidity or solvency thereof is adversely affected. Such term could be renewed for up to 90 additional days, with the approval of the Central Bank’s board of directors. During such suspension term an automatic stay of claims, enforcement actions and precautionary measures is triggered, any commitment increasing the financial institution’s obligations shall be null and void, and debt acceleration and interest accrual shall be suspended. If per the Central Bank’s criteria a financial institution is undergoing a situation which, under the Financial Institutions Law, would authorize the Central Bank to revoke its license to operate as such, the Central Bank may, before considering such revocation, order a plan of restructuring that may consist of certain steps, including, among others: measures to capitalize or increase the capital of the financial institution; revoke any approval granted to the shareholders of the financial institution to hold interests therein; restructure or transfer assets and liabilities; grant temporary exemptions to comply with technical regulations or payment of charges and penalties arising from such flawed compliance; or appoint a delegate or auditor (“interventor”) that may prospectively replace the board of directors of the financial institution.

Revocation of the license to operate as a financial institution

The Central Bank may revoke the license to operate as a financial institution in case a restructuring plan has failed or is not deemed feasible, violations of local laws and regulations have been incurred, solvency or liquidity of the financial institution has been affected, significant changes have occurred in the institution’s condition since the original authorization was granted, or if any decision by the financial institution’s legal or corporate authorities concerning its dissolution has been adopted, among other circumstances set forth in the Financial Institutions Law.

Once the license to operate as a financial institution has been revoked, the financial institution shall be liquidated.

Liquidation of financial institutions

As provided in the Financial Institutions Law, the Central Bank must notify the revocation decision to a competent court, which will then determine who will liquidate the entity: the corporate authorities (extrajudicial liquidation) or an independent liquidator appointed by the court for that purpose (judicial liquidation). The court’s decision will be based on whether or not there is sufficient assurance that the corporate authorities are capable of carrying out such liquidation properly.

Bankruptcy of financial institutions

According to the Financial Institutions Law, financial institutions are not allowed to file their own bankruptcy petitions. In addition, the bankruptcy shall not be adjudged until the license to operate as financial institution has been revoked.

Once the license to operate as a financial institution has been revoked, a court of competent jurisdiction may adjudge the former financial institution in bankruptcy, or a petition in bankruptcy may be filed by the Central Bank or by any creditor of the bank, in this case after a period of 60 calendar days has elapsed since the license was revoked.

Once the bankruptcy of a financial institution has been adjudged, provisions of the Bankruptcy Law No. 24,522 (the “Bankruptcy Law”) and the Financial Institutions Law shall be applicable; provided however that in certain cases, specific provisions of the Financial Institutions Law shall supersede the provisions of the Bankruptcy Law (i.e. priority rights of depositors).

Merger, consolidation and transfer of goodwill

Merger, consolidation and transfer of goodwill may be arranged between entities of the same or different type and will be subject to the prior approval of the Central Bank. The new entity must submit a financial-economic structure profile justifying the transaction in order to obtain authorization from the Central Bank.

 

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Financial system restructuring unit

The Financial System Restructuring Unit was created to monitor the implementation of a strategic approach for those banks benefiting from financial assistance granted by the Central Bank. This unit is in charge of rescheduling maturities, determining restructuring strategies and action plans, approving transformation plans, and accelerating repayment of the facilities granted by the Central Bank.

Anti-money laundering

The concept of money laundering is generally used to denote transactions aimed at introducing funds from illicit activities in the institutional system and thus transform gains from illegal activities in assets of a seemingly legitimate source.

On April 13, 2000, the Argentine Congress passed Law No. 25,246, as amended by Laws No. 26,087, 26,119, 26,286, and 26,683 (together the “Anti-Money Laundering Law”), which sets forth an administrative criminal system and supersedes several sections of the Argentine Criminal Code related to money laundering. This law defines money laundering as a crime committed whenever a person converts, transfers, manages, sells, encumbers, or otherwise uses money, or any other assets, connected to a crime with the possible result that the original or substituted assets may appear to be of a legitimate origin, provided the value of the assets exceeds Ps.300,000, whether such amount results from one or more transactions. Also, money laundering is considered as a separate crime against the economic and financial order, independent from the legal concept of concealment, which is considered an offense against the public administration. Thus, money laundering is a crime which may be prosecuted independently, whether or not the money launderer took part in the preceding crime from which the proceeds of which are being laundered. In compliance with recommendations made by the FATF on money laundering prevention, on June 1, 2011 the Argentine Congress enacted Argentine Law No. 26,683. Under this law, money laundering is a crime per se, and laundering one’s own money is also penalized. Also, this law extends reporting duties to certain members of the private sector who were formerly not under such an obligation.

In addition, the Anti-Money Laundering Law created the UIF, under the Argentine Ministry of Justice, Security and Human Rights, which is responsible for the handling and transmitting of information in order to prevent the laundering of assets originated from: (i) crimes related to illegal trafficking and commercialization of narcotics (Law No. 23,737); (ii) crimes related to arms trafficking (Law No. 22,415); (iii) crimes related to the activities of an illegal association as defined in Section 210 bis of the Argentine Criminal Code; (iv) illegal acts committed by illegal associations (Section 210 of the Argentine Criminal Code) organized to commit crimes with political or racial objectives; (v) crimes of fraud against the Public Administration (Section 174, Paragraph 5 of the Argentine Criminal Code); (vi) crimes against the Public Administration under Chapters VI, VII, IX and IX bis of Title XI of the Second Book of the Argentine Criminal Code; (vii) crimes of underage prostitution and child pornography under Sections 125, 125 bis, 127 bis and 128 of the Argentine Criminal Code; (viii) crimes involving terrorist financing (Section 213 quarter of the Argentine Criminal Code); (ix) extortion (Section 168 of the Argentine Criminal Code), (x) crimes contemplated by Law No. 24,769; and (xi) human trafficking.

The Anti-Money Laundering Law, like anti-money laundering laws of other countries, does not designate sole responsibility to the Argentine government for the monitoring of these criminal activities, but rather also delegates certain duties to diverse private sector entities such as banks, shareholders, stock markets and insurance companies, which became legally bound reporting parties. These obligations essentially consist of information gathering functions, such as: (a) obtaining from clients documents that indisputably prove the identity, legal status, domicile and other information, concerning their operations needed to accomplish the intended activity (know your customer policy); (b) reporting to the UIF any transaction considered suspicious (as such term is explained below), as well as any transaction that lacks economic or legal justification, or is unnecessarily complex, whether performed on isolated occasions or repeatedly; and (c) keeping any monitoring activities in connection with a proceeding pursuant to the Anti-Money Laundering Law confidential from both clients and third parties.

Argentine financial institutions must comply with all applicable anti-money laundering regulations as provided by the UIF, the Central Bank, and, if applicable (as is the case of Banco Macro), by the CNV. In this regard, in accordance with Resolution No. 229/2014 of the UIF, both the Central Bank and the CNV are considered “Specific Control Organs”. In such capacity, they must cooperate with the UIF in the evaluation of the compliance with the anti–money laundering proceedings of the legally bound reporting parties subject to their control. In that respect, they are entitled to supervise, monitor and inspect such entities, and in considered necessary, to implement certain corrective measures and actions.

Resolution 121/2011 issued by the UIF, as amended (“Resolution 121”), is applicable to financial entities subject to the Financial Institutions Law, to entities subject to the Law No. 18,924, as amended, and to individuals and legal entities authorized by the Central Bank to intervene in the purchase and sale of foreign currency through cash or checks issued in foreign currency or through the use of credit or payment cards, or in the transfer of funds within or outside the national territory. Resolution No. 229/2011 of the UIF, as amended or supplemented by Resolutions No. 52/2012 and 140/2012 (“Resolution 229”), is applicable to brokers and brokerage firms, companies managing common investment funds, agents of the over-the-counter market, intermediaries in the purchase or leasing of securities affiliated with stock exchange entities with or without associated markets, and intermediary agents registered on forwards or option markets. Resolution 121 and Resolution 229 regulate, among others, the obligation to collect documentation from clients and the terms, obligations and restrictions for compliance with the reporting duty regarding suspicious money laundering and terrorism financing transactions.

Resolution 121 and Resolution 229 set forth general guidelines in connection with the client’s identification (including the distinction between occasional and regular clients), the information to be requested, the documentation to be filed and the procedures to detect and report suspicious transactions. Moreover, the main duties established by such resolutions are the following: a) to create a manual establishing the mechanisms and procedures to be used to prevent money laundering and terrorism financing; b) to appoint a member of the board of directors as compliance officer; c) to implement periodic audits; d) to offer personnel training; e) to create a record of detected

 

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unusual (as such term is explained below) and suspicious operations; f) to implement technological tools to allow the development of efficient control systems for prevention of money laundering and terrorism financing; g) to implement measures to allow persons obliged under Resolution 121 and Resolution 229, to electronically consolidate the transactions carried out with clients, and to develop electronic tools to identify certain behaviors and observe possible suspicious transactions, requesting information and, if applicable, supporting documents from its customers and h) to adopt reinforced identification methods applicable to customers with specific features as provided by applicable regulations Entities covered by Resolution 121 and Resolution 229, as legally bound reporting parties, must report any money laundering suspicious activity to the UIF within 150 calendar days of its occurrence (or attempt) and any terrorism financing suspicious activity before a 48 hours period of its occurrence (or attempt) has elapsed. However, pursuant to Resolution UIF 3/2014, within the maximum 150 calendar days period, entities covered by Resolution 121 and Resolution 229 must report any money laundering suspicious activity to the UIF within 30 calendar days as of the day on which any such activity is qualified as suspicious by such legally bound reporting party.

According to Resolution 121, unusual transactions are those attempted or consummated transactions, on a one-time or on a regular basis, without economic or legal justification, inconsistent with the economic and financial profile of the client, and which deviate from standard market practices, based on their frequency, regularity, amount, complexity, nature or other particular features. According to Resolution 229, an unusual transaction is one that, considering the suitability of the reporter in light of the activity it carries out, and the analysis made, may be suspicious of money laundering and financing terrorism. On other hand, under Resolution 121 and Resolution 229, suspicious transactions are those attempted or consummated transactions that, having been previously identified as unusual transactions by the legally bound reporting party, are inconsistent with the lawful activities declared by the client or, even if related to lawful activities, give rise to suspicion that they are linked or used to finance terrorism.

The Central Bank and the CNV must also comply with anti-money laundering regulations set forth by the UIF, including reporting suspicious transactions. In particular, the Central Bank must comply with UIF Resolution No. 12/2011, as supplemented, among others, by Resolutions No. 1/2012 and No 92/2012, which, among other things, sets forth the Central Bank’s obligation to evaluate the anti-money laundering controls implemented by Argentine financial institutions (with the limitation of the access to the reports and records of suspicious operations, which are, as aforementioned, confidential and subject only to the UIF’s supervision), and lists examples of what circumstances should be specially considered in order to stablish if a particular transaction may be considered unusual and eventually qualified as suspicious. The listed transactions must be particularly scrutinized by the Central Bank and include, among others, any transaction involving financial institutions, regular transactions involving securities (specially daily purchases and sales of the same amount of securities), capital contributions into financial institutions that have been paid-in in cash (or means other than bank transfers), and capital contributions by companies incorporated or domiciled in jurisdictions that do not allow for information relating to family relations of its shareholders, board members or members of its supervisory committee, deposits or withdrawals in cash for unusual amounts by entities or individuals that normally use checks or other financial instruments and/or whose declared business does not correspond with the type or amount of the transaction; subsequent cash deposits for small amounts that, in the aggregate, add up to a relevant sum; a single client holding numerous accounts that, in the aggregate, hold relevant sums inconsistent with such client’s declared business; transfers of funds for amounts inconsistent with the client’s business or usual kind of transaction; accounts with several authorized signatories that hold no apparent relation (in particular when domiciled or acting off-shore or in tax havens); clients that unexpectedly cancel loans; frequent cash deposits or withdrawals for relevant amounts without commercial justification. On the other hand, the CNV must comply with UIF Resolution No. 22/2011, as supplemented, among others, by Resolutions No. 1/2012 and No. 92/2012, which sets forth the CNV’s obligation to evaluate the anti-money laundering controls implemented by entities subject to its control (with the limitation of the access to the reports and records of suspicious operations, which are confidential and subject only to the UIF’s supervision), and also lists some examples of what circumstances should be specially considered in order to stablish if a particular transaction may be considered unusual and eventually qualified as suspicious.

Central Bank Rules require Argentine banks to take certain precautions to prevent money laundering. In this regard, Central Bank recommends financial institutions create an anti-money laundering committee, to assist in the compliance of the anti-money laundering regulations. Additionally, as mentioned, each financial institution must appoint a member of the board of directors as the person responsible for money laundering prevention, in charge of centralizing any information the Central Bank may require on its own initiative or at the request of any competent authority and reporting any suspicious transactions to the UIF. In addition, the guidelines issued by the Central Bank to detect unusual or suspected money laundering or terrorist financing transactions require the reporting of suspicious transactions, based on the resources of the entity subject to the reporting obligation and on the type of analysis performed. In particular, the following special circumstances, among others, shall be considered: (a) if the amount, type, frequency and nature of a transaction made by a customer bears no relationship to such customer’s previous history and financial activity; (b) amounts that are unusually high or transactions that are of a complexity and type not usual for the relevant customer; (c) if a customer refuses to provide information or documents required by the entity or the information furnished is found to have been altered; (d) if a customer fails to comply with any applicable regulation; (e) if a customer appears to show an unusual disregard for risks it may be assuming and/or costs involved in the transactions, and this is incompatible with the customer’s financial profile; (f) if a country or jurisdiction that is not a territory or associated state included in the cooperating countries list contained in Executive Decree No. 589/2013, section 2(b) is involved; (g) if a same address appears registered for different legal entities or the same natural persons have been empowered by and/or act as attorneys-in-fact for different legal entities and such circumstance is not justified by any financial or legal reason, in particular taking into account whether any such companies or entities are not organized, domiciled or resident in dominions, jurisdictions, territories or associated states included in the cooperating countries list contained in Executive Decree No. 589/2013, section 2(b), and their main business involves off-shore transactions; (h) if transactions of a similar nature, amount, type or which are conducted simultaneously, it may be presumed that a single transaction has been split into several for the purpose of avoiding the application of transaction detection and/or reporting procedures; (i) if continued profits or losses are derived from transactions repeatedly conducted between the same parties; or (j) if certain signs suggest an illegal source, handling or use of funds involved in the transactions, and the entity subject to the legal obligation does not have any explanation for this.

 

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Furthermore, pursuant to Communication “A” 5612 of the Central Bank, in force as of February 2015, Argentina financial institutions must comply with certain additional “know your customer policies”. In this sense, pursuant to such Communication, under no circumstance new commercial relationships could be initiated if the “know your customer policies” and the risk management legal standards have not been complied with. In addition, as per the existing clients: (i) if the “know your customer policies” could not be complied with, the Argentine financial institution must discontinue operations with such client (i.e. cease the relationship with the client in accordance with Central Bank’s regulations for each type of product) within 150 calendar days as of the notice of such circumstances; and (ii) if a certain operation is qualified as suspicious by the Argentine financial institution, operations must be discontinued with such client within 30 calendar days as of such qualification (certain exceptions are made as per special accounts, such as social security accounts, salaries accounts and free universal accounts, in where simplified due diligence procedures could be implemented). Furthermore, pursuant to this Communication, Argentine financial entities must keep the documentation related to the discontinuance for 10 years and include in their prevention manuals the detailed procedures to initiate and discontinue operations with clients in accordance with the above-mentioned additional “know your customer policies” implemented.

The CNV Rules (as amended in September 2013) include a specific chapter regarding “Prevention of Money Laundering and the Financing of Terrorism” and state that the persons set forth therein (including, among others, Negotiation Agents, Clearing and Settlement Agents (which are stockbrokers), and Distribution and Placement Agents) are to be considered legally bound reporting under the Anti-Money Laundering Law, and therefore must comply with all the laws and regulations in force in connection with anti-money laundering and terrorism financing, including resolutions issued by the UIF, presidential decrees referring to resolutions issued by the United Nations Security Council in connection with the fight against terrorism and the resolutions (and its annexes) issued by the Ministry of Foreign Affairs. In addition, CNV Rules impose certain restrictions in connection with payment arrangements (restricting, among others, to Ps.1,000 the cash amount that the entities set forth therein could receive or pay per day and per client) and impose certain reporting obligations.

In addition, the CNV Rules establish that the above-mentioned entities shall only be able to carry out any transactions therein contemplated under the public offering system, when such transactions are carried out or ordered by persons organized, domiciled or resident in dominions, jurisdictions, territories or associated States included in the cooperating countries list contained in Executive Decree No. 589/2013, section 2(b). When such persons are not included in such list and in their home jurisdiction qualify as registered intermediaries in an entity under control and supervision of a body that carries out similar functions to those carried out by the CNV, they will only be allowed to carry out such transactions if they provide evidence indicating that the relevant securities and exchange commission in their home jurisdiction has signed a memorandum of understanding for cooperation and exchange of information with the CNV.

For a thorough analysis of money laundering regulations in effect as of the date of this document, investors are advised to consult with their own legal counsel and to read Title XIII, Second Book of the Argentine Criminal Code and any regulations issued by the UIF, the CNV and the Central Bank in their entirety. For this purpose, interested parties may visit the websites of the Argentine Ministry of Economy and Public Finance, www.infoleg.gov.ar, the UIF, www.uif.gov.ar, the CNV, www.cnv.gob.ar or the Central Bank, www.bcra.gov.ar.

C. Organizational Structure

Subsidiaries

We have five subsidiaries: (i) Banco del Tucumán, our acquired retail and commercial banking subsidiary in the province of Tucumán; (ii) Macro Bank Limited, our subsidiary in the Bahamas through which we provide primarily private banking services; (iii) Macro Securities S.A., which is a member of the BCBA, and through which we provide investment research, securities trading and custodial services to our customers; (iv) Macro Fiducia S.A., a subsidiary that acts as trustee and provides financial advisory and analysis services; and (v) Macro Fondos S.G.F.C.I. S.A., an asset management subsidiary.

 

     Banco Macro’s
direct and indirect interest
 

Subsidiary

   Percentage of Capital Stock     Percentage of possible votes  

Banco del Tucumán S.A. (1)

     89.932     89.932

Macro Bank Limited (2)

     99.999     100.000

Macro Securities S.A. (1)

     99.921     99.932

Macro Fiducia S.A. (1)

     98.605     98.605

Macro Fondos S.G.F.C.I. S.A. (1)

     99.936     100.000

 

(1) Country of residence: Argentina
(2) Country of residence: Bahamas

D. Property, plants and equipment

Property

Banco Macro dedicates 25,146 square meters of office space to headquarters, where management, accounting and administrative personnel are located, of which 23,646 square meters are owned by the Bank and 1,500 square meters are leased. Our headquarters are distributed at the offices located in Sarmiento 341-355, 401-447,731-735, Perón 564 and Leandro N. Alem 1110, all in the City of Buenos Aires. As of December 31, 2014, we have a branch network consisted of 434 branches in Argentina, of which 185 were leased properties.

 

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In 2011 we acquired from the Government of the City of Buenos Aires a site located at Av. Eduardo Madero No. 1180, in the City of Buenos Aires, for an aggregate amount of Ps.110 million. The Bank has developed a project to build its new corporate offices on this site. Works were initiated in 2012 and are expected to be completed by 2017. The new corporate tower will be designed taking full advantage of natural light, using materials that do not adversely affect the environment and with an efficient use of the available energy. It will be built in compliance with the Leed International Sustainability Standards of the “U.S. Green Building Council”.

The building will have an area of 52,700 square meters and the Bank estimates that its project will require an investment of approximately US$160 million. As of December 31, 2014 the total aggregate amount invested was Ps.292.7 million (approximately US$40.8. million at the applicable exchange rates as of the respective dates of such investments).

Selected Statistical Information

The following information is included for analytical purposes and should be read in conjunction with the consolidated financial statements as well as Item 5. “Operating and Financial Review and Prospects”. This information has been prepared from our financial records, which are maintained in accordance with the regulations established by the Central Bank and do not reflect adjustments necessary to state the information in accordance with U.S. GAAP. See Note 35 to our audited consolidated financial statements as of and for the three years ended December 31, 2014 for a summary of the significant differences between Central Bank Rules and U.S. GAAP.

Due to the modification of certain disclosure methods defined for certain items in the consolidated balance sheets and consolidated statements of income, certain figures have been restated for comparability purposes. See “Presentation of certain financial and other information.”

Average balance sheets, interest earned on interest-earning assets and interest paid on interest-bearing liabilities

The following tables show average balances, interest amounts and nominal rates for our interest-earning assets and interest-bearing liabilities for the years ended December 31, 2012, 2013 and 2014.

 

    2012     2013     2014  
    Average
Balance
    Interest
Earned/
(Paid)
    Average
Nominal
Rate
    Average
Balance
    Interest
Earned/
(Paid)
    Average
Nominal
Rate
    Average
Balance
    Interest
Earned/
(Paid)
    Average
Nominal
Rate
 
    (in thousand of Pesos)  

ASSETS

                 

Interest-earning assets

                 

Government and private securities (1)

                 

Pesos

    3,856,772        301,436        7.82     2,892,521        283,493        9.80     8,322,927        1,971,981        23.69

Foreign currency

    368,669        14,872        4.03     741,385        34,498        4.65     1,654,116        47,449        2.87

Total

    4,225,441        316,308        7.49     3,633,906        317,991        8.75     9,977,043        2,019,430        20.24

Loans

                 

Private and financial Sector

                 

Pesos

    23,580,405        5,641,032        23.92     31,438,373        7,904,360        25.14     37,004,555        11,068,167        29.91

Foreign currency

    2,766,236        173,996        6.29     2,016,460        195,404        9.69     2,184,470        258,640        11.84

Total

    26,346,641        5,815,028        22.07     33,454,833        8,099,764        24.21     39,189,025        11,326,807        28.90

Public Sector

                 

Pesos

    377,297        66,534        17.63     575,666        132,437        23.01     610,798        201,470        32.98

Foreign currency

    0        0        0.00     0        0        0.00     0        0        0.00

Total

    377,297        66,534        17.63     575,666        132,437        23.01     610,798        201,470        32.98

Other assets

                 

Pesos

    2,665,835        291,727        10.94     2,141,519        283,594        13.24     1,893,423        131,748        6.96

Foreign currency

    830,723        11,279        1.36     937,545        11,163        1.19     1,010,274        31,904        3.16

Total

    3,496,558        303,006        8.67     3,079,064        294,757        9.57     2,903,697        163,652        5.64

Total interest-earning assets

                 

Pesos

    30,480,309        6,300,729        20.67     37,048,079        8,603,884        23.22     47,831,703        13,373,366        27.96

Foreign currency

    3,965,628        200,147        5.05     3,695,390        241,065        6.52     4,848,860        337,993        6.97

Total

    34,445,937        6,500,876        18.87     40,743,469        8,844,949        21.71     52,680,563        13,711,359        26.03

Non interest-earning assets

                 

Cash and due from banks

                 

Pesos

    1,579,250        0        —          2,040,616        0        —          2,710,272        0        —     

Foreign currency

    473,668        0        —          271,698        0        —          756,574        0        —     

Total

    2,052,918        0        —          2,312,314        0        —          3,466,846        0        —     

Investments in other companies

                 

Pesos

    9,424        0        —          11,124        0        —          11,595        0        —     

Foreign currency

    808        0        —          974        0        —          2,164        0        —     

Total

    10,232        0        —          12,098        0        —          13,759        0        —     

 

60


Table of Contents
    2012     2013     2014  
    Average
Balance
    Interest
Earned/
(Paid)
    Average
Nominal
Rate
    Average
Balance
    Interest
Earned/
(Paid)
    Average
Nominal
Rate
    Average
Balance
    Interest
Earned/
(Paid)
    Average
Nominal
Rate
 
    (in thousand of Pesos)  

Property and equipment and miscellaneous and intangible assets and items pending of allocation

                 

Pesos

    1,196,379        0        —          1,315,587        0        —          1,767,760        0        —     

Foreign currency

    0        0        —          0        0        —          0        0        —     

Total

    1,196,379        0        —          1,315,587        0        —          1,767,760        0        —     

Allowance for loan losses

                 

Pesos

    (659,369     0        —          (883,915     0        —          (1,038,264     0        —     

Foreign currency

    (54,731     0        —          (51,343     0        —          (57,546     0        —     

Total

    (714,100     0        —          (935,258     0        —          (1,095,810     0        —     

Other assets

                 

Pesos

    4,507,991        0        —          5,612,108        0        —          6,588,491        0        —     

Foreign currency

    3,293,245        0        —          4,208,338        0        —          4,431,135        0        —     

Total

    7,801,236        0        —          9,820,446        0        —          11,019,626        0        —     

Total non interest-earning assets

                 

Pesos

    6,633,675        0        —          8,095,520        0        —          10,039,854        0        —     

Foreign currency

    3,712,990        0        —          4,429,667        0        —          5,132,327        0        —     

Total

    10,346,665        0        —          12,525,187        0        —          15,172,181        0        —     

TOTAL ASSETS

                 

Pesos

    37,113,984        0        —          45,143,599        0        —          57,871,557        0        —     

Foreign currency

    7,678,618        0        —          8,125,057        0        —          9,981,187        0        —     

Total

    44,792,602        0        —          53,268,656        0        —          67,852,744        0        —     

LIABILITIES

                 

Interest-bearing liabilities

                 

Savings accounts

                 

Pesos

    4,680,210        33,491        0.72     6,237,331        40,872        0.66     7,714,543        49,175        0.64

Foreign currency

    1,045,192        798        0.08     1,106,136        685        0.06     1,741,369        594        0.03

Total

    5,725,402        34,289        0.60     7,343,467        41,557        0.57     9,455,912        49,769        0.53

Time deposits

                 

Pesos

    15,483,182        2,154,075        13.91     19,059,864        3,054,652        16.03     23,407,958        5,128,065        21.91

Foreign currency

    2,056,050        15,402        0.75     1,804,392        12,959        0.72     2,142,104        10,962        0.51

Total

    17,539,232        2,169,477        12.37     20,864,256        3,067,611        14.70     25,550,062        5,139,027        20.11

Borrowing from the Central Bank

                 

Pesos

    13,572        1,188        8.75     18,129        1,603        8.84     14,957        1,308        8.75

Foreign currency

    0        0        0.00     42        0        0.00     75        0        0.00

Total

    13,572        1,188        8.75     18,171        1,603        8.82     15,032        1,308        8.70

Borrowings from other financial institutions

                 

Pesos

    114,920        13,113        11.41     142,310        14,562        10.23     116,446        23,331        20.04

Foreign currency

    202,554        7,394        3.65     147,728        5,318        3.60     282,786        9,997        3.54

Total

    317,474        20,507        6.46     290,038        19,880        6.85     399,232        33,328        8.35

Corporate Bonds

                 

Pesos

    85,072        9,180        10.79     0        0        0.00     0        0        0.00

Foreign currency

    1,166,812        108,288        9.28     1,404,885        131,117        9.33     2,082,246        194,864        9.36

Total

    1,251,884        117,468        9.38     1,404,885        131,117        9.33     2,082,246        194,864        9.36

Other liabilities

                 

Pesos

    0        0        0.00     0        0        0.00     0        0        0.00

Foreign currency

    0        0        0.00     4,613        0        0.00     26,740        0        0.00

Total

    0        0        0.00     4,613        0        0.00     26,740        0        0.00

Total Interest-bearing liabilities

                 

Pesos

    20,376,956        2,211,047        10.85     25,457,634        3,111,689        12.22     31,253,904        5,201,879        16.64

Foreign currency

    4,470,608        131,882        2.95     4,467,796        150,079        3.36     6,275,320        216,417        3.45

Total

    24,847,564        2,342,929        9.43     29,925,430        3,261,768        10.90     37,529,224        5,418,296        14.44

Non-interest bearing liabilities and Shareholders’ equity

                 

Demand deposits

                 

Pesos

    10,068,548        0        —          12,594,928        0        —          15,741,946        0        —     

Foreign currency

    645,064        0        —          376,681        0        —          555,170        0        —     

Total

    10,713,612        0        —          12,971,609        0        —          16,297,116        0        —     

Other liabilities

                 

Pesos

    3,004,536        0        —          2,399,233        0        —          2,477,047        0        —     

Foreign currency

    672,252        0        —          567,517        0        —          1,037,833        0        —     

Total

    3,676,788        0        —          2,966,750        0        —          3,514,880        0        —     

 

61


Table of Contents
    2012     2013     2014  
    Average
Balance
    Interest
Earned/
(Paid)
    Average
Nominal
Rate
    Average
Balance
    Interest
Earned/
(Paid)
    Average
Nominal
Rate
    Average
Balance
    Interest
Earned/
(Paid)
    Average
Nominal
Rate
 
    (in thousand of Pesos)  

Minority Interest

                 

Pesos

    44,275        0        —          60,531        0        —          82,807        0        —     

Foreign currency

    0        0        —          0        0        —          3,014        0        —     

Total

    44,275        0        —          60,531        0        —          85,821        0        —     

Shareholders’ equity

                 

Pesos

    5,510,363        0        —          7,344,336        0        —          10,425,703        0        —     

Foreign currency

    0        0        —          0        0        —          0        0        —     

Total

    5,510,363        0        —          7,344,336        0        —          10,425,703        0        —     

Total non-interest bearing liabilities and shareholders’ equity

                 

Pesos

    18,627,722        0        —          22,399,028        0        —          28,727,503        0        —     

Foreign currency

    1,317,316        0        —          944,198        0        —          1,596,017        0        —     

Total

    19,945,038        0        —          23,343,226        0        —          30,323,520        0        —     

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

                 

Pesos

    39,004,678        0        —          47,856,662        0        —          59,981,407        0        —     

Foreign currency

    5,787,924        0        —          5,411,994        0        —          7,871,337        0        —     

Total

    44,792,602        0        —          53,268,656        0        —          67,852,744        0        —     

 

(1) Includes instruments issued by the Central Bank. The interest earned/paid includes changes due to mark-to-market of those securities.

Changes in interest income and interest expense; volume and rate analysis

The following tables allocate, by currency of denomination, changes in our interest income and interest expense segregated for each major category of interest-earning assets and interest-bearing liabilities into amounts attributable to changes in their average volume and their respective nominal interest rates for fiscal year ended December 31, 2012 compared to the fiscal year ended December 31, 2011; for fiscal year ended December 31, 2013 compared to the fiscal year ended December 31, 2012 and for fiscal year ended December 31, 2014 compared to fiscal year ended December 31, 2013.

 

    December 2012/December 2011     December 2013/December 2012     December 2014/December 2013  
    Increase (Decrease) Due to Changes in     Increase (Decrease) Due to Changes in     Increase (Decrease) Due to Changes in  
    (in thousands of Pesos)  
    Volume     Rate     Net Change     Volume     Rate     Net Change     Volume     Rate     Net Change  

ASSETS

                 

Interest-earning assets

                 

Government and private securities

                 

Pesos

    38,028        (164,916     (126,888     (75,241     57,298        (17,943     532,228        1,156,260        1,688,488   

Foreign currency

    3,472        1,232        4,704        15,006        4,620        19,626        42,471        (29,520     12,951   

Total

    41,500        (163,684     (122,184     (60,235     61,918        1,683        574,699        1,126,740        1,701,439   

Loans

                 

Private and financial Sector

                 

Pesos

    1,583,504        415,922        1,999,426        1,879,027        384,301        2,263,328        1,399,471        1,764,336        3,163,807   

Foreign currency

    6,749        56,765        63,514        (47,161     68,569        21,408        16,281        46,955        63,236   

Total

    1,590,253        472,687        2,062,940        1,831,866        452,870        2,284,736        1,415,752        1,811,291        3,227,043   

Public Sector

                 

Pesos

    3,889        39,832        43,721        34,956        30,947        65,903        8,082        60,951        69,033   

Foreign currency

    0        0        0        0        0        0        0        0        0   

Total

    3,889        39,832        43,721        34,956        30,947        65,903        8,082        60,951        69,033   

Other assets

                 

Pesos

    190,947        (25,243     165,704        (57,445     49,312        (8,133     (32,855     (118,991     (151,846

Foreign currency

    (25,793     2,094        (23,699     1,472        (1,588     (116     866        19,875        20,741   

Total

    165,154        (23,149     142,005        (55,973     47,724        (8,249     (31,989     (99,116     (131,105

 

62


Table of Contents
    December 2012/December 2011     December 2013/December 2012     December 2014/December 2013  
    Increase (Decrease) Due to Changes in     Increase (Decrease) Due to Changes in     Increase (Decrease) Due to Changes in  
    (in thousands of Pesos)  
    Volume     Rate     Net Change     Volume     Rate     Net Change     Volume     Rate     Net Change  

Total interest-earning assets

                 

Pesos

    1,816,368        265,595        2,081,963        1,781,297        521,858        2,303,155        1,906,926        2,862,556        4,769,482   

Foreign currency

    (15,572     60,091        44,519        (30,683     71,601        40,918        59,618        37,310        96,928   

Total

    1,800,796        325,686        2,126,482        1,750,614        593,459        2,344,073        1,966,544        2,899,866        4,866,410   

LIABILITIES

                 

Interest-bearing liabilities

                 

Savings accounts

                 

Pesos

    8,188        771        8,959        11,418        (4,037     7,381        9,680        (1,377     8,303   

Foreign currency

    (10     (47     (57     87        (200     (113     393        (484     (91

Total

    8,178        724        8,902        11,505        (4,237     7,268        10,073        (1,861     8,212   

Time deposits

                 

Pesos

    649,046        292,571        941,617        497,152        403,425        900,577        696,853        1,376,560        2,073,413   

Foreign currency

    (4,180     4,329        149        (1,869     (574     (2,443     2,425        (4,422     (1,997

Total

    644,866        296,900        941,766        495,283        402,851        898,134        699,278        1,372,138        2,071,416   

Borrowing from the Central Bank

                 

Pesos

    1,155        (6     1,149        398        17        415        (280     (15     (295

Foreign currency

    0        0        0        0        0        0        0        0        0   

Total

    1,155        (6     1,149        398        17        415        (280     (15     (295

Borrowings from other financial institutions

                 

Pesos

    (8,095     2,935        (5,153     3,125        (1,676     1,449        (2,647     11,416        8,769   

Foreign currency

    3,511        2,168        5,679        (2,002     (74     (2,076     4,862        (183     4,679   

Total

    (4,584     5,103        526        1,123        (1,750     (627     2,215        11,233        13,448   

Corporate Bonds

                 

Pesos

    (12,085     80        (12,005     (9,180     0        (9,180     0        0        0   

Foreign currency

    10,008        206        10,214        22,085        744        22,829        63,218        529        63,747   

Total

    (2,077     286        (1,791     12,905        744        13,649        63,218        529        63,747   

Total Interest-bearing liabilities

                 

Pesos

    638,209        296,351        934,560        502,913        397,729        900,642        703,606        1,386,584        2,090,190   

Foreign currency

    9,329        6,656        15,985        18,301        (104     18,197        70,898        (4,560     66,338   

Total

    647,538        303,007        950,545        521,214        397,625        918,839        774,504        1,382,024        2,156,528   

Interest-earning assets: net interest margin and spread

The following table analyzes, by currency of denomination, the levels of our average interest-earning assets and net interest income, and illustrates the comparative margins and spreads for each of the years indicated.

 

     Year Ended December 31,  
     2012     2013     2014  
     (in thousands of Pesos, except percentages)  

Average interest-earning assets

      

Pesos

     30,480,309       37,048,079        47,831,703   

Foreign currency

     3,965,628       3,695,390        4,848,860   

Total

     34,445,937       40,743,469        52,680,563   

Net interest income (1)

      

Pesos

     4,089,682       5,492,195        8,171,487   

Foreign currency

     68,265       90,986        121,576   

Total

     4,157,947       5,583,181        8,293,063   

Net interest margin (2)

      

Pesos

     13.42     14.82     17.08

Foreign currency

     1.72     2.46     2.51

Weighted average rate

     12.07     13.70     15.74

Yield spread nominal basis (3)

      

Pesos

     9.82     11.00     11.32

Foreign currency

     2.10     3.16     3.52

Weighted average rate

     9.44     10.81     11.59

 

(1) Defined as interest earned less interest paid. Trading results from our portfolio of government and private securities are included in interest.
(2) Net interest income (including income from government and private securities) divided by average interest-earning assets.
(3) Defined as the difference between the average nominal rate on interest-earning assets and the average nominal rate on interest- bearing liabilities.

 

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Table of Contents

Investment portfolio: government and private securities

We own, manage and trade a portfolio of securities issued by the Argentine and other governments and private issuers. The following table analyzes, by currency of denomination, our investments in Argentine and other governments and private securities as of December 31, 2012, 2013 and 2014. Securities are stated before deduction of allowances.

 

     Years Ended December 31,  
     2012      2013      2014  
     (in thousands of Pesos)  

Government securities

        

In Pesos:

        

Government securities at market value (1)

        

Discount bonds at 5.83% – Maturity: 2033

     62,879         26,176         862,088   

Federal government bonds at Badlar Private + 2.00% – Maturity: 2017

     —           —