F-1/A 1 d421134df1a.htm AMENDMENT NO. 6 TO FORM F-1 Amendment No. 6 to Form F-1
Table of Contents

As filed with the Securities and Exchange Commission on September 8, 2017.

Registration No. 333-204429

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No.6

to

Form F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Bicapital Corporation

(Exact name of Registrant as specified in its charter)

 

 

 

Republic of Panama   6029   Not Applicable
(State or other jurisdiction of   (Primary Standard Industrial   (I.R.S. Employer
incorporation or organization)   Classification Code Number)   Identification No.)

 

 

Bicapital Corporation

Samuel Lewis Avenue and 57th Street

Obarrio

Panama City, Panama

+ (507) 396-9852

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

CT Corporation System

111 Eighth Avenue

New York, New York 10011

(212) 894-8940

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

Jorge U. Juantorena, Esq.   Juan Francisco Méndez, Esq.
Cleary Gottlieb Steen & Hamilton LLP   Simpson Thacher & Bartlett LLP
One Liberty Plaza   425 Lexington Avenue
New York, New York 10006   New York, New York 10017
(212) 225-2758   (212) 455-2579

 

 

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If delivery of this prospectus is expected to be made pursuant to Rule 434, check the following box.  ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging growth company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of
securities to be registered
 

Proposed

maximum

aggregate

offering price(2)

  Amount of
registration fee(3)

Common shares(1)

  US$345,000,000   US$40,089

 

 

(1)  Includes common shares that the underwriters have the option to purchase, if any, and common shares that are to be offered outside the United States but that may be resold from time to time in the United States in transactions requiring registration under the Securities Act. Offers and sales of common shares outside the United States are being made pursuant to Regulation S and are not covered by the Registration Statement.
(2)  Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.
(3)  The full amount of the registration fee was previously paid on May 22, 2015 and August 28. 2015. Accordingly, no additional fee is due in connection with this filing.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED SEPTEMBER 8, 2017

PRELIMINARY PROSPECTUS

 

LOGO

            Shares

Common Stock

US$             per share

 

 

This is Bicapital Corporation’s initial public offering. We are selling                  shares of our common stock.

We anticipate that the initial public offering price will be between US$                  and US$                  per share. Currently no public market exists for our shares. We will apply to list our shares on the New York Stock Exchange (“NYSE”) under the symbol “BICA.”

 

 

Investing in the shares involves risks. See “Risk Factors” beginning on page 21.

 

     Price to Public      Underwriting
Discount and
Commissions
     Proceeds
to us before
expenses*
 

Per Share

   US$                   US$                   US$               

Total

   US$      US$      US$  

 

* We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See “Underwriting.”

We have granted the underwriters an option for a period of 30 days after the date of this prospectus to purchase from us up to an additional                  shares, at the public offering price, less the underwriting discount.

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Neither this offering nor the shares have been registered in the Republic of Panama (“Panama”) and therefore are not subject to the Panamanian laws applicable to public offerings in Panama. The information contained in this prospectus has not been approved or disapproved by the Panamanian Superintendency of the Securities Market (Superintendencia del Mercado de Valores, or “Panamanian SMV”). The shares may not be sold in Panama except in compliance with the securities laws of Panama.

The underwriters expect to deliver the shares to purchasers on or about                  , 2017 through the book entry facilities of The Depository Trust Company.

 

 

Global Coordinators and Joint Bookrunners

 

BofA Merrill Lynch    Citigroup

Joint Bookrunner

 

J.P. Morgan

The date of this prospectus is                  , 2017


Table of Contents

 

TABLE OF CONTENTS

 

     Page  

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

     iii  

SUMMARY

     1  

THE OFFERING

     15  

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION

     17  

RISK FACTORS

     21  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     49  

EXCHANGE RATES

     51  

USE OF PROCEEDS

     53  

CAPITALIZATION

     54  

DILUTION

     55  

SELECTED CONSOLIDATED FINANCIAL INFORMATION

     56  

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

     60  

SELECTED STATISTICAL INFORMATION

     152  

INDUSTRY

     191  

BUSINESS

     211  

RISK MANAGEMENT

     252  

REGULATION AND SUPERVISION

     261  

MANAGEMENT

     282  

PRINCIPAL SHAREHOLDERS

     294  

RELATED PARTY TRANSACTIONS

     298  

DESCRIPTION OF SHARE CAPITAL AND ARTICLES OF INCORPORATION

     301  

DIVIDENDS AND DIVIDEND POLICY

     313  

TAXATION

     314  

UNDERWRITING

     321  

EXPENSES OF THE OFFERING

     331  

VALIDITY OF SECURITIES

     332  

EXPERTS

     333  

WHERE YOU CAN FIND MORE INFORMATION

     334  

ENFORCEABILITY OF CIVIL LIABILITIES

     335  

INDEX TO FINANCIAL STATEMENTS

     F-1  

We are responsible for the information contained in this prospectus. Neither we nor the underwriters have authorized anyone to provide any information, or to make any representations, other than the information contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell shares of common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including                     , 2017 (the 25th day after the date of this prospectus), U.S. federal securities law requires all dealers that effect transactions in our shares, whether or not participating in this offering, to deliver a prospectus. This requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscription.

This prospectus has been prepared on the basis that all offers of our shares in any Member State of the European Economic Area will be made pursuant to an exemption under the Prospectus Directive from the

 

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requirement to produce a prospectus for offers of our shares. Accordingly, any person making or intending to make any offer of our shares within the European Economic Area that are the subject of the offering contemplated in this prospectus should only do so in circumstances in which no obligation arises for us or the underwriters to produce a prospectus for such offer. Neither we nor the underwriters have authorized, or hereby authorize, the making of any offer of our shares in circumstances in which an obligation arises for us or the underwriters to publish a prospectus for such offer. “Prospectus Directive” means Directive 2003/71/EC as amended.

The distribution of this prospectus and the offering and sale of our shares in certain jurisdictions may be restricted by law. Persons who receive this prospectus must inform themselves about and observe any such restrictions. This prospectus does not constitute an offer of, or an invitation to purchase, any of the shares in any jurisdiction in which such offer or invitation would be unlawful.

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Certain Definitions

All references to “we,” “us,” “our company” and “Bicapital” in this prospectus are to Bicapital Corporation, a corporation (sociedad anónima) organized under the laws of Panama.

In this prospectus, we refer to our principal subsidiaries as follows: (i) Banco Industrial, S.A., a corporation (sociedad anónima) organized under the laws of the Republic of Guatemala (“Guatemala”), as “Banco Industrial;” (ii) Banco Industrial El Salvador, S.A., a corporation (sociedad anónima) organized under the laws of the Republic of El Salvador (“El Salvador”), as “BI El Salvador,” (iii) Financiera Industrial, S.A., a corporation (sociedad anónima) organized under the laws of Guatemala, as “Financiera Industrial,” (iv) Westrust Bank (International Limited), a corporation organized under the laws of The Bahamas, as “Westrust Bank,” (v) Contécnica, S.A. a corporation (sociedad anónima) organized under the laws of Guatemala, as “Contecnica;” (vi) Banco del País, S.A., a corporation (sociedad anónima) organized under the laws of the Republic of Honduras (“Honduras”), as “Banpaís,” (vii) Seguros El Roble, S.A., a corporation (sociedad anónima) organized under the laws of Guatemala, as “Seguros El Roble;” (viii) Fianzas El Roble, S.A., a corporation (sociedad anónima) organized under the laws of Guatemala, as “Fianzas El Roble;” and (ix) Seguros del País, S.A., a corporation (sociedad anónima) organized under the laws of Honduras, as “Seguros del País.”

Financial Statements

Our fiscal year begins on April 1 and ends on March 31. Our audited consolidated financial statements as of March 31, 2017 and 2016 and for the years ended March 31, 2017, 2016 and 2015 (the “Annual Financial Statements”) included in this prospectus have been prepared in U.S. dollars in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Our unaudited condensed consolidated interim financial statements as of June 30, 2017 and for the three-month periods ended June 30, 2017 and 2016 (the “Interim Financial Statements” and, together with the Annual Financial Statements, the “Financial Statements”) included in this prospectus have been prepared in accordance with IFRS, applying IAS 34, or “Interim Financial Reporting.”

We have historically prepared our financial statements in accordance with accounting principles prescribed by the Guatemalan Superintendency of Banks (Superintendencia de Bancos de Guatemala or “GSB”) and the Guatemalan Banks and Financial Groups Law (Ley de Bancos y Grupos Financieros) (collectively, “Guatemalan Banking GAAP”). We prepared our first financial statements in accordance with IFRS as issued by the IASB for the year ended March 31, 2014 and our transition date to IFRS was April 1, 2012.

For regulatory purposes, in Guatemala, Honduras, El Salvador and Panama our subsidiaries prepare and will continue to prepare and make available to shareholders statutory financial statements in accordance with local generally accepted accounting principles (“local GAAP”) as prescribed by the applicable regulators. Unless otherwise indicated, all financial information provided in this prospectus has been prepared in accordance with IFRS. IFRS differs in certain significant respects from local GAAP. Consequently, the information presented in this prospectus in accordance with local GAAP may not be comparable with our financial information prepared in accordance with IFRS.

We manage our business in four segments: (i) Commercial Banking, (ii) Retail Banking, (iii) Treasury and (iv) Insurance. For information on our results of operations per business segment, see Note 31 to our Annual Financial Statements and Note 16 to our Interim Financial Statements included in this prospectus.

Currency Translation

In this prospectus, references to “quetzales” or “Q.” are to Guatemalan quetzales, references to “U.S. dollars” or “US$” are to United States dollars and references to “lempiras” or “L.” are to Honduran lempiras.

 

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Our financial statements are presented in U.S. dollars, which is our presentation currency. For our Guatemalan subsidiaries the functional currency is the quetzal and for our Honduran subsidiaries the functional currency is the lempira. See “Exchange Rates” for information regarding historical exchange rates of quetzales and lempiras to U.S. dollars. For the Salvadoran entities and Westrust Bank, the functional currency is the U.S. dollar. For more information on the basis of presentation, see Note 2c to our Annual Financial Statements.

Terms Relating to our Loan Portfolio and Capital Adequacy

As used in this prospectus, the following terms relating to our loan portfolio and other credit assets, as well as our capital adequacy have the meanings set forth below, unless otherwise indicated.

“Allowance for loan losses” refers to the aggregate loan loss allowance or reserves shown as of a particular date as a balance sheet item.

“Capital ratio” refers to total regulatory capital divided by total risk-weighted assets. Total regulatory capital and risk-weighted assets are calculated in accordance with the guidelines established by the local regulator of each country in which our subsidiaries operate. Regulatory capital and risk-weighted assets for us and for Banco Industrial are calculated in accordance with regulatory requirements of the GSB. Regulatory capital and risk-weighted assets for Banpaís are calculated in accordance with regulatory requirements of the Honduran Banking Commission (Comisión Nacional de Bancos y Seguros or “CNBS”) while the regulatory capital and risk-weighted assets for BI El Salvador are calculated in accordance with regulatory requirements of the Salvadoran Financial System Commission (Superintendencia del Sistema Financiero de El Salvador or “SSF”).

“Net loans” and “net loan portfolio” refer to our total loan portfolio less allowance for loan losses.

“Net premiums earned” refers to net premiums written minus technical reserves.

“Non-performing loans” or “NPL” refers to total loans over 90 days past due.

“NPL coverage ratio” refers to the ratio of allowance for loan losses to NPL for a given period.

“NPL ratio” refers to total NPL divided by total loans.

“Tier 1 capital” is calculated in accordance with the guidelines established by the local regulator of each country in which our subsidiaries operate. Tier 1 capital for us and for Banco Industrial are calculated in accordance with regulatory requirements of the GSB and includes common stock, paid-in and additional paid-in capital, declared reserves and retained earnings. Tier 1 capital for Banpaís is calculated in accordance with regulatory requirements of the CNBS, while Tier 1 capital for BI El Salvador is calculated in accordance with regulatory requirements of the SSF.

“Tier 2 capital” is calculated in accordance with the guidelines established by the local regulator of each country in which our subsidiaries operate. Tier 2 capital for us and for Banco Industrial are calculated in accordance with regulatory requirements of the GSB and includes earnings obtained from the current fiscal year, revaluation of assets up to 50% of the paid-in capital, other capital reserves and qualified equity instruments. Tier 2 capital for Banpaís is calculated in accordance with regulatory requirements of the CNBS, while Tier 2 capital for BI El Salvador is calculated in accordance with regulatory requirements of the SSF.

“Total regulatory capital” is calculated in accordance with the guidelines established by the local regulator of each country in which our subsidiaries operate. Total regulatory capital for us and for Banco Industrial are calculated in accordance with regulatory requirements of the GSB, and refers to Tier 1 capital plus Tier 2 capital minus investments in capital in local and foreign banks and subsidiaries in which the bank holds at least 25% of their capital. The amount of Tier 2 capital included in the calculation of total regulatory capital cannot exceed the

 

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amount of Tier 1 capital. Total regulatory capital for Banpaís is calculated in accordance with regulatory requirements of the CNBS. Total regulatory capital for BI El Salvador is calculated in accordance with regulatory requirements of the SSF.

Market and Industry Data

This prospectus contains statements about our competitive position and market share in, and the market size of, the banking and insurance industry and market for financial services in the jurisdictions in which we operate. We have made these statements on the basis of statistics and other information from independent third-party sources that we believe are reliable.

All statements in this prospectus regarding our relative market position and financial performance vis-a-vis the financial services and insurance sectors are presented in local GAAP, and for: i) Guatemala are based, out of necessity, on information published and obtained from the GSB and the Guatemalan Central Bank (Banco de Guatemala); ii) El Salvador are based, out of necessity, on information published and obtained from the SSF; and iii) Honduras are based, out of necessity, on information published and obtained from CNBS and the Honduran Central Bank (Banco Central de Honduras). Unless otherwise indicated, the market share and ranking information included in this prospectus is derived from statistics as of June 30, 2017 and includes the information of the applicable subsidiary only, on an unconsolidated basis excluding its subsidiaries. In the section entitled “Business,” the information regarding market share by insurance business line in Guatemala only includes members of the Guatemalan Association of Insurance Institutions (Asociación Guatemalteca de Instituciones de Seguros (AGIS)), as published periodically by the GSB; Seguros CHN, part of Banco CHN, which has an unconditional and unlimited guarantee from the Guatemalan government, is not a member of the AGIS.

Furthermore, we obtained certain macroeconomic information used throughout this prospectus from publicly available information and market research, including, among others, the International Monetary Fund (“IMF”) and the World Bank Development Indicators.

Although we have no reason to believe that any of the above-described information or reports is inaccurate in any material respect, neither we nor the underwriters have independently verified the competitive position, market share, market size or market growth data contained in such reports.

Certain Other Definitions and Conventions

We include certain measures and ratios in this prospectus which we believe provide investors with important information regarding our operations.

“Administrative ratio” refers to administrative expenses divided by net premiums earned.

“Combined ratio” refers to the sum of incurred losses and operating expenses, divided by net premiums earned.

“Commission ratio” refers to insurance commissions divided by net premiums earned.

“Efficiency ratio” refers to operating and administrative expenses before depreciation and amortization divided by the period’s profit for banking and insurance operations plus loan impairment charges for the years ended March 31, 2017, 2016 and 2015. For the three-month periods ended June 30, 2017 and June 30, 2016 refers to operating and administrative expenses before depreciation and amortization minus operating and administrative expenses from our health care subsidiaries, divided by the period’s profit for banking and insurance operations plus loan impairment charges. For the three-month periods ended June 30, 2017 and June 30, 2016, operating and administrative expenses from our health care subsidiaries have been excluded from our consolidated operating and administrative expenses as a result of a reclassification of our income from health

 

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care services as other operating income. For the three-month period ended June 30, 2017 a US$6.4 million non-income tax expense from the intercompany sale of land has been excluded from our consolidated operating and administrative expenses which is considered a non-recurring transaction.

“Fee income ratio” refers to net fee and commission income divided by profit for banking and insurance operations.

“Incurred losses” refers to losses covered by an insurance policy over a period of time.

“Loss ratio” refers to claims divided by net premiums earned.

“Net interest margin” refers to net interest income divided by average interest-earning assets. Average interest-earning assets are determined on average monthly balances. Net interest margin for the three-month period ended June 30, 2017 is annualized and calculated as net interest income for the period multiplied by four, divided by an average of interest-earning assets as of March 31, 2017 and June 30, 2017.

“Return on average assets,” or “ROAA,” refers to profit for the period divided by average total assets. The average balances for total assets have been calculated on the basis of monthly balances. ROAA for the three-month period ended June 30, 2017 is annualized and calculated as profit for the period multiplied by four, divided by an average of total assets as of March 31, 2017 and June 30, 2017.

“Return on average shareholders’ equity,” or “ROAE,” refers to profit for the period divided by average shareholders’ equity. The average balances for shareholders’ equity have been calculated on the basis of our monthly balances. ROAE for the three-month period ended June 30, 2017 is annualized and calculated as profit for the period multiplied by four, divided by an average of shareholders’ equity as of March 31, 2017 and June 30, 2017.

We present average balances and nominal average interest rates in this prospectus. Except as otherwise indicated, average balances have been calculated by adding the month-end balances of our assets and liabilities and then dividing by the number of months in the period. Nominal average interest rates have been calculated by dividing interest earned or paid on assets or liabilities by the corresponding average balances on such assets or liabilities.

In addition, for certain information related to our compound annual growth rate (“CAGR”) we have included such information pursuant to local GAAP as reported to the local regulating entities in order to be able to show prospective investors our growth over a longer period than three years.

Effect of Rounding

Certain figures included in this prospectus and in our Financial Statements have been rounded for ease of presentation. Percentage figures included in this prospectus have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this prospectus may vary from those obtained by performing the same calculations using the figures in our Financial Statements. Certain other amounts that appear in this prospectus may not sum due to rounding.

Share Data and Other Related Data

At our board of directors’ meeting held on April 30, 2015, our board of directors approved the implementation of a five-to-one reverse stock split of our common shares effective as of July 31, 2015 (the “Reverse Stock Split”). Our issued and outstanding preferred shares were not impacted by the Reverse Stock Split. After July 31, 2015, every five shares of our issued and outstanding common stock were converted into one newly issued and outstanding share of common stock, without any change in the par value per share. The reverse

 

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stock split reduced the number of shares of our outstanding common stock from 555,316,597 to 111,068,949 immediately after the Reverse Stock Split (without giving effect to any conversions resulting from the Perpetual Exchange Right (as defined in “Description of Share Capital and Articles of Incorporation—Outstanding Capital Stock and Voting Rights”) after July 31, 2015). No fractional shares were issued in connection with the Reverse Stock Split; thus, any fractional shares resulting from the Reverse Stock Split were rounded up to the nearest whole share. The number of authorized shares of our common stock remained unchanged. See “Description of Share Capital and Articles of Incorporation—Outstanding Capital Stock and Voting Rights.”

Share data used throughout this prospectus, including dividends per share and earnings per share, have been adjusted to reflect the Reverse Stock Split unless otherwise indicated.

 

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SUMMARY

This summary highlights selected information described in greater detail elsewhere in this prospectus. You should carefully read this prospectus in its entirety before investing in our shares, including “Risk Factors,” “Management’s Discussion and Analysis of Our Financial Condition and Results of Operations” and our Financial Statements. Unless otherwise indicated, all financial information provided in this section has been prepared in accordance with IFRS.

Our Business

We are the largest financial services group in Guatemala, with a growing presence in other underpenetrated and fast-growing Central American countries. Through our subsidiaries, we provide a comprehensive range of corporate and retail banking, insurance and other financial services to more than 1.8 million clients as of June 30, 2017. We were formed as a holding company in 2006, and our main subsidiary, Banco Industrial, was founded in 1967. We believe that our businesses benefit from significant synergies as a result of being part of one financial group.

Our operations in Guatemala include Banco Industrial and Seguros El Roble, the largest bank and insurance company in the country, respectively, which are also among the most profitable entities in the Guatemalan banking and insurance systems, according to the GSB. We are the market leader in terms of total assets, total net loans and total deposits, with market shares of 27.7%, 27.8% and 24.3%, respectively, as of June 30, 2017, as well as, first in total gross premiums written, with a market share of 24.9% and 26.1%, respectively, for the three-month period ended June 30, 2017 and the year ended March 31, 2017, according to the GSB. On an annualized basis for the three-month period ended June 30, 2017 and for the year ended March 31, 2017, Banco Industrial had a ROAE of 19.6% and 21.7%, respectively, compared to a ROAE of 15.0% and 14.7%, respectively, for the Guatemalan banking system as a whole, and Seguros El Roble (including Fianzas El Roble) had a ROAE of 37.6% and 31.2%, respectively, compared to a ROAE of 25.6% and 21.8%, respectively, for the Guatemalan insurance system as a whole, according to the GSB. As of June 30, 2017, Banco Industrial had one of the largest banking distribution networks in Guatemala, with 6,164 points of service, comprised of 621 branches, 3,874 ATMs (including 1,026 proprietary and 2,848 third-party network ATMs) and 1,669 correspondent agents (third-party points of service). As of June 30, 2017, Banco Industrial, Seguros El Roble and our other financial operations in Guatemala represented 78.5% of our total assets.

As part of our growth strategy, beginning in 2007 with our acquisition of a controlling interest in Banpaís, we expanded our operations outside Guatemala to Honduras and El Salvador. Since then, our international growth has been focused on the northern part of Central America, given the high level of intra-regional trade activity by our clients. In January 2016 we expanded our operations into Panama. Currently, our operations outside of Guatemala include: (i) Banpaís, the fourth-largest bank in Honduras in terms of total net loans, with a 12.1% market share as of June 30, 2017, according to the CNBS, (ii) Seguros del País, the fourth-largest insurer in Honduras in terms of total gross premiums written, with a 12.2% and 8.7% market share for the three-month period ended June 30, 2017 and the year ended March 31, 2017, according to the CNBS, and (iii) BI El Salvador, the 12th-largest bank in El Salvador in terms of total net loans, with a 1.5% market share as of June 30, 2017, according to the SSF. Our banking network outside Guatemala is comprised of a total of 178 branches and 176 ATMs as of June 30, 2017. As of June 30, 2017, Banpaís, Seguros del País and BI El Salvador, together, represented 13.2% of our total assets.

Our operations are conducted across four principal business segments:

 

    commercial banking, which focuses on providing a full range of commercial banking products and services and financial assessment to large corporations, medium-sized companies, and small businesses in target industries;

 



 

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    retail banking, which focuses on providing a full range of banking products and services to retail clients;

 

    treasury, which focuses on funding activities, such as borrowings with international financial institutions, issuances of debt securities, subordinated liabilities, and investing in liquid assets, such as short-term placements and corporate and government debt securities; and

 

    insurance, which provides a variety of insurance products and services, including life insurance, property and casualty insurance and automobile insurance, to both commercial and retail clients.

Since our formation as a holding company in 2006, we have built a track record of delivering sustained profitable growth. For instance, our profit for banking and insurance operations was US$662.9 million, US$612.3 million and US$566.8 million, respectively, for the years ended March 31, 2017, 2016 and 2015 and US$169.2 million for the three-month period ended June 30, 2017. Our success has been primarily driven by our ability to penetrate high-margin market segments, maximize cross-selling opportunities, create strong relationships with the largest corporations in Central America, focus on technology to generate significant operational efficiencies and operate under conservative risk policies, coupled with an experienced management team and board of directors focused on delivering value to our shareholders.

As of June 30, 2017, we had total assets of US$15.4 billion, total net loans of US$9.0 billion, total deposits of US$9.5 billion, and total shareholders’ equity of US$1.4 billion. For the year ended March 31, 2017 and the three-month period ended June 30, 2017, respectively, our profit for the period was US$230.1 million and US$54.6 million, and for the year ended March 31, 2016 our profit for the period was US$215.9 million.

The following table shows, for the periods presented, key financial and operating indicators of our performance.

 

     As of and for the three months
ended June 30,
    As of and for the year ended
March 31,
 
   2017     2017     2016     2015  
     (US$ in millions, except percentages)  

Total assets

     15,364.3       15,187.6       14,002.0       12,640.4  

Total net loans

     9,027.6       8,834.4       7,880.0       7,128.2  

Total deposits

     9,473.1       9,134.1       8,571.4       7,735.5  

Total equity

     1,374.9       1,382.9       1,158.7       1,038.8  

Profit for the period

     54.6       230.1       215.9       185.9  

Return on average assets(1)

     1.4     1.6     1.6     1.6

Return on average shareholders’ equity(2)

     16.3     18.8     19.4     19.4

Net interest margin(3)

     4.0     4.0     4.1     4.3

Efficiency ratio(4)

     53.9     54.7     55.2     54.2

NPL ratio(5)

     1.1     1.0     1.2     1.1

NPL coverage ratio(6)

     93.4     95.9     93.5     104.6

Capital ratio of Bicapital(7)

     14.3     14.7     14.7     14.2

Capital ratio of Banco Industrial(7)

     12.7     12.6     12.5     11.3

Capital ratio of Banpaís(7)

     12.9     12.5     12.7     13.0

Capital ratio of BI El Salvador(7)

     18.1     18.1     18.3     19.8

 

(1) Refers to profit for the period divided by average total assets. The average balances for total assets have been calculated on the basis of monthly balances. ROAA for the three-month period ended June 30, 2017 is annualized and calculated as profit for the period multiplied by four, divided by an average of total assets as of March 31, 2017 and June 30, 2017.

 



 

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(2) Refers to profit for the period divided by average shareholders’ equity. The average balances for shareholders’ equity have been calculated on the basis of our monthly balances. ROAE for the three-month period ended June 30, 2017 is annualized and calculated as profit for the period multiplied by four, divided by an average of shareholders’ equity as of March 31, 2017 and June 30, 2017.
(3) Refers to net interest income divided by average interest-earning assets. Average interest-earning assets are determined on average monthly balances. Net interest margin for the three-month period ended June 30, 2017 is annualized and calculated as net interest income for the period multiplied by four, divided by an average of interest earning assets as of March 31, 2017 and June 30, 2017.
(4) Refers to operating and administrative expenses before depreciation and amortization divided by the period’s profit for banking and insurance operations plus loan impairment charges for the years ended March 31, 2017, 2016 and 2015. For the three-month periods ended June 30, 2017 and June 30, 2016 refers to operating and administrative expenses before depreciation and amortization minus operating and administrative expenses from our health care subsidiaries, divided by the period’s profit for banking and insurance operations plus loan impairment charges. For the three-month periods ended June 30, 2017 and June 30, 2016, operating and administrative expenses from our health care subsidiaries have been excluded from our consolidated operating and administrative expenses as a result of a reclassification of our income from health care services as other operating income. For the three-month period ended June 30, 2017 a US$6.4 million non-income tax expense from the intercompany sale of land has been excluded from our consolidated operating and administrative expenses which is considered a non-recurring transaction.
(5) Based on the loan activity carried out by our banking subsidiaries (Banco Industrial, Banpaís, BI El Salvador and Bi-Bank). Calculated as total NPL divided by total loans.
(6) Refers to the ratio of allowance for loan losses to NPL for a given period.
(7) Refers to total regulatory capital divided by total risk-weighted assets. Total regulatory capital and risk-weighted assets are calculated in accordance with the guidelines established by the local regulator of each country in which our subsidiaries operate. Regulatory capital and risk-weighted assets for us and for Banco Industrial are calculated in accordance with regulatory requirements of the GSB. Regulatory capital and risk-weighted assets for Banpaís are calculated in accordance with regulatory requirements of the CNBS, while the regulatory capital and risk-weighted assets for BI El Salvador are calculated in accordance with regulatory requirements of the SSF.

 



 

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Our Corporate Structure

The following chart presents our corporate structure, indicating our principal subsidiaries and respective ownership interests as of June 30, 2017.

 

LOGO

Market Opportunity

The majority of our business is generated through our operations in Guatemala, representing 83.4% and 78.5% of our profit for the period and total assets, respectively, as of and for the three-month period ended June 30, 2017 and 86.4% and 79.2% of our profit for the period and total assets, respectively, as of and for the year ended March 31, 2017. We believe that the size and sustained growth of Guatemala’s economy, the relatively low penetration of financial services in the country and a healthy financial system offer a significant opportunity for us to continue growing. Additionally, we have a clear expansion strategy for other Central American countries, which we know well and with which Guatemala has strong commercial ties. These countries, which we believe have favorable long-term prospects, present additional opportunities for us.

Attractive economy of Guatemala with sustained growth potential and stable macro fundamentals

Guatemala is the largest economy in Central America, with an estimated GDP of US$68.2 billion for the year ended December 31, 2016, according to the Guatemalan Central Bank, accounting for close to one-third of Central America’s GDP (28.6%). Guatemala has a strong private sector participation of 92.5% of its total GDP, one of the highest among Central American countries, as per the Guatemalan Central Bank. The country had credit ratings of Ba1 by Moody’s Investor Service (“Moody’s”), BB by Standard & Poor’s Rating Services (“S&P”) and BB by Fitch Ratings Ltd. (“Fitch”) as of June 30, 2017.

According to the International Monetary Fund (IMF), the country has grown at an average real GDP growth rate of 3.6% during the five-year period ended December 31, 2016, which is comparable to growth observed in certain other Latin American economies such as Colombia at 3.7%, Peru at 4.3%, Mexico at 2.5% and Chile at

 



 

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3.0% for the same period. The Guatemalan government’s prudent and responsible management of the economy, coupled with a conservative monetary policy by the Guatemalan Central Bank, have resulted in economic development, increased internal consumption and strong macroeconomic fundamentals, including low levels of public debt, low inflation, stable currency, low fiscal deficit and high levels of international reserves. Additionally, a significant inflow of funds is derived from foreign direct investment, a consequence of the country’s stable regulatory framework and improvement in its competitive indicators; based on the most-recently available Doing Business ranking issued by the International Finance Corporation (IFC), a member of the World Bank Group, Guatemala is ranked 88 as of June 2016, among 190 countries. According to the Guatemalan Central Bank, foreign investments grew at a CAGR of 2.9% during the five-year period ended December 31, 2016 (most recent data available).

Guatemala could further benefit from increased growth in the economy of the United States, its largest trade partner, accounting for 33.1% of Guatemala’s exports during 2016. Guatemala’s access to the U.S. economy has been favored by the Dominican Republic-Central American Free Trade Agreement, which entered into effect in Guatemala in 2006, the first free trade agreement between the United States, Central American countries (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua) and the Dominican Republic that promotes stronger trade and investment ties between the United States and the region. Additionally, Guatemalan immigrants living in the United States generate strong remittance flows, representing 10.3% of Guatemala’s GDP as of December 31, 2016, which have grown at a CAGR of 8.4% during the five-year period ended December 31, 2016, according to the Guatemalan Central Bank.

Well-regulated and underpenetrated financial system

Policy changes over the last fifteen years have strengthened Guatemala’s financial sector. With the assistance of the IMF and the World Bank, a financial sector reform program was implemented to establish a modern, strong and well-functioning financial system, able to improve and expand its intermediating functions and to withstand shocks. As a result, Guatemala has been able to develop and maintain a healthy financial system, with high profitability and strong asset quality, demonstrated by a total capital ratio of 14.3%, ROAE of 15.0%, NPL ratio of 2.5% and NPL coverage ratio of 114.1%, for the Guatemalan banking system as a whole as of June 30, 2017, according to the GSB.

For the five-year period ended March 31, 2017, according to the GSB, Guatemala’s financial system reported net loans and deposits CAGRs of 11.5% and 9.3% respectively, without adjustments for inflation. Despite this growth, the financial system in Guatemala remains underpenetrated. The domestic credit extended to the private sector to GDP ratio in Guatemala was 31.0% as of December 31, 2016, according to the GSB and the Guatemalan Central Bank. This ratio is relatively low when compared to the same ratio of most Central American and other Latin American countries, including Brazil at 66.7%, Colombia at 43.5%, Peru at 34.1%, Mexico at 22.2% and Chile at 90.6%, as of December 31, 2016, according to the local regulators in each country and the IMF. Retail banking represents even greater penetration potential. As of December 31, 2016, according to the Guatemalan Central Bank and the GSB, Guatemala had total consumer loan, credit card loan and mortgage loan to GDP ratios of 8.4%, 0.9% and 1.5%, respectively, substantially lower than other Latin American countries. In insurance, premiums written in Guatemala as a percentage of GDP represented 1.2%, the lowest among Central American and other Latin American countries, as of December 31, 2016, according to the IMF and the Guatemalan Central Bank.

 



 

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The graphs below further illustrate the comparison among different Latin American countries with respect to banking and insurance penetration, providing loan-to-GDP ratios and gross premiums written-to-GDP ratios for the region.

 

LOGO

 

Source: IMF, Guatemalan Central Bank, GSB, and the local banking regulatory entities of Chile, Colombia, Costa Rica, El Salvador, Honduras, Mexico, Panama and Peru.

Note: Ratios calculated in local currency. Loan calculations are based on net loans.

Market opportunity at a regional level

We view Central America as a strategic region offering expansion opportunities upon which we believe we are poised to capitalize. According to the IMF, as of December 31, 2016, Central America had a total population of approximately 46.1 million and a GDP of US$242.5 billion, making it the fourth-largest aggregated market in Latin America by population and the seventh-largest by GDP. According to estimates prepared by the IMF, Central America’s real GDP is expected to grow at an annual average rate of 3.9% between 2016 and 2018. Central American countries have similar cultures and enjoy relatively stable economic environments, which have enabled strong intra-regional economic and trade activity among countries. Corporations have established regional operations, increasing the demand for regional financial services. The trend over the last ten years in the Central American banking industry has been toward consolidation and the establishment of regional platforms, and we believe the region continues to offer growth and acquisition opportunities. In addition, the different countries of Central America have entered into various free trade agreements with the United States and other countries in Europe, South America and Asia that have promoted prosperity as well as stronger trade flows, which have increased the region’s attractiveness for foreign direct investment. According to the World Bank, foreign investments in Central America for the five-year period ended December 31, 2015 (the most recent data available) grew at a CAGR of 16.0%.

Our expansion plan in the region was initially focused on Honduras and El Salvador, Guatemala’s largest trading partners in Central America. Consistent with our vision of being the first option for Central Americans and the largest financial institution in Central America, we began operations in Panama in January 2016 in order to further expand our operations in the region. The total trade volume between these three countries and Guatemala was over US$4.1 billion in total imports and exports in 2016, according to the Guatemalan Central Bank, which represented 15.2% of Guatemala’s total trading volume in 2016. Our presence in these strategic countries has enabled us to position ourselves as one of the largest financial conglomerates in the region and provides a platform for potential expansion to the other countries in the region. As of December 31, 2016, we ranked fourth in terms of total assets with a 5.3% market share among banking institutions in Central America (Guatemala, Costa Rica, Nicaragua, Honduras, El Salvador and Panama), according to information from the local banking regulators.

 



 

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Our Competitive Strengths

Leading financial institution in Guatemala with a growing presence across Central America

Through our main subsidiary, Banco Industrial, we have been one of the main financial institutions in Guatemala over the past 45 years, consolidating our leadership position in commercial and retail banking. We believe that Banco Industrial’s strong brand recognition, solid reputation and distribution network have contributed to our leading position in Guatemala. Banco Industrial has one of the largest banking distribution networks in Guatemala, according to the GSB, serving approximately 1.4 million retail clients and 13,300 commercial clients, and processing approximately 212.6 million transactions during the year ended March 31, 2017 and processing approximately 56.5 million transactions during the three-month period ended June 30, 2017.

Banco Industrial performs a systemically important role for Guatemala’s financial market and economy. Banco Industrial is one of the leading check-clearing institutions in the Guatemalan financial system, with a 24.75% market share as of June 30, 2017 in amount of quetzales cleared, according to the Guatemalan Automated Clearing House’s compensation agent and operator (Imágenes Computarizadas de Guatemala, S.A.). Banco Industrial is the main tax collector for the Guatemalan government with a 40.9% market share as of June 30, 2017 according to the Guatemalan Superintendency of Tax Administration (Superintendencia de Administración Tributaria), and according to the Guatemalan Central Bank, Banco Industrial is a leading recipient of family remittances, processing US$2,018.2 million in remittances flowing into Guatemala, representing a 27.1% market share, for the year ended March 31, 2017 and processing US$597.4 million in remittances flowing into Guatemala, representing a 28.3% market share, for the three-month period ended June 30, 2017.

In addition to our leadership in banking, through Seguros El Roble and Fianzas al Roble, we are the leading insurer in Guatemala with a 24.9% and 26.1% market share in total gross premiums written for the three-month period ended June 30, 2017 and the year ended March 31, 2017, respectively, according to the GSB. Seguros El Roble and Fianzas El Roble together have consistently outperformed the growth of the Guatemalan insurance market. Seguros El Roble and Fianzas El Roble’s gross premiums written achieved a CAGR of 6.4% for the five-year period ended June 30, 2017, compared to a CAGR of 7.6% of the industry for the period, in Guatemalan GAAP as reported to the GSB.

We have a loan portfolio in Central America (excluding Guatemala) in an aggregate amount of US$1,589.9 million as of June 30, 2017, which represents 17.4% of our total loan portfolio. We are the fourth-largest bank in Honduras in terms of total net loans with a market share of 12.1%, with 169 branches and 157 ATMs as of June 30, 2017. In El Salvador we have a market share of 1.5% in terms of total net loans, with eight branches and 19 ATMs. In line with our expansion strategy, we began banking operations in Panama in January 2016 under the name BiBank, complementing our platform in Central America to better serve our clients’ needs, and allowing us to serve the many multinational companies who have established their headquarters in Panama.

Track record of profitable growth

We have consistently demonstrated our ability to deliver profitable growth. Our consolidated total assets, net loans, deposits and total equity grew at a compounded annual rate of 10.6%, 13.0%, 8.7% and 13.7%, respectively, over the period between April 1, 2012 and June 30, 2017. Our ROAE was 16.3% on an annualized basis for the three-month period ended June 30, 2017 compared to our ROAE of 18.8% and 19.4% for the years ended March 31, 2017 and 2016, respectively.

 



 

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Our main banking and insurance subsidiaries have been able to deliver strong performances as compared to the banking and insurance systems in the jurisdictions in which they operate, based on local GAAP reporting to each regulator, as shown in the table below.

 

     5-Year CAGR     For the year
ended
March 31,
 
     (April 1, 2012 - March 31, 2017)     2017  
     Total Assets     Total Loans     Total
Shareholders’
Equity
    Net
Income
    ROAE  

Banco Industrial Guatemala

     10.50     13.07     14.15     10.54     21.71

Guatemala Banking System(1)

     10.29     11.49     10.66     4.13     14.73

Top Three Private Banks(2)

     8.59     11.66     7.92     3.86     12.36

Banpaís

     11.55     11.78     11.97     8.73     14.92

Honduras Banking System(1)

     9.51     10.92     9.63     10.92     12.85

Top Three Private Banks(3)

     9.13     10.48     9.12     13.10     13.58

BI El Salvador

     20.82     25.89     11.07     33.28     1.63

El Salvador Banking System(1)

     5.11     6.02     3.70     (6.71 )%      6.77

Top Three Private Banks(4)

     3.77     4.22     2.58     (6.35 )%      9.22
     Total Assets     Gross
premiums
written
    Total
Shareholders’
Equity
    Net
Income
    ROAE  

Seguros El Roble(5)

     12.18     9.27     11.92     20.76     11.94

Guatemala Insurance System(1)

     8.15     7.58     11.22     10.26     10.81

Seguros del País

     14.30     (5.73 )%      10.11     14.80     54.80

Honduras Insurance System(1)

     9.56     (7.30 )%      9.57     7.44     31.70

 

Note: Figures in local GAAP, according to the GSB, the CNBS and the SSF. Top three private banks for each country determined by total assets as of March 31, 2017.
(1)  Figures exclude our subsidiaries.
(2)  G&T Continental, Agromercantil de Guatemala and Banco de América Central.
(3)  Banco Ficohsa, Banco Atlántida and Banco de Occidente.
(4)  Banco Agrícola, Banco Davivienda Salvadoreño and Scotiabank El Salvador.
(5)  Including Fianzas El Roble.

We believe that our broad retail and commercial client base allows us to sell complementary financial products and services, increasing our wallet penetration, strengthening customer loyalty and achieving higher profitability in our operations. An important component of our strategy is to provide our corporate clients with a package of services called Total Service (Servicio Total). We provide corporate clients with (i) a dedicated account manager specialized in fulfilling the specific needs of each client, (ii) high-quality and competitive financial services, (iii) technological services allowing commercial clients to connect online and (iv) insurance policies at competitive prices, including coverage for auto, transportation and property, as well as collective life and health insurance policies.

Our market knowledge, acquired over nearly 50 years, allows our subsidiaries to develop innovative product platforms to better serve our clients’ needs. As a result, we have recorded increased levels of productivity on a per client basis. Our clients in Guatemala used, on average, 2.7 of our products as of March 31, 2007, reaching 5.0 as of June 30, 2017, calculated as the total number of products over the total number of clients.

 



 

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In addition to our track record of organic growth, we have demonstrated an ability to identify and execute acquisitions, integrate other banks and capitalize on synergies. We have created an integrated merger and acquisition taskforce to identify, analyze and execute acquisitions and have also developed streamlined processes to integrate an acquired company into our operations. As part of our strategy, we intend to engage in tactical acquisitions on a selective basis. Our most recent acquisitions include: Sermesa (2014, Guatemala), Banco del Quetzal (2007, Guatemala), Banpaís (2007, Honduras) and Banco de Occidente (2006, Guatemala).

Sound risk management resulting in strong asset quality

We have an experienced risk-management team focused on monitoring and managing risks across all business areas. This team has internal policies, targets and limits in place to monitor each type of risk under the umbrella of comprehensive risk-management practices. Our credit risk policies are approved by our risk committee and board of directors and are revised on an annual basis.

Historically, and mainly as a result of our conservative credit risk-management policies, we have experienced low NPL and high NPL coverage ratios. As of June 30, 2017, based on Guatemalan GAAP, the NPL ratio for Banco Industrial in Guatemala was 0.7%, the second-lowest ratio in the banking industry, and significantly lower than the Guatemalan banking industry’s average NPL ratio of 2.5% as of the same date, and Banco Industrial’s NPL coverage ratio was 240.6% as compared to the Guatemalan banking industry’s NPL coverage ratio of 114.1%. As of June 30, 2017, Banpaís and BI El Salvador had NPL ratios of 1.1% and 0.8% (based on Honduran and Salvadoran GAAP, respectively), which were also significantly lower than the Honduran and Salvadoran banking industry’s average NPL ratio of 2.0% and 2.0%, respectively. The NPL coverage ratio for Banpaís and BI El Salvador was 146.6% and 136.1% (based on Honduran and Salvadoran GAAP, respectively), as compared to the Honduran and Salvadoran banking industry’s average NPL coverage ratio of 181.7% and 118.1%, respectively.

To date, our robust growth has not led to a deterioration of our loan portfolio due to our risk-management experience across our commercial and retail segments. In the commercial segment, which represented 73.6% of our total net loan portfolio as of June 30, 2017, we focus on the higher-quality clients in each sector of the economy, which allows us to maintain lower NPL levels. In retail lending, we target higher credit-worthy individuals, with job stability, low indebtedness and good commercial and personal references. As of June 30, 2017, our NPL and NPL coverage ratios were 1.1% and 93.4%, respectively.

Diversified funding base with competitive funding cost

We have access to diverse sources of funding, including traditional deposits (from both commercial and retail clients) and debt securities placed in local and international capital markets. For the three-month period ended June 30, 2017 and the year ended March 31, 2017, 70.6% and 69.0% of our total funding base, respectively, was comprised of traditional deposits. Our deposit base is broad and fragmented, such that we are not dependent on a certain type of client, which provides us with a competitive and consistent average cost of funding of 3.6% annualized for the three-month period ended June 30, 2017, 3.6% for the year ended March 31, 2017, 3.6% for the year ended March 31, 2016, and 3.7% for the year ended March 31, 2015. As of June 30, 2017, deposits were comprised of approximately 2.1 million accounts.

According to the GSB, Banco Industrial, our main subsidiary, has been the leading banking institution in deposits in Guatemala, with a market share of demand, savings, and term deposits of 30.3%, 23.9%, and 19.6% respectively, as of June 30, 2017. Our bank in Honduras, Banpaís occupies the fifth place in total deposits in Honduras according to the CNBS, with a market share of 10.4%, and specific market shares in demand, savings, and term deposits of 9.5%, 7.9% and 13.6%, respectively, as of June 30, 2017.

 



 

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In order to further diversify our funding base and improve duration matching, we regularly access the international capital markets to provide our subsidiaries with long-term funding and regulatory capital at competitive costs. Since 2007, we have raised over US$2,155 million in funding from the international capital markets.

Efficient operational platform supported by best-in-class technology

Through the use of advanced technology, we are focused on providing high-quality services to our clients in an efficient manner. Through our electronic banking platform, we offer retail clients different options for performing transactions, including through ATMs, web channels, apps and SMS. For our commercial clients, we offer an integral solution through a web page to carry out remote banking operations in a quick and secure manner directly from their offices. For the three-month period ended June 30, 2017 and the year ended March 31, 2017 respectively, approximately 67.8% and 65.2% of our total banking transactions in Guatemala, 47.0% and 41.3% of our banking transactions in Honduras and 10.9% and 12.0% of our banking transactions in El Salvador were conducted electronically.

We have our own telecommunications infrastructure consisting of a microwave network that interconnects most of our points of service in Guatemala, Honduras and El Salvador, thus facilitating efficient communication and improving customer service. In addition, we offer an integrated regional banking service through an electronic platform (web page) called Regional Connection (Conexión Regional), which allows our clients to perform financial transactions between their accounts in Guatemala, Honduras, and El Salvador.

Our commercial activities are supported by our Client Relationship Management system (“CRM”). We believe that our CRM provides us with a competitive advantage by allowing us to segment our clients based on, among other factors, profitability, income level, consumption preferences and location. Our CRM platform allows us to service our clients more efficiently and improves productivity by allowing us to better identify our clients’ needs and target cross-selling opportunities.

We believe that our focus on technology has been a key driver in generating significant operational efficiencies. We have also implemented a cost-reduction strategy, which has helped us realize higher profit margins in our products and services. For the three-month period ended June 30, 2017 our efficiency ratio was 53.9% as compared to our efficiency ratios of 54.7% and 55.2% for the years ended March 31, 2017 and 2016, respectively. Our total productivity per employee, calculated as operating and administrative expenses over the number of employees, stood at US$35,587.8 per employee (annualized) for the three-month period ended June 30, 2017, and US$31,683.4 and US$30,993.4 for the years ended March 31, 2017 and 2016, respectively.

Experienced management team, highly involved board of directors

Our senior management has significant experience in the banking and financial services industry and the know-how to identify and offer products and services that meet our clients’ needs, while maintaining effective risk management and strong profitability levels. Since 1967, Banco Industrial has had only two Chairmen and two Chief Executive Officers and a stable senior management team with an average of over 20 years with the company.

The experience of our senior management in the industry ranges between 10 and 38 years and most of our senior managers have master’s degrees in their relevant fields of specialization from leading business schools in Latin America and the United States. In addition, we are focused on attracting, developing and maintaining highly qualified personnel.

Our approach to promotion and succession focuses on identifying and internally developing the talent needed for the future. This allows us to create a stronger administrative team and preserve our work culture.

 



 

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Additionally, our board of directors is made up of well-known and recognized entrepreneurs in Guatemala with experience in the country’s largest industries such as textiles, food and beverages, cement, agroindustry, pharmaceutical and commercial products, among others. Our directors, including our independent directors, participate in all key governance committees and actively supervise our operations. Our directors’ experience in the financial industry ranges between 15 and 45 years. Our executive committee consists of our most senior directors, with an average of over 20 years of experience with the company. Our executive committee is required to meet at least quarterly but may meet more frequently if deemed necessary. In addition, because some of the boards of directors of our subsidiaries, such as Banco Industrial, are comprised of certain of the same members as our executive committee, members of our executive committee meet more frequently to discuss the operations of our subsidiaries.

Our Strategy

Over the course of our history we have developed a successful business strategy, which has allowed us to become Guatemala’s leading financial institution and expand our operations to attractive markets in Central America. This strategy provides us a basis for consistent profitable growth while adhering to sound risk-management policies. Beginning in 1995, a core element of our strategy has been the growth and expansion of our retail banking platform. We are also looking to increase market share in the small- and medium-enterprise (“SMEs”) and microfinance businesses, while maintaining our strategy of profitable growth combined with high-quality risk-management systems. We also aim to continue growing our other Central American operations by strengthening our business in Honduras and El Salvador and replicating our proven successful business model in other Central American countries, such as Panama.

We expect to achieve these objectives through the following strategies:

Increase our market share in high-margin businesses

As of June 30, 2017, our loan exposure was mainly concentrated in the commercial segment, representing 73.6% of our total net loan portfolio while the retail segment represented 26.4% of our total net loan portfolio, compared to our loan exposure of 73.9% and 26.1% in the commercial and retail segments, respectively, as of March 31, 2017. We believe the retail segment, as well as SMEs, provide not only great potential for growth, but also the ability to increase our financial margins. Further penetrating these segments will contribute to higher interest rates when compared to those charged to large corporations.

We will seek growth in the retail segment through a dual strategy of cross-selling with our existing clients, offering key retail products such as credit cards, payroll loans, mortgages, auto loans and other consumer loans, as well as through the generation of new clients as a result of the expansion of service points and entry into new market niches.

We aim to achieve growth in SME clients by creating partnerships with associations and organizations that bring together SMEs, with the aim of developing products and services within this segment, such as the development of a revolving credit line program designated for working capital needs for the members of the Chamber of Commerce and Industry in Guatemala.

In order to maximize cross-selling efforts, we have implemented a CRM platform that closely monitors the number of products per client, which has helped us identify opportunities to offer additional financial services to the clients of our banking and non-banking subsidiaries with an emphasis on meeting individual customer needs identified by our sales force.

 



 

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Capitalize on low banking penetration and increase our presence in rural areas

According to the World Bank, only 40.8% of the adult population (above 15 years old) of Guatemala had an account at a formal financial institution as of December 31, 2014; the same metric for Brazil, Colombia, Peru, Mexico and Chile was 68.1%, 38.4%, 29.0%, 38.7% and 63.2%, respectively (most recent data available). We believe that this low penetration rate creates a growth opportunity for us, which we plan to capitalize upon pursuant to the following strategies:

 

    developing financial products and services adapted to our microfinance customer needs, including loans, payment methods, insurance and specialized branches;

 

    increasing our network of correspondent agents in rural areas, enabling the population of these areas to have access to financial services through points of service in well-established businesses recognized in the community, providing a more familiar environment for them; and

 

    focusing on the family remittance business, which continues to represent a significant market opportunity in our existing geographic markets, allowing us to offer other banking services to the beneficiaries, like savings accounts, health and life insurance, mortgage products and credit cards, among others.

Continue to focus on monitoring and managing risks across all business areas

We have an experienced team focused on monitoring and managing risks across all business areas, including operational, market, liquidity and credit risks. Historically, we have experienced stable, low NPL ratios, well below the average NPL ratios for the countries in which we operate. Our overall NPL ratio as of June 30, 2017 was 1.1%; NPL ratios for our commercial banking portfolio and our retail banking portfolio were 0.5% and 2.8% as of June 30, 2017, respectively. As we continue to further penetrate higher-margin segments, by means of our strong risk-management system, we plan to take measures to ensure that growth in these segments does not lead to deterioration in our loan portfolio quality.

Sustain momentum in insurance

We intend to continue growing our personal insurance business by offering our clients differentiated and simplified products focused on client segmentation and specific distribution-channel needs, including branches, telemarketing and third-party networks. Guatemala offers opportunities for growth in the insurance segment due to its low penetration with a 1.2% ratio of gross premiums written-to-GDP as of December 31, 2016, according to the GSB and the Guatemalan Central Bank. We expect that future growth opportunities will arise from increased insurance needs of existing clients across all lines of business and the acquisition of new clients, mainly in health and life insurance.

Recently, the Guatemalan government has made certain proposals that could, if implemented, result in the occurrence of the following events: implementation of mandatory third-party liability insurance for automobile drivers (auto), reform or privatization of pensions in Guatemala (health and life), and widespread insuring of state-owned assets such as highways, bridges, and public sector buildings (property and casualty). Our insurance companies are well-structured to capitalize on any of these opportunities, should they arise, and are actively promoting the development of these market opportunities.

Additionally, in September 2014, we acquired Grupo Sermesa, which we believe is one of the largest hospital groups in Guatemala by bed count, with 302 beds across six hospitals as of June 30, 2017. We intend to vertically integrate our medical operations with our accident and health insurance business to drive growth. Furthermore, we believe that this acquisition will not only benefit the insurance business but also constitute a significant growth opportunity for us given Guatemala’s limited infrastructure and staffing in the healthcare field, which generates pent-up demand for medical services in the country. For a discussion of our insurance strategy, see “Business—Insurance Segment.”

 



 

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Further develop our Central American operations

Our presence in Guatemala, Honduras, El Salvador and Panama has enabled us to position ourselves as one of the largest financial conglomerates in Central America, and represents a platform for expansion to the other countries in the region. In the development of our regional expansion we will continue to pursue growth opportunities both organically and through acquisitions.

We intend to continue capitalizing on economies of scale and operating efficiencies through the implementation of the standards and best-practices of Banco Industrial’s business model in Guatemala in our banking operations in Honduras, El Salvador and Panama.

Despite our growing presence in Central America, we believe that Guatemala will continue to represent the majority of our operations and that the Central American expansion will continue to be centered through economies with significant ties to our clients and to the overall Guatemalan economy.

Risks and Challenges

Our ability to leverage our strengths and successfully pursue our strategies is subject to a high degree of risk. See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should consider before deciding to invest in our shares. Such risks include, but are not limited to, the following:

 

    Our growth and profitability depend on the level of economic activity in the countries where we operate, particularly Guatemala.

 

    Social conditions in the countries where we operate, especially Guatemala, impact our financial condition and results of operations. Central American countries have experienced and continue to experience significant violence and criminal activity.

 

    Political developments in the countries where we operate, notably Guatemala, Honduras and El Salvador have an effect on our growth and profitability. Recent corruption scandals in Guatemala and Honduras have prompted large protests, investigations and resignations of government officials. The Guatemalan President and Congress that took office in January 2016 have experienced some political difficulties that have led to reduced effectiveness. However, their general business outlook remains positive.

 

    We are a financial group established as a holding company and all of our operations are conducted by our subsidiaries. Our ability to pay dividends to you will depend on the ability of our subsidiaries to pay dividends to us.

 

    Our loan and investment portfolios and financial results are exposed to market risks, including interest rate changes, inflation, and currency fluctuations.

 

    Our banking business is subject to credit risk; estimating exposure to credit risk involves subjective and complex judgments and requires continuous upgrades to our credit management system.

 

    A decline in the asset quality of our loan portfolio may have an adverse impact on results of operations and financial condition of our banking business.

 

    Our insurance business is exposed to risks related to differences between underwriting and reserve assumptions and actual claims experienced.

 

    Our subsidiaries are subject to extensive regulation and supervision in the countries in which we operate and changes in existing regulations or the implementation of future regulations may adversely affect our results of operations and financial condition, and the value of our assets may be impaired due to regulatory initiatives and procedures.

 



 

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    Increased competition may adversely affect our results of operations.

 

    We depend on key personnel and the loss of any of our experienced principal officers, key employees or senior managers could negatively affect our ability to execute our business strategy.

Corporate Information

Our registered office in Panama is located at Samuel Lewis Avenue and 57th Street, Obarrio, Panama City, Panama. The principal executive offices of our main subsidiaries are located at 7a Avenida 5-10, Zona 4, Centro Financiero, Torre 1, Nivel 2, 01004, Guatemala, Guatemala. Our telephone number at this address is + (502) 2420 3625. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011. Our website address, the contents of which are not part of and are not incorporated into this prospectus, is www.corporacionbi.com.

 



 

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THE OFFERING

The following is a brief summary of the terms of this offering and should be read together with the more detailed information and financial data and statements contained elsewhere in this prospectus. For a more complete description of our shares, see “Description of Share Capital and Articles of Incorporation” in this prospectus.

 

Issuer

Bicapital Corporation.

 

Underwriters

Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities LLC.

 

Offering

We are offering          shares of common stock.

 

Offering price

We expect the offering price to be between US$          and US$          per share of common stock.

 

Option to purchase additional shares

We have granted the underwriters an option to purchase up to          additional shares at the offering price (less the underwriting discounts and commissions) exercisable at any time for a period of 30 days from the date of this prospectus.

 

Use of proceeds

We estimate that the net proceeds from the offering, after the deduction of commissions and the estimated offering expenses payable by us, will be approximately US$          (or approximately US$          if the option to purchase additional shares is fully exercised) based on the mid-point of the price range on the cover page of this prospectus.

 

  We intend to use the net proceeds from this offering to increase capital in our banking subsidiaries, mainly Banco Industrial. See “Use of Proceeds.”

 

Share capital before and after offering

We have three classes of authorized stock: (i) common, (ii) limited voting preferred and (iii) non-voting preferred. As of the date of this prospectus, we have              shares of common stock and              non-voting preferred shares issued and outstanding. We have no limited voting preferred shares issued or outstanding. Immediately after the offering, we will have              shares of common stock issued and outstanding, assuming no exercise of the underwriters’ option to purchase additional shares of common stock (or              shares of common stock if the option to purchase additional shares is fully exercised). See “Description of Share Capital and Articles of Incorporation.” The figures above do not take into account the Perpetual Exchange Right in favor of Banco Industrial’s shareholders. See “Description of Share Capital and Articles of Incorporation—Outstanding Capital Stock and Voting Rights.”

 



 

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Voting rights

Holders of shares of our common stock will have one vote per share on all matters submitted to a vote of holders of shares of common stock. Holders of shares of limited voting preferred stock will have one vote only for certain particular matters. See “Description of Share Capital and Articles of Incorporation.”

 

Dividends

We are a holding company and, as such, our ability to pay dividends is subject to the ability of our subsidiaries to pay dividends to us. Non-voting preferred shares have a preferential right to receive dividends. See “Description of Share Capital and Articles of Incorporation—Outstanding Capital Stock and Voting Rights.” Shares of common stock may only receive dividends after dividends are paid on non-voting preferred shares. See “Dividends and Dividend Policy” for further information on our dividend policy.

 

Listing

We will apply to list our shares on NYSE under the symbol “BICA.”

 

Transfer agent

American Stock Transfer & Trust Company, LLC. will act as our transfer agent for the offering of our shares of common stock.

 

Lock-up agreements

We, our directors and officers and certain of our shareholders (approximately 125 shareholders), who are extended family members of our directors and officers, or entities in which our directors and officers participate as shareholders or directors, which together with our directors and officers hold 68.60% of our common shares, have agreed that, subject to certain exceptions, we and they will not, offer, sell, contract to sell, pledge or otherwise dispose of, (or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise), directly or indirectly, including the filing (or participation in the filing) of a registration statement with the SEC in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Securities Act, and the rules and regulations of the SEC promulgated thereunder with respect to, any of our shares or any securities convertible into, or exercisable or exchangeable for our shares, or publicly announce an intention to effect any such transaction, without the prior written consent of the representatives on behalf of the underwriters, for a period of 180 days after the date of this prospectus. See “Underwriting—Lock-up Restrictions.”

 

Taxation

For a discussion of material Panamanian, Guatemalan and U.S. federal income tax consequences relating to an investment in our shares, see “Taxation.”

 

Risk factors

Investing in our shares involves risks. See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should consider before deciding to invest in our shares.

 



 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION

The following table sets forth our summary consolidated financial information. The summary financial data as of March 31, 2017 and 2016 and for the years ended March 31, 2017, 2016 and 2015 have been derived from our Annual Financial Statements included in this prospectus. The summary financial data as of June 30, 2017 and for the three-month periods ended June 30, 2017 and 2016 have been derived from our Interim Financial Statements included in this prospectus. Our Financial Statements were prepared in accordance with IFRS as issued by the IASB. The summary financial data as of March 31, 2015, 2014 and 2013 and for the years ended March 31, 2014 and 2013, have been derived from our audited consolidated financial statements prepared in accordance with IFRS as issued by the IASB (not included in this prospectus).

The financial data included below and elsewhere in this prospectus are not necessarily indicative of our future performance. Results for the three-month period ended June 30, 2017 are not necessarily indicative of results expected for the full year. The summary consolidated financial information presented below should be read in conjunction with our Financial Statements, “Presentation of Financial and Other Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in this prospectus.

 

     For the three-month period
ended June 30,
    For the year ended March 31,  
     2017      2016     2017     2016     2015     2014     2013  
     (US$ in millions)     (US$ in millions)  

CONSOLIDATED STATEMENT OF PROFIT AND LOSS

               

Interest income

     251.3        232.0       959.2       889.1       819.0       738.6       624.2  

Interest expense

     (119.9      (113.7     (457.3     (416.4     (387.0     (371.8     (310.5
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     131.4        118.3       501.9       472.8       432.0       366.8       313.7  

Loan impairment charges

     (12.1      (11.8     (51.5     (51.6     (56.5     (28.5     (16.9
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net fee and commission income

     42.6        34.8       185.9       168.8       159.9       171.8       156.7  

Net premium income

     7.3        5.8       26.7       22.3       31.4       26.1       20.2  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit for banking
and insurance operations

     169.2        147.1       662.9       612.3       566.8       536.1       473.6  

Operating and administrative expenses

     (120.8      (103.6     (426.9     (398.3     (365.8     (326.7     (276.1

Other operating income, net

     15.5        13.3       28.8       26.6       18.7       13.6       9.8  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before tax

     63.8        56.7       264.9       240.6       219.6       223.0       207.4  

Income tax

     (9.2      (6.3     (34.7     (24.7     (33.7     (41.8     (45.4

Profit for the period
Attributable to:

     54.6        50.4       230.1       215.9       185.9       181.2       162.0  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity holders of Bicapital

     52.6        48.6       223.0       208.9       179.3       174.9       155.9  

Non-controlling interest

     2.0        1.8       7.2       7.0       6.6       6.3       6.1  

Basic and diluted earnings per share (US$)(1)(2)

     0.47        0.44       1.99       1.89       1.63       1.59       1.43  

Weighted average number of ordinary shares outstanding (millions)(2)

     112.6        110.4       112.1       110.4       110.3       110.1       108.9  

 

(1)  Basic earnings per share is determined dividing profit after taxes attributable to the equity holders of Bicapital by the weighted average number of ordinary shares outstanding during the respective year. Diluted earnings per share reflect the potential dilution assuming the conversion of all dilutive potential ordinary shares. See Note 3u and Note 30 to our Annual Financial Statements for more information.
(2) Adjusted to reflect the Reverse Stock Split. See “Description of Share Capital and Articles of Incorporation—Outstanding Capital Stock and Voting Rights.”

 



 

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     As of
June 30,
     As of March 31,  
     2017      2017      2016     2015     2014     2013  
     (US$ in millions)  

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

              

Assets

              

Cash and cash equivalents

     1,825.2        1,731.9        1,760.7       1,427.9       1,078.6       1,082.9  

Investment securities

     3,454.3        3,578.4        3,422.9       3,212.2       3,149.7       2,737.0  

Loan portfolio, net

     9,027.6        8,834.4        7,880.0       7,128.2       6,372.3       5,512.0  

Restricted cash

     112.7        112.6        91.8       79.8       115.6       105.7  

Property and equipment, net

     332.4        342.0        310.9       297.7       267.3       253.0  

Goodwill

     146.8        146.8        137.9       139.0       136.3       135.9  

Other(1)

     465.3        441.6        397.9       355.6       289.5       285.0  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     15,364.3        15,187.6        14,002.0       12,640.4       11,409.3       10,111.6  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

              

Deposits and obligations from customers

     9,473.1        9,134.1        8,571.4       7,735.5       7,079.1       6,600.1  

Financing

     2,947.6        3,124.6        2,821.1       2,593.2       2,221.5       1,594.6  

Debt securities issued

     792.0        782.6        644.1       626.8       561.2       521.2  

Accruals and deferred income

     299.5        267.6        257.4       239.9       213.1       198.8  

Subordinated liabilities

     196.4        193.1        193.0       192.9       195.8       178.3  

Insurance reserves

     157.3        168.8        142.2       115.1       106.0       104.9  

Other(2)

     123.6        134.1        214.2       98.0       90.4       81.6  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     13,989.4        13,804.7        12,843.3       11,601.6       10,467.2       9,279.6  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Equity

              

Share capital

     423.8        437.4        392.3       391.8       389.3       386.4  

Reserves

     569.5        460.3        259.4       247.5       221.3       180.1  

Capital contributions

     54.1        7.1        7.1       7.1       7.1       7.3  

Retained earnings

     267.1        420.3        487.2       373.5       298.0       234.5  

Other comprehensive income

     21.8        20.7        (22.5     (13.8     (4.7     (6.4
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Equity attributable to owners of Bicapital

     1,336.3        1,345.9        1,123.5       1,006.0       911.0       801.8  

Non-Controlling interests

     38.5        37.1        35.2       32.8       31.1       30.2  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     1,374.9        1,382.9        1,158.7       1,038.8       942.1       832.0  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total equity and liabilities

     15,364.3        15,187.6        14,002.0       12,640.4       11,409.3       10,111.6  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Other assets are composed of: other receivables, prepayments, assets under insurance contracts, foreclosed assets, intangible assets and investment property.
(2) Other liabilities are composed of: government repurchase agreements, provisions, liabilities under insurance contracts, derivative liabilities held for risk management, employee benefits and deferred tax.

 



 

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     As of and for the
three-month period
ended June 30,
    As of and for the year ended
March 31,
 
     2017     2016     2017     2016     2015     2014     2013  
     (in percentages, unless otherwise indicated)  

SELECTED FINANCIAL RATIOS

              

Performance Ratios

              

Net interest margin(1)

     4.0     3.9     4.0     4.1     4.3     3.9     3.9

Efficiency ratio(2)

     53.9     56.2     54.7     55.2     54.2     53.2     51.4

Return on average assets(3)

     1.4     1.4     1.6     1.6     1.6     1.7     1.7

Return on average shareholders’ equity(4)

     16.3     17.6     18.8     19.4     19.4     21.7     22.7

Fee income ratio(5)

     25.2     23.7     28.0     27.6     28.2     32.0     33.1

Capital and Balance Sheet Structure

              

Average total equity as a percentage of average total assets(6)

     8.8     8.1     8.4     8.4     8.0     7.6     7.5

Total equity as a percentage of total assets(7)

     8.9     8.2     9.1     8.3     8.2     8.3     8.2

Tier 1 capital as a percentage of risk-weighted assets(8)

     12.6     12.3     12.9     12.3     11.6     11.8     11.9

Capital ratio of Bicapital(9)

     14.3     14.7     14.7     14.7     14.2     14.8     15.0

Capital ratio of Banco Industrial(9)(10)

     12.7     11.4     12.6     12.5     11.3     11.9     13.5

Capital ratio of Banpaís(9)(11)

     12.9     12.7     12.5     12.7     13.0     13.2     12.2

Capital ratio of BI El Salvador(9)(12)

     18.1     17.5     18.1     18.3     19.8     20.4     19.6

Total loans, net as a percentage of total deposits

     95.3     90.2     96.7     91.9     92.1     90.0     83.5

Credit Quality Ratios

              

NPL ratio(13)

     1.1     1.2     1.0     1.2     1.1     1.7     1.8

Loan impairment charges as a percentage of total gross loans(14)

     0.4     0.8     0.6     0.5     1.0     0.4     0.4

NPL coverage ratio(15)

     93.4     92.8     95.9     93.5     104.6     90.7     95.7

Allowance for loan losses as a percentage of total loans(16)

     1.0     1.1     1.0     1.2     1.2     1.7     1.8

Other Data

              

Dividends (US$ in millions)(17)

     —         —         96.7       88.9       83.3       77.6       71.4  

Dividends per share (in US$)(18)

     —         —         0.85       0.80       0.75       0.70       0.65  

Employees

     13,582       12,970       13,473       12,850       12,211       10,386       9,850  

Branches

     799       772       802       768       654       627       568  

ATMs(19)

     1,202       1,115       1,171       1,100       1,066       998       979  

 

(1)  Refers to net interest income divided by average interest-earning assets. Average interest-earning assets are determined on average monthly balances. Net interest margin for the three-month period ended June 30, 2017 is annualized and calculated as net interest income for the period multiplied by four, divided by an average of interest earning assets as of March 31, 2017 and June 30, 2017.
(2) 

Refers to operating and administrative expenses before depreciation and amortization divided by the period’s profit for banking and insurance operations plus loan impairment charges for the years ended March 31, 2017, 2016 and 2015. For the three-month periods ended June 30, 2017 and June 30, 2016 refers to operating and administrative expenses before depreciation and amortization minus operating and administrative expenses from our health care subsidiaries, divided by the period’s profit for banking and insurance operations plus loan impairment charges. For the three-month periods ended June 30, 2017 and June 30, 2016, operating and administrative expenses from our health care subsidiaries have been excluded

 



 

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  from our consolidated operating and administrative expenses as a result of a reclassification of our income from health care services as other operating income. For the three-month period ended June 30, 2017 a US$6.4 million non-income tax expense from the intercompany sale of land has been excluded from our consolidated operating and administrative expenses which is considered a non-recurring transaction.
(3)  Refers to profit for the period divided by average total assets. The average balances for total assets have been calculated on the basis of monthly balances. ROAA for the three-month period ended June 30, 2017 is annualized and calculated as profit for the period multiplied by four, divided by an average of total assets as of March 31, 2017 and June 30, 2017.
(4)  Refers to profit for the period divided by average shareholders’ equity. The average balances for shareholders’ equity have been calculated on the basis of our monthly balances. ROAE for the three-month period ended June 30, 2017 is annualized and calculated as profit for the period multiplied by four, divided by an average of shareholders’ equity as of March 31, 2017 and June 30, 2017.
(5)  Refers to net fee and commission income divided by profit for banking and insurance operations.
(6)  The average balances for total equity and total assets have been calculated on the basis of monthly balances.
(7)  Refers to the end-of-period total equity divided by the end-of-period total assets.
(8)  Refers to the end-of-period Tier 1 capital divided by the end-of-period risk-weighted assets. See Note 5 to our Annual Financial Statements.
(9) Refers to the ratio of total regulatory capital to total risk-weighted assets. Total regulatory capital and risk-weighted assets are calculated in accordance with the guidelines established by the local regulator of each country in which our subsidiaries operate. Regulatory capital and risk-weighted assets for us and for Banco Industrial are calculated in accordance with regulatory requirements of the GSB. Regulatory capital and risk-weighted assets for Banpaís are calculated in accordance with regulatory requirements of the CNBS, while the regulatory capital and risk-weighted assets for BI El Salvador are calculated in accordance with regulatory requirements of the SSF. See Note 5 to our Annual Financial Statements.
(10)  Banco Industrial’s capital ratio, on an unconsolidated basis, was in each case above the regulatory requirement of 10.0% of the GSB.
(11)  Banpaís’s capital ratio, on an unconsolidated basis, was in each case above the regulatory requirement of 12.0% of the CNBS.
(12)  BI El Salvador’s capital ratio, on an unconsolidated basis, was in each case above the regulatory requirement of 14.5% of the SSF.
(13)  Based on the loan activity carried out by our banking subsidiaries (Banco Industrial, Banpaís and BI El Salvador). Calculated as total NPL divided by total loans.
(14)  Figures for the three-month period ended June 30, 2017 and June 30, 2016 have been annualized.
(15) Refers to the end-of-period allowance for loan losses divided by the end-of-period NPL.
(16) Refers to the end-of-period allowance for loan losses divided by the end-of-period total loans.
(17) Dividends include dividends declared and paid by Bicapital for each year presented. See Notes 3 and 28b to our Annual Financial Statements. Dividends are declared and paid in U.S. dollars.
(18) Adjusted to reflect the Reverse Stock Split. See “Description of Share Capital and Articles of Incorporation—Outstanding Capital Stock and Voting Rights.”
(19) Excludes third-party network ATMs.

 



 

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RISK FACTORS

An investment in our shares involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information presented in this prospectus, before buying our shares. Any of the following risks, if they actually occur, could have a material adverse effect on our financial condition and results of operations. In that event, the market price of our shares could decline, and you may lose all or part of your investment.

Risks Relating to Our Business Overall

We are a holding company, and all of our operations are conducted by our subsidiaries. Our ability to pay dividends to you will depend on the ability of our subsidiaries to pay dividends to us.

As a holding company, all of our operations are conducted through our subsidiaries. Accordingly, our ability to pay dividends to you will depend upon our receipt of dividends and other distributions from our subsidiaries. There are various regulatory restrictions in Guatemala, El Salvador, Honduras, Panama and The Bahamas that may limit our subsidiaries’ ability to pay dividends or make other payments to us, such as the obligation to maintain minimum regulatory capital and liquidity requirements. Our ability to pay dividends may also be affected by repatriation taxes or similar taxes because we and our subsidiaries are domiciled in different jurisdictions. In addition, our subsidiaries may incur indebtedness or enter into other arrangements containing terms that may restrict or prohibit the payment of dividends, the making of other distributions, or the making of loans to us. To the extent our subsidiaries do not have funds available or are otherwise restricted from paying dividends to us, our ability to pay dividends to our shareholders will be adversely affected.

The only assets that we currently hold are our equity interests in our subsidiaries. As a holding company, our right to receive any distribution of assets from our subsidiaries upon any subsidiary’s liquidation or reorganization or otherwise (and thus the ability of the holders of our shares to benefit from such distribution), will be subject to the prior claims of creditors of that subsidiary, except to the extent that any claims by us as a creditor of such subsidiary may be recognized as such. Accordingly, holders of our shares will effectively be subordinated to all existing and future liabilities of our subsidiaries, and, in the event of any claim against us, our shareholders may have recourse only against our assets, and not those of our subsidiaries.

We may not be able to continue our historical growth.

We have experienced significant growth, and our subsidiaries’ loans, deposits, premiums, assets under management and profits have all experienced substantial growth since our formation. We may not be able to continue to grow strongly or at all in the future due to numerous factors, including factors beyond our control affecting the economies of the countries in which we operate, such as:

 

    a slowdown in the growth of the economies of Guatemala, Honduras, Panama and El Salvador;

 

    exchange rate fluctuations;

 

    increased inflation;

 

    changes in regulations and governmental banking or insurance policies;

 

    the degree of penetration of financial services, especially banking and insurance products, in Guatemala, Honduras, Panama and El Salvador;

 

    increased competition in the financial services and insurance markets; and

 

    increased costs of funding and increases in loan delinquencies and defaults.

These factors could have a material adverse effect on our financial condition and results of operations.

 

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Increased competition and consolidation in our industry may adversely affect our financial condition and results of operations.

We face significant competition from other Central American financial groups and from international financial institutions in providing financial services to the Central American retail and commercial banking sectors. In many markets in which we have operations, there are no restrictions on foreign competitors entering those markets and providing financial services. The banking markets in Central America are highly competitive. Over the last decade, the trend in the Central American banking markets has been toward consolidation and the establishment of regional platforms. As foreign participants with more reserves enter the market, attracted by Central America’s low banking penetration, we may be at risk of losing a portion of our market share to new larger local institutions. Our subsidiaries have experienced strong competition from local and foreign banks, as well as from department stores that offer credit cards and the local and international capital markets that lend to commercial clients.

Competition may reduce the average interest rates and insurance premiums that our subsidiaries can charge their clients, increase the average rates they must pay on deposits, and may negatively affect loan growth and place pressure on margins. Some of our subsidiaries’ competitors may have access to greater resources and may be more successful in the development of products and services that compete directly with theirs. If competitors are successful in developing products and services that are more effective or less expensive than the products and services offered by our subsidiaries, they may be unable to compete successfully. Even if our subsidiaries’ products and services prove to be more effective than those developed by other competitors, such other competitors may be more successful in marketing and positioning their products and services because of greater financial resources or marketing strategies, among other factors. Our subsidiaries may not be able to grow or maintain their market share if they are not able to match their respective competitors’ pricing or keep pace with their development of new products and services. Adverse impacts resulting from increased competition could have a material adverse effect on our financial condition and results of operations.

We and our subsidiaries are subject to extensive regulation and supervision in the countries in which we operate, and changes in existing regulations or the implementation of future regulations may adversely affect our financial condition and results of operations.

We and our subsidiaries are subject to extensive banking and insurance regulations and may be subject to other regulations, including antitrust, consumer protection and data protection regulations, in the jurisdictions in which we operate that are designed to maintain the safety and reliability of banks and insurance companies, ensure their compliance with economic and other obligations and limit their exposure to risk. These regulations or new regulations may increase our cost of doing business or limit our activities. In addition, a breach of regulatory guidelines could expose us to potential liabilities or sanctions.

We and our banking subsidiaries are subject to extensive regulation and supervision by the local banking authorities in the countries in which we operate (the GSB, the CNBS, the PSB and the SSF). The Guatemala Superintendency of Banks, the Honduras National Commission of Banks and Insurance, the Superintendency of Finance of El Salvador and the Panamanian Superintendency of Banks (Superintendencia de Banco de Panama or “PSB”) also oversee all of Banco Industrial, Seguros El Roble, Banpaís, Seguros del País, Bi-Bank and BI El Salvador’s subsidiaries and their operations, respectively. The GSB, the CNBS, the PSB and the SSF have general administrative responsibilities over banks, other financial institutions and insurance companies, including authority to set loan loss provisions, limits on fees, regulatory capital requirements and other minimum capital adequacy and reserve requirements. In addition, on a periodic basis, banks and insurance companies are required to provide the GSB, the CNBS, the PSB and the SSF all information necessary to allow for their evaluation of their financial performance.

Changes in the regulation and supervision of ourselves and our subsidiaries could have a material adverse effect on our financial condition and results of operations. For example, these regulatory bodies regulate, and have in the past changed, capital structure and deposit reserve requirements, interest paid on deposit reserves, the

 

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amount of deposit reserves for which no interest is payable, rules regarding provisions for loan losses and legal lending limits. Furthermore, our subsidiaries could be required to increase their level of provisions in response to pro-cyclical provisioning requirements that could be activated by regulators under certain favorable macroeconomic conditions.

The laws or regulations of the countries in which we operate may be amended, adopted, enforced or interpreted in a manner that could have an adverse effect on our financial condition and results of operations. Any failure to adopt adequate responses to such changes in the regulatory framework may have an adverse effect on our financial condition and results of operations. Antitrust, consumer protection and data protection legislation may prevent or reduce our existing ability to package financial products and thus decrease our profitability per customer. We cannot predict whether and to what extent new laws and regulations, or changes to existing laws and regulations, affecting our subsidiaries’ business will be adopted in the future, the timing of any such adoption and what effect such events would have on our financial condition and results of operations.

The operations of our subsidiaries require the maintenance of banking, insurance and other licenses and any non-compliance with applicable license and operating obligations could have a material adverse effect on our financial condition and results of operations.

All banks and insurance companies established in the jurisdictions in which we operate require certain authorizations issued by the applicable regulators in order to operate. Our banking and insurance subsidiaries currently have the required licenses in order to conduct their operations in their corresponding jurisdictions. Although we believe our subsidiaries are currently in compliance with their respective existing material license and reporting obligations, they may not be able to maintain the necessary licenses in the future. For example, future changes to existing laws and regulations, or stricter interpretation or enforcement of existing laws and regulations, could impair our subsidiaries’ ability to comply with such laws and regulations and thus with the terms of their licenses. If our subsidiaries do not comply with applicable statutory and regulatory requirements, the regulatory authorities could preclude or temporarily suspend them from carrying on some or all of their banking or insurance activities or monetarily penalize them.

The loss of a license, a breach of the terms of a license by any of our subsidiaries or the failure to obtain any further required licenses in the future could have a material adverse effect on our financial condition and results of operations. If any of our subsidiaries loses its licenses or is required to seek additional licenses, then such subsidiary will be unable to perform its operations as it is currently authorized, which could have a negative impact on our financial condition and results of operations.

Under certain circumstances, the regulatory authorities in the countries in which we operate may intervene in our and our subsidiaries’ operations in order to prevent, control and reduce the effects of a failure of our operations.

The regulators that oversee our banking and insurance subsidiaries operations may intervene upon the occurrence of any of the following events, depending on the applicable law:

 

    suspension of payment of their obligations or inability to pay their obligations as they come due;

 

    breach any of their commitments to the regulators under a surveillance regime imposed by them;

 

    performance of business in a manner detrimental to the public interest or the interests of its depositors or other creditors; and

 

    contravention of banking law or any other law, order or regulation made thereunder, or any term or condition subject to which the license was issued.

In the event of an intervention, the applicable regulator has the power to institute certain measures, such as limiting the decisions that could be taken at a shareholders’ meeting, suspending our normal activities and

 

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segregating certain assets and liabilities for transfer to third parties, among others. Furthermore, the regulators have the power under the applicable laws to declare the wind-up or liquidation of any bank or insurance company if an intervention extends for longer than a certain period of time, which period may be extended, and any company that has been subject to an intervention may not pay dividends or grant loans to its shareholders.

The adoption of new international banking and insurance guidelines may cause our subsidiaries to require additional capital and could cause their cost of funds to increase, which could have a material adverse effect on our financial condition and results of operations.

In December 2009, the Basel Committee announced its intention to issue a new framework (“Basel III”), related to the regulation, supervision and risk management of the banking industry. Among the changes adopted by Basel III were raising the quality, consistency and transparency of the capital base; enhancing risk coverage; reducing procyclicality and promoting countercyclical buffers; and addressing systemic risk and interconnectedness.

Our banking subsidiaries have implemented Basel I regulations regarding the minimum capital adequacy requirements for risk-weighted assets in each country in which they operate. The minimum level of net capital on an unconsolidated basis as a percentage of risk weighted assets, or capital ratio, is 10.0% in Guatemala, 12.0% in Honduras, 14.5% in El Salvador and 8.0% in Panama.

We have also implemented several measures within our operations and our banking subsidiaries related to Basel II and Basel III requirements as described below.

For Basel II, methodologies have been authorized by the relevant board of directors or the management board, as appropriate, to allow compliance with the first pillar related to the calculation of expected loss in credit risk, liquidity-adjusted value-at-risk and interest and exchange rate risk. For operational risk, the alpha factor remains to be calculated. For Pillar II and Pillar III, the regulator has constant supervision in-situ and ex situ, allowing constant communication and transparency. In addition, a website available to shareholders, investors, clients and other stakeholders is updated monthly.

With regards to Basel III, our subsidiaries monitor liquidity coverage ratios weekly and report liquidity bands to the regulator on a monthly basis in accordance with Basel II criteria. Currently, stress scenarios are being reconstructed to incorporate systemic risk and interconnectedness implementing the short- and long-term liquidity ratios under Basel III.

In connection with countercyclical buffers, our subsidiaries have been establishing basic reserves to cover our portfolio growth, however, we are developing methodologies to implement dynamic reserves, as even though our reserve coverage indicator is above required levels, it is a priority for each institution to comply with Basel III. Although each institution has calculated the total value-at-risk, specific reserves to cover them have not yet been established.

Our operations in Guatemala, Honduras and El Salvador are not currently required to adhere to Basel II and Basel III requirements. Our operations in Panama are required to adhere to Basel III provisions regarding minimum capital adequacy requirements, the rules for determining credit and risk-weighted assets and the guidelines for calculating our short-term liquidity ratio coverage. We cannot assess the impact of any such requirements in the future on our financial condition or results of operations.

We may need additional capital in the future, and may not be able to obtain such capital on acceptable terms, or at all.

In order for us to grow, remain competitive, enter into new businesses and meet regulatory capital adequacy requirements, we may require new capital in the future. Moreover, we may need to raise additional capital in the

 

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event of large losses in connection with any of our activities that result in a reduction of our shareholders’ equity. Our ability to obtain additional capital in the future is subject to a variety of uncertainties, including:

 

    our future financial condition, results of operations and cash flows;

 

    any necessary government regulatory approvals;

 

    conditions in global credit and capital markets;

 

    general market conditions for capital-raising activities by financial institutions or commercial banks; and

 

    economic, political and other conditions in Central America.

We may not be able to obtain additional capital in a timely manner or on acceptable terms or at all. If we are unable to obtain additional capital, our financial condition and results of operations could be materially and adversely affected.

The banking and insurance markets are exposed to macroeconomic shocks that may negatively impact income, and consequently, could have a material adverse effect on our financial condition and results of operations.

Our banking business is currently concentrated in corporate clients. As a result, our loan portfolios are subject to global and regional economic development that have a significant adverse effect on Central America, particularly Guatemalan businesses. Part of our growth strategy is to increase our participation and market share in the retail, SME and microfinance businesses. As a result, our loan portfolio is vulnerable to macroeconomic shocks that could negatively impact the household and business income of our clients and result in increased loan losses. Furthermore, because the penetration of bank lending products in the Central American retail and SME sectors has been historically low, there is no basis to evaluate how the retail and SME markets will perform in the event of an economic crisis, such as a recession or a significant devaluation of the quetzal or lempira, in the case of Guatemala and Honduras, respectively, and our historical loan loss experience may not be indicative of the performance of our loan portfolios in the future.

Our investment portfolio is exposed to significant capital market risks related to changes in interest rates and credit spreads, as well as other investment risks, which may adversely affect our financial condition and results of operations.

The performance of our investment portfolio has a significant impact on our financial results. A failure to successfully execute our investment strategy could have an impact on our financial condition and results of operations. For example, as part of their operations, our insurance and banking subsidiaries invest in various financial instruments and other assets, primarily debt and fixed income. They have established position limits in accordance with their overall risk management policy and with regulatory requirements. Our investment portfolio is subject to a variety of market risks beyond our control, including risks relating to general economic conditions, interest rate fluctuations, pre-payment or reinvestment risk, liquidity risk and credit risk. Although we attempt to manage market risks through, among other things, stressing diversification and conservation of principal and liquidity, it is possible that, in periods of economic weakness or periods of turmoil in capital markets, we may experience significant losses in our portfolio, which would have a material adverse effect on our financial condition and results of operations.

A reduction in the value of our sovereign debt portfolios could have an adverse effect on our financial condition and results of operations.

Our portfolio of investment securities primarily consists of sovereign bonds, mainly securities issued or guaranteed by the Guatemalan government. We are exposed to significant credit, market and liquidity risks

 

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associated with sovereign debt. As of June 30, 2017, 93.5% of our investment portfolio consisted of government securities. As of June 30, 2017, 83.3% of our investment portfolio was invested in securities issued by the Guatemalan government and the Guatemalan Central Bank in the international and domestic capital markets, which represented 89.1% of our government securities. A significant decline in the value of these government securities could materially and adversely affect our debt securities portfolio and, consequently, our financial condition and results of operations.

Reductions in the credit ratings of our subsidiaries could increase our cost of borrowing funds and make our ability and that of our subsidiaries to raise new funds, attract deposits and renew maturing debt more difficult.

The credit ratings of our subsidiaries, particularly Banco Industrial, are an important component of our liquidity profile. Among other factors, our credit ratings and those of our subsidiaries are based on the financial strength, credit quality and concentrations in the loan portfolio of our subsidiaries, the level and volatility of earnings, capital adequacy, the quality of management, the liquidity of our balance sheet, the availability of a significant base of core retail and commercial deposits and our ability to access a broad array of funding sources. Our lenders and those of our subsidiaries may be sensitive to the risk of a ratings downgrade. For instance, on June 3, 2015, Moody’s downgraded its rating for Banco Industrial as a consequence of the implementation of Moody’s new bank rating methodology, in line with actions taken with respect to other Central American and Caribbean banks. Similarly, on October 28, 2016, Standard and Poor’s revised its outlook from stable to negative for Banco Industrial as a result of similar downgrade for Guatemala. Although these downgrades have not impacted our cost of funding to date, a future downgrade in our credit ratings could not only adversely affect perception of our financial stability but could also increase the cost of refinancing our existing obligations, raising funds in the capital markets and borrowing funds from private lenders. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Funding.”

We may not be able to detect money-laundering and other illegal or improper activities fully or on a timely basis, which could expose us to additional liability and harm our business.

We are required to comply with applicable anti-money laundering, anti-terrorism laws and other regulations in Guatemala, El Salvador, Honduras, Panama and The Bahamas. These laws and regulations require us, among other things, to adopt and enforce “know your customer” policies and procedures and to report suspicious and large transactions to the applicable regulatory authorities. While we have adopted policies and procedures aimed at detecting and preventing the use of our banking network for money laundering activities and by terrorists and terrorist-related organizations and individuals generally, such policies and procedures have in some cases only been recently adopted to address new laws and may not completely eliminate instances where our operations may be used by other parties to engage in money laundering and other illegal or improper activities. Moreover, due to the high levels of drug trafficking and organized crime in the countries in which we operate, we face an increased risk of the use of our banking network for money-laundering purposes. To the extent we fail to fully comply with applicable laws and regulations, the relevant government agencies to which we report have the power and authority to impose fines and other penalties on us. For instance, on August 2015, the Unit of Special Supervision (Intendencia de Verificación Especial) of the GSB imposed administrative fines on Banco Industrial for certain reporting omissions, including a failure to maintain certain information and documentation regarding customers and delays in reporting one suspicious transaction. The aggregate amount of these fines amounted to US$85,000, which was not material to our operations. In addition, our business and reputation could suffer if clients use us for money-laundering or illegal or improper purposes. Enforcement action by the relevant government agencies may limit our ability to collect amounts due from such entities and therefore affect our financial results.

In addition, U.S. trade and economic sanctions laws, including regulations maintained by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) may impact us since any failure to comply with these laws and regulations could lead to reputational harm. U.S. export control laws and economic sanctions laws prohibit certain transactions with U.S. embargoed or sanctioned countries, governments, persons and entities. Any foreign entity or national who does not comply with these prohibitions could be designated as Specially

 

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Designated Narcotics Traffickers or as Specially Designated Nationals pursuant to the Foreign Narcotics Kingpin Designation Act (“Kingpin Act”) for playing a significant role in international narcotics trafficking. Any investigation by OFAC may also have a negative impact on the political and economic stability of a country’s banking sector.

For instance, in Honduras, on October 7, 2015, in connection with the OFAC’s designation of certain members of the Rosenthal family (including Jaime Rolando Rosenthal Oliva, Yani Benjamin Rosenthal Hidalgo, and Yankel Antonio Rosenthal Coello) as Specially Designated Narcotics Traffickers, OFAC designated several businesses associated with the members of the Rosenthal family as Specially Designated Nationals. The businesses designated include Inversiones Continental (Panamá), S.A. de C.V., known as Grupo Continental, the parent company of a conglomerate of businesses in Honduras that encompasses the Honduran bank Banco Continental S.A. (“Banco Continental”) and Inversiones Continental, S.A. (“Inversiones Continental”). In reaction to this designation, on October 12, 2015, the CNBS took control of Banco Continental and is subjecting it to a forced liquidation, which may directly affect us. In 2003, Banpaís acquired 100% of the shares of Banco Sociedad General de Inversiones (“Banco Sogerín”) and all of Banco Sogerín’s assets and liabilities were transferred to Banpaís. In 2007, we acquired Banpaís. As a result of Banpaís’ acquisition of Banco Sogerín, Banpaís holds, as assets on its balance sheet, 600,769 shares of Banco Continental, which represent less than 1% of Banco Continental’s shares, and 658,194 shares of Inversiones Continental, which in our books represents 3.8% of Inversiones Continental’s shares. The carrying value of both investments is US$2.2 million as of June 30, 2017. Additionally, Banpaís has an outstanding loan of US$263,000 to Yani Benjamín Rosenthal Hidalgo, and Westrust Bank (International) Ltd., our Bahamas subsidiary, has an outstanding loan of US$2.0 million to Banco Continental, both also included in our balance sheet as part of our loan portfolio. We cannot predict the outcome of the liquidation proceedings and therefore the level of impairment of the abovementioned financial assets. Moreover, any instability within the Honduran banking sector caused by these actions by the U.S. Department of Treasury and the CNBS may affect our Honduran subsidiaries and consequently cause a material adverse effect on our business.

A similar situation occurred in Panama, on May 5, 2016, when OFAC designated Balboa Bank & Trust Corp. (“Balboa Bank”) and its subsidiaries, Balboa Securities, Corp. and Pershore Investments, S.A., as Specially Designated Nationals and Blocked Persons in the context of the “Waked Money Laundering Organization”. As a result of this designation, among other things, Balboa Bank suffered a retention of funds in excess of US$36 million in the United States and other jurisdictions and, on July 1, 2016, the PSB took control of the bank, ordered its restructuring and required the establishment of a plan for the bank to be sold to a bona fide third party.

We are subject to regulatory inspections, examinations, inquiries and audits in the jurisdictions in which we operate, and future sanctions, fines and other penalties resulting from such inspections and audits could materially and adversely affect our financial condition and results of operations or our reputation.

We are subject to comprehensive regulation and supervision by banking and insurance authorities in Guatemala, El Salvador, Honduras, Panama and The Bahamas. These regulatory authorities have broad powers to adopt regulations and other requirements affecting or restricting virtually all aspects of our capitalization, organization and operations, including the imposition of anti-money laundering measures and the authority to regulate the terms and conditions of credit and insurance operations that can be applied by banks and insurers. Moreover, banking and insurance regulatory authorities in the jurisdictions in which we operate possess significant powers to enforce applicable regulatory requirements in the event of our non-compliance, including the imposition of fines, sanctions or the revocation of licenses or permits to operate our business. In the event we encounter significant financial problems or became insolvent or in danger of becoming insolvent, the relevant banking and insurance authorities would have the power, after a sequence of actions aimed at reverting our financial problems, to ultimately take over our management and operations.

Banking and financial services laws and regulations in the jurisdictions in which we operate are subject to change. Any such changes may have an adverse impact on, among other things, our ability to make and collect

 

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loans and extend credit on favorable terms and conditions, including interest rates, which could materially and adversely affect our financial condition and results of operations.

We may be subject to litigation proceedings, including proceedings relating to tax matters that could materially and adversely affect our financial condition and results of operations if an unfavorable ruling were to occur.

From time to time, we may become involved in litigation and other legal proceedings relating to claims arising from our operations in the normal course of business. Litigation is subject to inherent uncertainties, and unfavorable rulings may occur. We cannot assure you that these or other legal proceedings will not materially affect our ability to conduct our business in the manner that we expect or otherwise adversely affect our financial condition and results of operations should an unfavorable ruling occur.

We are subject to operational risks, including fraud, employee errors and system failures.

Our business depends on the ability of our subsidiaries to process large numbers of transactions efficiently and accurately. Operational risks and losses can result from fraud, employee error, failure to properly document transactions or to obtain proper internal authorization, failure to comply with regulatory requirements, breaches of conduct of business rules, equipment failures, natural disasters or the failure of external systems, among others. Our subsidiaries’ procedures may not be effective in controlling each of the relevant operational risks they face.

Our businesses rely heavily on data collection, processing and storage systems, the failure of which could materially and adversely affect the effectiveness of our risk management and internal control system as well as our reputation, financial condition and results of operations.

Our businesses are highly dependent on the ability to timely collect and process a large amount of financial and other information across numerous and diverse markets and products of our subsidiaries, at a time when transaction processes have become increasingly complex with increasing volume. The proper functioning of financial control, accounting or other data collection and processing systems is critical to our businesses and to our ability to compete effectively. A partial or complete failure of any of these primary systems could materially and adversely affect our decision-making process, our risk management and internal control systems, the quality of our service, as well as our ability to respond on a timely basis to changing market conditions. If we cannot maintain an effective data collection and management system, our business operations, reputation, financial condition and results of operations could be materially and adversely affected.

We are also dependent on information systems to operate websites, process transactions, respond to customer inquiries on a timely basis and maintain cost-efficient operations. We may experience operational problems with our information systems as a result of system failures, denial of service attacks, viruses, computer hackers or other causes. Any material disruption or slowdown of our systems could cause information, including data related to customer requests, to be lost or to be delivered to our clients with delays or errors, which could reduce demand for our services and products and could materially and adversely affect our financial condition and results of operations.

Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely manner could adversely affect our competitiveness, financial condition and results of operations.

Our ability to remain competitive will depend in part on our ability to upgrade our, and our subsidiaries’, information technology infrastructure on a timely and cost-effective basis. We must continually make significant investments and improvements in our information technology infrastructure in order to remain competitive. Any expansion of our operations will require us to improve our information technology infrastructure, including

 

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maintaining and upgrading our software and hardware systems and back-office operations. The information available to and received by our management through our existing information systems may not be timely or sufficient to manage risks as well as to plan for and respond to changes in market conditions and other developments in our operations. In addition, we may experience difficulties in upgrading, developing and expanding our information technology systems quickly enough to accommodate our growing customer base. Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely manner could materially and adversely affect our competitiveness, financial condition and results of operations.

Our subsidiaries are subject to cybersecurity risks.

Our subsidiaries are subject to cybersecurity risks including unauthorized access to privileged information, technological assaults on our infrastructure aimed at stealing information, fraud or interference with regular service and interruption of our services to clients or users resulting from the exploitation of these vulnerabilities. While our subsidiaries have never experienced a material breach of cybersecurity, we cannot assure you that we will not experience any such breach in the future, and any failure to anticipate, identify or offset such threats of potential cyber-attacks or breaches of our security in a timely manner could materially and adversely affect our financial condition and results of operations.

Our subsidiaries engage in transactions with our related parties, and these transactions may create the potential for, or result in, conflicts of interest or that others may not consider to be on an arm’s-length basis.

Our subsidiaries have in the past and may in the future engage in a variety of commercial and financial transactions with certain of our shareholders, directors, executive officers or their families, any one of which may create the potential for, or result in, a conflict of interest between those entities, certain of our shareholders and us. In addition, our board of directors is made up of well-known and recognized entrepreneurs in Guatemala who represent the country’s largest business groups, which also may result in conflicts of interest.

In the case of loans to related parties, there are specific regulations and limits established by the regulators in the jurisdictions in which we operate. In addition, our policies require that we conduct such transactions on an arm’s-length basis that reflect the market rates within the industry for such services. See “Regulation and Supervision” and “Related Party Transactions.”

While we believe we have complied with these policies and regulations, future commercial and financial transactions between us and related parties may not be carried out on market terms. To the extent that the price we pay for any assets or services acquired from companies owned or controlled by our subsidiaries, entities affiliated with our shareholders, or directors, executive officers or their families exceeds the market value of such assets or services, or it is not as productive use of our cash as other uses, our financial condition and results of operations could be adversely affected.

We may not be able to make successful acquisitions.

A component of our strategy is to identify and pursue growth-enhancing strategic opportunities. As part of that strategy, we have acquired interests in various financial institutions. We regularly evaluate strategic acquisitions, inside and outside of the countries where we operate. Strategic acquisitions or investments could expose us to risks with which we have limited or no experience. In addition, potential acquisitions in the countries where we conduct our business and elsewhere may be subject to regulatory approval. We may be unsuccessful in obtaining any such approval or we may not obtain approvals on terms that are optimal for us—particularly in view of our subsidiaries’ market share in certain of their respective markets and industries.

We must necessarily base any assessment of potential acquisitions or investments on assumptions with respect to operations, profitability and other matters that may subsequently prove to be incorrect. Future

 

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acquisitions, as well as other investments, may not produce anticipated synergies or perform in accordance with our expectations and could adversely affect our operations and profitability. In addition, new demands on our existing organization and personnel resulting from the integration of new acquisitions could disrupt our operations and adversely affect our financial condition and results of operations.

We and our subsidiaries depend on key personnel.

We depend on the services of our directors, officers and other key employees and those of our subsidiaries. The loss of any of our experienced key personnel could negatively affect our ability to execute our business strategy. In addition, our future success also depends on our continuing ability to identify, hire, train and retain other qualified sales, marketing and managerial personnel. Competition for such qualified personnel is intense in the jurisdictions in which we operate, given that there is a limited pool of qualified talent and we may be unable to attract, integrate or retain qualified personnel at levels of experience or compensation that are necessary to maintain our quality and reputation or to sustain or expand our operations. Our business could be materially and adversely affected if we cannot attract and retain these necessary personnel.

Our introduction of new products and services may not be successful.

As part of our business strategy, we plan to develop and introduce new products and services that complement those we currently offer and meet the ever-changing needs of our clients. However, we cannot guarantee that we will develop any such products or services or that these new products and services will be successful once they are offered to our target clients.

In the event of a macroeconomic shock, the value of our insurance businesses investments may also suffer losses, including their investment property. A macroeconomic shock may also negatively impact wealth generation in Central American and, in turn, impact the demand for our non-banking services.

Banking and insurance regulations applicable to us differ from those in the United States and other countries.

While many of the policies underlying Guatemalan, Salvadoran, Honduran, Panamanian and Bahamian regulations (including banking and insurance regulations) are similar to those underlying regulations applicable to companies in other countries, these regulations may differ in material respects from regulations applicable to companies in other countries, including those in the United States. Capital adequacy requirements for banks and insurance companies under these regulations differ from those under U.S. regulations and may differ from those of other countries.

We could be adversely affected by the impairment of other financial institutions.

Our subsidiaries’ ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial services institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Our subsidiaries routinely execute transactions with counterparties in the financial services industry, including commercial banks, investment banks and insurance companies. Defaults or non-performance by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by one or more of our subsidiaries’ counterparties, which, in turn, could have a material adverse effect on our financial condition and results of operations.

If we are not able to protect our intellectual property and invest successfully in technological development, our financial condition and results of operations could be negatively affected.

Our industry is subject to rapid and significant technological changes. We rely in part on third parties, including some of our existing and potential competitors, for the development of and access to new technologies.

 

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We expect that new technologies applicable to the payments industry will continue to emerge, and these new technologies may be superior to, or render obsolete, the technologies we currently use in our subsidiaries’ services. Because of evolving payments technologies and the competitive landscape, we may not, among other things, be successful in increasing or maintaining our market share in the financial services sector, which could have an adverse effect on our financial condition and results of operations. Our ability to develop, acquire or access competitive technologies or business processes on acceptable terms may be limited by patent rights that third parties, including existing and potential competitors, may assert. In addition, our ability to adopt new technologies may be inhibited by a need for industry-wide standards, by resistance to change from our clients, by the complexity of our systems or by intellectual property rights of third parties.

We rely on a variety of measures to protect our intellectual property and proprietary information, including copyrights, trademarks, patents and controls on access and distribution. These measures may not prevent misappropriation or infringement of our intellectual property or proprietary information and a resulting loss of competitive advantage. In addition, competitors or other third parties may allege that our systems, processes or technologies infringe on their intellectual property rights. Given the complex, rapidly changing and competitive technological and business environment in which we operate, and the potential risks and uncertainties of intellectual property-related litigation, we cannot assure you that a future assertion of an infringement claim against us will not cause us to lose significant revenues, incur significant license, royalty or technology development expenses, or pay significant monetary damages.

Risk Factors Relating to Our Banking Business

Our financial results and those of our subsidiaries are constantly exposed to market risk, such as fluctuations in interest rates and other market risks, which may materially and adversely affect our financial condition and results of operations.

Market risk refers to the probability of variations in our financial margin, or in the market value of our assets and liabilities, due to interest rate volatility and exchange rate fluctuations (for currency risks, see below). Changes in interest rates affect the following areas of our business, among others:

 

    financial margin;

 

    volume of loans originated;

 

    market value of our financial assets; and

 

    gains or losses from sales of loans and securities.

Increases in short-term interest rates could reduce financial margin, which comprises the majority of our revenue. A significant portion of our subsidiaries’ assets, including loans, are long-term assets. In contrast, most deposits are short-term. When interest rates rise, our banking subsidiaries must pay higher interest on deposits while interest earned on assets does not rise as quickly, which causes profits to decrease. Interest rate increases could result in adverse changes in our financial margin, reducing its growth rate or even resulting in losses against previous periods.

Increases in interest rates may reduce the volume of loans originated by our banking subsidiaries. Sustained high interest rates have historically discouraged clients from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets.

Increases in interest rates may reduce the value of our financial assets. Our banking subsidiaries hold a substantial portfolio of loans and debt securities that have both fixed and variable interest rates. The market value of a security with a fixed interest rate generally decreases when prevailing interest rates rise, which may have an adverse effect on our financial condition and results of operations. In addition, we may incur costs (which, in turn, will impact our results) as our subsidiaries implement strategies to reduce future interest rate exposure. The market value of an obligation with a variable interest rate can be adversely affected when interest rates increase, due to a lag in the implementation of repricing terms.

 

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Our banking business is subject to credit risk; estimating exposure to credit risk involves subjective and complex judgments and requires continuous upgrades to our credit management system.

A number of our banking business’s financial products expose us to credit risk, including loans, financial leases, lending commitments and derivatives. Our banking business estimates and establishes reserves for credit risk and potential credit losses. An important part of its credit risk management system is to employ an internal credit rating system to assess the particular risk profile of a client. This process involves subjective and complex judgments, and takes into account both quantitative and qualitative factors, including projections of economic conditions and assumptions on the ability of our banking business’s borrowers to repay their loans. This process is subject to human error as our banking business’s employees may not always be able to assign an accurate credit rating to a client, which may result in exposure to higher credit risks than indicated by our banking business’s risk rating system. Additionally, our banking business may not be able to upgrade its credit risk management system on a timely basis or detect risks before they occur. Furthermore, our banking business’s employees may not be able to effectively implement the resources or tools available to them, which may increase our banking business’s credit risk. As a result, failure to implement effectively, consistently follow or continuously refine our banking business’s credit risk management system may result in a higher risk exposure for our banking system, which could materially and adversely affect our financial condition and results of operations.

In addition, the amount of our banking business’s NPL may increase in the future, including loan portfolios that it may acquire through auctions or otherwise, as a result of factors beyond its control, such as changes in the income levels of its borrowers, increases in the inflation rate or an increase in interest rates, the impact of macroeconomic trends and political events affecting the countries where we conduct our business, or events affecting specific industries. Any of these developments could have a negative effect on the quality of its loan portfolio, causing it to increase provisions for loan losses and resulting in reduced profits or in losses, adversely affecting our financial condition and results of operations.

Currency risks may adversely affect our loan and investment portfolios as well as our ability to service our U.S. dollar-denominated obligations.

We are exposed to currency risk any time we hold an open position in a currency other than quetzales or lempiras. Volatility in quetzal and lempira exchange rates in Guatemala and Honduras could result in higher risks associated with such positions. We cannot assure you that we will not experience losses with respect to these positions in the future, any of which could have an adverse effect on our financial condition and results of operations.

As of June 30, 2017, the distribution of our net loans in U.S. dollars and local currency was 53.9% and 46.1%, respectively, and the distribution of our deposits in U.S. dollars and local currency was 32.7% and 67.3%, respectively. As of June 30, 2017, we had US$3,298.2 million of debt denominated in U.S. dollars, representing 83.8% of our total outstanding debt. Our U.S. dollar-denominated debt must be serviced with funds generated by our subsidiaries. A devaluation or depreciation in the value of the currencies of the countries in which we operate compared to the U.S. dollar could adversely affect our ability to service our debt.

In addition, any devaluation or depreciation of the quetzal or lempira against the U.S. dollar could have a negative impact on the ability of our subsidiaries’ clients to repay loans and make premium payments. Similarly, despite any devaluation, and absent any change in foreign exchange regulations, our subsidiaries would be required to continue to repay dollar-denominated deposits in U.S. dollars. While we seek to manage the gap between foreign currency-denominated assets and liabilities, we may not be successful in doing so. Therefore, any significant devaluation of the quetzal and lempira against the U.S. dollar could have a material adverse effect on our financial condition and results of operations.

 

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If we are unable to effectively control the level of NPL in our loan portfolio, or if our loan loss reserves are insufficient to cover actual loan losses, our financial condition and results of operations may be materially and adversely affected.

We cannot assure you that we will be able to effectively control and reduce the level of NPL in our loan portfolio. Changes in the financial condition or credit profiles of our banking business’s clients and increases in inflation or interest rates could have a negative effect on the quality of its loan portfolios, causing it to increase loan loss provisions and resulting in reduced profitability. NPL can negatively impact our financial condition and results of operations. In particular, the level of NPL may increase in the future as a result of factors beyond our banking business’s control, such as economic conditions and political events affecting Central America generally or specific sectors of the economy.

A substantial number of our banking business’s clients are individuals and SMEs. These clients are more likely to be adversely affected by downturns in the Central American economy than large corporations and high-income individuals. For example, unemployment directly affects the ability of individuals to obtain and repay consumer and residential mortgage loans. Furthermore, because the penetration of bank lending products in the Central American retail sector historically has been low, there is no basis on which to evaluate how the retail sector will perform in the event of an economic crisis, such as a recession or a significant devaluation, and our historical loan loss experience may not be indicative of the performance of our loan portfolio in the future. Consequently, our banking business may experience higher levels of NPL, which could result in increased loan loss provisions due to defaults by, or deterioration in the credit profiles of, individual borrowers. NPL and resulting loan losses may increase materially in the future and adversely affect our banking business’s financial condition and results of operations.

Existing allowances for loan losses may not be adequate to cover an increase in the amount of NPL or any future deterioration in the overall credit quality of our loan portfolio. As a result, if the credit quality of our loan portfolio deteriorates we may be required to increase our loan loss reserves, which may adversely affect us. Moreover, there is no precise method for predicting loan and credit losses, and we cannot assure you that our loan loss reserves are or will be sufficient to cover actual losses. If our banking business is unable to control or reduce the level of its NPL or other poor credit quality loans, our financial condition and results of operations could be materially and adversely affected.

Our banking business’s loan portfolios have grown substantially in recent years. As default rates generally increase with the age of loans, the level of NPL may lag behind the rate of growth in loans but may increase when growth slows or the loan portfolios become more mature. As a result, historic loan loss experience may not necessarily be indicative of future loan loss experience.

We are subject to capitalization requirements that limit our capital flexibility.

Pursuant to Article 64 of the Guatemalan Banks and Financial Groups Law, Congressional Decree 19-2002 and Regulation JM-46-2004 issued by the Guatemalan Monetary Board, Banco Industrial is required to maintain specified levels of net capital on an unconsolidated basis as a percentage of risk-weighted assets, or capital ratio, of 10% or above. As of June 30, 2017, Banco Industrial had a capital ratio of 12.7% on an unconsolidated basis. Pursuant to Honduran capitalization requirements, Banpaís also is required to maintain specified levels of net capital on an unconsolidated basis as a percentage of risk-weighted assets, or capital ratio, of 12% or above. As of June 30, 2017, Banpaís had a capital ratio of 12.9% on an unconsolidated basis. Pursuant to Panamanian capitalization requirements, Bi-Bank is required to maintain specified levels of net capital on an unconsolidated basis as a percentage of risk-weighted assets, or capital ratio, of 8.0% or above. As of June 30, 2017, Bi-Bank had a capital ratio of 23.0% on an unconsolidated basis. Pursuant to Salvadoran capitalization requirements, BI El Salvador is required to maintain specified levels of net capital on an unconsolidated basis as a percentage of risk-weighted assets, or capital ratio, of 14.5% or above. As of June 30, 2017, BI El Salvador had a capital ratio of 18.1% on an unconsolidated basis.

 

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Our ability to comply with these capitalization requirements in Guatemala, El Salvador, Honduras, Panama and other jurisdictions where we conduct business may be affected by changes in economic or business conditions, results of operations or other events beyond our control.

Guidelines for loan classification and provisions in the jurisdictions in which we operate may be less stringent than those in other countries.

Banking regulations in the jurisdictions in which we operate require us to classify each loan or type of loan according to a risk assessment that is based on specified criteria, to establish corresponding reserves and, in the case of some non-performing assets, to write off the loans. The criteria to establish reserves include both qualitative and quantitative factors. Regulations relating to loan classification and determination of loan loss reserves in the jurisdictions in which we operate are generally different or less stringent than those applicable to banks in the United States and certain other countries. Under U.S. rules, our level of loan loss reserves may be different than our current reserve levels. We may be required or deem it necessary to increase our loan loss reserves in the future. Increasing loan loss reserves could materially and adversely affect our financial condition and results of operations.

The change in the composition of our mix of products could adversely affect our results.

Given the nature of the products that our subsidiaries offer to clients, there is a wide range of interest rates and commissions by product. For example, the interest rates and commissions that are charged in the commercial banking segment are less than the interest rates and commissions that are charged in the retail banking segment. This reflects the greater risk associated with personal loans compared to commercial loans. Similarly, our participation and market share in the retail segment and SME and microfinance businesses results in our loan portfolio being vulnerable to macroeconomic shocks that could negatively impact the household income of their clients. If in the future our mix of products is concentrated more on products with smaller margins and commissions, then our financial condition and results of operations could be affected. Our financial condition and results of operations could also be affected if a greater concentration of products with higher margins (and therefore greater risk) is accompanied by an increase in our allowance for loan losses.

Liquidity risks may adversely affect our business.

Our banking assets have grown rapidly over the past several years, driven in part by the expansion of our business. Historically, one of our principal sources of funds has been customer deposits. Historically, adverse economic developments in Latin America, even if not attributable to the financial system, have resulted in deposits flowing out of the banks as depositors seek to shield financial assets. Any such run on deposits could create liquidity problems. Since we rely heavily on deposits and other short-term liabilities for our funding, we cannot assure you that in the event of a sudden or unexpected shortage of funds in the banking systems in which we operate or otherwise we will be able to maintain our levels of funding without adversely affecting our liquidity or increasing our cost of funding. In addition, non-compliance with our financial obligations or those of our subsidiaries could accelerate such obligations or those of our subsidiaries, or affect our ability to obtain additional funding.

Our banking business may be unable to realize the collateral or guarantees securing their loans to cover the outstanding principal and interest balance of those loans, which may adversely affect our financial condition and results of operations.

As of June 30, 2017, 46.1% of our banking business’s total loans were secured by collateral or guarantees, including real estate, assets pledged in financial leasing transactions and other assets that are located primarily in Guatemala, Honduras, El Salvador and Panama. The value of collateral may significantly fluctuate or decline due to factors beyond our control, including, for example, economic and political conditions in the country. An economic slowdown may lead to a downturn in the Central American real estate market, which may, in turn,

 

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result in declines in the value of real estate securing loans to levels below the principal balances of those loans. Any decline in the value of the collateral securing loans may result in reduced recoveries from collateral realization and have an adverse impact on our financial condition and results of operations.

Our banking business also makes loans on the basis of guarantees from relatives, affiliates or associated persons of borrowers. To the extent that guarantors encounter financial difficulties due to economic conditions, personal or business circumstances, or otherwise, our banking business’s ability to enforce such guarantees may be impaired.

In addition, our banking business may face difficulties in enforcing its rights as secured creditors against borrowers, collateral or guarantees. In particular, timing delays and procedural problems in realizing against collateral, as well as judicial interpretations of the law that are protective of borrowers, may make it difficult to foreclose on collateral, realize against guarantees or enforce judgments in their favor, which could materially and adversely affect our financial condition and results of operations.

Our banking business’s loan and investment portfolios are subject to risk of prepayment, which may result in reinvestment of assets on less profitable terms.

Our banking business’s loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a declining interest rate environment, prepayment activity increases, which reduces the weighted average lives of our earning assets and adversely affects our banking business’s operating results. Our banking business would also be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has an adverse impact on our banking business’s loan portfolios, since prepayments could shorten their weighted average life, which may result in a mismatch in funding or reinvestment at lower yields.

Our banking business is subject to market and operational risks associated with derivative transactions.

Our banking business enters into derivative transactions primarily on behalf of clients. Our banking business is subject to market and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of a counterparty to perform its obligations to our banking business).

Market practices and documentation for derivative transactions in Guatemala, El Salvador, Honduras, Panama and The Bahamas may differ from those in other countries. In addition, the execution and performance of these transactions depend on our banking business’s ability to develop adequate control and administration systems, and to hire and retain qualified personnel. These risks associated with derivative transactions could materially and adversely affect our banking business’s financial condition and results of operations.

We are subject to counterparty risk in our banking business.

Our banking business is exposed to counterparty risks in addition to credit risks associated with lending activities. Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivative contracts under which counterparties have obligations to make payments to our banking business, or executing securities, futures or currency trades from proprietary trading activities that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries. Any significant increases in exposure to any of these non-traditional risks, or a significant decline in credit risk or bankruptcy of any of the counterparties, could materially and adversely affect their financial condition and results of operations.

 

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Default by one or more of our banking business’s largest borrowers could adversely affect its financial condition and results of operations.

The aggregate outstanding loans to our banking business’s ten largest borrowers represented 10.4% of our consolidated total loan portfolio at June 30, 2017. Default on loans by one or more of these borrowers may adversely affect our banking business’s financial condition and results of operations, and a default by a number of these borrowers could adversely affect their liquidity. Additionally, a significant withdrawal of deposits by a large number of their largest depositors could also adversely affect its liquidity.

New regulations relating to our retail credit card services in Guatemala could limit our business activities, product offerings and fees charged.

Our credit card business is subject to substantial regulation. For instance, the Guatemalan Congress recently approved Decree 7-2015, which came into effect in March 2016, which contained the Credit Card Law (Ley de Tarjetas de Crédito) that regulates credit card operations as well as the relationships among credit card issuers, operators, cardholders and affiliated establishments. The Credit Card Law includes, among other things, controls on the maximum interest rate applicable to financing operations, stern automatic restructuring mandates based on the cardholder reaching specified credit limit thresholds or on whether the cardholder is approaching insolvency, constraints on collection procedures, the creation of new oversight powers for the GSB over credit card issuers, the creation of criminal offenses related to credit card fraud, the requirement that all credit card issuers have credit card insurance in the event of theft and loss of credit cards, and certain transparency requirements regarding applicant’s credit history. Several parties, including Contécnica, challenged this statute before the Guatemalan Constitutional Court and on April 4, 2016 obtained a preliminary injunction, temporarily suspending the enforcement of the Credit Card Law until the Constitutional Court issues a ruling on the merits of the case. There is a possibility that before the final ruling is issued, a bill to introduce amendments to the Credit Card Law will be submitted to the Guatemalan Congress. As such, we cannot predict how or to what extent the Credit Card Law will ultimately affect our existing practices. When the preliminary injunction is lifted, the Credit Card Law and the regulations issued thereunder could potentially have a material adverse effect on our financial condition and results of operation. See “Regulation and Supervision—Guatemala—Credit Card Law” for more information.

Risks Factors Relating to Our Insurance Business

Increased competition may adversely affect our insurance business and its financial condition and results of operations.

The Guatemalan and Honduran insurance markets are also highly competitive. If our insurance business’s competitors obtain better access to independent brokers who sell insurance to clients we may experience an erosion in our market share. Any adverse impact on our insurance business resulting from increased competition could have a material adverse effect on our financial condition and results of operations.

Actual mortality and morbidity rates and other factors may differ from those assumed in the calculation of technical reserves and may have a material adverse effect on our insurance business’s financial condition and results of operations.

Insurance technical reserves are calculated on a monthly basis according to local regulations and converted to IFRS for our reporting purposes. Mortality tables recommended by our reinsurers inform our underwriting and premium pricing. Changes in the tables and assumptions we use may lead to increases in technical reserves and may have an adverse effect on the insurance business’s financial condition and results of operations. In addition, actual mortality and morbidity rates may differ from those assumed in the initial calculation of reserves at the time of the issuance of the policy and their periodic adjustments. Significant shortfalls could have a material adverse effect on our financial condition and results of operations.

 

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Our insurance business’s failure to underwrite and price insurance premiums accurately for the products it offers would have a material adverse effect on its financial condition and results of operations.

Our insurance business’s financial condition and results of operations depend on its ability to underwrite insurance policies and set premium rates accurately. Our insurance business must generate sufficient premiums to offset claim losses and cover operating and underwriting expenses to make a profit. In order to price insurance policies accurately, the business must collect and analyze a substantial volume of data, develop, test and apply appropriate rating formulae, closely monitor changes in trends in a timely fashion and project both severity and frequency of loss with reasonable accuracy. If the business fails to assess accurately the risks that it assumes or does not reinsure an appropriate level of risk, it may fail to establish adequate premium rates, which could reduce income and have a material adverse effect on its financial condition and results of operations.

An increase in the number of claims against our insurance business, and other events outside of our control, could affect our results.

Our insurance business maintains reasonable levels of claims in accordance with market standards for all our insurance products. Our main insurance products are: life, health and casualty (including fire, catastrophe, automobile and cargo). To maintain reasonable claim levels, our insurance subsidiaries supervise their network of claims adjusters and appraisers with a team of engineers and experts in different insurance business lines that inspects all the risks of our insurance subsidiaries, as well as claim reports for casualties and insured events. Our insurance subsidiaries have also established systems that enable them to detect and correct failures in the attention and payment of claims and in the corresponding costs.

Notwithstanding, there are factors which could increase the current level of claims against our insurance subsidiaries, such as an increase in vehicle thefts, a rise in repair costs for damaged assets, natural disasters and other catastrophic events like social uprisings, floods, earthquakes, hurricanes, among others. An increase in claims against our insurance business, in addition to events or failures in estimates relating to the reasonableness of reserves and the level of reserve provisions, could affect our financial condition and results of operations.

Differences between actual claims experience and underwriting and reserving assumptions could adversely affect our insurance business’s financial condition and results of operations.

Our life insurance business’s earnings depend significantly upon the extent to which our actual claims experience is consistent with the assumptions used in setting prices for our life insurance products and establishing liabilities for future policy benefits and claims. Our liabilities for future policy benefits and claims are established based on estimates by actuaries of how much will be needed to pay for future benefits and claims. We calculate these liabilities based on many assumptions and estimates, including the likelihood that a claim event will occur, estimated premiums to be received over the assumed life of the policy, the timing of the event covered by the insurance policy, the amount of benefits or claims to be paid and the investment returns on the investments that we make with the premiums that we receive. To the extent that actual claims experience is less favorable than the underlying assumptions that we use in establishing such liabilities, we could be required to increase our reserves. Due to the nature of the underlying risks and the high degree of uncertainty associated with the determination of liabilities for future policy benefits and claims, we cannot determine precisely the amounts that we will ultimately pay to settle our liabilities. Such amounts may vary from the estimated amounts, particularly when those payments may not occur until well into the future. We evaluate our liabilities periodically based on accounting requirements, which change from time to time the assumptions used to establish the liabilities, as well as our actual experience. We charge or credit change in our liabilities to expenses in the period the liabilities are established or re-estimated. If the liabilities originally established for future benefit payments prove inadequate, we must increase them. Such increases could adversely affect our financial condition and results of operations.

 

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Catastrophic events may adversely impact liabilities for policyholder claims and reinsurance availability.

Our insurance business is exposed to the risk of catastrophic events. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas; however, hurricanes, earthquakes, tsunamis and man-made catastrophes may produce significant damage or loss of life in larger areas. Claims resulting from natural or man-made catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year and could adversely affect our profitability, financial condition and results of operations. Also, catastrophic events could harm the financial condition of issuers of obligations that we hold in our investment portfolio, resulting in impairments to these obligations, and the financial condition of our reinsurers, and thereby increase the probability of default on reinsurance recoveries. Large-scale catastrophes may also reduce the overall level of economic activity in affected countries, which could hurt our business and the value of our investments. Our ability to write new business could also be affected. It is possible that increases in the value of our investments, caused by the effects of inflation or other factors, and geographic concentration of insured property, could increase the severity of claims from catastrophic events in the future.

Our life insurance business is exposed to the risk of catastrophic mortality, such as a pandemic or other event that causes a large number of deaths. Significant influenza pandemics have occurred three times in the last century; however, the likelihood, timing and severity of a future pandemic cannot be predicted. A significant pandemic could have a major impact on the global economy or the economies of particular countries or regions, including travel, trade, tourism, the health system, food supply, consumption, overall economic output and, eventually, the financial markets. In addition, if a pandemic affected our employees or the employees of our distributors or of other companies with which we do business, it could disrupt our business operations. The effectiveness of external parties, including governmental and non-governmental organizations, in combating the spread and severity of such a pandemic could have a material impact on the losses experienced by us. In our group insurance operations, a localized event that affects the workplace of one or more of our group insurance clients could cause a significant loss due to mortality or morbidity claims. These events could adversely affect our financial condition and results of operations.

Consistent with industry practice and accounting standards, we establish liabilities for claims arising from a catastrophe only after assessing the probable losses arising from the event. We cannot be certain that the liabilities that we have established will be adequate to cover actual claim liabilities.

Any decline in the availability of reinsurance, any increase in reinsurance costs, in particular as a consequence of environmental catastrophes, and/or an inability to pay, or untimely payment by, reinsurers could adversely affect our financial condition and results of operations.

As of June 30, 2017, 41.6% of our insurance business’s assumed risks in connection with our insurance portfolio is transferred to reinsurance companies. However, this transfer of risk to reinsurers does not relieve us of our obligations to policyholders. For that reason, we are exposed to the risk of the reinsurer’s inability to pay. Untimely payment or an inability of a reinsurer to pay could adversely affect our financial condition and results of operations. There is also a risk that due to, for example, environmental catastrophes, we will only be able to enter into reinsurance agreements at higher costs or will be unable to transfer certain risks to reinsurance companies in the future, which could also adversely affect our financial condition and results of operations.

Our insurance business is subject to market risks, which may materially and adversely affect our financial condition and results of operations.

Our insurance business is 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 insurance business’s investments.

 

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Changes in market conditions that may affect its financial condition and results of operations include fluctuations in inflation, interest and currency exchange rates, securities prices, changes in the implied volatility of interest rates and foreign exchange rates, among others.

Our insurance business is subject to litigation risks, including risks relating to the application and interpretation of contracts, and adverse outcomes in litigation and legal proceedings could adversely affect its financial condition and results of operations.

Our insurance business is subject to litigation risks, including risks relating to the application and interpretation of insurance and reinsurance contracts, and are routinely involved in litigation that challenges specific terms and language incorporated into property and casualty contracts, such as claims reimbursements, covered perils and exclusion clauses, among others, or the interpretation or administration of such contracts. See “Business—Legal Proceedings.”

Risks Relating to Guatemala and other Central American Markets

Guatemalan and Central American economic, political, social and other conditions and events may adversely affect our business.

Our financial performance may be significantly affected by general economic, political, social and other conditions and events in the markets where we operate, including Guatemala, Honduras, El Salvador and Panama. Many countries in Central America, including Guatemala, have suffered significant economic, political and social crises in the past, including civil strife and a significant level of violence and criminal activities, and severe weather and natural disasters, and these events may occur again in the future. We cannot predict whether changes in administrations will result in changes in governmental policies and whether such changes will affect our business. We may be adversely affected by many different factors, including:

 

    significant governmental influence over local economies;

 

    economic deceleration;

 

    high levels of inflation;

 

    volatility in currency exchange markets;

 

    exchange controls or restrictions on expatriation of profits and foreign payments;

 

    high domestic interest rates;

 

    wage and price controls;

 

    changes in governmental economic or tax policies;

 

    unexpected changes in regulation;

 

    imposition of trade barriers;

 

    natural disasters and severe weather conditions;

 

    high levels of poverty;

 

    weaknesses in judicial systems and the rule of law;

 

    political corruption scandals;

 

    high levels of violence and criminal activity;

 

    political protests; and

 

    overall political, social and economic instability.

 

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Adverse events and conditions in Central America, particularly in the countries in which we operate, may inhibit demand for financial services and create uncertainty in our operations, which could have a material adverse effect on us.

Recent corruption scandals and the subsequent political, economic and social effects may adversely affect our business.

There have been recent corruption scandals in Guatemala, Honduras and Panama, which have prompted legal action against government officials and significant public political protests. Guatemala’s Attorney General Office and the United Nations International Commission Against Impunity in Guatemala have presented criminal accusations against a considerable number of former high-ranking government officials in connection with several corruption scandals. Although these accusations (and others that may follow) aim at putting an end to a variety of corrupt practices, it is not possible for us to determine how the related political, economic and social effects of these corruption scandals may adversely affect our business.

In Guatemala in 2015, several high ranking government officials were arrested or forced to resign on charges including fraud, corruption, conspiracy and influence peddling. In addition, former President Otto Perez Molina was facing impeachment over his alleged involvement in a corruption racket, and was arrested shortly after resigning from office in September 2015. More recently, in 2016 and 2017 three Supreme Court Justices have been subjected to investigation and forced to resign or removed, several mayors have faced criminal charges and two major political parties have been cancelled and others are subject to investigation.

In Honduras, the director and two members of the board of the Honduran Social Security Institute (Instituto de Seguridad Social) were arrested in 2015, and the ongoing investigations have implicated past and current government officials. Notably, charges were filed against Lena Gutierrez (Second Vice President of the National Congress, member of the governing National Party) for defrauding the country’s health ministry and falsifying documents. In response to extensive protests, Honduran President Juan Orlando Hernandez has proposed several initiatives to prevent corruption in government procurement.

In Panama, former President Ricardo Martinelli was arrested in June of 2017 and is facing charges of corruption and illegal spying.

Furthermore, the corruption scandals in both Guatemala and Honduras have prompted significant public political protests. Corruption scandals could have a significant effect on the political, economic and social stability of the countries in which we operate, which could have a material adverse effect on us.

Changes in economic policies, stability or the regulatory environment in the countries in which we operate may adversely affect our business.

Guatemalan President Jimmy Morales of the National Convergence Front Party (Frente de Convergencia Nacional) took office in January of 2016. Currently, National Convergence Front Party, the governing party, is the leader in the Guatemalan Congress, with 37 out of 158 seats, followed by the National Unity of Hope Party (Unidad Nacional de la Esperanza) with 32 seats. As no political party has obtained a majority of the congressional seats, this may potentially lead to a gridlock in the Guatemalan Congress and create political uncertainty.

Honduran President Juan Orlando Hernandez of the right-wing National Party (Partido Nacional) was elected in November 2013 and assumed office in January 2014. The elections marked a historical milestone in the Honduran political arena, which traditionally has been ruled by two parties: the center-right Liberal Party (Partido Liberal) and the National Party. Although the governing National Party won a majority of seats in the Honduran Congress, two new parties, leftist Liberty and Refoundation (Libertad y Refundación, or LIBRE) and

 

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the centrist Anti-Corruption Party (Partido Anticorrupción or PAC) managed to gain representation. The majority in Congress is held by National Party, followed by LIBRE, with the Liberal Party and PAC in third and fourth place, respectively.

Salvadoran President Salvador Sanchez Ceren of the leftist Farabundo Martí National Liberation Front (Frente Farabundo Martí para la Liberación Nacional or FMLN) assumed office in June 2014 after winning the March 2014 run-off election against Norman Quijano from the right-wing Nationalist Republican Alliance (Alianza Republicana Nacionalista or ARENA). In March 2015, legislative and municipal elections took place in El Salvador. The largest number of seats in the Salvadoran Legislative Assembly is held by ARENA with 35 out of 158 seats, followed by FMLN with 31 seats. In March 2018 there will be new elections for mayors and deputies. According to recent surveys it is estimated that ARENA will achieve at least the same number of seats in the Salvadoran Legislative Assembly.

Changes in governments and their policies could have a significant effect on Central American financial institutions, including our subsidiaries, as well as on market conditions and the prices of and returns on securities.

Developments in other countries could adversely affect the economies in which we operate and negatively impact our financial condition and results of operations.

The economies in the jurisdictions in which we operate may be, to varying degrees, affected by economic and market conditions in other countries. Although economic conditions in other countries may differ significantly from economic conditions in the jurisdictions in which we operate, investors’ reactions to adverse developments in other countries may have an adverse effect on the market value of our securities.

In addition, economic conditions in the jurisdictions in which we operate may be correlated with economic conditions in the United States as a result of increased economic activity between the countries. Therefore, adverse economic conditions in the United States or other related events could have a significant adverse effect on the economies of the jurisdictions in which we operate. We cannot assure you that events in other emerging countries, in the United States or elsewhere will not adversely affect our financial condition and results of operations.

Exchange controls may adversely affect our ability to engage in foreign exchange activities, which would hurt our financial condition and results of operations.

Although currently there are no exchange controls in the countries in which we operate, we cannot assure you that the governmental authorities in those jurisdictions will not institute restrictive exchange rate policies in the future. Any such restrictive exchange control policy would adversely affect our ability to engage in foreign exchange activities and could also have a material adverse effect on our financial condition and results of operations.

Central America has experienced several periods of conflict, violence and instability, and such instability could affect the economy and us.

Central America has experienced several periods of significant civil strife and high levels of criminal violence over the past four decades, primarily due to the activities of guerilla groups and organized crime. In response, Central American governments have implemented various security measures and have strengthened their military and police forces. Despite these efforts, high levels of drug-related and organized crime continue to exist in some regions of Central America. These activities, their possible escalation and the violence associated with them may have a negative impact on the Central American economy or on our financial condition and results of operations in the future. Our business or financial condition and the market value of the shares could be adversely affected by rapidly changing economic and social conditions in Central American and by the different governments’ response to such conditions.

 

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In addition, Central America has, from time to time, experienced social turmoil, including riots, protests, strikes and street demonstrations. For example, in Guatemala, two groups of organized activists, one pursuing environmental claims, and the other purporting to seek the protection of human rights, have recently launched a series of protests against the establishment of business ventures in the mining, energy, agribusiness, cement factories and other similar industries. Despite the region’s ongoing economic growth and stabilization, the social and political tensions and high levels of poverty and unemployment continue. Future government policies to preempt or respond to social unrest could include, among other things, expropriation, nationalization, suspension of the enforcement of creditors’ rights and new taxation policies. These policies could adversely and materially affect the economy of Central American countries in which we operate and our financial condition and results of operations.

Judicial systems in the jurisdictions where we operate can be weak and have previously required the assistance of special commissions to strengthen such systems.

In certain jurisdictions in which we operate, the judicial system is weaker than that in the United States. In the particular case of Guatemala, an official commission (Comisión Nacional para el Seguimiento y Apoyo al Fortalecimiento de la Justicia) has been established to review existing legal and institutional arrangements in order to propose reforms that would strengthen the judiciary and the rule of law generally. Similarly, the International Commission Against Impunity in Guatemala (Comisión Internacional Contra la Impunidad en Guatemala), created by the United Nations to investigate the establishment of illegal bodies and clandestine security organizations and to strengthen local institutions in Guatemala, has suggested that the government of Guatemala consider and promote major reforms to tackle the weakness of the judicial system. These weaknesses may delay the enforceability of general obligations and hinder collections in general, which could have an adverse effect on our financial condition and results of operations.

Natural disasters could disrupt our businesses and impact our financial condition and results of operations.

We are exposed to natural disasters such as earthquakes, volcanic eruptions, tornadoes, tropical storms and hurricanes. In the event of a natural disaster, our disaster recovery plans may prove to be ineffective, which could have a material adverse impact on our ability to conduct our businesses, particularly if such an occurrence affects computer-based data processing, transmission, storage and retrieval systems or destroys customer or other data. In addition, if a significant number of our employees and senior managers were unavailable because of a natural disaster, our ability to conduct our businesses could be compromised. Natural disasters or similar events could also result in substantial volatility in our results of operations for any fiscal quarter or year. Furthermore, natural disasters and severe weather patterns may negatively impact our clients and their ability to meet their financial obligations to us, including the repayment of loans, particularly those clients who are involved in agriculture. Such events may also result in an impairment of the value of property or other collateral used to secure the loans that we extend. Any of the foregoing factors may have a material adverse effect on our results.

Changes in tax regulations or the interpretation of existing regulations in Guatemala, Honduras, Panama, El Salvador or The Bahamas could adversely affect our financial condition and results of operations.

New tax laws and regulations and uncertainties with respect to future tax policies in the countries where we operate may materially affect us. Changes in tax-related laws and regulations or in the interpretation of existing regulations may affect tax burdens by increasing tax rates and fees, creating new taxes, limiting tax deductions and eliminating tax-based incentives and non-taxable income rules. In addition, the interpretation of tax regulations of tax authorities and courts may differ from ours, which could result in tax litigation and associated costs and penalties.

 

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Panama, Guatemala, Honduras and El Salvador have different corporate disclosure and accounting standards for our industry than those you may be familiar with in the United States.

Financial reporting disclosure requirements in the jurisdictions in which we operate differ in certain significant respects from those required in the United States. There are also material differences among IFRS, local GAAP and U.S. GAAP. Accordingly, the information about us available to you will not be the same as the information available to holders of shares issued by a U.S. company. Furthermore, we recently began preparing our financial statements in accordance with IFRS and, as a result, some of our financial data may not be easily comparable from period to period.

Risks Relating to the Shares and the Offering

There may be a lack of liquidity and market for our shares.

Prior to this offering, there has not been a public market for our shares in the United States. We will apply to list our shares on NYSE. Active, liquid trading markets generally result in lower price volatility and respond more efficiently to orders from investors to purchase or sell securities. Liquidity of a securities’ market is often a function of the volume of the underlying shares that are publicly-held by unrelated parties. We cannot predict whether an active liquid public trading market for our shares in the United States will develop or be sustained.

The price of our shares may be volatile.

The trading price of our shares following this offering may fluctuate substantially and may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose part or all of your investment in our shares. The factors that could cause fluctuations include, but are not limited to, the following:

 

    overall price and volume fluctuations affecting the stock exchanges on which our shares are listed;

 

    significant volatility in the market price and trading volume of banking or insurance company securities generally;

 

    actual or anticipated changes in our earnings, fluctuations in our operating results or the failure to meet the expectations of financial market analysts and investors;

 

    investor perceptions of the banking and insurance industries in general and our company in particular;

 

    investor perceptions of emerging markets and Latin American or Central American issuers;

 

    the operating and stock performance of comparable companies;

 

    general economic conditions and trends;

 

    catastrophic events;

 

    changes in accounting standards, policies, guidance, interpretation or principles;

 

    regulatory changes;

 

    loss of external funding sources; or

 

    sales of large blocks of our stock or sales by insiders.

We may raise additional capital in the future through the issuance of equity securities, which may result in dilution of the interests of our shareholders.

We may need to raise additional capital and may opt for obtaining such capital through the public or private placement of equity securities or securities convertible into our shares. Our articles of incorporation do not provide for preemptive rights for our shareholders in the event of a public or private equity offering through organized capital markets. Accordingly, such additional funds may dilute the percentage interests of investors in our shares.

 

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Sales of additional shares, including by us, our directors and officers or certain of our shareholders, following expiration or early release of certain lock-up agreements, could cause the price of our shares to decline.

Sales of additional shares, including by us, our directors and officers or certain of our shareholders, following expiration or early release of certain lock-up agreements, could cause the price of our shares to decline. Sales of substantial amounts of our shares in the public market, or the availability of such shares for sale, by us, our directors and officers or certain of our shareholders, could adversely affect the price of our shares. In connection with the offering of our shares, we, our directors and officers and certain of our shareholders, have entered into lock-up agreements for a period of 180 days following                 , 2017 (which period may be extended under certain circumstances). These lock-up agreements are subject to certain exceptions and described under “Underwriting—Lockup Restriction.” Upon the expiration of such lock-up agreements, we, our directors and officers and certain of our shareholders, will be free to sell additional shares subject to complying with applicable securities laws.

A third party could be prevented from acquiring control of us because of the anti-takeover provisions in our articles of incorporation and restrictions under Guatemalan law.

The ownership and transfer of our shares is subject to certain requirements, options and restrictions under our articles of incorporation. Our articles of incorporation provide that any direct or indirect acquisition by any person or group of persons of more than 5%, or more than 2% if such purchaser is a competitor, of our capital stock requires prior written authorization of our board of directors. Upon the authorization of our board of directors, unless our board of directors determines otherwise, the acquirer must make a public offer to acquire all of our shares at or above a price based on our stock’s trading history plus a 20% premium. This provision could discourage possible future purchasers of our shares, or of a significant portion of our shares and, accordingly, could adversely affect the liquidity and price of our shares. See “Description of Share Capital and Articles of Incorporation—Limitation on Acquisition of our Capital Stock and Public Tender Offers” for more information.

In addition, under Guatemalan law, any person or group of persons who directly or indirectly acquires more than 5% of the capital stock of a Guatemalan bank or insurance company must first obtain authorization from the Guatemalan Superintendency of Banks. In connection with the exchange offer pursuant to which Banco Industrial became our subsidiary, we were granted such authorization by the Guatemalan Superintendency of Banks, subject to the requirement that we report to it any change in our capital structure, or any acquisition of our shares that results in any person or group of persons directly or indirectly owning 5% or more of the capital stock of Banco Industrial. Any direct acquisition of 5% or more of the capital stock of Banco Industrial or Seguros el Roble requires prior authorization from the Guatemalan Superintendency of Banks, and prior authorization from the Guatemalan Superintendency of Banks may also be required for any acquisition of our shares that results in the indirect acquisition of 5% or more of the capital stock of Banco Industrial or Seguros el Roble.

In the event that any person seeks authorization from our board of directors to acquire more than 5% of our capital stock as required by our articles of incorporation, our board of directors would in turn require such person to seek authorization from the Guatemalan Superintendency of Banks. A failure by any purchaser of our shares to comply with the requirements in our articles of incorporation would result in a loss of all of the rights derived from the shares (including economic and voting rights), and such shares would not be taken into consideration for purposes of determining the required quorum or majority at our shareholders’ meetings, nor would such purchaser be recorded as a shareholder in the stock registry of our company or in the registries of the depositary institutions in which our shares are deposited. In addition, our board of directors would require such purchaser to transfer its shares to a third party previously approved by our board of directors. We are unable to predict with certainty the additional consequences that may be imposed by the Guatemalan Superintendency of Banks upon a purchaser of our shares who failed to seek prior authorization as described above. Prospective purchasers of our shares should assume that our board of directors will comply with any order from the Guatemelan Superintendency of Banks in connection with the enforcement of the requirements described above.

 

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You will experience immediate and substantial dilution in the book value of the shares you purchase in this offering.

Because the initial offering price of the shares being sold in this offering will be substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution in the book value underlying your shares. Net tangible book value represents the amount of our tangible assets on an adjusted basis, minus our total liabilities on an adjusted basis. As a result, at the assumed initial public offering price of US$                 per share (based on the mid-point of the price range set forth on the cover page of this prospectus), we currently expect that you will incur immediate dilution of US$                 per share (assuming no exercise of the underwriters’ option to purchase additional shares).

The interests of the non-independent members of our board of directors, who as a group may have been deemed to beneficially own approximately 62.84% of our common stock as of our 2017 shareholders’ meeting, may conflict with those of other shareholders.

Historically, a significant amount of our shareholders have granted powers of attorney to our directors and officers for the purpose of voting the corresponding shares at the relevant general annual shareholders’ meeting. As a group, as of our 2017 shareholders’ meeting, the non-independent members of our board of directors may have been deemed to beneficially own approximately 62.84% of our outstanding shares of common stock; non-independent members of the board beneficially owned 12.46% of our outstanding shares of common stock and may have been deemed to be the beneficial owners of an additional 50.38% of our outstanding shares of common stock by means of shareholder grants of powers of attorney. This entitles them, among other things, to significantly influence the outcome of most actions requiring shareholder approval or participation, including election of the board of directors, corporate reorganizations, dispositions and the timing and payment of any future dividends. Upon completion of the offering, they will continue to have such power. These shareholders may have an interest in pursuing joint ventures, acquisitions, dispositions, financings, or similar transactions that could conflict with the interests of other shareholders. Accordingly, these shareholders may have interests that differ from yours and may vote in a way with which you disagree and that may be adverse to your interests.

You may have fewer and less well-defined rights than shareholders of a company organized in other jurisdictions, such as the United States.

We are a corporation (sociedad anónima) organized under the laws of Panama. Our corporate affairs are governed by our organizational documents and the laws of Panama. Under such documents and laws, holders of our shares, may have fewer or less well-defined rights than they might have as shareholders of a corporation incorporated in other jurisdictions, such as the United States, especially with regards to minority shareholders.

Exercising the right to vote requires attendance or representation at shareholder meetings.

We are a Panamanian company, and as such, many of our shareholder meetings take place in Panama. Shareholders located outside of Panama that wish to exercise their right to vote will have to attend shareholder meetings in Panama or arrange other means of representation.

You may have difficulty enforcing judgments against us, our directors and officers.

Substantially all of our directors and officers, and certain of the experts named herein reside outside the United States, and all or substantial portions of our assets are located outside the United States. As a result, it may not be possible for you to effect service of process within the United States upon such persons or upon us, including with respect to matters arising under the federal securities laws of the United States, or to enforce against such persons or against us judgments of courts of the United States predicated upon the civil liability provisions of the federal securities laws of the United States.

 

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We have been advised by our Panamanian counsel that no bilateral or multilateral treaties exist between the United States and Panama for the reciprocal enforcement of foreign judgments and judgments of courts outside Panama, including but not limited to judgments of United States court. Such judgments may only be recognized and enforced by the courts of Panama in the event that the Supreme Court of Panama validates the judgment by the issuance of a writ of exequatur. Subject to a writ of exequatur, any final judgment rendered by any federal or state court located in the State of New York will be recognized, conclusive and enforceable in the courts of Panama without reconsideration of the merits, provided that (i) such foreign court grants reciprocity to the enforcement of judgments of courts of Panama, (ii) the party against whom the judgment was rendered, or its agent, was personally served in such action, (iii) the judgment arises out of a personal action against the defendant, (iv) the obligation in respect of which the judgment was rendered is lawful in Panama and does not contradict the public policy of Panama, (v) the judgment is properly authenticated by diplomatic or consular officers of Panama or pursuant to the 1961 Hague Convention on the legalization of documents, (vi) that the judgment has been rendered by a competent court, i.e., that it does not violate the putative jurisdiction of the Panamanian courts and (vii) a copy of the final judgment is translated into Spanish by a licensed translator in Panama.

In addition, our articles of incorporation contain a general indemnification provision for our directors and officers. Our articles of incorporation state that we shall indemnify and hold our directors and officers harmless with respect to any action, judicial expense, loss, damage or cost which they may incur or suffer as a consequence of acts or omissions in the performance of their duties, and none of them will be liable for any acts, omissions, or negligence of the other directors and/or officers, except in the case of the gross negligence, willful misconduct or bad faith by the director or officer.

If we were to become a passive foreign investment company, U.S. investors could experience adverse U.S. tax consequences.

Based on our current expectations regarding the value and nature of our assets, the sources and nature of our income, relevant market and shareholder data and our current business plans, we do not expect to be classified as a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes. However, PFIC status is a factual determination that must be made after the close of each taxable year and it is possible that we may become a PFIC in the current year or a future year due to changes in the valuation or composition of our income or assets or those of our subsidiaries.

In the event that, contrary to our expectation, we are classified as a PFIC, U.S. investors could be subject to adverse U.S. federal income tax consequences and additional information reporting requirements. See “Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Companies” for more information.

If we are unable to implement and maintain effective internal control over financial reporting in the future, our results of operations and the price of our shares could be adversely affected.

We are not currently required to comply with Section 404 of the U.S. Sarbanes-Oxley Act of 2002 and, therefore, we have not made a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Section 404 of the U.S. Sarbanes-Oxley Act of 2002 will require us, for the year ending March 31, 2019 and subsequent years, to document and test the effectiveness of our internal control over financial reporting in accordance with an established internal control framework and to report on our conclusion as to the effectiveness of our internal controls. It will also require an independent registered public accounting firm to test our internal control over financial reporting and to report on and attest to the effectiveness of our internal control over financial reporting. Any delays or difficulty in satisfying our requirements could adversely affect our future results of operations and the price of our shares. Moreover, it may cost us more than we expect to comply with these control-and procedure-related requirements. Failure to comply with Section 404 could potentially subject us to sanctions or investigations by the SEC, NYSE or other regulatory authorities.

 

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Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal control over financial reporting, or if our independent registered public accounting firm is unable to provide us with an unqualified opinion regarding the effectiveness of our internal control over financial reporting as of March 31, 2019 and in subsequent years as required by Section 404, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our shares.

Our status as a foreign private issuer allows us to follow alternate standards to the corporate governance standards of the NYSE, which may limit the protections afforded to investors.

We are a “foreign private issuer” within the meaning of NYSE corporate governance standards. Under NYSE rules, a foreign private issuer may elect to comply with the practices of its home country and not comply with certain corporate governance requirements applicable to U.S. companies with securities listed on the exchange. We currently follow certain Panamanian and Guatemalan practices concerning corporate governance and intend to continue to do so. Accordingly, holders of our shares will not have the same protections afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements.

For example, NYSE listing standards provide that the board of directors of a U.S. listed company must have a majority of independent directors at the time the company ceases to be a “controlled company.” The listing standards for the NYSE also require that U.S. listed companies, at the time they cease to be “controlled companies,” have a nominating/corporate governance committee and a compensation committee (in addition to an audit committee). Each of these committees must consist solely of independent directors and must have a written charter that addresses certain matters specified in the listing standards. Under both Panamanian and Guatemalan law, companies may, but are not required to, form special governance committees, which may be composed partially or entirely of non-independent directors. In addition, NYSE rules require the independent non-executive directors of U.S. listed companies to meet on a regular basis without management being present. There is no similar requirement under Guatemalan and Panamanian law.

The NYSE’s listing standards also require U.S. listed companies to adopt and disclose corporate governance guidelines. Although we have implemented certain similar measures of corporate governance, these are not mandatory and therefore we are not legally required to comply with the corporate governance guidelines.

As a foreign private issuer we are not subject to the provisions of Regulation FD or U.S. proxy rules and are exempt from filing certain Exchange Act reports.

As a foreign private issuer, we are exempt from a number of requirements under U.S. securities laws that apply to public companies that are not foreign private issuers. In particular, we are exempt from the rules and regulations under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual and current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act and we are generally exempt from filing quarterly reports.

We are also exempt from the provisions of Regulation FD, which prohibits issuers from making selective disclosure of material non-public information to, among others, broker-dealers and holders of a company’s securities under circumstances in which it is reasonably foreseeable that the holder will trade in the company’s securities on the basis of the information. Even though we intend to comply voluntarily with selective disclosure principles, these exemptions and leniencies will reduce the frequency and scope of information and protections to which you are entitled as an investor.

 

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We would lose our foreign private issuer status if a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher.

If securities or industry analysts do not actively follow our business, or if they publish unfavorable research about our business, the price and trading volume of our shares could decline.

The trading market for our shares will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. If analysts do not cover our company, the trading price for our shares may be negatively impacted. If one or more of the analysts who covers us downgrades our shares or publishes unfavorable research about our business, the price of our shares would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our shares could decrease, which could cause the price and trading volume of our shares to decline.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains statements that constitute forward-looking statements. These statements appear throughout this prospectus, including, without limitation, under “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Our Financial Condition and Results of Operations” and “Business,” and include statements regarding our current intent, belief or expectations of our officers or management with respect to (1) our strategic plans, (2) trends affecting our financial condition or results of operations, (3) the impact of competition and regulations, (4) projected capital expenditures and (5) liquidity. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements included in this prospectus as a result of various factors, many of which are beyond our control.

Factors that could cause actual results to differ materially and adversely include, but are not limited to:

 

    the effect of the implementation of any aspect of our business strategy;

 

    economic, business and political developments in Guatemala, Honduras, El Salvador, Panama and other countries in Central America and globally;

 

    exchange rate fluctuations and government measures to control foreign exchange rates;

 

    increased inflation;

 

    increases in interest rates;

 

    changes in regulations and governmental banking or insurance policy in the jurisdictions in which we operate as they relate to the services and products we offer;

 

    increased competition and consolidation in the Guatemalan, Salvadoran, Honduran and Panamanian financial services and insurance markets;

 

    increased costs of funding or our inability to obtain additional debt or equity financing on attractive terms;

 

    increases in defaults by our banking business’s borrowers and other loan delinquencies;

 

    allowances for impairment losses may be inadequate;

 

    failure to adequately meet capital or other requirements;

 

    failure to accurately price insurance premiums;

 

    dependence on information technology systems;

 

    acquisitions and divestitures;

 

    adequacy of our risk management procedures and credit, currency, market and investment risks;

 

    other risks of our lending and business activities;

 

    management’s belief that pending legal and administrative proceedings will not have a materially adverse effect on Bicapital financial condition or results of operations; and

 

    the other factors discussed under “Risk Factors” in this prospectus.

The words “believe,” “understand,” “may,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “seek,” “intend,” “expect,” “should,” “could,” “forecast” and similar words are intended to identify forward-looking statements. You should not place undue reliance on such statements, which speak only as of the date they were made. These cautionary statements should be considered in connection with any written or oral forward-looking statements that we may issue in the future. We do not undertake any obligation to update publicly or to revise any forward-looking statements after we distribute this prospectus because of new information, future events or

 

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other factors, except as required by applicable law. Our independent public auditors have neither examined nor compiled the forward-looking statements and, accordingly, do not provide any assurance with respect to such statements. In light of the risks and uncertainties described above, the future events and circumstances discussed in this prospectus might not occur and are not guarantees of future performance. Because of these uncertainties, you should not make any investment decision based upon these estimates and forward-looking statements.

 

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EXCHANGE RATES

Our financial statements are presented in U.S. dollars, which is our presentation currency. For our Guatemalan subsidiaries the functional currency is the quetzal and for our Honduran subsidiaries the functional currency is the lempira. For our Salvadoran subsidiaries and Westrust Bank, the functional currency is the U.S. dollar. For more information on the basis of presentation see Note 2c to our Annual Financial Statements.

Quetzales

Since 1994, the Guatemalan Monetary Board (Junta Monetaria del Banco de Guatemala) has allowed the exchange rate for the quetzal to be determined predominantly by market forces. The Guatemalan Central Bank intervenes in the foreign exchange market by buying or selling U.S. dollars to counter drastic fluctuations in the exchange rate caused by speculative, cyclical or seasonal factors that affect the balance of payments.

Since 1996, the Guatemalan Central Bank has intervened in the foreign exchange market through the Electronic Currency Negotiation System (Sistema Electrónico de Negociación de Divisas), an electronic system used for buying and selling foreign exchange. Currently, there are no restrictions on the conversion of quetzales into other currencies. On May 1, 2001, the Guatemalan Law of Free Transfer of Foreign Currency (Ley de Libre Negociación de Divisas) came into effect, permitting both domestic and foreign banks in Guatemala to freely enter into foreign currency-denominated contracts and accept demand deposits and offer bank accounts in foreign currency.

The following table sets forth the high, low, average and period-end exchange rates for the periods indicated, expressed in quetzal per U.S. dollar. Exchange rates are derived from the average rate for the day reported by the Guatemalan Central Bank. The Federal Reserve Bank of New York does not report a noon buying rate for quetzales. These rates are presented for information purposes.

 

Period

   Low      High      Average(1)      Period-end  

2010

     7.9335        8.3948        8.0593        8.0136  

2011

     7.5753        8.0287        7.7898        7.8108  

2012

     7.6782        8.0153        7.8342        7.9023  

2013

     7.7712        7.9980        7.8588        7.8414  

2014

     7.5966        7.8881        7.7350        7.5968  

2015

     7.5913        7.7722        7.6556        7.6324  

2016

     7.4692        7.7453        7.6021        7.5221  

2017

           

March

     7.3348        7.3788        7.3595        7.3398  

April

     7.3303        7.3418        7.3375        7.3389  

May

     7.3318        7.3526        7.3388        7.3526  

June

     7.3341        7.3584        7.3432        7.3352  

July

     7.2824        7.3352        7.3063        7.2824  

August

     7.2694        7.2909        7.2752        7.2909  

September (through September 6, 2017)

     7.2918        7.2970        7.2950        7.2920  

 

Source: Guatemalan Central Bank
(1) Average of daily rates.

Lempiras

Until March 11, 1990, the official exchange rate was fixed at L.2.00 per US$1.00. From March 12, 1990, the fixed rate was removed and the value of the lempira sharply declined. The government tried to support the currency by strictly enforcing laws that required exporters to repatriate foreign exchange earnings.

 

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Pursuant to Decree 136/94 dated October 12, 1994, the reference exchange rate in Honduras began to be determined by supply and demand forces in the foreign currency exchange market by means of a public U.S. dollar auction system. This decree was ratified in the amendments to the Honduran Central Banks’ governing statutes, approved by the Honduran Congress under Decree No. 228-96.

From October 2005 until June 30, 2011, the Honduran Central Bank set the exchange rate at L.18.8951 per US$1.00, with minimal fluctuations. In response to IMF requirements, the policy shifted from a fixed-rate system to a variable rate reflecting international prices.

From July 1, 2011 to June 31, 2013, the Honduran Central Bank implemented a currency band system, maintaining the exchange rate band within a margin of +/- 7.0% from the base price, which was the closing price of the Honduran foreign currency market for the prior year.

As of July 1, 2013, the Honduran Central Bank established that the offering price for purchase requests in the Honduran foreign currency market should not be greater than 1% of the average basis price at the U.S. dollar auctions held by the Honduran Central Bank in the previous seven business days.

The following table sets forth the high, low, average and period-end exchange rates for the periods indicated, expressed in lempira per U.S. dollar. Exchange rates are derived from the rates reported by the Honduran Central Bank. The Federal Reserve Bank of New York does not report a noon buying rate for lempiras. These rates are presented for information purposes.

 

Period

   Low      High      Average(1)      Period-End  

2010

     18.8951        19.0274        18.9613        18.8951  

2011

     18.8485        19.1459        18.9834        19.0128  

2012

     19.0519        20.1020        19.5721        19.9623  

2013

     19.9623        20.7417        20.4271        20.5975  

2014

     20.5973        21.6630        21.0624        21.5124  

2015

     21.5123        22.5242        22.0236        22.3676  

2016

     22.3676        23.6674        22.9185        23.5029  

2017

           

March

     23.4940        23.7108        23.6140        23.4940  

April

     23.4484        23.6468        23.5444        23.4745  

May

     23.4626        23.6454        23.5526        23.4718  

June

     23.4406        23.6233        23.5257        23.4445  

July

     23.4011        23.6207        23.5170        23.4011  

August

     23.3652        23.5541        23.4541        23.3801  

September (through September 6, 2017)

     23.3802        23.5440        23.4621        23.3803  

 

Source: Honduran Central Bank
(1) Average of daily rates.

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of the shares being offered by us in the offering will be approximately US$              million (or approximately US$              million if the option to purchase additional shares is fully exercised by the underwriters) after deducting estimated discounts and commissions and offering expenses payable by us. This estimate is based on a price per share of US$             , which is the midpoint of the price range indicated on the cover of this prospectus. A US$1.00 increase (decrease) in the assumed initial offering price per share would result in an increase (decrease) in the estimated net proceeds to us of approximately US$             million.

We intend to use the net proceeds to increase capital in our banking subsidiaries, mainly Banco Industrial. We anticipate allocating approximately 85% and 15% of the net proceeds to increase capital in Banco Industrial and across our other subsidiaries, respectively. Our expected use of the net proceeds represents our intentions based upon our present plans and business conditions. We cannot predict with certainty all of the particular uses of the proceeds from this offering. Accordingly, our management has significant flexibility in applying the net proceeds of this offering.

 

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CAPITALIZATION

The following table sets forth, as of June 30, 2017:

 

    our actual capitalization; and

 

    as adjusted to give effect to the sale of our shares in the offering at an assumed initial public offering price of US$                 per share (the mid-point of the price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and offering expenses payable by us in connection with the offering and assuming no exercise of the underwriters’ option to purchase additional shares.

This table should be read in conjunction with the information contained in the sections “Presentation of Financial and Other Information,” “Selected Consolidated Financial Information,” “Management’s Discussion and Analysis of Our Financial Condition and Results of Operations,” “Selected Statistical Information,” and our Annual Financial Statements included in this prospectus.

 

     As of June 30, 2017  
     Actual      As adjusted
for the offering
 
     (US$ in millions)      (US$ in millions)  

Liabilities:

     

Long-term debt(1)

     2,541.6     

Shareholders’ Equity:

     

Share capital

     423.8     

Reserves

     569.5     

Capital contributions

     54.1     

Retained earnings

     267.1     

Translation reserve

     23.4     

Actuarial losses

     (1.6   

Equity attributable to owners of Bicapital

     1,336.3     

Non-controlling interests

     38.5     
  

 

 

    

 

 

 

Total Equity

     1,374.9     
  

 

 

    

 

 

 

Total Capitalization

     3,916.5     

 

(1) Refers to loans and borrowings from banks, debt securities issued and subordinated liabilities with maturities over one year.

The discussion and table above do not take into account the Perpetual Exchange Right in favor of Banco Industrial’s shareholders. See “Description of Share Capital and Articles of Incorporation—Outstanding Capital Stock and Voting Rights.”

 

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DILUTION

If you invest in our shares in this offering, your ownership interest will be immediately diluted to the extent of the difference between the public offering price per share and the net tangible book value per share after this offering. Our historical net tangible book value per share is determined by dividing our total tangible assets less our total liabilities and non-controlling interests by the number of shares outstanding. Our historical net tangible book value as of June 30, 2017 was US$1,336.3 million, or US$11.75 per share, based on 113,739,432 shares outstanding. See “Description of Share Capital and Articles of Incorporation—Outstanding Capital Stock and Voting Rights.”

Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of our shares in this offering and the as adjusted net tangible book value per share immediately after completion of this offering. After giving effect to our sale of              shares at the public offering price of US$             per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net tangible book value as of June 30, 2017 would have been US$             million, or US$             per share. This represents an immediate increase in net tangible book value of US$             per share to existing shareholders and an immediate dilution in net tangible book value of US$             per share to purchasers of ordinary shares in this offering, as illustrated in the following table.

 

Assumed initial public offering price per share

  

Actual net tangible book value as of June 30, 2017

   US$ 1,336.3 million  

Actual net tangible book value per share as of June 30, 2017

     US$11.75  

Increase in net tangible book value per share attributable to the offering

  

As adjusted net tangible book value per share as of June 30, 2017 after giving effect to the offering

  

Estimate of dilution per share to new investors

  

The discussion and table above assume no exercise of the underwriters’ option to purchase additional shares. If the underwriters exercise their option to purchase additional shares in full, the as adjusted number of our shares held by new investors will increase to              or approximately             %, of the total as adjusted number of our shares outstanding after this offering. In such case, the estimate of dilution per share to new investors will be US$            .

In addition, the discussion and table above do not take into account the Perpetual Exchange Right in favor of Banco Industrial’s shareholders. As of June 30, 2017, Banco Industrial shareholders held shares that could be exchanged for 2,371,202 of our shares, which represented 2.08% of our outstanding shares prior to the offering. Pursuant to our articles of incorporation, we have authorized the issuance and sale of up to 2,371,202 shares to Banco Industrial shareholders who elect to exercise the Perpetual Exchange Right. See “Description of Share Capital and Articles of Incorporation—Outstanding Capital Stock and Voting Rights.”

 

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following table sets forth our selected consolidated financial information. The selected financial data as of March 31, 2017 and 2016 and for the years ended March 31, 2017, 2016 and 2015 have been derived from our Annual Financial Statements included in this prospectus. The selected financial data as of June 30, 2017 and for the three-month periods ended June 30, 2017 and 2016 have been derived from our Interim Financial Statements included in this prospectus. Our Financial Statements were prepared in accordance with IFRS as issued by the IASB. The selected financial data as of March 31, 2015, 2014 and 2013 and for the years ended March 31, 2014 and 2013, have been derived from our audited consolidated financial statements prepared in accordance with IFRS as issued by the IASB (not included in this prospectus).

The financial data included below and elsewhere in this prospectus are not necessarily indicative of our future performance. Results for the three-month period ended June 30, 2017 are not necessarily indicative of results expected for the full year. The selected consolidated financial information presented below should be read in conjunction with our Financial Statements, “Presentation of Financial and Other Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in this prospectus.

 

    For the three-month period
ended June 30,
    For the year ended
March 31,
 
        2017             2016         2017     2016     2015     2014     2013  
    (US$ in millions)     (US$ in millions)  

CONSOLIDATED STATEMENT OF PROFIT AND LOSS

             

Interest income

    251.3       232.0       959.2       889.1       819.0       738.6       624.2  

Interest expense

    (119.9     (113.7     (457.3     (416.4     (387.0     (371.8     (310.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    131.4       118.3       501.9       472.8       432.0       366.8       313.7  

Loan impairment charges

    (12.1     (11.8     (51.5     (51.6     (56.5     (28.5     (16.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net fee and commission income

    42.6       34.8       185.9       168.8       159.9       171.8       156.7  

Net premium income

    7.3       5.8       26.7       22.3       31.4       26.1       20.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit for banking and insurance operations

    169.2       147.1       662.9       612.3       566.8       536.1       473.6  

Operating and administrative expenses

    (120.8     (103.6     (426.9     (398.3     (365.8     (326.7     (276.1

Other operating income, net

    15.5       13.3       28.8       26.6       18.7       13.6       9.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before tax

    63.8       56.7       264.9       240.6       219.6       223.0       207.4  

Income tax

    (9.2     (6.3     (34.7     (24.7     (33.7     (41.8     (45.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit for the period Attributable to:

    54.6       50.4       230.1       215.9       185.9       181.2       162.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity holders of Bicapital

    52.6       48.6       223.0       208.9       179.3       174.9       155.9  

Non-controlling interest

    2.0       1.8       7.2       7.0       6.6       6.3       6.1  

Basic and diluted earnings per share (US$)(1)(2)

    0.47       0.44       1.99       1.89       1.63       1.59       1.43  

Weighted average number of ordinary shares outstanding (millions)(2)

    112.6       110.4       112.1       110.4       110.3       110.1       108.9  

 

(1) Basic earnings per share is determined dividing profit after taxes attributable to the equity holders of Bicapital by the weighted average number of ordinary shares outstanding during the respective year. Diluted earnings per share reflect the potential dilution assuming the conversion of all dilutive potential ordinary shares. See Note 3u and Note 30 to our Annual Financial Statements for more information.
(2) Adjusted to reflect the Reverse Stock Split. See “Description of Share Capital and Articles of Incorporation—Outstanding Capital Stock and Voting Rights.”

 

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     As of
June 30,
     As of March 31,  
     2017      2017      2016     2015     2014     2013  
     (US$ in millions)  

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

              

Assets

              

Cash and cash equivalents

     1,825.2        1,731.9        1,760.7       1,427.9       1,078.6       1,082.9  

Investment securities

     3,454.3        3,578.4        3,422.9       3,212.2       3,149.7       2,737.0  

Loan portfolio, net

     9,027.6        8,834.4        7,880.0       7,128.2       6,372.3       5,512.0  

Restricted cash

     112.7        112.6        91.8       79.8       115.6       105.7  

Property and equipment, net

     332.4        342.0        310.9       297.7       267.3       253.0  

Goodwill

     146.8        146.8        137.9       139.0       136.3       135.9  

Other(1)

     465.3        441.6        397.9       355.6       289.5       285.0  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     15,364.3        15,187.6        14,002.0       12,640.4       11,409.3       10,111.6  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

              

Deposits and obligations from customers

     9,473.1        9,134.1        8,571.4       7,735.5       7,079.1       6,600.1  

Financing

     2,947.6        3,124.6        2,821.1       2,593.2       2,221.5       1,594.6  

Debt securities issued

     792.0        782.6        644.1       626.8       561.2       521.2  

Accruals and deferred income

     299.5        267.6        257.4       239.9       213.1       198.8  

Subordinated liabilities

     196.4        193.1        193.0       192.9       195.8       178.3  

Insurance reserves

     157.3        168.8        142.2       115.1       106.0       104.9  

Other(2)

     123.6        134.1        214.2       98.0       90.4       81.6  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     13,989.4        13,804.7        12,843.3       11,601.6       10,467.2       9,279.6  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Equity

              

Share capital

     423.8        437.4        392.3       391.8       389.3       386.4  

Reserves

     569.5        460.3        259.4       247.5       221.3       180.1  

Capital contributions

     54.1        7.1        7.1       7.1       7.1       7.3  

Retained earnings

     267.1        420.3        487.2       373.5       298.0       234.5  

Other comprehensive income

     21.8        20.7        (22.5     (13.8     (4.7     (6.4
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Equity attributable to owners of Bicapital

     1,336.3        1,345.9        1,123.5       1,006.0       911.0       801.8  

Non-Controlling interests

     38.5        37.1        35.2       32.8       31.1       30.2  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     1,374.9        1,382.9        1,158.7       1,038.8       942.1       832.0  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total equity and liabilities

     15,364.3        15,187.6        14,002.0       12,640.4       11,409.3       10,111.6  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Other assets are composed of: other receivables, prepayments, assets under insurance contracts, foreclosed assets, intangible assets and investment property.
(2) Other liabilities are composed of: government repurchase agreements, provisions, liabilities under insurance contracts, derivative liabilities held for risk management, employee benefits and deferred tax.

 

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     As of and for the
three-month
period ended
June 30,
    As of and for the year ended March 31,  
     2017     2016     2017     2016     2015     2014     2013  
     (in percentages, unless otherwise indicated)  

SELECTED FINANCIAL RATIOS

              

Performance Ratios

              

Net interest margin(1)

     4.0     3.9     4.0     4.1     4.3     3.9     3.9

Efficiency ratio(2)

     53.9     56.2     54.7     55.2     54.2     53.2     51.4

Return on average assets(3)

     1.4     1.4     1.6     1.6     1.6     1.7     1.7

Return on average shareholders’ equity(4)

     16.3     17.6     18.8     19.4     19.4     21.7     22.7

Fee income ratio(5)

     25.2     23.7     28.0     27.6     28.2     32.0     33.1

Capital and Balance Sheet Structure

              

Average total equity as a percentage of average total assets(6)

     8.8     8.1     8.4     8.4     8.0     7.6     7.5

Total equity as a percentage of total assets(7)

     8.9     8.2     9.1     8.3     8.2     8.3     8.2

Tier 1 capital as a percentage of risk-weighted assets(8)

     12.6     12.3     12.9     12.3     11.6     11.8     11.9

Capital ratio of Bicapital(9)

     14.3     14.7     14.7     14.7     14.2     14.8     15.0

Capital ratio of Banco Industrial(9)(10)

     12.7     11.4     12.6     12.5     11.3     11.9     13.5

Capital ratio of Banpaís(9)(11)

     12.9     12.7     12.5     12.7     13.0     13.2     12.2

Capital ratio of BI El Salvador(9)(12)

     18.1     17.5     18.1     18.3     19.8     20.4     19.6

Total loans, net as a percentage of total deposits

     95.3     90.2     96.7     91.9     92.1     90.0     83.5

Credit Quality Ratios

              

NPL ratio(13)

     1.1     1.2     1.0     1.2     1.1     1.7     1.8

Loan impairment charges as a percentage of total gross loans(14)

     0.4     0.8     0.6     0.5     1.0     0.4     0.4

NPL coverage ratio(15)

     93.4     92.8     95.9     93.5     104.6     90.7     95.7

Allowance for loan losses as a percentage of total loans(16)

     1.0     1.1     1.0     1.2     1.2     1.7     1.8

Other Data

              

Dividends (US$ in millions)(17)

     —         —         96.7       88.9       83.3       77.6       71.4  

Dividends per share (in US$)(18)

     —         —         0.85       0.80       0.75       0.70       0.65  

Employees

     13,582       12,970       13,473       12,850       12,211       10,386       9,850  

Branches

     799       772       802       768       654       627       568  

ATMs(19)

     1,202       1,115       1,171       1,100       1,066       998       979  

 

(1) Refers to net interest income divided by average interest-earning assets. Average interest-earning assets are determined on average monthly balances. Net interest margin for the three-month period ended June 30, 2017 is annualized and calculated as net interest income for the period multiplied by four, divided by an average of interest earning assets as of March 31, 2017 and June 30, 2017.
(2)

Refers to operating and administrative expenses before depreciation and amortization divided by the period’s profit for banking and insurance operations plus loan impairment charges for the years ended March 31, 2017, 2016 and 2015. For the three-month periods ended June 30, 2017 and June 30, 2016 refers to operating and administrative expenses before depreciation and amortization minus operating and administrative expenses from our health care subsidiaries, divided by the period’s profit for banking and insurance operations plus loan impairment charges. For the three-month periods ended June 30, 2017 and June 30, 2016, operating and administrative expenses from our health care subsidiaries have been excluded from our consolidated operating and administrative expenses as a result of a reclassification of our income from health care services as other operating income. For the three-month period ended June 30, 2017 a

 

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  US$6.4 million non-income tax expense from the intercompany sale of land has been excluded from our consolidated operating and administrative expenses, which is considered a non-recurring transaction.
(3) Refers to profit for the period divided by average total assets. The average balances for total assets have been calculated on the basis of monthly balances. ROAA for the three-month period ended June 30, 2017 is annualized and calculated as profit for the period multiplied by four, divided by an average of total assets as of March 31, 2017 and June 30, 2017.
(4) Refers to profit for the period divided by average shareholders’ equity. The average balances for shareholders’ equity have been calculated on the basis of our monthly balances. ROAE for the three-month period ended June 30, 2017 is annualized and calculated as profit for the period multiplied by four, divided by an average of shareholders’ equity as of March 31, 2017 and June 30, 2017.
(5) Refers to net fee and commission income divided by profit for banking and insurance operations.
(6) The average balances for total equity and total assets have been calculated on the basis of monthly balances.
(7) Refers to the end-of-period total equity divided by the end-of-period total assets.
(8) Refers to the end-of-period Tier 1 capital divided by the end-of-period risk-weighted assets. See Note 5 to our Annual Financial Statements.
(9) Refers to the ratio of total regulatory capital to total risk-weighted assets. Total regulatory capital and risk-weighted assets are calculated in accordance with the guidelines established by the local regulator of each country in which our subsidiaries operate. Regulatory capital and risk-weighted assets for us and for Banco Industrial are calculated in accordance with regulatory requirements of the GSB. Regulatory capital and risk-weighted assets for Banpaís are calculated in accordance with regulatory requirements of the CNBS, while the regulatory capital and risk-weighted assets for BI El Salvador are calculated in accordance with regulatory requirements of the SSF. See Note 5 to our Annual Financial Statements.
(10) Banco Industrial’s capital ratio, on an unconsolidated basis, was in each case above the regulatory requirement of 10.0% of the GSB.
(11) Banpaís’s capital ratio, on an unconsolidated basis, was in each case above the regulatory requirement of 12.0% of the CNBS.
(12) BI El Salvador’s capital ratio, on an unconsolidated basis, was in each case above the regulatory requirement of 14.5% of the SSF.
(13) Based on the loan activity carried out by our banking subsidiaries (Banco Industrial, Banpaís and BI El Salvador). Calculated as total NPL divided by total loans.
(14) Figures for the three-month period ended June 30, 2017 have been annualized.
(15) Refers to the end-of-period allowance for loan losses divided by the end-of-period NPL.
(16) Refers to the end-of-period allowance for loan losses divided by the end-of-period total loans.
(17) Dividends include dividends declared and paid by Bicapital for each year presented. See Notes 3 and 28b to our Annual Financial Statements. Dividends are declared and paid in U.S. dollars.
(18) Adjusted to reflect the Reverse Stock Split. See “Description of Share Capital and Articles of Incorporation—Outstanding Capital Stock and Voting Rights.”
(19) Excludes third-party network ATMs.

 

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

The following discussion of our financial condition and results of operations should be read in conjunction with our Financial Statements, and with the other financial information included in this prospectus. Our Financial Statements included in this prospectus have been prepared in accordance with IFRS. Our future results may vary substantially from those discussed herein because of various factors that affect our business, including, but not limited to, those discussed under “Forward-Looking Statements” and “Risk Factors” and other factors discussed in this prospectus.

Overview

We are the largest financial services group in Guatemala, with a growing presence in other underpenetrated and fast-growing Central American countries. Through our subsidiaries, we provide a comprehensive range of corporate and retail banking, insurance and other financial services to more than 1.8 million clients as of June 30, 2017. We were formed as a holding company in 2006, and our main subsidiary, Banco Industrial, was founded in 1967. We believe that our businesses benefit from significant synergies as a result of being part of one financial group.

Our operations in Guatemala include Banco Industrial and Seguros El Roble, the largest bank and insurance company in the country, respectively, which are also among the most profitable entities in the Guatemalan banking and insurance systems, according to the GSB. We are the market leader in terms of total assets, total net loans and total deposits, with market shares of 27.7%, 27.8% and 24.3%, respectively, as of June 30, 2017, as well as, first in total gross premiums written, with a market share of 24.9% and 26.1%, respectively, for the three-month period ended June 30, 2017 and the year ended March 31, 2017, according to the GSB. On an annualized basis for the three-month period ended June 30, 2017 and for the year ended March 31, 2017, Banco Industrial had a ROAE of 19.6% and 21.7%, respectively, compared to a ROAE of 15.0% and 14.7%, respectively, for the Guatemalan banking system as a whole, and Seguros El Roble (including Fianzas El Roble) had a ROAE of 37.6% and 31.2%, respectively, compared to a ROAE of 25.6% and 21.8%, respectively, for the Guatemalan insurance system as a whole, according to the GSB. As of June 30, 2017, Banco Industrial had one of the largest banking distribution networks in Guatemala, with 6,164 points of service, comprised of 621 branches, 3,874 ATMs (including 1,026 proprietary and 2,848 third-party network ATMs) and 1,669 correspondent agents (third-party points of service). As of June 30, 2017, Banco Industrial, Seguros El Roble and our other financial operations in Guatemala represented 78.5% of our total assets.

As part of our growth strategy, beginning in 2007 with our acquisition of a controlling interest in Banpaís, we expanded our operations outside Guatemala to Honduras and El Salvador. Since then, our international growth has been focused on the northern part of Central America, given the high level of intra-regional trade activity by our clients. In January 2016 we expanded our operations into Panama. Currently, our operations outside of Guatemala include: (i) Banpaís, the fourth-largest bank in Honduras in terms of total net loans, with a 12.1% market share as of June 30, 2017, according to the CNBS, (ii) Seguros del País, the fourth-largest insurer in Honduras in terms of total gross premiums written, with a 12.2% and 8.7% market share for the three-month period ended June 30, 2017 and the year ended March 31, 2017, according to the CNBS, and (iii) BI El Salvador, the 12th-largest bank in El Salvador in terms of total net loans, with a 1.5% market share as of June 30, 2017, according to the SSF. Our banking network outside Guatemala is comprised of a total of 178 branches and 176 ATMs as of June 30, 2017. As of June 30, 2017, Banpaís, Seguros del País and BI El Salvador, together, represented 13.2% of our total assets.

 

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Principal Factors Affecting our Financial Condition and Results of Operations

Economic Environment

Our banking and insurance subsidiaries are affected by the general economic environment of the countries in which we operate, mainly Guatemala. As of June 30, 2017, Banco Industrial, Seguros El Roble and our other financial operations in Guatemala represented 78.2%% of our total assets and Banpaís, Seguros del País and BI El Salvador, together, represented 13.2% of our total assets. Decreases in the growth rate of the country’s economy, periods of negative growth, or material increases in inflation or interest rates could result in lower demand for, or affect the pricing of, our services and products. Because a large percentage of the costs and expenses of our subsidiaries is fixed, we may not be able to reduce costs and expenses upon the occurrence of any of these events, in which case our profitability could be affected. Changes in the financial condition or credit profiles of clients of our banking subsidiaries and increases in inflation or interest rates could have a negative effect on the quality of our banking subsidiaries’ loan portfolios, potentially requiring them to increase loan loss provisions or resulting in reduced profitability.

Guatemala

The Guatemalan economy in recent years has been characterized by consistent growth rates. Based on reports published by the Guatemalan Central Bank, GDP growth for 2016 was 3.1%, compared to 4.1% in 2015 and 4.2% in 2014, and is projected to reach between 3.0% and 3.8% in 2017. Furthermore, according to the Guatemalan Central Bank, Guatemala’s international net reserves (foreign-currency deposits held by the Guatemalan Central Bank) were approximately US$9,160.4 million as of December 31, 2016 as compared to approximately US$7,751.2 million as of December 31, 2015 an 18.2% increase and US$7,333.4 million at December 31, 2014 a 5.7% increase. In 2016, Guatemala’s fiscal deficit was 1.1% of GDP, compared to 1.4% of GDP in 2015 and 1.9% of GDP in 2014. From 2015 to 2016, the decrease in deficit was due to an increase of 8.7% and 5.3% in government income and expenses, respectively. From 2014 to 2015, the decrease in deficit was due to an increase of 1.3% and a decrease of 1.5% in government income and expenses, respectively.

During 2016, growth was driven by internal demand, mainly by a 4.2% increase in private consumption, compared to an increase of 5.1% in 2015, which represented approximately 85.0% of the GDP growth rate for 2016, primarily as a result of growth in family remittances and household income. In 2014, growth was driven by internal demand, mainly by a 3.9% increase in private consumption, which represented approximately 84.3% of the GDP growth rate for 2014, primarily as a result of growth in family remittances and household income.

The economic sectors that showed the highest growth were: manufacturing; retail and wholesale trade; financial services; private services; and agriculture, livestock, fishing and forestry. These sectors contributed approximately 77.0% of the GDP growth rate for 2016. For 2015, the economic sectors that showed the highest growth were: manufacturing; private services; financial services; and agriculture, livestock, fishing and forestry; together contributing approximately 74.0% of the GDP growth rate. For 2014, the economic sectors that showed the highest growth were: mining; retail and wholesale trade; manufacturing; professional services; and agriculture, livestock, fishing and forestry, together contributing approximately 77.0% of the GDP growth rate.

The table below sets forth additional details regarding Guatemala’s recent economic performance.

 

     As of December 31,  
     2016     2015     2014  

Real GDP growth rate

     3.07     4.14     4.17

Reference interest rate

     3.00     3.00     4.00

Variation in Consumer Price Index

     4.23     3.07     2.95

Net international reserves (US$ in millions)

     9,160.4       7,751.2       7,333.4  

Source: Guatemalan Central Bank.

 

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Due to Guatemala’s macroeconomic indicators and political environment, the country has an overall credit rating of Ba1 by Moody’s, BB by Fitch (both with a stable outlook) and BB by S&P (with a negative outlook).

Honduras

The Honduran economy has also maintained consistent economic growth in recent years. According to the Honduran Central Bank, GDP growth for 2016 was 3.6%, compared to 3.6% in 2015 and 3.1% in 2014. The IMF further estimates that GDP will grow 3.4% in 2017. During 2016, internal demand grew as a result of the growth shown in the following economic sectors: financial services; construction; agriculture, livestock, fishing and forestry; energy and water; communications and manufacturing. The current fiscal deficit for 2016 was 3.8% of GDP, compared to 3.0% of GDP in 2015 and 4.4% of GDP in 2014. Honduras’s international net reserves were approximately US$3.9 billion as of December 31, 2016, compared to US$3.8 billion and US$3.5 billion as of the same date in 2015 and 2014, respectively.

The increase in net international reserves (foreign-currency deposits held by the Honduran Central Bank) was driven by net purchases of foreign currency of US$1,184.9 million and international donations of US$46.6 million.

The table below sets forth additional details regarding Honduras’s recent economic performance.

 

     As of December 31,  
     2016     2015     2014  

Real GDP growth rate

     3.61     3.64     3.06

Reference interest rate

     5.50     6.25     7.00

Variation in Consumer Price Index

     3.31     2.36     5.82

Net international reserves (US$ in millions)

     3,887.6       3,822.3       3,516.5  

Source: Honduran Central Bank.

Due to Honduras’s macroeconomic indicators and political environment, the country has an overall credit rating of B+ from S&P with a stable outlook and a sovereign debt rating of B2 from Moody’s with a positive outlook.

El Salvador

According to the Salvadoran Central Bank (Banco Central de Reserva de El Salvador), GDP growth for 2016 was 1.4%, compared to 2.3% in 2015 and 2.4% in 2014.

The fiscal deficit for 2016 was 8.1% of GDP, compared to 11.5% of GDP in 2015 and 16.0% of GDP in 2014. El Salvador’s international net reserves were approximately US$2.9 billion as of December 31, 2016, compared to US$2.7 billion and US$2.7 billion as of the same date in 2015 and 2014, respectively.

Although there was a slowdown in the growth of GDP during 2016, there was an increase in local demand, mainly in private investment and domestic consumption and in a lesser degree in investment and public consumption. An important factor that drove the internal demand was the growth in banking loans, which allowed the financing of the increasing demand for funds by the private sector. El Salvador also received an important flow of family remittances, which together with loans, increased nominal salaries and reduced internal local prices, strengthening domestic consumption.

 

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The table below sets forth additional details regarding El Salvador’s recent economic performance.

 

     As of December 31,  
     2016     2015     2014  

Real GDP growth rate

     1.43     2.30     2.37

Reference interest rate

     4.29     4.51     4.82

Variation in Consumer Price Index

     (0.94 )%      1.02     0.47

Net international reserves (US$ in millions)

     2,923.0       2,670.2       2,661.2  

Due to El Salvador’s macroeconomic indicators and political environment, the country has an overall credit rating of B+ from S&P and from Fitch Ratings, both with a stable outlook, and a rating of Ba3 from Moody’s, with a negative outlook.

Effects of Changes in Interest Rates

Changes in interest rates affect the following areas of our business, among others:

 

    financial margin;

 

    volume of loans originated;

 

    market value of our financial assets; and

 

    gains or losses from sales of loans and securities.

Increases in short-term interest rates could reduce our financial margin, which comprises the majority of our revenue. A significant portion of our subsidiaries’ assets, including loans, are long-term assets. In contrast, most deposits are short-term. When interest rates rise, our banking subsidiaries must pay higher interest on deposits while interest earned on assets does not rise as quickly, which causes profits to decrease. Interest rate increases could result in adverse changes in our financial margin, reducing its growth rate or even resulting in decreases as compared to previous periods.

Increases in interest rates may reduce the volume of loans originated by our banking subsidiaries. Sustained high interest rates have historically discouraged clients from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets.

Increases in interest rates may reduce the value of our financial assets. Our banking subsidiaries hold a substantial portfolio of loans and debt securities that have both fixed and variable interest rates. The market value of a security with a fixed interest rate generally decreases when prevailing interest rates rise, which may have an adverse effect on our earnings and financial condition. In addition, we may incur costs (which, in turn, could impact our results) as our subsidiaries implement strategies to reduce future interest rate exposure. The market value of an obligation with a variable interest rate can be adversely affected when interest rates increase, due to a lag in the implementation of repricing terms.

Assets and liabilities have been classified by the domicile of our subsidiary as Domestic (operations in Guatemala) or Foreign (operations in Honduras and El Salvador) and by currency of denomination (quetzales, U.S. dollars and lempiras). Domestic operations include quetzal- (local currency of our operations in Guatemala) and U.S. dollar-denominated assets and liabilities. All quetzal-denominated assets and liabilities have been converted into U.S. dollars using the interbank exchange rate published by the Guatemalan Central Bank at the relevant date, as required by IFRS. Foreign operations include lempiras (local currency of Honduras) and U.S. dollars (which is used in our Honduran and Salvadoran operations). Lempiras have been converted to U.S. dollars using the exchange rate published by the Honduran Central Bank at the relevant dates, as required by IFRS. For more information see “Exchange Rates.” For purposes of this section, U.S. dollar-denominated assets and liabilities include: (i) U.S. dollar Domestic, which includes all transactions conducted in Guatemala or on

 

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behalf of Guatemalan residents in U.S. dollars; and (ii) U.S. dollar Foreign, which includes (a) all transactions conducted in Honduras or on behalf of Honduran residents in lempiras and (b) transactions conducted in Honduras or on behalf of Honduran residents in U.S. dollars and all transactions conducted in El Salvador or on behalf of Salvadoran residents in U.S. dollars.

Quetzal-Denominated Assets and Liabilities in Guatemala

The chart below presents the weighted average interest rates on quetzal-denominated assets and liabilities of the Guatemalan banking industry (including Banco Industrial) and of Banco Industrial for the years indicated, as published by the Guatemalan Central Bank. The table also shows the seven-day deposit rate published by the Guatemalan Central Bank.

 

LOGO

The Guatemalan banking industry generally does not establish its interest rates by reference to a benchmark rate; however, the weighted average interest rates on quetzal-denominated assets and liabilities of the Guatemalan banking industry are somewhat influenced by the rate for seven-day deposits published by the Guatemalan Central Bank. The seven-day deposit rate has generally shown a stable trend, remaining unchanged at 3.0% as of June 30, 2017, as of December 31, 2016 and as of December 31, 2015, after decreasing from 4.0% as of December 31, 2014.

The Guatemalan banking industry’s weighted average interest rate paid on local-currency assets has generally shown a stable trend, increasing slightly to 13.1% as of June 30, 2017 from 13.0% as of December 31, 2016 and 13.1% as of December 31, 2015 after decreasing from 13.6% as of December 31, 2014. Banco Industrial’s weighted average interest rate on quetzal-denominated assets is lower than the average interest rate of the Guatemalan banking industry due to its significantly lower-liability interest rates as compared to the industry average, which enables Banco Industrial to maintain a healthy financial margin while charging lower interest rates. This difference results from Banco Industrial’s product mix, which is more heavily focused on commercial clients, and the fact that debt instruments offered to its commercial clients typically have lower interest rates than those for its retail clients. Banco Industrial’s average interest rate on quetzal-denominated assets was 8.9% as of June 30, 2017, as compared to 9.0% as of December 31, 2016, 9.3% as of December 31, 2015 and 9.7% as of December 31, 2014.

The Guatemalan banking industry’s weighted average interest rate on local-currency denominated liabilities has remained unchanged at 5.4% as of June 30, 2017, as of December 31, 2016, and as of December 31, 2015, decreasing slightly from 5.5% as of December 31, 2014. Banco Industrial’s average interest rate on quetzal-denominated liabilities is lower than the local banking industry due to its diverse retail deposit base, with no significant concentration in any specific type of deposit, maintaining a relatively stable trend, with a rate of 3.3% as of June 30, 2017 and 3.4% as of December 31, 2016 and December 31, 2015 and 3.5% as of December 31, 2014.

 

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Foreign Currency-Denominated Assets and Liabilities in Guatemala

The chart below presents the weighted average rates on foreign currency-denominated assets and liabilities of the Guatemalan banking industry (including Banco Industrial) and of Banco Industrial for the periods indicated, as published by the Guatemalan Central Bank.

 

LOGO

The Guatemalan banking industry’s weighted average interest rate on foreign-currency denominated assets has shown a stable trend in recent years, increasing slightly to 6.0% as of June 30, 2017 from 5.9%, 5.9% and 6.0% as of December 31, 2016, 2015 and 2014, respectively. Banco Industrial’s average interest rate on foreign currency-denominated assets is lower than the banking system’s due to its concentration on commercial lending. Banco Industrial’s average interest rate on foreign currency-denominated assets has remained unchanged at 5.6%, as of June 30, 2017 and as of December 31, 2016, 2015 and 2014, respectively. The Guatemalan banking industry’s weighted average interest rate on foreign currency-denominated liabilities showed a stable trend, at 3.0% as of June 30, 2017, compared to 2.9% as of December 31, 2016 and 3.0% as of December 31, 2015 and 2.9% as of December 31, 2014. Banco Industrial’s average interest rate on foreign-denominated liabilities was higher than the banking system’s due to a higher concentration of longer-tenor loans and borrowings from banks. Banco Industrial’s average interest rate on foreign-denominated liabilities has been relatively stable, increasing slightly to 3.4% as of June 30, 2017, from 3.3% as of December 31, 2016, 3.1% as of December 31, 2015, and 3.2% as of December 31, 2014.

Lempira-Denominated Assets and Liabilities in Honduras

The chart below presents the weighted average interest rates on lempira-denominated assets and liabilities of the Honduran banking industry (including Banpaís) and of Banpaís, for the periods indicated. The table also presents the seven-day interest rate published by the Honduran Central Bank. The Honduran Central Bank publishes an interest rate that reflects the maximum rate allowed for the bid and ask positions on government securities sold in seven-day auctions, which we refer to as the Honduran Central Bank rate.

 

LOGO

 

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The Honduran banking industry generally does not establish its interest rates by reference to a benchmark rate. However, the weighted average interest rates on lempira-denominated assets and liabilities of the Honduran banking industry are somewhat influenced by the Honduran Central Bank rate.

The Honduran banking industry’s weighted average interest rate paid on lempira-denominated assets increased to 20.0% as of June 30, 2017 from 18.8% as of December 31, 2016, after decreasing from 20.0% and 20.7% as of December 31, 2015 and 2014, respectively. The weighted average interest rate on Banpaís’s lempira-denominated assets was lower than that of the banking system due to its significant focus on lending to commercial clients, who demand lower rates. It increased to 14.1% as of June 30, 2017 from 14.0% as of December 31, 2016, compared to 14.6% as of December 31, 2015 and 16.0% as of December 31, 2014.

The Honduran banking industry’s weighted average interest rate on lempira-denominated liabilities was 3.6% as of June 30, 2017, lower than 5.6% as of December 31, 2016, 6.1% as of December 31, 2015 and 7.0% as of December 31, 2014. The weighted average interest rate on Banpaís’s lempira-denominated liabilities decreased to 3.8% as of June 30, 2017 from 4.5% as of December 31, 2016, compared to 3.5% as of December 31, 2015 and 2.9% as of December 31, 2014, which resulted from a strategy focused on maintaining our net interest margin.

Foreign Currency-Denominated Assets and Liabilities in Honduras

The chart below presents the weighted average interest rates on foreign currency-denominated assets and foreign currency-denominated liabilities of the Honduran banking industry as a whole (including Banpaís) and of Banpaís for the periods indicated.

 

LOGO

The Honduran banking industry’s weighted average interest rate on foreign currency-denominated assets was 6.0% as of June 30, 2017, significantly lower than 8.2% as of December 31, 2016, 8.3% as of December 31, 2015 and 8.7% as of December 31, 2014. The weighted average interest rate on foreign currency-denominated assets of Banpaís has shown a downward trend similar to that of the banking system due to an increased demand for lower rates in the market. Banpaís’s weighted average interest rate on foreign currency-denominated assets slightly decreased to 6.4% as of June 30, 2017 compared to 6.7% as of December 31, 2016, after decreasing from 7.3% as of December 31, 2015 and 7.0% as of December 31, 2014.

The Honduran banking industry’s weighted average interest rate on foreign currency-denominated liabilities has shown a stable trend, closing at 2.5% as of June 30, 2017 compared to 2.6% as of December 31, 2016, 2.7% as of December 31, 2015, and 2.6% as of December 31, 2014. The weighted average interest rate on foreign currency-denominated liabilities of Banpaís was lower than the banking system’s due to low costs, allowing it to provide a lower rate. Banpaís’s weighted average interest rate on foreign currency-denominated liabilities increased to 1.6% as of June 30, 2017 from 1.3% as of December 31, 2016, compared to 2.5% as of December 31, 2015 and 1.7% as of December 31, 2012.

 

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Effect of Family Remittances

Total family remittances to Guatemala from abroad were US$2,111 billion for the three-months ended June 30, 2017 (an increase of 14.1% from the corresponding period in 2016), US$7.4 billion for the year ended March 31, 2017, (an increase of 13.5% from the corresponding period in 2016), US$6.6 billion for the year ended March 31, 2016 (an increase of 14.9% from the corresponding period in 2015) and US$5.7 billion for the year ended March 31, 2015 (an increase of 9.5% from the corresponding period in 2014), according to the Guatemalan Central Bank. Total family remittances to Honduras from abroad were US$1,143 billion for the three-months ended June 30, 2017 (an increase of 12.9% from the corresponding period in 2016), US$4.1 billion for the year ended March 31, 2017 (an increase of 8.2% from the corresponding period in 2016), US$3.8 billion for the year ended March 31, 2016 (an increase of 6.4% from the corresponding period in 2015) and US$3.6 billion for the year ended March 31, 2015 (an increase of 13.3% from the corresponding period in 2014), according to the Honduran Central Bank.

The revenue we earned from family remittances consisted of commissions on foreign exchange transactions, fees for money orders and other related fees, as well as gains on currency exchange transactions. According to the GSB, through our banking subsidiary, Banco Industrial, we processed US$597 million in family remittances to Guatemala from abroad for the three-months ended June 30, 2017 (28.3% of the market) compared to US$2,018.2 million in family remittances to Guatemala from abroad for the year ended March 31, 2017 (27.1% of the market). Banpaís processed US$113 million in family remittances to Honduras from abroad for the three-months ended June 30, 2017 (9.8% of the market) compared to US$433.2 million (10.6% of the market) in family remittances received for the year ended March 31, 2017. For more information, see “Business.”

Competition

We face intense competition in all of our segments, which can materially affect our growth, market share, margins and profitability. For more information, see “Industry.”

Inflation

Our performance may be impacted by inflation because substantially all of our assets are not adjusted for the effects of inflation. In addition, material increases in inflation could result in lower demand for, and affect the pricing of, our services and products. Because the majority of the costs and expenses of our subsidiaries are fixed, we may not be able to reduce costs in the event of inflation. Increases in inflation could also negatively impact our banking subsidiaries’ loan portfolios.

The Guatemalan economy has been characterized by moderate inflation in recent years. Inflation for the year ended December 31, 2016 was 4.2%, compared to 3.1% in 2015. This increase was principally due to increases in the cost of energy and various agricultural products (mainly tomato and other legumes and vegetables), with a resulting effect on food prices and on the inflation rate that has had an upward trend since the last quarter of 2015. Inflation for the year ended December 31, 2014 was 3.0%. The inflation target of the Guatemalan Central Bank for 2017 is 4.0%.

Honduras experienced inflation of 3.3% for 2016 and 2.4% for 2015, according to the Honduran Central Bank. The primary drivers of inflation were the increase of prices in energy, clothing, and restaurants; other sectors that contributed to the inflation in 2016 were housing, water and fuels. Inflation for the year ended December 31, 2014 was 5.8%. The Honduran Central Bank estimates that the inflation for Honduras for 2017 will be around 4.5%.

Inflation in El Salvador for the year ended December 31, 2016 was (0.9)%, compared to 1.0% for the year ended December 31, 2015. The principal drivers of inflation were mostly climatic conditions and to a lesser degree the international oil prices, as well as the public policy of grants and focus on market prices (energy, communication, and fuels). Inflation for the year ended December 31, 2014 was 0.5%. The IMF estimates a deflation for El Salvador of 2.7% for 2017.

 

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Exchange Rates

We are exposed to currency risk any time we hold an open position in a currency other than quetzales or lempiras. Volatility in quetzal and lempira exchange rates in Guatemala and Honduras could result in higher risks associated with such positions.

In addition, any devaluation or depreciation of the quetzal or lempira against the U.S. dollar could have a negative impact on the ability of our subsidiaries’ clients to repay loans and make premium payments. Therefore, any significant devaluation of the quetzal and lempira against the U.S. dollar could have a material adverse effect on our financial condition and results of operations.

The exchange rate of the quetzal against the U.S. dollar has been stable during recent years. The quetzal exchange rate is characterized by cyclical fluctuations in line with the export seasons of Guatemala’s main commodities. The exchange rate was Q.7.3352 per US$1.00 on June 30, 2017, as published by the Guatemalan Central Bank.

The exchange rate of the lempira has been characterized by a gradual depreciation against the U.S. dollar during recent years, mainly due to higher consumption of imported goods, as well as the drop in prices of exported products like coffee, sugar, and palm oil. The exchange rate was L.23.4445 per US$1.00 on June 30, 2017, as published by the Honduran Central Bank.

For more information, see “Exchange Rates.”

Demographic Trends

As of 2016, Guatemala had a population of approximately 16.7 million people, according to the International Monetary Fund, which represented an estimated increase of approximately 407,000 people compared to 2015. The average annual population growth rate from 2012-2016 was 2.5%, a trend that is estimated to continue for the following five years according to the International Monetary Fund. According to the World Bank, the poverty rate in Guatemala decreased to 9.3% in 2014 (most recent data available), from approximately 11.5% in 2011, and the unemployment rate decreased from 4.13% in 2011 to 2.38% in 2016. According to the International Monetary Fund, GDP per capita in U.S. dollars increased from an estimated US$3,335.9 in 2012 to US$4,088.9 in 2016, reflecting an increase in purchasing power.

As of 2016, Honduras had a population of approximately 8.2 million people, according to the International Monetary Fund, which represented an estimated increase of approximately 115,000 people compared to 2015. The average annual population growth rate from 2012-2016 was 1.5%, a trend that is estimated to continue for the following five years, according to the International Monetary Fund. According to the World Bank, the poverty rate in Honduras increased to 16% in 2014 (most recent data available), from approximately 14% in 2009, and the unemployment rate increased from 4.4% in 2011 to 6.3% in 2016. According to the International Monetary Fund, GDP per capita in U.S. dollars increased from US$2,386.7 in 2012 to US$2,608.6 in 2016, reflecting an increase in purchasing power.

As of 2016, El Salvador had a population of approximately 6.1 million people, according to the International Monetary Fund, which represents an estimated increase of approximately 19,000 people compared to 2015. The average annual population growth rate from 2012-2016 was 0.3%. According to the World Bank, the poverty rate in El Salvador declined to 3.0% in 2014 (most recent data available), from 6.4% in 2009 and the unemployment rate decreased to 6.3% in 2016 from 6.6% in 2011. According to the International Monetary Fund, GDP per capita in U.S. dollars increased from US$3,923.2 in 2012 to US$4,343.4 in 2016, reflecting an increase in purchasing power.

We expect these trends to benefit our business, particularly our retail banking, commercial banking and insurance segments, because as the population increases, unemployment rates decrease and GDP per capita increases, the need for financial services is expected to increase accordingly.

 

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Bank Loans

The growth rates of the loan portfolios of our banking subsidiaries have been a result of the low banking penetration in the countries where we conduct our main operations. In terms of banking penetration, the ratio of loans (as published by the GSB and the CNBS) to GDP (as published by the Guatemalan Central Bank and the Honduran Central Bank) of Guatemala and Honduras was 31.0% and 55.7%, respectively, as of December 31, 2016.

In Guatemala, since the beginning of 2013, the growth of bank loans to the private sector has been experiencing a gradual slowdown. According to the Guatemalan Central Bank, for the three-month period ended June 30, 2017 the growth rate of bank loans to the private sector was 1.1%, while for the years ended March 31, 2017 and 2016, the growth rate was 5.2% and 10.5%, respectively, compared to 11.6% for the year ended March 31, 2015. According to the Guatemalan Central Bank, the primary reason for the slowdown has been a decrease in the growth of domestic corporate loans over the corresponding period; demand for such loans in Guatemala has declined, as certain large corporations have instead decided to access the international markets to issue bonds and obtain loans to meet their funding needs. For the three-month period ended June 30, 2017, the growth rate in loans to the corporate sector was 0.3% as compared to 3.5%, 10.8% and 12.4% for the years ended March 31, 2017, 2016 and 2015, respectively. Despite the decrease in the growth rate, private-sector bank loans continued to experience growth rates higher than GDP growth during the same period.

In Honduras, bank loans to the private sector grew at a rate of 1.8% for the three-month period ended June 30, 2017, as compared to 9.5%, 10.8% and 10.2% for the years ended March 31, 2017, 2016 and 2015, respectively. Private-sector bank loans have experienced growth rates higher than GDP growth during the same periods.

In El Salvador, bank loans to the private sector increased by 1.3% for the three-months ended June 30, 2017, as compared to a growth rate of 5.8%, 4.6% and 4.2% for the years ended March 31, 2017, 2016 and 2015, respectively. The increase in bank loans to the private sector was mainly driven by local private demand for investment and working capital, primarily in the transportation, financial services, and energy sectors.

Critical Accounting Policies under IFRS

We prepare our consolidated financial statements in accordance with IFRS as issued by the IASB. The notes to our Annual Financial Statements contain a summary of our significant accounting policies. The following discussion describes those areas that require considerable management judgment or involve a higher degree of complexity in the application of the accounting policies that currently affect our financial condition and results of operations. For more information, see Note 3 to our Annual Financial Statements.

Measurement of Financial Instruments

IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We have an established control framework with respect to the measurement of fair values, using valuation models according to the fair value hierarchy (Level 1, Level 2 or Level 3), reflecting the degree of subjectivity of the models and their inputs.

We use valuation techniques such as net present value and discounted cash flow models, comparison with similar instruments for which observable market prices and other valuation models exist. Our assumptions include risk-free interest rates; reference interest rates; credit spreads and other premiums for determining discount rates; bonds and equity prices; foreign exchange rates; equity and equity index prices; and expected price volatilities and correlations.

The objective of valuation techniques is to arrive at a fair-value measurement that reflects the price that would be received to sell an asset or paid to transfer the liability in an orderly transaction between market participants as of the measurement date.

 

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Our financial assets and liabilities measured at fair value are interest-rate swaps and futures contracts used for economic hedging purposes. The rest of our financial assets and liabilities are not recognized at fair value.

Our loan portfolio and our investments in debt securities are measured at amortized cost, as we maintain the positions to collect principal and interest. Amortized cost requires an estimation of the recoverability of contractual cash flows. Revenue is recognized using the effective interest method.

Our financial assets are measured at their fair value only for disclosure purposes and are classified on the corresponding fair value hierarchy based on the valuation methodology. Our valuation methodology includes cash flow discount models based on secondary markets and future cash flow discount models using discount rates of similar instruments. Both models take into consideration information input under the fair value hierarchy, mainly Level 2 and Level 3. As of March 31, 2017, 2016 and 2015 the impact of such valuation reflects a higher fair value of assets and liabilities compared to book value, as follows: US$396.1 million, US$328.9 million and US$752.3 million respectively. For more information, see Note 3(c) and Note 5 to our Annual Financial Statements.

Recognition of Insurance Contracts

We record our insurance contracts when issued and recognize our insurance premium income based on the coverage of the insurance provided. The unearned premium reserve represents the portion of premiums issued with respect to the unearned insurance coverage period. In the case of life insurance, premiums are recognized as income upon being issued. For more information, see Note 3(d) to our Annual Financial Statements.

Impairment of Financial Assets

For each reporting period, we define an asset as impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that such loss event has had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

To assess allowance for loan losses and other receivables, we use an individual approach and a collective approach, depending on the level of significance of the loans and other receivables. Loans and other accounts receivable not individually significant are assessed collectively for potential impairment by grouping items with similar risk characteristics. Individually significant loans and other accounts receivable are assessed for potential specific impairment.

Loans are evaluated for impairment on a regular basis for any event that may cause such impairment and adjusted if necessary in our results for the period. To determine whether an impairment loss should be recorded in our results, our subsidiaries make decisions as to whether there is any observable data indicating that there is a reduction of the loan value that can be measured through the estimated future cash flows of the loan portfolio. This evidence includes observable data indicating that an adverse change occurred in the repayment situation of borrowers, or an adverse change in economic conditions that may lead to losses in the loan portfolio. The methodology and assumptions used to estimate the amount and timing of future cash flows are regularly reviewed to reduce any difference between the estimated losses and the actual loss experience.

Components for calculating allowance for loan losses are:

 

    Probability of default: describes the probability of default by a borrower in a given time horizon.

 

    Loss given default or severity rate: describes the amount of funds that can be lost if a borrower defaults after considering all related collateral. With regard to investments, the amount that can be lost is called exposure at default.

 

    Expected loss: defined as the product of the probability of default times (i) the loss given default or severity rate or (ii) the exposure at default, as applicable.

 

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For more information, see Note 3(l) to our Annual Financial Statements.

Measurement of Defined-Benefit Obligations

We recognize as benefit obligations all defined employee liabilities relating to defined-benefit plans, short-term benefits and termination benefits.

In the case of defined-benefit plans, we recognize not only our legal obligation under the formal term, but also any constructive obligation that arises from our optional practices. We measure our net obligation in respect of defined-benefit plans by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and any unrecognized past service costs and the fair value of any plan assets are deducted.

The fair value of employee benefits is determined using an actuarial valuation based on the standards defined in IAS 19. Such valuation includes biometric and financial actuarial assumptions such as discount rate and increase rate, and also includes a sensitivity analysis by reference to a change in the discount rate and increase rate of -0.50% and +0.50%. Regarding short-term benefits, we measure these on an undiscounted basis and they are expensed as the related services are provided, considering current wages. This liability is recognized as the amount expected to be paid under short-term cash and includes mainly wages and salaries, bonuses, paid absences, vacations, vacation bonuses and incentives to pay this amount as a result of past services provided by the employee, and the obligation can be estimated reliably.

With respect to termination benefits, these liabilities are recognized as an expense when we are committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary termination. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value. For more information, see Note 3(o) and Note 27 to our Annual Financial Statements.

Deferred Tax

We account for deferred tax under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between such values. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to temporary differences when recovered or settled in each of the jurisdictions where our subsidiaries operate, based on laws enacted or substantially enacted as of the reporting date.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which such can be reversed. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that is no longer probable that the related tax benefit will be realized.

One of the main changes affecting our subsidiaries in Guatemala is that the income tax rate for companies was reduced from 31% to 28% for 2014 and further reduced from 28% to 25% for 2015, which is the current rate.

For more information, see Note 3(r) and Note 18 to our Annual Financial Statements.

Goodwill and Intangible Assets with Undefined Useful Life

We measure goodwill according to the value determined in accordance with the purchase price less accrued impairment losses. Goodwill is subject to impairment tests at the end of the reporting period and when there are triggering events that may indicate that impairment has occurred.

 

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We measure intangible assets with an undefined useful life at cost and subsequently subject to impairment tests at the end of the reporting period and when there are triggering events that may indicate that impairment has occurred.

We make an annual valuation to determine if there is a deterioration on the amount recorded as goodwill in our financial statements. This methodology is based on:

 

    Using a precedent transaction methodology to determine the estimated value of Banco del País, S.A. and Seguros del País, S.A. As of March 31, 2017, this valuation was US$432 million, which translates to a positive result for Bicapital Corporation of US$187 million.

 

    Using peer comparison valuation methodology to determine the estimated value of Banco del País, S.A. and Seguros del País, S.A.. As of March 31, 2017, this valuation was US$346 million, which translates to a positive result for Bicapital Corporation of US$101 million.

 

    Determining the book value of our healthcare subsidiaries, which as of March 31, 2017 was US$48 million, which translates to a positive result for Bicapital Corporation of US$21 million.

 

    Estimating the value of our subsidiary Alerta Médica through a ten year financial projection discount model. The estimated recovery period of the initial investment is five years.

For more information, see Note 3(j)(k), Note 15 and Note 16 to our Annual Financial Statements.

Recent Accounting Pronouncements

None of the standards and interpretations applicable to annual periods started on or after April 1, 2013 is expected to have an effect on our financial statements, except for IFRS 9 “Financial Instruments,” which is mandatory for our financial statements beginning on January 1, 2018, as well as IFRS 15 “Revenue from Contracts with Customers,” mandatory for our financial statements as of January 1, 2018, which introduces the new revenue model and might change its recognition. The extent of the impact of these two rules has not been determined.

IFRS 16 “Leases” (“IFRS 16”) was issued in January 2016 and replaced IAS 17 “Leases”. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. The major change introduced by IFRS 16 is that leases will be brought onto a lessee’s statement of financial position, providing a more complete picture of the lessee’s assets and liabilities. IFRS 16 removes the classification of leases as either operating leases or financial leases, treating all leases as financial leases. Short-term leases (less than 12 months) and leases of low-value assets are exempt from the requirements. Early application of IFRS 16 is permitted as long as IFRS 15 “Revenue from Contracts with Customers” is also applied. Our company’s management is currently evaluating the impact IFRS 16 will have on our consolidated financial statements and disclosures; however, most of the company’s leases are already classified and measured as financial leases.

Principal Line Items in Consolidated Income Statements

Below is a description of certain significant line items from our consolidated income statements.

Interest income: includes interest from investment securities; interest from loans and advances to customers; income from financial derivatives; interest from accounts receivable; and interest from cash and cash equivalents deposits in other banks.

Interest expense: includes interest paid on deposits from customers (demand, time and savings deposits); loans obtained from other financial institutions (interbank loans, including securitized loans and trade and working capital lines of credit in foreign currency); financial obligations (local- and foreign-currency bond issuances); other obligations (subordinated liabilities); and financial derivatives expense.

 

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Loan impairment charges: determined by estimating potential losses that the company might experience due to credit risk. Loan impairment charges represents the amount estimated to be lost and is treated as an expense in our financial statements. For more information regarding “credit risk,” see Note 5 to our Annual Financial Statements.

Net fee and commission income: includes (a) fee and commission income from bank services, leasing services, account handling, gain on foreign exchange transactions, trading in securities, legal services, maintenance services, storage services, tax collections, mobile banking (BiMóvil), electronic billing, rejected checks and price differences in repurchase of government securities; and (b) fee and commission expense for protection fund contributions, expenses for assistance for property and casualty, other services, additional benefits, loans obtained, trading in securities, collections, loss on foreign exchange transactions, price differences in repurchases of government securities, commission expenses for deposits from customers, uncollected income and commissions.

Net premium income: result of premiums earned, net of technical reserves, minus the acquisition and renewal costs, minus expenses for insurance claims. Premiums earned include premiums on life, group life and property and casualty plans, direct insurance and reinsurance. Acquisition and renewal cost includes insurance agents’ commissions, as well as satellite localization services, extraordinary commissions for supervisors and agents, bonus and prizes, fees, inspection and risk costs, vehicle assistance and reinsurance. Expenses for insurance claims includes claims for life insurance, group plans, and property and casualty.

Operating and administrative expenses: includes personnel costs, administrative expenses and rent expenses. Personnel costs includes wages and salaries, bonuses, employer contributions, severance payments, vacation bonuses, extraordinary salaries, transportation and training. Administrative expenses includes non-income taxes and dues, depreciation, professional fees, marketing and advertising, security and monitoring, repairs and maintenance, utilities, amortizations, communications, insurance premiums and bonding, stationery and office supplies and courier. Rent expenses includes property rentals, equipment and fixtures and certain other rental expenses.

Other operating income, net: includes income from the sale of foreclosed assets, selling of property, recoveries, gain on selling of equity securities, dividends and foreign exchange differences. It also includes expenses from losses on selling of equity securities, extraordinary expenses and participation in reinsurance recoveries.

Income tax: subsidiaries based in Guatemala may elect between the two tax regimes in order to determine their current income tax. Certain of our subsidiaries, including Banco Industrial, Seguros El Roble and Fianzas El Roble (our surety company) adopted the tax regime for profitable activities. For the year ended December 31, 2014, our statutory tax rate was 28%, and for the years-ended December 31, 2015 and 2016, our statutory tax rate was 25%. Additionally, computed capital income and capital gains are taxed at the rate of 10%. Certain of our other subsidiaries, including Westrust, Cotecnica and Financiera Industrial adopted the optional simplified tax regime based on gross revenues (Régimen Opcional Simplificado sobre ingresos de actividades lucrativas) (the Guatemalan Optional Simplified Tax Regime Based on Gross Revenues) for determining their current income tax expense, which is based on a 5% rate on the gross monthly revenues up to Q.30,000 and 6% for gross revenues in excess of said amount.

Honduran entities pay income taxes at the rate of 25% on adjusted taxable income before taxes. Additionally, entities whose income exceed L.1,000,000 are required to pay 5% of the net taxable income under local GAAP.

Salvadoran entities pay income taxes at the rate of 30% on adjusted taxable income before taxes under local GAAP.

 

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

The following table shows the principal components of our consolidated income statement for the three-month periods ended June 30, 2017 and 2016.

 

     For the three months ended
June 30,
               
     2017      2016      Absolute Change      Percentage
Change
 
     (US$ in
millions)
     (US$ in
millions)
     (%)  

CONSOLIDATED INCOME STATEMENTS

           

Interest income

     251.3        232.0        19.3        8.3  

Interest expense

     (119.9      (113.7      (6.2      5.5  
  

 

 

    

 

 

    

 

 

    

Net interest income

     131.4        118.3        13.1        11.1  
  

 

 

    

 

 

    

 

 

    

Loan impairment charges

     (12.1      (11.8      (0.3      2.5  
  

 

 

    

 

 

    

 

 

    

Net interest income after provisions

     119.3        106.5        12.8        12.0  

Fee and commission income

     52.3        43.5        8.8        20.2  

Fee and commission expense

     (9.7      (8.7      (1.0      11.5  
  

 

 

    

 

 

    

 

 

    

Net fee and commission income

     42.6        34.8        7.8        22.4  
  

 

 

    

 

 

    

 

 

    

Premiums earned

     87.3        74.2        13.1        17.7  

Technical reserves

     (22.6      (17.6      (5.0      28.4  

Acquisition and renewal costs

     (33.2      (26.9      (6.3      23.4  

Expenses for insurance claims

     (24.2      (23.9      (0.3      1.3  
  

 

 

    

 

 

    

 

 

    

Net premium income

     7.3        5.8        1.5        25.9  
  

 

 

    

 

 

    

 

 

    

Profit for banking and insurance
operations

     169.2        147.1        22.1        15.0  

Operating and administrative expenses

     (120.8      (103.6      (17.2      16.6  

Other operating income, net

     15.5        13.3        2.2        16.5  
  

 

 

    

 

 

    

 

 

    

Profit before income tax

     63.8        56.7        7.1        12.5  

Income tax

     (9.2      (6.3      (2.9      46.0  

Profit for the period

     54.6        50.4        4.2        8.3  

An analysis of the components set forth in the foregoing table follows.

Interest Income

The following table presents the components of our interest income for the three-month periods ended June 30, 2017 and 2016.

 

     For the three-month period ended
June 30,
               
     2017      2016      Absolute Change      Percentage
Change
 
     (US$ in
millions)
     (US$ in
millions)
     (%)  

Interest income

           

Loans and advances to customers

     185.5        166.8        18.7        11.2  

Investment securities

     64.6        64.3        0.3        0.5  

Accounts receivable

     0.4        0.5        (0.1      (20.0

Cash and cash equivalents

     0.3        0.2        0.1        50.0  

Government repurchase agreements

     0.3        0.2        0.1        50.0  

Financial derivatives income

     0.2        0.0        0.2        N/M  
  

 

 

    

 

 

    

 

 

    

Total interest income

     251.3        232.0        19.3        8.3  
  

 

 

    

 

 

    

 

 

    

 

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Interest income increased 8.3% to US$251.3 million for the three-month period ended June 30, 2017 from US$232.0 million for the corresponding period in 2016, primarily due to higher average balance of interest earning assets, which increased by US$1,018.6 million, or 8.4%, for the three-month period ended June 30, 2017, compared to the same period in 2016. The increase in interest income was mainly due to a US$18.7 million increase in interest income from loans and advances to customers, a US$0.3 million increase in interest income from investment securities, a US$0.2 million increase in interest income from financial derivatives income, a US$0.1 million increase in interest income from cash and cash equivalents, and a US$0.1 million increase in interest income from government repurchase agreements. The increase in interest income was partially offset by a US$0.1 million decrease in interest income from accounts receivable.

The increase in the average balance of our loan portfolio was mainly derived from our commercial banking segment, the average loan portfolio of which increased by US$581.6 million, or 10.1%, for the three-month period ended June 30, 2017, compared to the corresponding period in 2016.

The decrease in the average nominal interest rate of our loan portfolio was mainly due to lower average nominal interest rate of our foreign loan portfolio to 10.4% for the three-month period ended June 30, 2017, from 11.6% for the corresponding period in 2016. The decrease in the average nominal interest rate of our foreign portfolio was mainly driven by Banpaís. The average nominal interest rate of Banpaís’ foreign currency portfolio decreased to 6.4% for the three-month period ended June 30, 2017 from 6.7% for the corresponding period in 2016, mainly as a result of increased competition in the Honduran banking system, which is reflected in a lower average nominal interest rate of 6.0% for the three-month period ended June 30, 2017 from 8.4% for the corresponding period in 2016, according to the CNBS.

Interest on investment securities increased US$0.3 million, or 0.5%, for the three-month period ended June 30, 2017 compared to the corresponding period in 2016, due to an increase in the average nominal interest rate to 7.1% for the three-month period ended June 30, 2017, from 7.0% for the corresponding period in 2016, accounting for a US$0.6 million increase in interest income. The increase in interest income on investment securities was partially offset by lower average balance of investment securities, which decreased by US$12.7 million, or 0.3%, for the three-month period ended June 30, 2017, compared to the corresponding period in 2016, accounting for a US$0.4 million decrease in interest income.

The increase in the average nominal interest rate on investment securities was mainly due to a higher average nominal interest rate of our Quetzal-denominated investment securities, which increased to 7.4% for the three-month period ended June 30, 2017, from 7.3% for the corresponding period in 2016, as a result of certain investments in time deposit certificates of the Central Government of Guatemala that were not renewed consisting of investments with lower rates compared to other instruments in the portfolio.

The decrease in the average balance on investment securities was mainly due to our Quetzal-denominated investment securities, the average balance of which decreased by US$76.6 million, or 3.1%, for the three-month period ended June 30, 2017, compared to the corresponding period in 2016. The decrease in the average balance of our Quetzal denominated investment securities was the result of certain time deposit certificates of the Central Government of Guatemala that were not renewed as a result of lower interest rates.

The increase in interest income from financial derivatives was mainly due to an increase in the average nominal interest rate to 229,906.5% for the three-month period ended June 30, 2017, from 17,257.9% for the corresponding period in 2016, accounting for a US$0.6 million increase in interest income. The increase in interest income from financial derivatives was partially offset by a lower average balance of investment securities, which decreased by US$0.6 thousand, or 59.0%, for the three-month period ended June 30, 2017, compared to the corresponding period in 2016, accounting for a US$0.4 million decrease in interest income.

The increase in interest income from cash and cash equivalents was a result of higher average balance of cash and cash equivalents, which increased by US$48.8 million, or 18.7%, accounting for a US$0.1 million increase in interest income.

 

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The increase in interest income from government repurchase agreements was driven by a higher average nominal interest rate, which was 9.1% for the three-month period ended June 30, 2017, compared to 8.1% for the corresponding period in 2016.

The decrease in interest income from accounts receivable was driven by lower average nominal interest rate, which was 0.96% for the three-month period ended June 30, 2017, compared to 1.0% for the corresponding period in 2016.

Interest Expense

The following table presents the components of our interest expense for the three-month period ended June 30, 2017 and 2016.

 

     For the three months ended
June 30,
               
     2017      2016      Absolute Change      Percentage
Change
 
     (US$ in
millions)
     (US$ in
millions)
     (%)  

Interest expense

           

Depositary obligations

     70.3        68.8        1.5        2.2  

Financing

     33.2        28.8        4.4        15.3  

Financial obligations

     11.5        10.9        0.6        5.5  

Other obligations

     4.8        4.8        0.0        0.0  

Financial derivatives expenses

     0.1        0.1        0.0        0.0  

Government repurchase agreements

     0.0        0.4        (0.4      (100.0
  

 

 

    

 

 

    

 

 

    

Total interest expense

     119.9        113.7        6.2        5.5  
  

 

 

    

 

 

    

 

 

    

Interest expense increased 5.5% to US$119.9 million for the three-month period ended June 30, 2017 from US$113.7 million for the corresponding period in 2016, primarily due to a higher average balance of interest-bearing liabilities, which increased by US$950.6 million, or 7.7%, for the three-month period ended June 30, 2017, compared to the corresponding period in 2016. The total increase in interest expense was mainly due to a US$4.4 million increase in interest expense from financing, a US$1.5 million increase in interest expense from depositary obligations and to a US$0.6 million increase in interest expense from financial obligations. The increase in interest expense was partially offset by a US$0.4 million decrease in interest expense from government repurchase agreements.

Interest expense from financing increased by US$4.4 million, or 15.3%, for the three-month period ended June 30, 2017 compared to the corresponding period in 2016, mainly due to higher average balance of financing, which increased by US$263.5 million, or 9.8%, for the three-month period ended June 30, 2017 compared to the corresponding period in 2016, accounting for US$2.5 million increase in interest expense. The increase in interest expense from financing was also as a result of higher average nominal interest rate, which increased to 4.5% for the three-month period ended June 30, 2017, from 4.3% for the corresponding period in 2016, accounting for a US$1.9 million increase in interest expense.

The increase in the average balance of our financing was primarily the result of a higher average balance of U.S. dollar-denominated debt, which increased by US$308.6 million, or 13.8%, for the three-month period ended June 30, 2017, compared to the corresponding period in 2016. This financing was mainly destined to finance our U.S. dollar-denominated loan portfolio, the average balance of which increased by US$220.7 million, or 5.7%, for the three-month period ended June 30, 2017, compared to the corresponding period in 2016.

The increase in the average nominal interest rate of our financing was mainly the result of higher average nominal interest rates in our U.S. dollar-denominated financing, which increased to 4.2% for the three-month period ended June 30, 2017 from 4.0% for the corresponding period in 2016. The increase in interest rates in dollar denominated financing was mainly driven by an environment of increasing interest rates in international markets.

 

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Interest expense from depositary obligations increased by US$1.5 million, or 2.2%, for the three-month period ended June 30, 2017 compared to the corresponding period ended June 30, 2016, mainly due to a higher average balance of depositary obligations, which increased by US$656.1 million, or 7.6%, for the three-month period ended June 30, 2017 compared to the corresponding period in 2016, accounting for US$5.9 million increase in interest expense. The increase in interest expense from depositary obligations was partially offset by a decrease in the average nominal interest rate to 3.0% for the three-month period ended June 30, 2017 from 3.2% for the corresponding period in 2016, accounting for a US$4.4 million decrease in interest expense.

The increase in the average balance of our depositary obligations mainly came from our term deposits, the average balance of which increased by US$293.3 million, or 7.7%, for the three-month period ended June 30, 2017, compared to the corresponding period in 2016, followed by our saving deposits, the average balance of which increased by US$197.5 million, or 12.0%, for the three-month period ended June 30, 2017, compared to the corresponding period in 2016. From our operating segments, the main contributor to the increase in the average balance of depositary obligations was our commercial banking segment with an increase in the average balance of depositary obligations of US$572.2 million, or 18.1%, for the three-month period ended June 30, 2017, compared to the corresponding period in 2016.

The decrease in the average nominal interest rate of our depositary obligations was mainly the result of lower average nominal interest rates in our term deposits, which decreased to 5.5% for the three-month period ended June 30, 2017 from 5.8% for the corresponding period in 2016, mainly as a result of lower average nominal interest rates on our dollar denominated term deposits mainly driven by higher foreign currency liquidity in Guatemala.

Interest expense from financial obligations increased by US$0.6 million mainly due to a higher average balance of financial obligations, which increased by US$97.7 million, or 14.9%, for the three-month period ended June 30, 2017, compared to the corresponding period in 2016, accounting for US$1.4 million increase in interest expense. The increase in interest expense from financial obligations was partially offset by a decrease in the average nominal interest rate to 6.1% for the three-month period ended June 30, 2017 from 6.6% for the corresponding period in 2016, accounting for US$0.8 million decrease in interest expense.

The increase in interest expense was partially offset by a US$0.4 million decrease in interest expense from government repurchase agreements mainly as a result of lower volume of transactions, which decreased to US$0.1 million for the three-month period ended June 30, 2017 as compared to US$66.7 million for the corresponding period in 2016.

Net interest margin for the three-month period ended June 30, 2017 increased to 4.0% as compared to 3.9% for the corresponding period in 2016, primarily as a result of a US$13.1 million, or 11.1%, increase in net interest income, while the increase in total average interest earning assets was of US$1,018.6 million, or 8.4%, from the corresponding period in 2016.

Loan Impairment Charges

The following table presents our loan impairment charges, our NPL ratio, our coverage ratio and our allowances for loan losses for the three-month periods ended June 30, 2017 and 2016.

 

     For the three months ended
June 30,
              
     2017     2016     Absolute Change      Percentage
Change
 
     (US$ in
millions)
    (US$ in
millions)
     (%)  

Loan impairment charges

     (12.1     (11.8     (0.3      2.5  

NPL ratio

     1.1     1.2     

Coverage ratio

     93.4     92.8     

Allowance for loan losses

     91.5       87.8       

 

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Loan impairment charges increased 2.5% to US$12.1 million for the three-month period ended June 30, 2017 from US$11.8 million for the corresponding period in 2016. The increase in loan impairment charges was mainly due to higher delinquencies in our retail banking segment with an NPL ratio of 2.8% as of June 30, 2017, up from 2.6% as of June 30, 2016 resulting in an increase in the provisioning for loan losses to US$91.5 million as of June 30, 2017, compared to US$87.8 million as of June 30, 2016.

The main contributor to the increase in loan impairment charges was our retail banking segment with a US$1.4 million, or 20.6%, increase, mainly as a result of higher NPL ratio of our retail loan portfolio of 2.8% (2.2% for consumer loans, 3.3% for microfinance, and 3.2% for mortgage loans) as of June 30, 2017, compared to 2.6% (2.0% for consumer loans, 2.6% for microfinance, and 3.1% for mortgage loans) as of June 30, 2016, leading to an increase in the provisions for loan losses in our retail banking segment to US$58.4 million as of June 30, 2017 from US$48.3 million for the corresponding period in 2016.

On the other hand loan impairment charges in our commercial banking segment decreased by US$0.5 million, or 11.4%, mainly driven by a decrease in the NPL ratio of our commercial loan portfolio to 0.5% as of June 30, 2017, from 0.7% as of June 30, 2016, leading to a decrease in the provisions for loan losses in our commercial banking segment to US$33.1 million as of June 30, 2017 from US$39.4 million for the corresponding period in 2016.

Allowances for loan losses increased 4.3% to US$91.5 million as of June 30, 2017 from US$87.8 million as of June 30, 2016, while our total non-performing loans increased 3.6% to US$98.0 million as of June 30, 2017 from US$94.6 million as of June 30, 2016, resulting in an increase in our NPL coverage ratio to 93.4% as of June 30, 2017 from 92.8% as of June 30, 2016.

Fee and Commission Income

The following table presents the components of our fee and commission income for the three-month periods ended June 30, 2017 and 2016.

 

     For the three months ended
June 30,
               
     2017      2016      Absolute Change      Percentage
Change
 
     (US$ in
millions)
     (US$ in
millions)
     (%)  

Fee and commission income

           

Commissions credit cards

     12.9        10.3        2.6        25.2  

Bank services

     11.2        9.0        2.2        24.4  

Gain of foreign exchange currency transactions

     7.1        6.7        0.4        6.0  

Account handling

     4.1        4.0        0.1        2.5  

Commissions for money transfers

     2.8        2.5        0.3        12.0  

Commissions for family remittances

     2.0        1.7        0.3        17.6  

Commissions of loans

     1.7        0.6        1.1        183.3  

Other

     10.5        8.7        1.8        20.7  
  

 

 

    

 

 

    

 

 

    

Total fee and commission income

     52.3        43.5        8.8        20.2  
  

 

 

    

 

 

    

 

 

    

 

(1)  Other includes fees and commissions from collections from third parties, storage, leases, legal services, mobile banking (BiMóvil), letters of credit, collections, electronic billing, rejected checks, maintenance, and trading in securities.

Fee and commission income increased 20.2% to US$52.3 million for the three-month period ended June 30, 2017 from US$43.5 million for the corresponding period in 2016, primarily as a result of a US$2.6 million increase in commissions from credit cards, a US$2.2 million increase in bank services, a US$1.8 million increase

 

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in other fee and commissions, a US$1.1 million increase in commissions of loans, a US$0.4 million of gain of foreign exchange currency transactions, a US$0.3 million increase in commissions for money transfers, a US$0.3 million increase in commissions for family remittances and a US$0.1 million increase in account handling.

The increase in commissions from credit cards is a result of the growth of our consumer loan portfolio, which increased by US$146.8 million, or 16.8%, as of June 30, 2017 compared to June 30, 2016.

The increase in commissions from bank services is the result of the growth of our operations. Our banking transactions totaled 74.2 million for the three-month period ended June 30, 2017, compared to 69.4 million for the same period in 2016.

The increase in other fee and commissions was mainly due to an increase in legal services by US$1.5 million for the three-month period ended June 30, 2017 compared to the same period in 2016, as a result of the legalization of loans and an increase in legal fees billed by our legal service subsidiaries.

The increase in commissions of loans is a result of the structuring fees originated by two syndicated loan transactions in the energy sector in Guatemala and in Honduras.

The increase in gain of foreign exchange currency transactions was mainly driven by our foreign exchange desk in Guatemala as we continue to be one of the main FX providers in the financial market.

The increase in fees from money transfers was mainly due to an increase in electronic transactions to 29.3 million for the three-month period ended June 30, 2017, compared to 23.2 million for the corresponding period in 2016.

The increase in commissions for family remittances was mainly driven by our family remittances business in Guatemala as we continue to be a leading recipient of family remittance in the country.

The increase in commissions from account handling is a result of our growth in depositary obligations, for which the average balance increased by US$656.1 million, or 7.6%, for the three-month period ended June 30, 2017 compared to the same period in 2016.

Fee and Commission Expense

The following table presents the components of our fee and commission expense for the three-month periods ended June 30, 2017 and 2016.

 

     For the three months ended
June 30,
               
     2017      2016      Absolute Change      Percentage
Change
 
     (US$ in
millions)
     (US$ in
millions)
     (%)  

Fee and commission expense

           

Protection fund contributions

     4.3        4.1        0.2        4.9  

Other services expense

     4.0        2.6        1.4        53.8  

Additional benefits

     0.6        0.6        0.0        0.0  

Trading in securities

     0.3        0.3        0.0        0.0  

Collections

     0.3        0.2        0.1        50.0  

Other

     0.1        0.9        (0.8      (88.9
  

 

 

    

 

 

    

 

 

    

Total fee and commission expense

     9.7        8.7        1.0        11.5  
  

 

 

    

 

 

    

 

 

    

 

(1)  Other includes fee and commission expenses from loss on foreign exchange transactions, fees from assistance on damages, fees from financing and uncollected income.

 

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Fee and commission expense increased 11.5% to US$9.7 million for the three-month period ended June 30, 2017 from US$8.7 million for the corresponding period in 2016, primarily due to a US$1.4 million increase in other services expense, a US$0.2 million increase in protection fund contributions, and to a US$0.1 million increase in collections. The increase in fee and commission expense was partially offset by US$0.8 million decrease in other fees and commissions.

The increase in other services expense mainly consisted in higher service expenses on fast money transfers, higher service expenses on air time and higher service expenses on credit cards.

The US$0.2 million increase in the protection fund contributions was a result of our growth in depositary obligations, for which the average balance increased by US$656.1 million, or 7.6%, for the three-month period ended June 30, 2017 compared to the same period in 2016. The protection fund contribution is similar to the FDIC (Federal Deposit Insurance Corporation) insurance scheme in the United States and is paid to local banking regulators as a percentage of total deposits.

The increase in collections was mainly driven by higher expenses on the claims of past due loans, which increased by US$52.4 million, or 7.7%, as of June 30, 2017 compared to the same date in 2016.

The increase in fee and commission expense was partially offset by US$0.8 million decrease in other fees and commissions as a result of US$0.7 million decrease in assistance on damages and US$0.1 million decrease in loss of foreign exchange transactions.

Fee income ratio for the three-month period ended June 30, 2017 increased to 25.2% as compared to 23.7% for the corresponding period in 2016, primarily as a result of an increase in net fee and commission income of US$7.8 million, or 22.4% while our profit for banking and insurance operations increased by US$22.1 million, or 15.0%.

Net Premium Income

The following table presents the components of our net premium income for the three-month periods ended June 30, 2017 and 2016.

 

     For the three months ended
June 30,
               
     2017      2016      Absolute Change      Percentage
Change
 
     (US$ in
millions)
     (US$ in
millions)
     (%)  

Premiums earned

     87.3        74.2        13.1        17.7  

Technical reserves

     (22.6      (17.6      (5.0      28.4  

Acquisition and renewal costs

     (33.2      (26.9      (6.3      23.4  

Expenses for insurance claims

     (24.2      (23.9      (0.3      1.3  
  

 

 

    

 

 

    

 

 

    

Net premiums income

     7.3        5.8        1.5        25.9  
  

 

 

    

 

 

    

 

 

    

Premiums earned, net of technical reserves increased by US$8.1 million, or 14.3%, for the three-month period ended June 30, 2017 compared to the corresponding period in 2016, mainly as a result of an increase in premiums earned by our insurance subsidiary in Guatemala, which grew by US$8.8 million, or 19.1%, for the three-month period ended June 30, 2017, compared to the same period in 2016, mainly driven by higher premiums written in property and casualty and group life and health which grew by US$6.3 million and US$2.5 million, or 23.3% and 13.8%, respectively, for the three-month period ended June 30, 2017 compared to the corresponding period in 2016. The increase in premiums earned, net of technical reserves was partially offset by a decrease in premiums earned by our insurance subsidiary in Honduras, which decreased by US$0.7, million or 6.7%, for the three-month period ended June 30, 2017, compared to the same period in 2016, mainly driven by lower premiums written in life and health which decreased by US$0.6 million, or 15.8%, for the three-month period ended June 30, 2017 compared to the corresponding period in 2016.

 

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Technical reserves are constituted on a pro-rata basis of premiums written. Changes in the percentage of reserves in relation to premiums written are explained by the maturing of policies and changes in reinsurance programs over time.

Acquisition and renewal costs increased 23.4% to US$33.2 million for the three-month period ended June 30, 2017, from US$26.9 million for the corresponding period in 2016. The main cost under acquisition and renewal costs was our reinsurance programs. Additionally, acquisition and renewal costs also included brokerage commissions, sales incentives, advertising expenditures, risk inspection costs and vehicle-assistance programs. The increase in acquisition and renewal costs was mainly due to a US$5.0 million, or 21.0%, increase in reinsurance ceded. The increase in acquisition and renewal costs was also a result of a US$1.3 million, or 41.9%, increase in acquisition and renewal costs related to commissions paid to insurance brokers.

Expenses for insurance claims increased 1.3% to US$24.2 million for the three-month period ended June 30, 2017 from US$23.9 million for the corresponding period in 2016. The increase in expenses for insurance claims was principally due to higher expenditures for claims for property and casualty resulting from the growth of our business.

Operating and Administrative Expenses

The following table presents the components of our operating and administrative expenses for the three-month periods ended June 30, 2017 and 2016.

 

     For the three months ended
June 30,
               
     2017      2016      Absolute Change      Percentage
Change
 
     (US$ in
millions)
     (US$ in
millions)
     (%)  

Operating and administrative expenses

           

Personnel costs

     55.6        50.6        5.0        9.9  

Administrative expenses

     61.4        49.5        11.9        24.0  

Rent expenses

     3.8        3.5        0.3        8.6  
  

 

 

    

 

 

    

 

 

    

Total operating and administrative expenses

     120.8        103.6        17.2        16.6  
  

 

 

    

 

 

    

 

 

    

Operating and administrative expenses increased 16.6% to US$120.8 million for the three-month period ended June 30, 2017 from US$103.6 million for the corresponding period in 2016. The increase in operating and administrative expenses was principally due to a US$11.9 million, or 24.0%, increase in administrative expenses, a US$5.0 million, or 9.9%, increase in personnel costs and a US$0.3 million, or 8.6%, increase in rent expenses.

The increase in administrative expenses was mainly due to a US$9.2 million increase in non-income taxes and dues mainly as a result of payment of taxes derived from the intercompany sale of land, which is considered a non-recurring transaction. The increase in administrative expenses was also as a result of a US$0.7 million and US$0.2 million increase in depreciation and amortization, respectively, a US$0.8 million increase in maintenance, and a US$0.4 million increase in marketing and advertising.

Personnel costs increased 9.9%, from US$50.6 million for the three-month period ended June 30, 2017 to US$55.6 million for the three-month period ended June 30, 2016, primarily due a US$3.9 million increase in wages and salaries as a result of the expansion of our network and our internal policy of increasing wages and salaries annually to adjust for inflation. The increase in personnel costs was also as a result of a US$1.8 million increase in other variable benefits for our employees which was partially offset by a US$0.6 million decrease in vacation bonus. As of June 30, 2017 we had 13,582 employees in total, with a US$4,093.7 average personnel cost compared to 12,970 employees in total with a US$3,903.7 average personnel cost as of June 30, 2016.

 

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The increase in rent expenses was mainly driven by an increase in the number of our branches to 799 as of June 30, 2017 from 772 as of June 30, 2016.

Our efficiency ratio for the three-month period ended June 30, 2017 was 53.9%, compared to 56.2% for the corresponding period in 2016. The higher efficiency ratio for the three-month period ended June 30, 2017 was mainly a result of a higher increase in our profit for banking and insurance operations before provisions when compared to the increase in our operating and administrative expenses during the same period in 2016.

Other Income

Other income increased 16.5% to US$15.5 million for the three-month period ended June 30, 2017 from US$13.3 million for the corresponding period in 2016 mainly as a result of a US$2.6 million increase in health care services, a US$0.6 million increase in exchange rate variations and a US$0.5 million increase in loan portfolio recoveries. The increase in other income was partially offset by a US$0.7 million decrease in other receivables impairment, a US$0.3 million decrease in salvage and recovery from our reinsurance business, a US$0.1 million decrease in the sale of foreclosed assets and a US$0.1 decrease in salvage and recovery from our participation in reinsurance programs.

Profit Before Income Tax

Profit before income tax increased 12.5% to US$63.8 million for the three-month period ended June 30, 2017 from US$56.7 million for the corresponding period in 2016, primarily as a result of a US$12.8 million, or 12.0%, increase in net interest income after provisions; a US$7.8 million, or 22.4%, increase in net fee and commission income; a US$1.5 million, or 25.9%, increase in net premiums income; and a US$2.2 million, or 16.5%, increase in other income; which was partially offset by a US$17.2 million, or 16.6%, increase in operating and administrative expenses.

Income Tax

Our income tax expense increased to US$9.2 million for the three-month period ended June 30, 2017 from US$6.3 million for the corresponding period in 2016, resulting in an increase in our effective tax rate to 14.4% for the three-month period ended June 30, 2017 from 11.1% for the corresponding period in 2016.

Profit for the Period

Our profit for the period increased 8.3% to US$54.6 million for the three-month period ended June 30, 2017 from US$50.4 million for the corresponding period in 2016.

A 16.9% higher average shareholders’ equity of US$1,341.9 million for the three-month period ended June 30, 2017, up from US$1,147.9 million for the corresponding period in 2016, resulted in a ROAE of 16.3% for the three-month period ended June 30, 2017, compared to 17.6% for the corresponding period in 2016.

An 8.4% higher average total assets of US$15,284.4 million for the three-month period ended June 30, 2017, up from US$14,094.1 million for the corresponding period in 2016, resulted in a ROAA of 1.4% for the three-month period ended June 30, 2017, compared to 1.4% for the corresponding period in 2016.

 

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Results of Operations by Segment for the Three-Month Period Ended June 30, 2017 Compared to the Three-Month Period Ended June 30, 2016

The following table presents the income statement data for each of our reportable operating segments (see Note 15 to our Interim Financial Statements), including eliminations of inter-segment revenue and unallocated amounts, for the three-month periods ended June 30, 2017 and 2016.

 

     Corporate
Banking
    Retail
Banking
    Treasury     Insurance     Corporate
and
Eliminations(1)
 
     For the three months ended June 30,  
     2017     2016     2017     2016     2017     2016     2017     2016     2017     2016  
     (US$ in
millions)
    (US$ in
millions)
    (US$ in
millions)
    (US$ in
millions)
    (US$ in
millions)
 

Interest income

     106.2       96.0       79.3       70.8       63.4       63.1       2.4       2.1       0.0       0.0  

Interest expense

     (52.9     (48.3     (19.2     (17.6     (47.8     (47.9     0.0       0.0       0.0       0.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     53.4       47.7       60.0       53.3       15.6       15.2       2.4       2.1       0.0       0.0  

Loan impairment charges

     (3.9     (4.4     (8.2     (6.8     0.0       (0.6     0.0       0.0       0.0       0.0  

Net fee and commission income and other operating income

     8.3       9.1       30.6       23.7       0.5       0.5       1.9       1.7       16.9       13.2  

Net premiums income

     0.0       0.0       0.0       0.0       0.0       0.0       7.3       5.8       0.0       0.0  

Operating and administrative expenses

     (25.2     (23.9     (53.1     (48.0     (8.4     (6.6     (7.0     (7.3     (27.1     (17.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before tax

     32.5       28.5       29.3       22.1       7.7       8.5       4.5       2.3       (10.2     (4.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Corporate and eliminations corresponds to expenses of Bicapital, elimination of intercompany transactions, and certain other unallocated amounts.

An analysis of the components by segment set forth in the foregoing table follows.

Commercial Banking

Interest Income

The following table presents the components of interest income in our commercial banking segment for the three-month periods ended June 30, 2017 and 2016.

 

     For the three months ended
June 30,
               
     2017      2016      Absolute Change      Percentage
Change
 
     (US$ in
millions)
     (US$ in
millions)
     (%)  

Interest income

           

Loans and advance to customers

     106.2        96.0        10.2        10.6  
  

 

 

    

 

 

    

 

 

    

Total interest income

     106.2        96.0        10.2        10.6  
  

 

 

    

 

 

    

 

 

    

Interest income increased by US$10.2 million, or 10.6%, to US$106.2 million for the three-month period ended June 30, 2017 from US$96.0 million for the corresponding period in 2016. Interest income in our commercial banking segment income consisted of interest income from our commercial loan portfolio (including both corporate clients and SMEs).

A 10.1% increase in the average balance of loans and advances to customers to US$6,333.9 million for the three-month period ended June 30, 2017 from US$5,752.3 million for the same period in 2016, accounted for a US$10.1 million increase in interest income.

 

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The increase in the average balance of our commercial loan portfolio was mainly to our foreign currency denominated loan portfolio, the average balance of which increased by US$339.1 million, or 7.7%, for the three-month period ended June 30, 2017 compared to the corresponding period in 2016, as a result of the preference of our commercial clients to fund their financial needs with foreign currency debt as most of them are foreign currency generators.

An increase in the average nominal interest rate to 6.71% for the three-month period ended June 30, 2017, from 6.67% for the corresponding period in 2016, accounted for a US$0.2 million increase in interest income.

The increase in the average nominal interest rate of our commercial loan portfolio was mainly due to higher average nominal interest rate of our foreign currency loan portfolio to 6.35% for the three-month period ended June 30, 2017, from 6.33% for the corresponding period in 2016, mainly as a result of increasing interest rates in international markets.

Interest Expense

The following table presents the components of interest expense in our commercial banking segment for the three-month periods ended June 30, 2017 and 2016.

 

     For the three months ended
June 30,
               
     2017      2016      Absolute Change      Percentage
Change
 
     (US$ in
millions)
     (US$ in
millions)
     (%)  

Interest expense

           

Depositary obligations

     28.0        24.4        3.6        14.8  

Financing

     18.0        17.0        1.0        5.9  

Debt securities issued

     4.2        4.0        0.2        5.0  

Other obligations

     2.7        2.9        (0.2      (6.9
  

 

 

    

 

 

    

 

 

    

Total interest expense

     52.9        48.3        4.6        9.5  
  

 

 

    

 

 

    

 

 

    

Interest expense increased 9.5% to US$52.9 million for the three-month period ended June 30, 2017 from US$48.3 million for the corresponding period in 2016. The increase in interest expense for the three-month period ended June 30, 2017 was principally due to a US$3.6 million, or 14.8%, increase in interest expense from depositary obligations, a US$1.0 million, or 5.9%, increase in interest expense from financing, and a US$0.2 million, or 5.0%, increase in interest expense from debt securities issued. The increase in interest expense was partially offset by a US$0.2 million, or 6.9%, decrease in interest expense from other obligations.

The increase in interest expense from depositary obligations was mainly due to a higher average balance of depositary obligations, which increased by US$572.2 million, or 18.1%, for the three-month period ended June 30, 2017, compared to the corresponding period in 2016, accounting for a US$5.1 million increase in interest expense. The increase in interest expense from depositary obligations was partially offset by a lower average nominal interest rate to 3.0% for the three-month period ended June 30, 2017, from 3.1% for the corresponding period in 2016, accounting for a US$1.5 million decrease in interest expense.

The higher average balance of our commercial depositary obligations was mainly the result of our commercial term deposits, the average balance of which increased by US$310.5 million, or 22.9%, for the three-month period ended June 30, 2017, compared to the corresponding period in 2016.

The decrease in the average nominal interest rate of our commercial depositary obligations was mainly due to lower average nominal interest rate on our term deposits of 5.5% for the three-month period ended June 30, 2017 compared to 5.8% for the corresponding period in 2016, mainly driven by higher foreign currency liquidity in Guatemala.

 

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The increase in interest expense from financing was mainly driven by a higher average nominal interest rate of 4.5% for the three-month period ended June 30, 2017 from 4.2% for the corresponding period in 2016, accounting for a US$0.9 million increase in interest expense, as a result of an environment of higher interest rates in financing from foreign institutions.

The increase in interest expense on our debt securities issued was mainly due to a higher average balance of debt securities issued by US$22.5 million, or 9.0%, for the three month-period ended June 30, 2017, compared to the corresponding period in 2016, accounting for a US$0.4 million increase in interest expense. The increase in interest expense from debt securities issued was partially offset by lower average nominal interest rate of 6.1% for the three-month period ended June 30, 2017 compared to 6.4% for the corresponding period in 2016, accounting for US$0.2 million decrease in interest expense.

The increase in interest expenses was partially offset by a decrease in interest expense from other financial obligations mainly as a result of a decrease in the average balance of other financial obligations by US$10.3 million, or 7.5%, accounting for US$0.2 million decrease in interest expense.

Net interest margin for the three-month period ended June 30, 2017 increased to 3.4% as compared to 3.3% for the corresponding period in 2016, primarily as a result of an increase in net interest income by US$5.7 million, or 11.9%, while total average interest-earning assets increased by US$581.6 million, or 10.1%.

Loan Impairment Charges

The following table presents the loan impairment charges in our commercial banking segment for the three-month periods ended June 30, 2017 and 2016.

 

     For the three months ended
June 30,
               
     2017      2016      Absolute Change      Percentage
Change
 
     (US$ in
millions)
     (US$ in
millions)
     (%)  

Loan impairment charges

     (3.9      (4.4      0.5        (11.4

Loan impairment charges decreased 11.4% to US$3.9 million for the three-month period ended June 30, 2017 from US$4.4 million for the corresponding period in 2016. The decrease in loan impairment charges was principally due to lower delinquencies in our commercial banking segment, which is reflected by a decrease in the NPL ratio of our commercial loan portfolio to 0.5% as of June 30, 2017, from 0.7% as of June 30, 2016 suggesting that our commercial banking segment maintains a high quality loan portfolio.

For the three-month period ended June 30, 2017 our commercial banking segment recorded US$3.9 million in loan impairment charges, representing 32.2% of our total loan impairment charges, while as of June 30, 2017 our commercial banking segment loan portfolio represented 73.2% of our total loans.

 

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Fee and Commission Income, Net

The following table presents the components of fee and commission income, net in our commercial banking segment for the three-month periods ended June 30, 2017 and 2016.

 

     For the three months ended
June 30,
        
     2017