20-F 1 dp90229_20f.htm FORM 20-F

As filed with the Securities and Exchange Commission on May 2, 2018

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 001-12568

 

BBVA BANCO FRANCÉS S.A.

(Exact name of Registrant as specified in its charter)

BBVA FRENCH BANK

(Translation of Registrant’s name into English)

 

Republic of Argentina

(Jurisdiction of incorporation or organization)

 

 

Av. Córdoba 111, C1054AAA

Ciudad Autónoma de Buenos Aires, Argentina

(Address of principal executive offices)

 

 

Eduardo González Correas – 011-54-11-4348-0000 (ext. 14483) – egonzalezcorreas@bbva.com – Av. Córdoba 111 31° (C1054AAA)

Ciudad Autónoma de Buenos Aires, Republic of Argentina

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

 

 

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

 

Title of each class

Name of each exchange on which registered

American Depositary Shares, each representing the right to receive three ordinary shares, par value Ps.1.00 per share

 New York Stock Exchange

Ordinary shares, par value Ps.1.00 per share New York Stock Exchange*

 

* The ordinary shares are not listed for trading, but are listed only in connection with the registration of the American Depositary Shares, pursuant to requirements of the New York Stock Exchange.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

The number of outstanding shares of each of the classes of capital or common stock of the registrant
as of the close of the period covered by the annual report:

 

Title of class

Number of shares outstanding

Ordinary Shares, par value Ps.1.00 per share 612,659,638

 

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

 

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

 

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

 

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

 

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

 

Large accelerated filer Accelerated filer Non-accelerated filer 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 13(a) of the Exchange 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.

 

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

 

U.S. GAAP

 

International Financial Reporting Standards                          by the International Accounting Standards      Board as issued

Other

 

 

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

 

Item 17Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
FORWARD-LOOKING STATEMENTS 1
   
PRESENTATION OF FINANCIAL INFORMATION 1
   
CERTAIN TERMS AND CONVENTIONS 3
PART I  
     
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 4
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 4
ITEM 3. KEY INFORMATION 4
ITEM 4. INFORMATION ON THE COMPANY 26
ITEM 4A. UNRESOLVED STAFF COMMENTS 115
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 115
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 141
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 156
ITEM 8. FINANCIAL INFORMATION 158
ITEM 9. THE OFFER AND LISTING 159
ITEM 10. ADDITIONAL INFORMATION 163
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 176
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 186
   
PART II  
     
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 188
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 188
ITEM 15. CONTROLS AND PROCEDURES 188
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 190
ITEM 16B. CODE OF ETHICS 190
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 191
ITEM 16D. EXEMPTIONS FROM LISTING REQUIREMENTS FOR AUDIT COMMITTEES 191
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY ONE ISSUER AND AFFILIATED PERSONS 191
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 191
ITEM 16G. CORPORATE GOVERNANCE 191
   
PART III  
     
ITEM 17. FINANCIAL STATEMENTS 195
ITEM 18. FINANCIAL STATEMENTS 195
ITEM 19. EXHIBITS 195

FORWARD-LOOKING STATEMENTS

 

This Form 20-F contains words, such as “believe”, “expect”, “estimate”, “intend”, “plan”, “may” and “anticipate” and similar expressions that identify forward-looking statements, which reflect our views about future events and financial performance. Actual results could differ materially as a result of factors beyond our control, including but not limited to:

 

§changes in general economic, business or political or other conditions in the Republic of Argentina (“Argentina” or “the Republic”) or changes in general economic or business conditions in Latin America;

 

§changes in capital markets in general that may affect policies towards or lending to Argentina or Argentine companies;

 

§increased costs and decreased income related to macroeconomic variables such as exchange rates and the Consumer Price Index in Argentina (“CPI”);

 

§unanticipated increases in financing and other costs or the inability to obtain additional debt, equity or wholesale financing on attractive terms or at all; and

 

§the factors discussed under “Item 3. Key Information—D. Risk Factors”.

 

Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. BBVA Banco Francés S.A. (“BBVA Francés” or the “Bank”) undertakes no obligation to update or revise these forward-looking statements or to publicly release the results of any revisions to these forward-looking statements. The accompanying information in this annual report, including, without limitation, the information under “Item 4. Information on the Company”, “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk” identifies important factors that could cause material differences between any forward-looking statements and actual results.

 

PRESENTATION OF FINANCIAL INFORMATION

 

General

 

BBVA Francés is an Argentine bank and maintains its financial books and records in Argentine pesos and prepares its Consolidated Financial Statements in conformity with the accounting rules established by Argentine Central Bank (the “Central Bank” or “BCRA”) related thereto (“BCRA GAAP”), which differ in some respects from generally accepted accounting principles in Argentina (see Note 4 to our Consolidated Financial Statements) and the generally accepted accounting principles in the United States (“U.S. GAAP”). See Note 26 to our Consolidated Financial Statements for a description of the principal differences between BCRA GAAP and U.S. GAAP, as they relate to us, and a reconciliation to U.S. GAAP of net income, total shareholders’ equity and cash flows. In this annual report, references to “$”, “US$”, “U.S. dollars” and “dollars” are to United States dollars and references to “Ps.” or “pesos” are to Argentine pesos. Percentages and certain dollar and peso amounts have been rounded for ease of presentation. Unless otherwise stated, all market share and other industry information has been derived from information published by the Central Bank.

 

In accordance with Decree No. 664/03 issued by the Federal Executive, Resolution No. 441 issued by the Argentine National Securities Commission (“CNV”) and Communication “A” 3921 of the BCRA, the Bank discontinued application of the restatement method on financial statements in equivalent purchasing power as of March 1, 2003.

 

Argentina’s professional accounting standards require the application of Technical Resolution No. 6 issued by the Argentine Federation of Professional Councils of Economic Sciences (FACPCE) (modified by Technical Resolution No. 39) which prescribes the accounting recognition of the effects of inflation when the Republic’s economic environment exhibits certain features. If the restatement of financial statements into constant currency were to become mandatory, the adjustment is to be applied by taking as a basis the last date on which the Bank adjusted its financial statements to reflect the effects of inflation.

 

As of December 31, 2017, the features set forth in Technical Resolution No. 6 had not been observed and, therefore, the Bank’s financial statements have not been restated into constant currency.

 

Unless otherwise indicated, financial information contained in this annual report reflects the consolidation of the following subsidiaries at the year end and for the fiscal years indicated below:

1 

 

 

As of December 31,

Entity

2017

2016

2015

PSA Finance Argentina Compañía Financiera S.A. X X X
Volkswagen Financial Services Compañía Financiera S.A. X X  
Consolidar AFJP S.A. (undergoing liquidation proceedings) X X X
BBVA Francés Valores S.A. X X X
BBVA Francés Asset Management S.A. Sociedad Gerente de Fondos Comunes de Inversión X X X

 

On January 7, 2002, Argentina abandoned the peso-dollar parity introduced in April 1991 under Law No. 23,928 (the “Convertibility Law”). Following the initial devaluation and the setting of an official rate exchange at Ps.1.4 per US$1.00, the peso was allowed to float, and as of April 26, 2018 the peso traded at Ps.20.4475 per US$1.00. See Item 3. Key Information—Exchange Rates” for information regarding the evolution of rates of exchange since 2012.

 

As mentioned in Note 15 to our Consolidated Financial Statements, the Pension Fund Manager segment was affected by the reform of the integrated retirement and pension system and Consolidar AFJP S.A. has been undergoing liquidation proceedings since then. As the Pension Fund Manager segment did not meet the quantitative thresholds detailed in ASC 280-10-50-12, the Bank decided to discontinue the separate reporting for this segment since the fiscal year ended on December 31, 2016 and, instead, reports it within the BBVA Banco Francés S.A. (banking) segment. Prior years’ segment information has been modified to reflect this change in reporting.

 

BCRA Communication “A” 5541, of February 12, 2014, requires that financial institutions prepare their financial statements for fiscal years beginning on January 1, 2018 in accordance with International Financial Reporting Standards, as adopted by BCRA (“IFRS-BCRA”). IFRS-BCRA differs in significant respects from International Financial Reporting Standards as issued by the International Accounting Standards Board (“IASB”) (“IFRS-IASB”).

 

We intend to file with the SEC our consolidated financial statements as of and for the year ended December 31, 2018 and for future periods applying IFRS-IASB. As a result, going forward we do not expect to present the reconciliation to U.S. GAAP, otherwise required by Item 18 of Form 20-F and included in Note 26 to the Consolidated Financial Statements. We intend to comply with the requirements of General Instruction G to Form 20-F and omit the earliest of the three years of audited financial statements required by Item 8.A.2 of Form 20-F.

 

When an entity adopts IFRS-IASB for the first time, it must follow the requirements of IFRS 1 “First-time adoption of International Financial Reporting Standards”, which establishes certain exceptions and exemptions for first-time adopters of IFRS-IASB regarding the general requirement to retrospectively apply IFRS-IASB.

 

Restatement

 

The Consolidated Statement of Cash Flows for the years ended December 31, 2016 and 2015 included in the Consolidated Financial Statements have been restated to correct misclassifications of income tax payments and the effect of foreign exchange rate changes on cash and cash equivalents (the “BCRA GAAP Restatement”). The BCRA GAAP Restatement does not impact BBVA Francés’ previously reported overall net change in cash and cash equivalents in the consolidated statements of cash flows under BCRA GAAP for any period presented or any prior periods. Finally, the BCRA GAAP Restatement does not impact BBVA Francés’ consolidated balance sheets or consolidated statements of income under BCRA GAAP for any periods presented or any prior periods. See Note 1.5 to the Consolidated Financial Statements.

 

In addition to the BCRA GAAP Reconciliation, the Bank has restated the presentation of cash flow information and its reconciliation of net income and shareholders’ equity as of and for the years ended December 31, 2016 and 2015 from BCRA GAAP to U.S. GAAP due to the BCRA Restatement and certain misclassifications and errors related to the consolidation of an entity and the allowance for loan losses (the “U.S. GAAP Restatement” and, together with the BCRA GAAP Restatement, the “Restatement”). The U.S. GAAP Restatement impacts BBVA Francés’ previously reported net income for the year ended December 31, 2016 and 2015 and shareholders’ equity at December 31, 2016 and 2015. See Notes 25.I and 26 to the Consolidated Financial Statements.

 

As a result of the Restatement, the management of the Bank, which is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act, when assessing the effectiveness of our internal control over financial reporting as of December 31, 2017, concluded that our internal control over financial reporting was not effective as of such date. See “Item 15. Controls and Procedures” and “Risk Factors—The Restatement could have a material adverse effect on our business, results of operations and financial condition and result in a decline in our share price”.

 

 

2 

CERTAIN TERMS AND CONVENTIONS

 

The terms below are used as follows throughout this report:

 

§“BBVA Francés”, the “Bank” or the “Company” and terms such as “we”, “us” and “our” mean BBVA Banco Francés S.A. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.

 

§“BBVA” or the “BBVA Group” means Banco Bilbao Vizcaya Argentaria, S.A. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.

 

§“Consolidated Financial Statements” means our audited consolidated financial statements as of and for the years ended December 31, 2017, 2016 and 2015 prepared in accordance with BCRA GAAP and included in this Form 20-F.

 

3 

- PART I -

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A.Selected Financial Data

 

The historical financial information set forth below for the years ended December 31, 2017, 2016 and 2015 has been selected from, and should be read together with, the Consolidated Financial Statements included herein. The audited financial statements for 2014 and 2013 are not included in this document, but they are included in our annual reports on Form 20-F for the years ended December 31, 2016 and December 31, 2015, respectively, filed by us with the U.S. Securities and Exchange Commission (“SEC”) on April 19, 2017 and April 27, 2016, respectively, with retrospective adjustments made for the application of certain changes in accounting principles.

 

For information concerning the preparation and presentation of the Consolidated Financial Statements, see “Presentation of Financial Information”. See also “D. Risk Factors—Risks Relating to Argentina”, and “D. Risk Factors—Risks Related to the Argentine Financial System and to BBVA Francés” below.

 

4 

  

For the year ended December 31,

  

2017

 

2016

 

2015

 

2014

 

2013

   (in thousands of pesos) (1)
CONSOLIDATED INCOME STATEMENT               
Amounts in accordance with BCRA GAAP                         
Financial income   24,599,569    22,679,938    16,564,779    13,276,999    8,243,409 
Financial expenses   (9,552,561)   (10,255,842)   (7,121,001)   (5,660,119)   (3,253,810)
Gross intermediation margin - Gain   15,047,008    12,424,096    9,443,778    7,616,880    4,989,599 
Provision for loan losses   (1,560,720)   (1,054,828)   (637,017)   (574,663)   (453,264)
Service income   11,279,481    8,255,907    6,095,836    4,678,533    3,453,850 
Service expenses   (5,661,163)   (3,933,108)   (2,420,780)   (1,329,085)   (955,329)
Operating expenses   (12,613,471)   (9,557,633)   (6,595,146)   (5,607,097)   (3,900,469)
Other income   2,584,766    1,167,798    611,171    531,267    361,531 
Other expenses   (2,827,718)   (1,102,470)   (526,814)   (336,952)   (295,800)
Net income before income tax expenses   6,248,183    6,199,762    5,971,028    4,978,883    3,200,118 
Income tax expense   (2,264,629)   (2,449,870)   (2,050,470)   (1,670,724)   (1,121,460)
Results of subsidiaries attributable to minority interests   (105,289)   (106,220)   (136,071)   (103,663)   (54,414)
Net income for the year   3,878,265    3,643,672    3,784,487    3,204,496    2,024,244 
                          
Net income from financial transactions (2)   6,491,135    6,134,434    5,886,671    4,784,568    3,134,387 
                          
Net income per ordinary share (3) (4)   6.75    6.79    7.05    5.97    3.77 
Net income per ADS (3) (4)   20.25    20.37    21.15    17.91    11.31 
Dividends per ordinary share (4) (5)   1.68764    1.69685    1.67636    0.74505    0.05364 
Dividends per ADS (4) (5)   5.06292    5.09055    5.02908    2.23515    0.16092 
Net operating income per ordinary share (3) (4)   11.29    11.43    10.96    8.91    5.84 
Net operating income per ADS (3) (4)   33.87    34.29    32.88    26.73    17.52 
Average ordinary shares outstanding (in thousands) (4)   574,769    536,878    536,878    536,878    536,878 
                          
                          
CONSOLIDATED BALANCE SHEET                         
Amounts in accordance with BCRA GAAP                         
Cash and due from banks   37,664,382    48,226,107    27,970,286    12,560,154    12,881,781 
Government and corporate securities   34,048,445    12,738,809    14,422,191    11,633,489    3,459,935 
Loans, net of allowances   128,366,202    78,889,921    56,563,321    41,442,840    36,468,194 
All other assets   25,563,761    11,897,874    11,780,400    8,652,423    5,713,714 
Total assets   225,642,790    151,752,711    110,736,198    74,288,906    58,523,624 
                          
Deposits   154,050,302    114,621,753    76,864,493    51,442,877    43,759,465 
All other liabilities and minority interest in subsidiaries   45,535,940    20,670,923    20,155,342    12,514,153    7,607,979 
Total liabilities and minority interest in subsidiaries   199,586,242    135,292,676    97,019,835    63,957,030    51,367,444 
                          
Capital stock   612,660    536,878    536,878    536,878    536,878 
Issuance premiums   6,735,977    182,511    182,511    182,511    182,511 
Adjustments to shareholders’ equity   312,979    312,979    312,979    312,979    312,979 
Retained earnings   14,516,667    11,783,995    8,899,508    6,095,012    4,099,568 
Unappropriated earnings   3,878,265    3,643,672    3,784,487    3,204,496    2,024,244 
Total shareholders’ equity   26,056,548    16,460,035    13,716,363    10,331,876    7,156,180 

 


5 

 

 

  

For the year ended December 31,

  

2017

 

2016

 

2015

 

2014

 

2013

   (in thousands of pesos) (1)
SELECTED RATIOS IN ACCORDANCE WITH BCRA GAAP                         
                          
Profitability and Performance                         
Return on average total assets (6)   2.06%   2.78%   4.09%   4.83%   3.92%
Return on average shareholders’ equity (7)   18.24%   24.15%   31.47%   36.65%   32.95%
Services income as a percentage of operating expenses   89.42%   86.38%   92.43%   83.44%   88.55%
Operating expenses as a percentage of average total assets (8)   6.68%   7.28%   7.13%   8.44%   7.55%
                          
Capital                         
Shareholders’ equity as a percentage of total assets   11.55%   10.85%   12.39%   13.91%   12.23%
Total liabilities as a multiple of shareholders’ equity   7.66x   8.22x   7.07x   6.19x   7.18x
                          
Credit Quality                         
Allowances for loans losses as a percentage of total loans   1.75%   2.01%   1.92%   2.21%   1.94%
Non-performing loans as a percentage of gross loans (9)   0.69%   0.77%   0.64%   0.99%   0.76%
Allowances for loans losses as a percentage of non-performing loans (8)   253.07%   262.65%   298.90%   224.20%   254.16%
                          
                          

 

    

For the year ended December 31,

 
    2017    

2016

Restated

    

2015 

Restated

    2014(10)    2013(10) 
    (in thousands of pesos) (1) 
AMOUNTS IN ACCORDANCE WITH U.S. GAAP                         
Net income   5,227,853    4,051,525    3,287,077    3,157,758    2,178,544 
Net income per ordinary share (3) (4)   9.10    7.55    6.12    5.88    4.06 
Net income per ADS (3) (4)   27.30    22.65    18.36    17.64    12.18 
Average ordinary shares outstanding (thousands) (4)   574,769    536,878    536,878    536,878    536,878 
                          
Total assets    223,572,582    153,707,955    110,306,393    76,039,348    61,316,755 
Total shareholders’ equity   27,897,981    17,075,489    13,770,518    10,834,230    7,615,291 

 

 

(1)Except net income per ordinary share and net income per ADS data and financial ratios.

(2)Includes: financial income, financial expenses, allowances for loan losses, service charge income, service charge expenses and operating expenses.

(3)Based on the average number of ordinary shares outstanding during the year.

(4)The average number of ordinary shares outstanding during a year was computed as the average number of shares outstanding during the twelve months taking into account the outstanding amounts as of the end of each month.

(5)For the fiscal year ended December 31, 2017, the dividends in cash declared at the ordinary and extraordinary shareholders’ meeting on April 10, 2018 were Ps.970 million (see Note 14.b) to the Consolidated Financial Statements). For the fiscal year ended December 31, 2016, the dividends in cash declared at the ordinary and extraordinary shareholders’ meeting on March 30, 2017 were Ps.911 million. For the fiscal year ended December 31, 2015, the dividends in cash declared at the ordinary and extraordinary shareholders’ meeting on April 26, 2016 were Ps.900 million. For the fiscal years ended December 31, 2014, the dividends in cash declared at the ordinary and extraordinary shareholders’ meeting on April 7, 2015 were Ps.400 million. For the fiscal years ended December 31, 2013, the dividends in cash declared at the ordinary and extraordinary shareholders’ meeting on April 10, 2014 were Ps.28.8 million. Dividends per ordinary share for each year are calculated taking into account dividends declared in such year and the number of outstanding shares at the end of such year.

(6)Net income as a percentage of average total assets, computed as the average of fiscal-year-beginning and fiscal-year-ending balances.

(7)Net income as a percentage of average stockholders’ equity, computed as the average of fiscal-year-beginning and fiscal-year-ending balances.

(8)Operating expenses as a percentage of average total assets, computed as the average of fiscal-year-beginning and fiscal-year-ending balances.

(9)Non-performing loans include all loans to borrowers classified as “Problem”, “Medium Risk”, “High Risk of Insolvency”, “High Risk”, “Irrecoverable” and “Irrecoverable for Technical Decision” according to the Central Bank’s loan classification system as well as all loans contractually past due 90 days or more. See “Item 4. Information on the Company—E. Selected Statistical Information—Allowance for Loan Losses and Loan Loss Experience”.

(10)Amounts for the years ended December 31, 2014 and 2013 have not been restated pursuant to the U.S. GAAP Restatement described in Note 26 to the Consolidated Financial Statements.

 

 

Dividends

 

The table below shows the dividends paid on each ordinary share and the equivalent of those dividends expressed in terms of dividends per American Depositary Share, each representing three ordinary shares (the “ADSs”), in each case adjusted for all stock dividends during the relevant periods. The Central Bank requires that we maintain 20% of our net income in legal reserves.

6 

 

 

  

Declared Dividends
Per Ordinary Share (1)

 

Declared Dividends

Per ADS (1)

  

Ps.(2)

 

US$ 

 

Ps.(2)

 

US$

December 31, 2017 (3) (4)    1.58326    0.07743    4.74978    0.23229 
December 31, 2016 (3) (5)   1.69685    0.11182    5.09054    0.33547 
December 31, 2015 (3) (6)   1.67636    0.11596    5.02908    0.34789 
December 31, 2014 (3) (7)   0.74505    0.08434    2.23515    0.25301 
December 31, 2013 (3) (8)   0.05364    0.00670    0.16092    0.02011 

 

(1)For the fiscal year ended December 31, 2017, the dividends in cash declared at the ordinary and extraordinary shareholders’ meeting on April 10, 2018 were Ps.970 million (see Note 14.b) to the Consolidated Financial Statements).For the fiscal year ended December 31, 2016, the dividends in cash declared at the ordinary and extraordinary shareholders’ meeting on March 30, 2017 were Ps.911 million. For the fiscal year ended December 31, 2015, the dividends in cash declared at the ordinary and extraordinary shareholders’ meeting on April 26, 2016 were Ps.900 million. For the fiscal year ended December 31, 2014, the dividends in cash declared at the ordinary and extraordinary shareholders’ meeting on April 7, 2015 were Ps.400 million. For the fiscal year ended December 31, 2013, the dividends in cash declared at the ordinary and extraordinary shareholders’ meeting on April 10, 2014 were Ps.28.8 million. During the fiscal year ended December 31, 2017 the average number of outstanding shares were 574,768,744. During the fiscal years ended December 31, 2016, 2015, 2014 and 2013 the average number of outstanding shares were 536,877,850. Dividends per ordinary share for each year are calculated taking into account dividends declared in such year and the number of outstanding shares at the end of such year.

(2)Historical values.

(3)Since 2004, prior authorization from the Central Bank is required to pay dividends. See “Item 8. Financial Information—Dividends”.

(4)Based upon the reference exchange rate quoted by the Central Bank at April 26, 2018.

(5)Based upon the reference exchange rate quoted by the Central Bank at April 12, 2017.

(6)Based upon the reference exchange rate quoted by the Central Bank at April 22, 2016.

(7)Based upon the reference exchange rate quoted by the Central Bank at April 7, 2015.

(8)Based upon the reference exchange rate quoted by the Central Bank at April 7, 2014.

 

Exchange Rates

 

The following tables show the annual high, low, average and period-end exchange rate for US$1.00 for the periods indicated. The exchange rate is calculated by the Central Bank based on the information provided by financial institutions on the exchange rate for trading of U.S. dollars for settled transactions in Argentine pesos and U.S. dollars. Such information must be representative of the prevailing market conditions. After gathering this information, the Central Bank calculates the daily exchange rate using the formula set out in Annex I of Communication “A” 3500.

 

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

 

Year /Period

High (1)

Low (1)

Average (2)

Period-end

(in pesos per US$1.00) 

2013 6.5180 4.9228 5.4789 6.5180
2014 8.5555 6.5430 8.1188 8.5520
2015 13.7633 8.5537 9.2692 13.0050
2016 16.0392 13.0692 14.7738 15.8502
2017 18.8300 15.1742 16.5665 18.7742
2018 (through April 26, 2018) 20.4475 18.4158 19.7987 20.4475
October 2017 17.6775 17.3217 17.4528 17.6713
November 2017 17.6703 17.3307 17.4925 17.3845
December 2017 18.8300 17.2600 17.7001 18.7742
January 2018 19.6525 18.4158 19.0290 19.6525
February 2018 20.1600 19.4700 19.8409 20.1150
March 2018 20.3875 20.1433 20.2378 20.1433
April 2018 (through April 26, 2018) 20.4475 20.1450 20.2095 20.4475

 

(1)Source: BCRA.

(2)The average of monthly average rates during the period.

 

The exchange rate on April 26, 2018 was Ps.20.4475 = US$1.00.

 

Fluctuations in the exchange rate between pesos and dollars affect the dollar equivalent of the peso price of the ordinary shares on the Buenos Aires Stock Exchange (Bolsa de Comercio de Buenos Aires, the “BCBA”) and as a result, would most likely affect the market price of the ADSs. Fluctuations in exchange rates also affect dividend income measured in dollars. The Bank of New York Mellon, as depositary for the ADSs, is required, subject to the terms of the deposit agreement, to convert pesos to dollars at the prevailing exchange rate at the time of making any dividend payments or other distributions. The following table shows the rate of devaluation of

 

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the peso vis-à-vis the dollar at year end, the rate of exchange (number of pesos per dollar prevailing in the Argentine foreign exchange market at year end) and the rate of inflation for wholesale price for the fiscal years ended December 31, 2017, 2016, 2015, 2014 and 2013.

 

Since the repeal of the Convertibility Law in January 2002, the peso has devalued approximately 1,944.75% vis-à-vis the dollar.

 

  

As at December 31,

  

2017

 

2016

 

2015

 

2014

 

2013

Devaluation Rate (1)   18.45%   21.88%   52.07%   31.21%   32.55%
Exchange Rate (2)   18.7742    15.8502    13.0050    8.5520    6.5180 
Inflation Rate (3)   18.80%   34.50%   10.58%   28.27%   14.76%

 

 

(1)For the twelve-month period then ending according to the Argentine Central Bank.

(2)Pesos per dollar according to the Argentine Central Bank.

(3)The inflation rate presented is for the Wholesale Price Index (“IPIM” by its acronym in Spanish) published by the Argentine National Statistics and Censuses Institute (“INDEC”) and is calculated over the prior twelve months.

 

B.Capitalization and indebtedness

 

Not applicable.

 

C.Reasons for the offer and use of proceeds

 

Not applicable.

 

D.Risk Factors

 

Risks Relating to Argentina

 

Overview

 

We are an Argentine corporation (sociedad anónima), and the vast majority of our operations, properties and customers are located in Argentina. Accordingly, the quality of our assets, our financial condition and our results of operations are significantly affected by macroeconomic and political conditions prevailing in Argentina.

 

Economic and political instability in Argentina may adversely and materially affect our business, results of operations and financial condition.

 

The Argentine economy has experienced significant volatility in recent decades, characterized by periods of low or negative growth, high levels of inflation and currency devaluation. As a consequence, our business and operations have been, and could in the future be, affected from time to time to varying degrees by economic and political developments and other material events affecting the Argentine economy, such as inflation, price controls, foreign exchange controls, fluctuations in foreign currency exchange rates and interest rates, governmental policies regarding spending and investment, national, provincial or municipal tax increases and other initiatives increasing government involvement in business activities, and civil unrest and local security concerns.

 

In 2001 and 2002, the Argentine economy suffered a severe economic and political crisis (the “Argentine Crisis”). Among other consequences, the Argentine Crisis resulted in Argentina defaulting on its foreign debt obligations and introducing emergency measures and numerous changes in economic policies that affected utilities, financial institutions and many other sectors of the economy. Argentina also suffered a significant real devaluation of the peso, which in turn caused numerous Argentine private sector debtors with foreign currency exposure to default on their outstanding debt. Restrictions on deposit withdrawals from the banking system were implemented, as dollar-denominated loans and deposits were “pesified” (reclassified as peso-denominated) and maturities reprogrammed. In 2002, inflation soared to 40% while GDP collapsed by almost 11%. Following that crisis, Argentina substantially increased its real gross domestic product (“GDP”), growing 8.9% in 2005, 8.0% in 2006, 9.0% in 2007 and 4.1 % in 2008. During 2009, however, the Argentine economy suffered a slowdown attributed to local and external factors, including an extended drought affecting agricultural activities, and the effects of the global economic crisis which led to a contraction of the economy of 5.9% in 2009. Real GDP growth recovered in 2010 and 2011, increasing to 10.1% and 6.0%, respectively. However, real GDP fell again by 1.0% in 2012 and then grew by 2.4% in 2013. In 2014, the economy underwent another recession and GDP contracted by 2.5%. Finally, real GDP grew by 2.6% in 2015, primarily driven by an increase in public expenditures and investment. The economic and financial environment in Argentina was significantly influenced by the presidential elections held on November 22, 2015, which resulted in Mr. Mauricio

 

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Macri being elected President of Argentina. Mr. Macri’s administration (the “Macri Administration”) took office on December 10, 2015 and launched a wide array of measures intended to correct longstanding fiscal and monetary policies that had resulted in recurrent public sector deficits, high inflation, pervasive foreign exchange controls and limited foreign investment. In 2016, the elimination of foreign exchange restrictions and rebalancing of utility rates led to an increase in inflation to 41% year-on-year according to the City of Buenos Aires index at year end and a considerable fall in consumption. As a result, GDP fell by 2.3% in 2016. Once the main imbalances were eliminated, the economy picked up again in 2017, with GDP growing 0.4% year-on-year in the first quarter, 2.9% year-on-year in the second quarter and 4.2% year-on-year in the third quarter of 2017. Although the inflation rate for 2017 slowed to 24.8% year-on-year it was higher than the goal defined by the Central Bank. The Macri Administration’s Cambiemos political party triumphed in the midterm elections of 2017, obtaining the necessary support to implement tax and pension reforms, as well as a fiscal agreement with the provinces aimed at normalizing the finances of the provincial administrations.

 

Sustainable economic growth and improved employment in the medium term will depend upon the manner in which the remaining structural imbalances are addressed and may develop adversely if these policy issues are not addressed adequately or successfully.

 

Inflation, any decline in GDP and/or other future economic, social and political developments in Argentina, over which we have no control, may adversely affect our business, results of operations and financial condition

 

The Macri Administration has implemented significant changes in policy and has announced additional measures, but the ability to successfully implement such additional measures and the eventual outcome of such changes in the medium term are still in doubt.

 

Presidential and congressional elections in Argentina took place on October 25, 2015, and a runoff election between the two leading Presidential candidates was held on November 22, 2015, which resulted in Mr. Mauricio Macri being elected President of Argentina. The Macri Administration assumed office on December 10, 2015.

 

Since assuming office, the Macri Administration has implemented several significant economic and policy reforms and announced other intended reforms, including reforms to:

 

§foreign exchange restrictions;

 

§methodologies used by the Argentine National Statistics and Censuses Institute (the “INDEC”);

 

§financial policy;

 

§foreign trade policy;

 

§fiscal policy;

 

§monetary imbalances;

 

§Argentina’s energy generation and consumption regime;

 

§the reparation program for retirees and pensioners;

 

§the tax amnesty regime;

 

§tax matters, including payroll taxes; and

 

§labor matters.

 

For a description of these economic and policy reforms, see “Item 4. Information on the Company—Recent Political and Economic Developments in Argentina—The Macri Administration”.

 

Although we understand the Macri Administration believes that the national economy has responded largely as expected to the measures implemented to date, the ultimate long-term impact of each of these measures on the national economy as well as the ability to implement all announced measures as currently contemplated cannot be assured. The ability of the Macri Administration to implement legislative measures will require obtaining support from opposition parties. The opposition parties did support the passage of the Debt

 

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Authorization Law submitted by the Macri Administration or the 2017 Budget Law. After the 2017 congressional elections, Cambiemos, Mr. Macri’s political party, increased its representation in both chambers of Congress but still lacks an absolute majority in either. As such, it will need to continue negotiating with the opposition parties in order to pass laws in Congress. If the Macri Administration’s agenda cannot be successfully implemented, including as a result of a lack of political support from opposition parties in Congress, the result may weaken confidence in the Argentine economy and adversely affect its financial condition, which could in turn have a material adverse effect on our business, results of operations and financial condition.

 

High inflation rates could negatively affect the Argentine economy in general, including access to the long-term financing market.

 

Historically, inflation has materially undermined the Argentine economy and the government’s ability to create conditions that permit growth. In recent years, Argentina has experienced high inflation rates which rose from 26.6% year-on-year in 2013 to 41% year-on-year in 2016 according to the City of Buenos Aires index.

 

High inflation rates have led to the loss of competiveness of Argentine exports in international markets and to a decline in private consumption, causing a negative effect on economic activity and employment. Moreover, high inflation rates have in the past and could in the future undermine confidence in the Argentine financial sector, in particular with respect to the peso deposit base, reducing the demand for pesos and leading to a portfolio dollarization, which would in turn cause a decrease in the deposit base. This would negatively affect the business volume of banks, including BBVA Francés.

 

From 2007 to mid-2016, the CPI data for the Greater Buenos Aires area (the “CPI-GBA”) and for other Argentine regions/provinces published by the INDEC was not consistent with the CPI data published by private institutions. These inconsistencies created uncertainty regarding the Republic’s actual inflation rate and made it difficult to anchor inflation expectations. Assets, such as public bonds, indexed to the Benchmark Stabilization Ratio (Coeficiente de Estabilización de Referencia or “CER”) are adjusted according to the CPI-GBA. Uncertainties concerning official inflation indexes have since been reduced or eliminated with the publication of a credible inflation index by INDEC as discussed below. For more information see “Item 5. Operating and Financial Review and Prospect—Effects of Recent Events on BBVA Francés”.

 

Argentina’s professional accounting standards require applying Technical Pronouncement No. 6 of the Argentine Federation of Professional Councils in Economic Sciences (“FACPCE”) (as amended by Technical Resolution No. 39), which sets forth that financial statements are to be restated in constant currency when the Republic’s economic environment exhibits certain characteristics. In the event that the restatement of financial statements in constant currency becomes mandatory, the adjustment must be performed based on the last date on which the Bank adjusted its financial statements to reflect the effects of inflation.

 

Between January 12 and June 2, 2016, the government issued a series of resolutions designating either the CPI calculated by the government of the City of Buenos Aires, the only institution in Argentina with the statutory authority to produce official nationwide statistics, or the CPI calculated by the Province of San Luis as the index to be used by the Central Bank to calculate the CER. On June 15, 2016, the INDEC, Argentina’s principal statistics agency and the only national institution with the statutory authority to produce nation-wide statistics, published the inflation rate for May 2016 using its new methodology for calculating the CPI. Beginning as of June 26, 2016, the government resumed using the INDEC CPI to calculate the CER. Adjustments and payments on Argentina’s inflation-indexed debt are not subject to restatement or revision.

 

In 2017, the INDEC began publishing a national CPI index for the purpose of calculating CER adjustments going forward. This new national CPI extended the methodology of the previous CPI-GBA, which had covered only the City of Buenos Aires and Greater Buenos Aires, utilizing December 2016 as its base of 100. In the past and through the Fernández de Kirchner Administration, the government implemented programs to control inflation and monitor prices for essential goods and services, including attempts to freeze the prices of certain supermarket products, and price support arrangements agreed between the government and private sector companies in several industries and markets that did not address the structural causes of inflation and failed to reduce inflation. In early 2016, the government’s adjustments to electricity and gas tariffs, as well as the increase in the price of gasoline impacted prices, created additional inflationary pressure which resulted in an acceleration of inflation in 2016. Further increases in energy tariffs and other regulated prices led to an inflation rate of 24.8% year-on-year in 2017, missing the Central Bank inflation targets of 12-17% by a wide margin. These targets were changed at the end of 2017 to 15% for 2018, 10% for 2019 and 5% as a long-run target to be reached by 2020, one year later than previously targeted. For the first quarter of 2018, the inflation rate was 6.7 %.

 

Inflation remains a significant challenge for Argentina given its persistent nature in recent years. The Macri Administration has announced its intention to reduce the primary fiscal deficit as a percentage of GDP over time and also reduce the government’s reliance on Central Bank financing by 0.5% of GDP per year until 2020. If, despite the measures adopted by the Macri Administration, these

 

10 

measures fail to address Argentina’s structural inflationary imbalances, the current levels of inflation may continue and have an adverse effect on Argentina’s economy and financial condition, which could in turn have a material adverse effect on our business, results of operations and financial condition.

 

The credibility of several Argentine economic indices was called into question in the past, which led to a lack of confidence in the Argentine economy and could affect the evolution of the Argentine economy in the future.

 

During the presidency of Cristina Fernández de Kirchner, the INDEC, the government’s principal statistical agency, underwent institutional and methodological reforms that gave rise to controversy regarding the reliability of the information that it produced, including inflation, GDP, unemployment and poverty data.

 

Reports published by the International Monetary Fund (the “IMF”) stated that their staff used alternative measures of inflation for macroeconomic surveillance, including data produced by private sources, which showed inflation rates considerably higher than those published by the INDEC since 2007. The IMF also censured Argentina for failing to make sufficient progress, as required under the Articles of Agreement of the IMF, in adopting remedial measures to address the quality of official data, including inflation and GDP data. In February 2014, the INDEC released a new inflation index, known as the National Urban Consumer Price Index (the “CPI NU”), which measured prices of goods across the Republic and replaced the previous index that only measured inflation in the greater Buenos Aires metropolitan area. Although the new methodology brought inflation statistics closer to those estimated by private sources, there were still significant differences between official inflation data and private estimates.

 

On January 8, 2016, based on the determination that the INDEC had failed to produce reliable statistical information, particularly with respect to CPI, GDP and foreign trade data, poverty and unemployment rates, the Macri Administration declared a state of administrative emergency for the national statistical system and the INDEC until December 31, 2016. The INDEC suspended publication of certain statistical data pending reorganization of its technical and administrative structure to recover its ability to produce sufficient and reliable statistical information. During the first six months of this reorganization period, the INDEC published official CPI figures published by the City of Buenos Aires and the Province of San Luis for reference, as described in “High inflation rates could negatively affect the Argentine economy in general, including access to the long-term financing market.” above.

 

After revision of the methodology and data compilation in June 2016, the INDEC began publishing the CPI-GBA index for the Greater Buenos Aires area which showed inflation rates of 4.2% month-on-month in May 2016 and 3.1% month-on-month in June 2016, in line with private estimates. Also in June 2016, the INDEC published revised GDP series for the 2004-2015 period.

 

In July 2016, an IMF team met officers of the INDEC and the Argentine finance ministry to discuss the government’s new inflation and gross domestic product statistics and expressed it was pleased with Argentina’s efforts to restore confidence in its official statistics under the Macri Administration. In November 2016, the IMF concluded the Article IV Consultation with Argentina after 10 years of its last revision. At the same time, the Executive Board of the IMF lifted its censure on Argentina’s official data concluding that Argentina’s CPI and GDP data collection and publication were in line with international standards.

 

In order to be effective, reforms implemented by the INDEC require, however, data to be collected on a timely basis and the continuous implementation of correct methodologies. If these reforms fail to sustain credibility, such failure may adversely affect the Argentine economy. The INDEC’s past or future data also may be materially revised to reveal a different economic or financial situation in Argentina, which could affect investment decisions in the Republic. All of these factors could adversely affect our business, results of operations and financial conditions.

 

A considerable increase in the government’s expenditure could negatively affect the Argentine economy and its access to international financial markets.

 

Starting in 2005, public expenditures began to increase faster than public revenues and the primary fiscal balance of the national public non-financial sector went from a surplus of 3.2% of GDP in 2004 to a deficit of 5.4% of GDP in 2015. In 2016, the primary deficit was Ps.359.4 billion, which represented an increase of 52.9% compared with the previous year, because the reduction of export duties and the income tax reform negatively impacted revenue growth while the reduction in subsidies to the energy and transport sectors was slower than expected. The Macri Administration announced gradual adjustments to the primary fiscal deficit, which is expected to decline to -2.2 % of GDP in 2019. Most of the fiscal adjustments are intended to come from the elimination of the subsidies to the energy sector, a measure which is currently being implemented, while primary spending is expected to remain constant in real terms as revenues recover on the back of economic growth. In 2017, the Macri Administration met the primary fiscal deficit target of 4.2% of GDP by lowering the deficit to 3.9% of GDP.

 

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Any further deterioration of the government’s fiscal position, however, would negatively affect its ability to access the debt markets and could in turn result in more limited access to such markets by Argentine companies, including BBVA Francés.

 

Moreover, in 2016 the government started issuing debt in the local Argentine market again after a number of years without any such issuance. Argentine private banks, such as BBVA Francés, often purchase such issuances. The Macri Administration has announced that it will continue to issue debt in the local Argentine market and this could lead to increased exposure of private banks, such as BBVA Francés, to the public sector.

 

The Macri Administration has undertaken important steps to curb the fiscal deficit through a series of tax and other measures aimed at increasing revenues, reducing energy, gas and transport subsidies and controlling public expenditures. However, we cannot assure that such measures will be successful or sufficient to reduce the fiscal deficit in the medium term.

 

Certain programs announced by the Macri Administration may also increase public expenditures, including the bill for the Programa de Reparación Histórica para Jubilados y Pensionados (Historical Reparations Program for Retirees and Pensioners) passed on June 29, 2016, which requires retroactive compensation to cover all potential beneficiaries. The tax reform approved in December 2017 stipulates the reduction of taxes for reinvested profits but on a gradual basis, so the impact is expected to lower tax collections by approximately 1.5% of GDP in four years.

 

It is uncertain whether the Macri Administration will succeed in implementing its strategy to reduce the fiscal deficit and public expenditures, particularly in light of the fact that any measures subject to congressional approval will require support from the opposition. Failure to implement these policies, or if they prove ineffective, could increase the fiscal deficit, negatively impact consumers’ purchasing power and lead to overall higher prices. Furthermore, the government’s primary fiscal balance could be negatively affected if public expenditures continue to increase in the future. A weaker fiscal position could have a material adverse effect on the government’s ability to obtain long-term financing and adversely affect economic conditions in Argentina, which could adversely affect our business, results of operations and financial condition.

 

The Argentine economy remains vulnerable to external events that could be caused by significant economic difficulties of Argentina’s major regional trading partners, particularly Brazil, or by more general “contagion” effects, including those precipitated by the economic policy of the current government of the United States and the United Kingdom’s impending departure from the European Union. Such external events and “contagion” effects could have a material adverse effect on Argentina’s economic growth and its ability to service its public debt, and, as a result, on our business.

 

Weak, flat or negative economic growth of any of Argentina’s major trading partners, such as Brazil, could adversely affect Argentina’s balance of payments and, consequently, Argentina’s economic growth.

 

In 2015 and 2016, the economy of Brazil, Argentina’s largest export market and the principal source of imports, experienced heightened negative pressure due to the uncertainties stemming from its political crisis, including the removal of Ms. Dilma Rousseff as President from office. The Brazilian economy contracted by 3.8% during 2015, mainly due to a 8.3% decrease in industrial production, and further decreased by 3.6% in 2016. The Brazilian real depreciated against the U.S. dollar by approximately 49.1% from January 2015 to February 2016, the largest depreciation in over a decade, in an attempt to increase exports, before appreciating by 15.98% between March 2016 and February 2017. Although the Brazilian economy began to recover in 2017 as GDP grew 1%, inflation fell to 2.9% year-on-year and the Real appreciated 1.5% year-on-year in December 2017, any deterioration of economic conditions in Brazil may reduce demand for Argentine exports and increase demand in Argentina for Brazilian imports. Political instability remains possible in Brazil, particularly given that in 2018 there are presidential elections, and any such Brazilian political instability could have a negative impact on the Argentine economy. Any deterioration of economic conditions in Brazil may reduce demand for Argentine exports and increase demand in Argentina for Brazilian imports. It is possible that Brazilian political instability could have a further negative impact on the Argentine economy.

 

The Argentine economy may also be affected by “contagion” effects. International investors’ reactions to events occurring in one developing country sometimes appear to follow a “contagion” pattern, in which an entire region or investment class is disfavored by international investors. In the past, the Argentine economy has been adversely affected by such contagion effects on a number of occasions, including the 1994 Mexican financial crisis, the 1997 Asian financial crisis, the 1998 Russian financial crisis, the 1999 devaluation of the Brazilian real, the 2001 collapse of Turkey’s fixed exchange rate regime and the global financial crisis that began in 2008.

 

12 

The Argentine economy may also be affected by conditions in developed economies, such as the United States, that are significant trading partners of Argentina or have influence over world economic cycles. A more protectionist trade policy from the new government of the United States could affect world trade with negative repercussions for Argentina. If interest rates increase significantly in developed economies, including the United States and Europe, Argentina and its developing economy trading partners, such as Brazil, could find it more difficult and expensive to borrow capital and refinance existing debt, which could adversely affect economic growth in those countries. The perceptions as to the impact of the withdrawal of the United Kingdom from the European Union may adversely affect business activity and economic and market conditions in the United Kingdom, the Eurozone and globally, and could contribute to instability in global financial and foreign exchange markets. In addition, Brexit could lead to additional political, legal and economic instability in the European Union.

 

Any of these factors could adversely affect economic conditions in Argentina which would in turn adversely affect our business, results of operations and financial conditions.

 

A decline in international prices for Argentina’s principal commodity exports could have a material adverse effect on Argentina’s economy and public finances, and, as a result, on our business.

 

Historically, the commodities market has been characterized by high volatility. Despite the volatility of prices of most of Argentina’s commodities exports, commodities have significantly contributed to the government’s revenues during the 2000s due to the imposition of export duties on agricultural products in 2002. Although most duties were eliminated and the export tax on soy was reduced from 35% to 30% by the Macri Administration in 2016, and is expected to be further reduced in 2018 by 0.5% per month, the Argentine economy is still relatively dependent on the price of its main agricultural exports, primarily soy. This dependence, in turn, renders the Argentine economy vulnerable to commodity prices fluctuations. International commodities prices decreased during 2015 but partially recovered during 2016 and 2017. Declines in commodity prices may adversely affect the Argentine economy, and the government’s fiscal revenues, which could in turn adversely affect our business, results of operations and financial condition.

 

While the lowering of export taxes implemented in 2016 was intended to encourage exports, reductions in export taxes in the future, unless replaced with other sources of revenues, may adversely affect the Argentina’s public finances, which could in turn adversely affect our business, results of operations and financial condition.

 

Exchange controls and restrictions on capital inflows and outflows could have a material adverse effect on Argentine public sector activity, and, as a result, our business.

 

In 2001 and 2002, following a run on the financial sector triggered by the public’s lack of confidence in the continuity of the convertibility regime that resulted in massive capital outflows, the government introduced exchange controls and restrictions on the transfer of foreign currency in an attempt to prevent capital flight and a further depreciation of the peso. These exchange controls substantially limited the ability of issuers of debt securities, among others, to accumulate or maintain foreign currency in Argentina or make payments abroad.

 

Although several of such exchange controls and transfer restrictions were subsequently suspended or terminated, in June 2005 the government issued a decree that established new controls on capital flows, which resulted in a decrease in the availability of international credit for Argentine companies.

 

In addition, from 2011 until the Macri Administration took office in December 2015, the government increased controls on the sale of foreign currency and the acquisition of foreign assets by local residents, limiting the possibility of transferring funds abroad. Together with regulations established in 2012 that subjected certain foreign exchange transactions to prior approval by Argentine tax authorities or the Central Bank, these measures significantly curtailed access to the foreign exchange market. In response, an unofficial U.S. dollar trading market developed in which the peso-U.S. dollar exchange rate differed substantially from the official peso-U.S. dollar exchange rate.

 

The Macri Administration has substantially eliminated all foreign exchange restrictions that developed under the Fernández de Kirchner regime. See “—Fluctuations in the value of the peso could adversely affect the Argentine economy and the Republic’s ability to service its debt obligations.” below. Notwithstanding the measures recently adopted by the Macri Administration, if in the future the Central Bank and/or the government re-introduce exchange controls and impose restrictions on transfers abroad, such measures may negatively affect Argentina’s international competitiveness, discourage foreign investments and increase foreign capital outflows, which could have an adverse effect on economic activity in Argentina.

 

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Any of these factors could have a material adverse effect on our business, results of operations and financial condition.

 

The Macri Administration has begun to implement significant measures to solve the current energy sector crisis, but the eventual outcome of such measures is unknown.

 

Economic policies since the Argentine Crisis have had an adverse effect on Argentina’s energy sector. The failure to reverse the freeze on electricity and natural gas tariffs imposed during the Argentine Crisis created a disincentive for investments in the energy sector. Instead, the government sought to encourage investment by subsidizing energy consumption. The policy proved ineffective and operated to further discourage investment in the energy sector and caused production of oil and gas and electricity generation, transmission and distribution to stagnate while consumption continued to rise. To address energy shortages starting in 2011, the government attempted to increase imports of energy, with adverse implications for the trade balance and the international reserves.

 

In response to the growing energy crisis, the Macri Administration declared a state of emergency with respect to the national electricity system, which was in effect until December 31, 2017. The state of emergency allowed the government to take actions designed to stabilize the supply of electricity to the Republic, such as instructing the Ministerio de Energía y Minería de la Nación (Ministry of Energy and Mining) to design and implement, with the cooperation of all federal public entities, a coordinated program to guarantee the quality and security of the electricity system. In addition, the Macri Administration announced the elimination of certain energy subsidies and significant adjustments to electricity rates to reflect generation costs.

 

Additionally, the Macri Administration announced the elimination of a portion of subsidies to natural gas and adjustment to natural gas rates. As a result, average electricity and gas prices increased gradually as energy subsidies fell from Ps.209.2 billion in 2016 to Ps.125.6 billion (-39.9 % year-on-year) during 2017, according to the Ministry of Economy. However, certain of the government’s initiatives relating to the energy and gas sectors were challenged in the Argentine courts and resulted in judicial injunctions or rulings against the government’s policies, which were later lifted as the legal objections were overcome.

 

The Macri Administration has taken steps and announced measures to address the energy sector crisis while taking into consideration the implications of these price increases for the poorest segments of society by approving subsidized tariffs for qualifying users. Failing to address the negative effects on energy generation, transportation and distribution in Argentina with respect to both the residential and industrial supply, resulting in part from the pricing policies of the prior administrations, could weaken confidence in and adversely affect the Argentine economy and the Republic’s ability to service its debt. There can be no assurance that the measures adopted by the Macri Administration to address the energy crisis will not be challenged in the local courts in the future and/or be sufficient to restore production of energy in Argentina within the short or medium term.

 

Any failure by the Macri Administration to solve the current energy crisis could have a material adverse effect on Argentine economy, which could in turn have a material adverse effect on our business, results of operations and financial condition.

 

Any failure to adequately address actual and perceived risks of institutional deterioration and corruption may adversely affect Argentina’s economy and financial condition.

 

The lack of a solid institutional framework and corruption have been identified as, and continue to be, a significant problem for Argentina. In Transparency International’s 2016 Corruption Perceptions Index survey of 176 countries, Argentina ranked #95. In the World Bank’s Doing Business 2017 report, Argentina ranked #117 out of 190 countries, up from #121 in 2016.

 

Recognizing that the failure to address these issues could increase the risk of political instability, distort decision-making processes and adversely affect Argentina’s international reputation and ability to attract foreign investment, the Macri Administration has announced several measures aimed at strengthening Argentina’s institutions and reducing corruption. These measures include reducing criminal sentences in exchange for cooperation with the government in corruption investigations, increasing access to public information, seizing assets from corrupt officials, increasing the powers of the Anticorruption Office (Oficina Anticorrupción) and the passing of a new public ethics law, among others. The government’s ability to implement these initiatives is uncertain as it requires the involvement of the judicial branch, which is independent, as well as legislative support from opposition parties. No assurances can be given that the implementation of these measures will be successful.

 

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Any failure by the Macri Administration to adequately address actual and perceived risks of institutional deterioration and corruption may adversely affect Argentina’s economy and financial condition, which could in turn have a material adverse effect on our business, results of operations and financial condition.

 

Fluctuations in the value of the peso could adversely affect the Argentine economy and the Republic’s ability to service its debt obligations.

 

Fluctuations in the value of the peso may adversely affect the Argentine economy. The devaluation of the peso may have a negative impact on the government’s revenues (measured in U.S. dollars), fuel inflation and significantly reduce real wages. After several years of moderate variations in the nominal exchange rate, the peso lost 35.3% of its value in 2014, 33.7% in 2015 and 38.5% in 2016 considering the average foreign exchange rate in December of each year compared with the average foreign exchange rate in December of the previous year. In 2017, the depreciation of the peso fell to 11.8%, from an average foreign exchange rate of Ps.15.83 per dollar on average in December 2016 to an average of Ps.17.7 per dollar in December 2017).

 

Persistent high inflation during this period, with formal and “de facto” exchange controls, resulted in an increasingly overvalued real official exchange rate. Compounded by the effects of foreign exchange controls and restrictions on foreign trade, these highly distorted relative prices resulted in a loss of competitiveness of Argentine production, impeded investment and resulted in economic stagnation during this period. For a description of the measures taken by the Macri Administration to address these issues, see “Item 4. Information on the Company—Recent Political and Economic Developments in Argentina—The Macri Administration”.

 

A significant appreciation of the peso against the U.S. Dollar also presents risks for the Argentine economy, including the possibility of a reduction in exports as a consequence of the loss of external competitiveness and further deterioration of the current account deficit. Any such appreciation could also have a negative effect on economic growth and employment and reduce tax revenues in real terms. From time to time, the Central Bank may intervene in the foreign exchange market in order to maintain the currency exchange rate. Additional volatility, appreciations or depreciations of the peso or reduction of the Central Bank’s reserves as a result of currency intervention could adversely affect the Argentine economy and the Republic’s ability to service its debt obligations.

 

Any of these factors could have a material adverse effect on our business, results of operations and financial condition.

 

There can be no assurances that the Republic will be able to obtain financing on satisfactory terms in the future, which could have a material adverse effect on the Republic’s ability to make payments on its outstanding public debt.

 

The Republic’s future tax revenue and fiscal results may be insufficient to meet its debt service obligations and the Republic may have to rely in part on additional financing from domestic and international capital markets in order to meet future debt service obligations. However, the Republic may not be able to access international or domestic capital markets at acceptable prices or at all, and, if that is the case, the Republic’s ability to service its outstanding public debt could be adversely affected, which could in turn adversely affect Argentina’s economy and financial condition and thereby have a material adverse effect on our business, results of operations and financial condition.

 

Risks Relating to the Argentine Financial System and to BBVA Francés

 

The short-term structure of the deposit base of the Argentine financial system, including the deposit base of the Bank, could lead to a reduction in liquidity levels and limit the long-term expansion of financial intermediation.

 

In recent years, growth of the Argentine financial sector has been heavily dependent on deposit levels because of the relatively small size of the Argentine capital markets and the lack of access to foreign capital markets. Since the Macri Administration took office, access to foreign capital markets has again been possible, supporting credit growth in addition to the deposit base, but there is no assurance that access to foreign credit markets will continue in the future.

 

In 2016, the implementation of the tax amnesty regime resulted in a significant growth of deposits, mainly in U.S. dollars. Additionally, in 2017, the local capital markets also started showing signs of activity and numerous companies, some of them banks, including BBVA Francés, were able to access funding in the local capital markets. During 2017, loans grew at a faster rate than deposits did. That was possible because banks had an excess of liquid assets in their books, and some banks, including BBVA Francés, also raised new capital.

 

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Even though, the liquidity of the Argentine financial sector is currently relatively high due to the high level of minimum cash requirements applicable to Argentine financial institutions. These requirements can be met by holding either cash or other short-term investments, such as Argentine treasury bills issued by the Central Bank. For BBVA Francés, these liquid assets account for 35.3% of our total deposits as of December 31, 2017.

 

Notwithstanding the above, because most deposits are short-term deposits, a substantial part of loans must also have short-term maturities to match the terms of the deposits. The proportion of long-term credit lines, such as mortgages, is small, although it has been growing faster lately as a consequence of the success of inflation-adjusted (“UVA”) loans. UVA deposits, which have a tenor of at least six months, have also started to grow, but at a slower pace than loans. We expect that during 2018, Argentine banks will be able to start issuing UVA debt in the local capital markets, thereby lengthening the maturity of their liabilities. However, there is no assurance that this will be the case.

 

We have a continuous demand for liquidity to fund our business activities. Our profitability or solvency could be adversely affected if access to liquidity and funding is constrained or made more expensive for a prolonged period of time. Furthermore, withdrawals of deposits or other sources of liquidity may make it more difficult or costly for us to fund our business on favorable terms. Although we believe that deposit liquidity levels are currently reasonable, no assurance can be given that those levels will not be reduced due to future negative economic conditions or otherwise. If depositors lose confidence as a result of negative economic conditions or otherwise and withdraw significant funds from financial institutions, there will be a substantial negative impact on the manner in which financial institutions, including us, conduct their business and on their and our ability to operate as financial intermediaries. If we are unable to access adequate sources of medium and long-term funding or if we are required to pay high costs in order to obtain the same and/or if we cannot generate profits and/or maintain our current volume and/or scale of our business, whether due to a decline in deposits or otherwise, our liquidity position and ability to honor our debts as they come due may be adversely affected, which could have a material adverse effect on our business, results of operations and financial condition.

 

Significant growth of peso cash (banknotes) positions in the Bank could have an adverse impact on our results of operations.

 

The Central Bank has made a key policy of trying to minimize the use of physical bills (banknotes) in the economy as a way to reduce informal activity and improve efficiency. This policy involves numerous sectors of the Argentine economy, including banks, and is likely to require significant time to realize significant changes. Since 2012, the Argentine Central Bank’s charter states that peso cash balances in physical bills (banknotes) cannot be used by financial institutions to comply with statutory reserve requirements. As a result, the Bank has sought to minimize its peso cash balances in physical bills (banknotes), as they yield no income. Since the second half of 2016, the Central Bank began refusing to receive physical bills from financial institutions in order to further decrease their use in the Argentine economy. As a consequence, BBVA Francés’ balance of physical bills increased above normal levels, mainly through the first half of 2017, as a result of our business strategy of collecting a substantial amount of physical bills from large retail corporations as a way to promote business within the retail sector. Collecting bills generates a surplus of bills that the Bank used to deposit in its current account in the Central Bank and then allocated to profitable assets. This policy affected adversely our net income through these periods. Although the Bank took measures to offset this impact, such as raising the fees we charge for the collection service or reducing the net amount of bills we receive from customers every month, and banknotes balances declined to pre-2016 levels from the third quarter of 2017, no assurance can be given that our peso cash balances in physical bills (banknotes) will not arise again in the future. Therefore, a significant growth of peso cash balances in physical bills (banknotes) positions in the Bank could have an adverse impact on our business, results of operations and financial condition.

 

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

 

The spread for Argentina’s financial sector between the interest rates on loans and deposits could be affected as a result of increased competition in the banking sector and the government’s tightening of monetary policy in response to inflation concerns. During recent years, the financial sector has registered in Argentina an increase in interest rates. The relative weight of demand deposits as sources of liquidity in the Argentine financial system results in an increase of spreads between interest rates received on loans and those paid on deposits. As inflation is declining, a decrease in interest rates is expected to occur, which should in turn result in a higher demand for credit, with higher volume of activity compensating lower margins. However, we can provide no assurance that an increase in the volume of lending will occur. Any failure to increase the volume of lending could have a material adverse effect on our business, results of operations and financial condition.

 

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Our business is particularly vulnerable to volatility in interest rates.

 

Our results of operations are substantially dependent upon the level of our net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Interest rates are highly sensitive to many factors beyond our control, including fiscal and monetary policies of governments and central banks, regulation of the financial sector in the market in which we operate, domestic and international economic and political conditions and other factors.

 

In the current Argentine scenario where the government is attempting to stabilize high inflation rates, there is a risk of volatility in the interest rates. This scenario could adversely affect our financial margin as a result of differential movements in interest rates for deposits, loans or other bank assets and liabilities. In addition, a high proportion of loans referenced to variable interest rates makes debt service on such loans more vulnerable to changes in interest rates. In addition, a rise in interest rates could reduce the demand for credit and our ability to generate credit for our clients, as well as contribute to an increase in the credit default rate. As a result of these and the above factors, significant changes or volatility in interest rates could have a material adverse effect on our business, results of operations and financial condition.

 

Mismatch between UVA loans and UVA deposits could adversely affect our profitability

 

During 2017, new UVA mortgages started to grow significantly. At the same time, the Bank launched UVA deposits, but such deposits grew at a slower pace. The Bank is also considering UVA bonds and other instruments to offset the mismatch. If this mismatch continues or increases in the future it could have a material adverse effect on our business, results of operations and financial condition.

 

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

 

A number of our products expose us to credit risk, including consumer loans, commercial loans and other receivables. Changes in the income levels of our borrowers, increases in the inflation rate or an increase in interest rates could have a negative effect on the quality of our loan portfolio, causing us to increase provisions for loan losses and resulting in reduced profits or in losses. We estimate and establish reserves for credit risk and potential credit losses. This process involves subjective and complex judgments, including projections of economic conditions and assumptions on the ability of our borrowers to repay their loans. We may not be able to timely detect these risks before they occur, which may increase our exposure to credit risk. Overall, if we are unable to effectively control the level of non-performing or poor credit quality loans in the future, or if our loan loss reserves are insufficient to cover future loan losses, this could have a material adverse effect on our business, results of operations and financial condition.

 

Increased competition in the banking industry may adversely affect the Bank’s operations.

 

The markets in which we operate are highly competitive and this trend will likely continue. In particular, we expect that competition with respect to small- and medium-sized businesses is likely to increase. As a result, even if the demand for financial products and services from these markets continues to grow, competition may adversely affect our results of operations by decreasing the net margins we are able to generate. In addition, the trend towards consolidation in the banking industry has created larger and stronger banks with which we must now compete. We also face competition from non-bank competitors, such as payment platforms, e-commerce businesses, department stores (for some credit products), automotive finance corporations, leasing companies, factoring companies, mutual funds, pension funds, insurance companies and crowdfunding platforms. There can be no assurance that this competition will not have a material adverse effect on our business, results of operations and financial condition.

 

Our credit ratings depend on sovereign credit ratings, and such dependence limits our access to international financial markets.

 

Our credit ratings are based on Argentina’s sovereign rating, which has fluctuated considerably since the Argentine Crisis. As a result, our ratings have also fluctuated in this period, although they have tended to be higher than the sovereign rating. These fluctuations impact our costs of funding, our collateral obligations and our ability to access international markets. Although Argentina is no longer in default following the final agreement reached with certain of the holders of bonds issued by the Republic (holdouts), and during the last two years Argentina’s sovereign ratings have been upgraded, a decrease in Argentina’s sovereign rating could limit our access to financing or make such financing more expensive for us, even if available, which could have a material adverse effect on our business, results of operations and financial condition.

 

During the last two years, the rating agencies upgraded Argentina’s sovereign ratings, which, among other matters, has allowed the Republic and certain companies to have access to the international capital markets.

 

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The financial industry is increasingly dependent on information technology systems, which may fail, may not be adequate for the tasks at hand or may no longer be available.

 

Banks and their activities are increasingly dependent on highly sophisticated information technology (“IT”) systems. IT systems are vulnerable to a number of problems, such as software or hardware malfunctions, computer viruses, hacking and physical damage to vital IT centers. IT systems need regular upgrading and banks, including us, may not be able to implement necessary upgrades on a timely basis or upgrades may fail to function as planned.

 

Furthermore, we are under continuous threat of loss due to cyber-attacks, especially as we continue to expand customer capabilities to utilize internet and other remote channels to transact business. Two of the most significant cyber-attack risks that we face are e-fraud and breach of sensitive customer data. Loss from e-fraud occurs when cybercriminals breach and extract funds directly from customers’ or our accounts. A breach of sensitive customer data, such as account numbers, could present significant reputational, legal and/or regulatory costs to us.

 

Over the past few years, there have been a series of distributed denial of service attacks on financial services companies. Distributed denial of service attacks are designed to saturate the targeted online network with excessive amounts of network traffic, resulting in slow response times, or in some cases, causing the site to be temporarily unavailable. Generally, these attacks have not been conducted to steal financial data, but meant to interrupt or suspend a company’s internet service. While these events may not result in a breach of client data and account information, the attacks can adversely affect the performance of a company’s website and in some instances have prevented customers from accessing a company’s website. Distributed denial of service attacks, hacking and identity theft risks could cause serious reputational harm. Cyber threats are rapidly evolving and we may not be able to anticipate or prevent all such attacks. Our risk and exposure to these matters remains heightened because of the evolving nature and complexity of these threats from cybercriminals and hackers, our plans to continue to provide internet banking and mobile banking channels, and our plans to develop additional remote connectivity solutions to serve our customers. We may incur increasing costs in an effort to minimize these risks and could be held liable for any security breach or loss.

 

Additionally, fraud risk may increase as we offer more products online or through mobile channels.

 

In addition to costs that may be incurred as a result of any failure of our IT systems, we could face fines from bank regulators if we fail to comply with applicable banking or reporting regulations as a result of any such IT failure or otherwise.

 

We face security risks, including denial of service attacks, hacking, social engineering attacks targeting its colleagues and customers, malware intrusion or data corruption attempts, and identity theft that could result in the disclosure of confidential information, adversely affect our business or reputation, and create significant legal and financial exposure.

 

Our computer systems and network infrastructure and those of third parties, on which we are highly dependent, are subject to security risks and could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Our business relies on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in its computer and data management systems and networks, and in the computer and data management systems and networks of third parties. In addition to accessing our network, products and services, our customers and other third parties may use personal mobile devices or computing devices that are outside of our network environment and are subject to their own cybersecurity risks.

 

We, our customers, regulators and other third parties, including other financial services institutions and companies engaged in data processing, have been subject to, and are likely to continue to be the target of, cyber-attacks. These cyber-attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information, ransomware, improper access by employees or vendors, attacks on personal email of employees, ransom demands to not expose security vulnerabilities in our systems or the systems of third parties or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of us, our employees, our customers or of third parties, damage our systems or otherwise materially disrupt our or our customers’ or other third parties’ network access or business operations. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to ensure the integrity of our systems and implement controls, processes, policies and other protective measures, we may not be able to anticipate all security breaches, nor may we be able to implement guaranteed preventive measures against such security breaches. Cyber threats are rapidly evolving and we may not be able to anticipate or prevent all such attacks and could be held liable for any security breach or loss.

 

Cybersecurity risks for banking organizations have significantly increased in recent years in part because of the proliferation of new technologies, and the use of the internet and telecommunications technologies to conduct financial transactions. For example,

 

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cybersecurity risks may increase in the future as we continue to increase our mobile-payment and other internet-based product offerings and expand our internal usage of web-based products and applications. In addition, cybersecurity risks have significantly increased in recent years in part due to the increased sophistication and activities of organized crime affiliates, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists and other external parties, including those involved in corporate espionage. Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks and “spear phishing” attacks are becoming more sophisticated and are extremely difficult to prevent. In such an attack, an attacker will attempt to fraudulently induce colleagues, customers or other users of our systems to disclose sensitive information in order to gain access to its data or that of our clients. Persistent attackers may succeed in penetrating defenses given enough resources, time, and motive. The techniques used by cyber criminals change frequently, may not be recognized until launched and may not be recognized until well after a breach has occurred. The risk of a security breach caused by a cyber-attack at a vendor or by unauthorized vendor access has also increased in recent years. Additionally, the existence of cyber-attacks or security breaches at third-party vendors with access to our data may not be disclosed to it in a timely manner.

 

We also face indirect technology, cybersecurity and operational risks relating to the customers, clients and other third parties with whom we does business or upon whom we rely to facilitate or enable our business activities, including, for example, financial counterparties, regulators and providers of critical infrastructure such as internet access and electrical power. As a result of increasing consolidation, interdependence and complexity of financial entities and technology systems, a technology failure, cyber-attack or other information or security breach that significantly degrades, deletes or compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including us. This consolidation, interconnectivity and complexity increases the risk of operational failure, on both individual and industry-wide bases, as disparate systems need to be integrated, often on an accelerated basis. Any third-party technology failure, cyber-attack or other information or security breach, termination or constraint could, among other things, adversely affect our ability to effect transactions, service our clients, manage our exposure to risk or expand our business.

 

Cyber-attacks or other information or security breaches, whether directed at us or at third parties, may result in a material loss or have material consequences. Furthermore, the public perception that a cyber-attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with customers and third parties with whom we do business. Hacking of personal information and identity theft risks, in particular, could cause serious reputational harm. A successful penetration or circumvention of system security could cause us serious negative consequences, including loss of customers and business opportunities, significant business disruption to our operations and business, misappropriation or destruction of our confidential information and/or that of our customers, or damage to our or our customers’ and/or third parties’ computers or systems, and could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and could adversely impact our results of operations, liquidity and financial condition.

 

An increase in fraud or transaction errors may adversely affect our reputation, results of operations and financial condition.

 

Due to the large number of transactions that occur in a financial institution such as the Bank, errors can occur and worsen before being detected and corrected. In addition, some of our transactions are not fully automatic, which may increase the risk of human error, or manipulation, and it may be difficult to detect losses quickly. If we are unable to effectively and timely detect and remedy fraudulent and erroneous transactions, it could damage our reputation, entail serious costs and affect our transactions, as well as have a material adverse effect on our business, results of operations and financial condition.

 

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

 

Under Argentine law, the liquidation and commencement of bankruptcy proceedings against financial institutions, until their banking license has been revoked by the Central Bank, may only be commenced by the Central Bank. If BBVA Francés were unable to pay its debts as they come due, the Central Bank could intervene and revoke our banking license, and file a bankruptcy petition before a commercial court. If the Central Bank intervenes, the reorganization proceeding could take longer and it is likely that the shareholders’ remedies would be restricted. During any such process, the Central Bank would have to consider its interests as a regulator and could well prioritize the claims of other creditors and third parties against us. As a result of any such intervention, shareholders may realize substantially less on the claims than they would in a bankruptcy proceeding of a non-financial institution in Argentina or a financial institution or non-financial institution in the United States or any other country.

 

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Lawsuits brought against us outside Argentina, the enforcement of foreign judgments and complaints based on foreign legal concepts may be unsuccessful.

 

We are a commercial bank organized under the laws of Argentina. Most of our shareholders, directors, members of the supervisory committee and officers and certain experts named herein reside outside the United States (principally in Argentina). Substantially all of our assets are located outside the United States. If any shareholder were to bring a lawsuit against our directors, officers or experts in the United States, it may be difficult for them to effect service of legal process within the United States upon these persons or to enforce in Argentina a judgment against them obtained in the courts of the United States based upon the civil liability provisions of the United States federal securities laws, due to specific requirements of Argentine law regarding procedural law issues and principles of public policy.

 

Class actions against financial institutions for an indeterminate amount may adversely affect the profitability of the financial sector and of the Bank.

 

The Argentine national constitution and the Argentine Consumer Protection Law No. 24,240, as supplemented or amended (the “Consumer Protection Law”), contain certain provisions regarding class actions. However, their guidance with respect to procedural rules for instituting and trying class action cases is limited. Nonetheless, Argentine courts have admitted class actions in certain cases, including various lawsuits against financial institutions related to “collective interests” such as alleged overcharging on products, interest rates and advice in the sale of public securities. Recently, some of these lawsuits have been settled by the parties out of court. These settlements have typically involved an undertaking by the financial institution to adjust its fees and charges. If class action plaintiffs were to prevail in these or other matters against financial institutions generally, or against us specifically, this could have an adverse effect on the financial industry generally and on our business, results of operations and financial condition in particular.

 

In the future, court and administrative decisions may increase the degree of protection afforded to our debtors and other customers, or be favorable to the claims brought by consumer groups or associations. This could affect the ability of financial institutions, including us, to freely determine charges, fees or expenses for their services and products, thereby affecting our business and results of operations.

 

BBVA, our controlling shareholder, has the ability to direct our business and its interests could conflict with yours.

 

As of December 31, 2017, our parent company, BBVA, directly or beneficially owned 66.55% of our capital stock. As a result, BBVA controls virtually all decisions with respect to our company made by shareholders. It may, for example, without the concurrence of the remaining shareholders, elect a majority of our directors, effect or prevent a merger, sale of assets or other business acquisition or disposition, cause us to issue additional equity securities and determine the timing and amounts of dividends, if any, always subject to the applicable legal framework. Its interests may conflict with your interests as a holder of our shares or ADSs, and it may take actions that might be desirable to BBVA but not to our other shareholders.

 

Our plan to grow our business depends on our ability to manage our relationships with partners and grow our deposit base.

 

We plan to grow our business by, among other means, increasing our client base. Our strategic partnerships are important components of our client acquisition strategy. We have various strategic partnerships, including those with LATAM Airlines, soccer clubs Boca Juniors, River Plate and Talleres de Cordoba, car manufacturers Peugeot, Renault and Volkswagen, and insurance companies such as La Caja, which we depend on to expand our client reach cost efficiently, further expand our points of presence and enhance our value proposition. Any deterioration in our relationships with our strategic partners could adversely affect our strategy and materially and adversely affect our business, results of operations and financial condition.

 

In addition, the successful growth of our business depends on our ability to grow our deposit base. A tax amnesty law introduced in Argentina in July 2016 resulted in the declaration of over US$115 billion of undeclared assets by Argentine residents, improving our deposit base. Political, economic or legal developments in Argentina or other factors could lead customers to withdraw funds from the Argentine financial system, adversely affecting us. Moreover, we expect improvements in the Argentine economy, including lower inflation and increased bancarization and lending activity in the Argentine banking sector, to contribute to the growth of our business and profitability. If our assumptions prove to be incorrect, it could have a material adverse effect on our business, results of operations and financial condition.

 

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We may enter into one or more acquisitions which could adversely affect the value of the Bank.

 

We regularly explore consolidation opportunities in the ordinary course of business and believe there are significant opportunities to expand our footprint in the Argentine banking sector. In the event that we choose to make an acquisition in the future, any such transaction would involve a number of risks and uncertainties, including:

 

§the possibility that we pay more than the value we will derive from any such transaction;

 

§the possibility that Argentine economic and political conditions will not develop in the manner we expect;

 

§the possibility that the Argentine financial services market will not develop in the manner we expect;

 

§a reduction in our cash available for operations and other uses;

 

§the potential incurrence of indebtedness to finance any such transaction;

 

§delays in achieving or our failure to achieve successfully achieve the anticipated benefits of any acquisition;

 

§difficulties in integrating any business acquired, including difficulties in harmonizing the companies’ operating practices, technology platforms, internal controls and other policies, procedures and processes;

 

§diversion of management time and resources in coordinating a larger or more geographically dispersed organization;

 

§the quality of the assets of the acquired business may be lower than we anticipate; and

 

§the assumption of certain liabilities, whether known or unknown.

 

Any of the foregoing or other risks and uncertainties related to any acquisition could have a material adverse effect on our business, results of operations and financial condition or the value of the Bank.

 

We may suffer adverse consequences related to our calculation of income tax for the year ended December 31, 2016

 

As discussed in our Form 6-K furnished to the SEC on June 30, 2017, on May 12, 2017, we filed a request for declaratory judgment with the Contentious Administrative Federal Court No. 12, Secretariat No. 23, seeking that such court declare unconstitutional certain provisions of Argentine law that prevented us from applying such inflation adjustment mechanism. On May 12, 2017, we filed our income tax return for 2016 giving effect to this adjustment for inflation.

 

On May 29, 2017, the Argentine Central Bank, without ruling on the merits of our application of the inflation adjustment mechanism nor on our right to initiate the above legal action, issued a formal notice requiring us to record a provision of Ps.1,185.8 million in our statements of operations in order to recognize a regulatory reserve against what the Central Bank considers possible contingencies arising from the tax position we assumed. In response to this formal notice, we filed a petition providing documentation supporting our assessment and requesting that the order from the Central Bank be reviewed. We have not yet been notified of the Central Bank’s response to this petition. On June 7, 2017, we recorded this provision for Ps.1,185.8 million following the Central Bank’s request, which was reflected in our statements of operations for the year ended December 31, 2017. This provision affects the comparability of our results of operations for the year ended December 31, 2017, as compared with our results for other periods.

 

In addition, based on legal precedents applicable to this case, we have not modified our income tax return for the year ended December 31, 2016, as we intend to continue to pursue a declaratory judgment from the court. We cannot predict the outcome of this legal action or whether we will be required to amend our income tax return for 2016 in the future. If we are required to amend our income tax return for 2016, we may be required to pay interest and charges to the Argentine tax authorities, and may be subject to an investigation or legal action by such authorities. We cannot predict the outcome of any such investigation or legal action or whether it would have a material adverse effect on our business, results of operations or financial condition, or the trading prices of our ordinary shares and ADSs.

 

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Legal, Regulatory and Compliance Risks

 

We operate in a highly regulated environment, and our operations are subject to regulations adopted, and measures taken, by several regulatory agencies.

 

Financial institutions in Argentina are subject to significant regulation relating to functions that historically have been determined by the Central Bank and other regulatory authorities. The Central Bank may penalize us, in case of any breach of applicable regulations. Similarly, the CNV, which authorizes securities offerings and regulates the public securities markets in Argentina, has the authority to impose sanctions on us and our Board of Directors for breaches of corporate governance. In addition, pursuant to Law No. 26,831, the CNV may appoint supervisors with veto powers over resolutions of our board of directors and may temporarily remove our board of directors when as determined by the CNV, minority shareholders’ or bondholders’ interests or rights have been infringed upon. The Financial Information Unit (Unidad de Información Financiera, or “UIF”) regulates matters relating to anti-money laundering and has the ability to monitor compliance with any such regulations by financial institutions and, eventually, impose sanctions. Any such regulatory agencies could initiate proceedings and impose sanctions against us, our shareholders or our directors.

 

The Central Bank has also imposed restrictions on the positive foreign currency net global position of financial institutions, which have been modified several times, to prevent the Central Bank’s foreign currency reserves from further decreasing. As of the date of this annual report, the positive foreign currency net global position may not exceed 25% of the lesser of the financial institution’s total capital computed for the relevant preceding month or the financial institution’s own liquid assets.

 

In addition, pursuant to Communication “A” 5785, sanctions imposed by the Central Bank, the UIF, the CNV and/or the Superintendencia de Entidades Financieras y Cambiarias (the Superintendence of Financial Institutions and Exchanges, referred to as the “Superintendence”) and/or their authorities, may result in the revocation of the licenses to operate as financial institutions. Such revocation may occur when, in the opinion of the board of directors of the Central Bank, there was a material change in the conditions deemed necessary to maintain such license, including those relating to the suitability, experience, moral character or integrity of (i) the members of a financial institution’s board of directors (directors, counselors or equivalent authorities), (ii) its shareholders, (iii) the members of its supervisory committee or (iv) others, such as its managers.

 

The absence of a stable regulatory framework or the imposition of measures that may affect the profitability of financial institutions in Argentina and limit the capacity to hedge against currency fluctuations could result in significant limits to financial institutions’ decision-making ability. In turn, this could cause uncertainty and negatively affect our future financial activities and result of operations. In addition, existing or future legislation and regulation could require material expenditures or otherwise have a material adverse effect on our business, results of operations and financial conditions.

 

In addition to regulations specific to our industry, we are subject to a wide range of federal, provincial and municipal regulations and supervision generally applicable to businesses operating in Argentina, including laws and regulations pertaining to labor, social security, public health, consumer protection, the environment, competition and price controls.

 

These or any other future governmental measures or regulations could have a material adverse effect on our business, results of operations and financial condition.

 

The instability of the regulatory framework, in particular the regulatory framework affecting financial institutions, could have a material adverse effect on financial institutions such as BBVA Francés.

 

During Cristina Kirchner’s second term as President a series of new regulations were issued affecting financial institutions, mainly regulating the foreign exchange market and imposing new capital requirements for financial institutions. In this regard, Communications “A” 5272 and 5273 of the Central Bank, dated January 27, 2012, increased the capital requirements for financial institutions operating in Argentina. These Communications required certain minimum capital levels in order to support operational risks and the distribution of dividends, and an additional capital buffer equivalent to 75% of the total capital requirements. For more information regarding capital requirements for Argentine banks please see “Item 4. Information on the Company—F. The Argentine Banking System and its Regulatory Framework”.

 

Moreover, a new law was approved by the Congress introducing amendments to the Central Bank’s charter. The principal issues addressed by this bill were the use of Central Bank’s reserves for the cancellation of public debt together with the implementation of polices by the Central Bank in order to interfere in the determination of interest rates and terms of loans to financial institutions.

 

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The Central Bank issued Communications “A” 5319 and “A” 5380, dated July 5, 2012 and December 21, 2012, respectively, and Communication “A” 5516, dated December 27, 2013, making it mandatory for banks to provide credit lines for productive purposes. This requirement has been renewed every six months since then. The purpose of these measures implemented by the former government was to foster investment and growth. Finally, on November 3, 2017 the Central Bank determined that mandatory credit lines for productive financing and financial inclusion will continue to be required until December 2018. The quota for 2018 will be a percentage of monthly non-financial private deposits in pesos as of November 30, 2017, according to the following schedule: January 2018: 16.5%, decreasing by 1.5 percentage points monthly until reaching 0% in December 2018. This is a significant development for banks given that the portion of deposits that financial institutions must loan at low interest rates will be significantly reduced, allowing banks to allocate such funds in a more profitable way.

 

On November 29, 2012, the Argentine Congress passed the new “Securities Law”, which modified the public offer regime set forth by Law No. 17,811, as amended. One of the most significant amendments introduced by the Securities Law referred to the powers of the CNV. The adoption of Section 20 of the Securities Law raised concern in the market, especially among listed companies, since it entitles the CNV to (i) appoint supervisors with veto power over the resolutions adopted by the board of directors of listed companies and (ii) disqualify the board of directors of listed companies for a period of 180 days when, as determined by the CNV, the interests of the minority shareholders and/or security holders are adversely affected.

 

On October 1, 2013, the Central Bank issued Communication “A” 5460, granting broad protections to consumers of financial services, including, among other aspects, the regulation of fees and commissions charged by financial institutions for their services. As a result, fees and charges must represent a real, direct and demonstrable cost and should have technical and economic justification. Communication “A” 5514 introduced an exception to the application of Communication “A” 5460 for certain credit agreements that have pledges as collateral and are entered into before September 30, 2019.

 

On December 23, 2014, the Central Bank amended Communication “A” 5460 through Communication “A” 5685. As a result of this amendment, any increase in commissions for new products or services for retail customers must have the prior authorization of the Central Bank.

 

Additionally, according to Central Bank Communication “A” 5689 dated January 8, 2015 and subsequent modifications, , financial institutions must deduct from the potential dividend distributable amount any fine imposed by the Central Bank, the CNV and the UIF.

 

While the Macri Administration has repealed part of the regulatory framework enacted by the Fernández de Kirchner Administration, such as (i) the restrictions on the foreign exchange market, (ii) the regulations concerning minimum and maximum interest rates on certain loans and deposits, (iii) the requirements governing the flow of capital into Argentina, (iv) the percentage of foreign currency positions of financial institutions, (v) the monthly contributions that banks must set aside each month to fund the deposit guarantee fund, (vi) additional capital requirements for the dividend distribution, and (vii) the requirement of prior authorizations to increase commissions, it is still unclear whether the new regulatory framework will be stable and the impact that the new regulatory framework may have on our business. The absence of a stable regulatory framework or the introduction of new regulations that affect the banking business could limit the ability of financial institutions, including BBVA Francés, to make long-term decisions, such as asset-allocation decisions, and could cause uncertainty with respect to our future business, results of operations and financial condition. We cannot assure that laws and regulations currently governing the financial sector will not continue to change in the future or that any changes will not have a material adverse effect on our business, results of operations and financial condition.

 

Exposure to multiple provincial and municipal legislation and regulations could adversely affect our business and results of operations.

 

Argentina has a federal system of government with 23 provinces and one autonomous city (Buenos Aires), each of which, under the Argentine national constitution, has full power to enact legislation concerning taxes and other matters. Likewise, within each province, municipal governments have broad powers to regulate such matters. Due to the fact that our branches are located in multiple provinces, we are also subject to multiple provincial and municipal legislation and regulations. Future developments in provincial and municipal legislation concerning taxes, provincial regulations or other matters could have a material adverse effect on our business, results of operations and financial condition.

 

The Consumer Protection Law and the Credit Card Law may limit some of the rights afforded to us and our subsidiaries.

 

The Consumer Protection Law establishes a number of rules and principles for the protection of consumers. Although the Consumer Protection Law does not contain specific provisions for its enforcement in relation to financial activities, it does contain

 

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general provisions that might be used as grounds to uphold such enforcement, as it has been previously interpreted in various legal precedents. Moreover, the new Argentine Civil and Commercial Code has captured the principles of the Consumer Protection Law and established their application to banking agreements.

 

The application of both the Consumer Protection Law and the Credit Card Law No. 25,065 (the “Credit Card Law”) by administrative authorities and courts at the federal, provincial and municipal levels has increased. Moreover, administrative and judicial authorities have issued various rules and regulations aimed at strengthening consumer protection. In this context, the Central Bank issued Communication “A” 5460, as supplemented and amended, granting broad protection to financial services customers, limiting fees and charges that financial institutions may validly collect from their clients. In addition, the Argentine Supreme Court of Justice issued the Acordada 32/2014, creating the Public Registry of Collective Proceedings for the purpose of registering collective proceedings (such as class actions) filed with national and federal courts. In the event that we are found to be liable for violations of any of the provisions of the Consumer Protection Law or the Credit Card Law, the potential penalties could limit some of our rights, such as reducing our ability to collect payments due from services and financing provided by us, or otherwise adversely affect our business, results of operations and financial condition.

 

 On September 18, 2014, a new pre-judicial service of dispute resolution was created by Law No. 26,993, in order for consumers and providers to resolve any dispute within the course of 30 days, including fines for companies that do not attend the hearings.

 

Furthermore, the rules that govern the credit card business provide for variable caps on the interest rates that financial institutions may charge clients and the fees that they may charge merchants. Moreover, general legal provisions exist pursuant to which courts could decrease the interest rates and fees agreed upon by the parties on the grounds that they are excessively high. A change in applicable law or the existence of court decisions that lower the cap on interest rates and fees that clients and merchants may be charged would reduce our revenues and therefore negatively affect our results of operations.

 

The application of this regulation or any new regulation that may limit some of the rights afforded to us could have a material adverse effect on our business, results of operations and financial condition.

 

We are exposed to risks in relation to compliance with anti-corruption laws and regulations and economic sanctions programs.

 

Our operations are subject to various anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977, and economic sanction programs, including those administered by the United Nations and the United States, including the U.S. Treasury Department’s Office of Foreign Assets Control. The anti-corruption laws generally prohibit providing anything of value to government officials for the purposes of obtaining or retaining business or securing any improper business advantage. As part of our business, we may deal with entities the employees of which are considered government officials. In addition, economic sanctions programs restrict our business dealings with certain sanctioned countries, individuals and entities.

 

Although we have internal policies and procedures designed to ensure compliance with applicable anti-corruption laws and sanctions regulations, there can be no assurance that such policies and procedures will be sufficient or that our employees, directors, officers, partners, agents and service providers will not take actions in violation of our policies and procedures (or otherwise in violation of the relevant anti-corruption laws and sanctions regulations) for which we or they may be ultimately held responsible. Violations of anti-corruption laws and sanctions regulations could lead to financial penalties being imposed on us, limits being placed on our activities, our authorizations and licenses being revoked, damage to our reputation and other consequences that could have a material adverse effect on our business, results of operations and financial condition. Further, litigations or investigations relating to alleged or suspected violations of anti-corruption laws and sanctions regulations could be costly.

 

Our anti-money laundering and anti-terrorism policies may be circumvented or otherwise not be sufficient to prevent all money laundering or terrorism financing.

 

We are subject to rules and regulations regarding money laundering and the financing of terrorism. Monitoring compliance with anti-money laundering and anti-terrorism financing rules can put a significant financial burden on banks and other financial institutions and pose significant technical problems. Although we believe that our current policies and procedures are sufficient to comply with applicable rules and regulations, we cannot guarantee that our anti-money laundering and anti-terrorism financing policies and procedures will not be circumvented or otherwise not be sufficient to prevent all money laundering or terrorism financing. Any of such events may have severe consequences, including sanctions, fines and notably reputational consequences, which could have a material adverse effect on our business, results of operations and financial condition.

 

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Argentine corporate disclosure, governance and accounting standards may require us to provide different information than would be required under U.S. standards. This difference could influence foreign investors’ decisions to invest in Argentine securities and could therefore limit our access to international markets.

 

The securities laws of Argentina that govern publicly-listed companies such as us impose disclosure requirements that are more limited than those in the United States. The Argentine securities markets are not as highly regulated and supervised as the U.S. securities markets. There are also important differences between accounting and financial reporting standards applicable to financial institutions in Argentina and those in the United States. As a result, financial statements and reported earnings of Argentine financial institutions generally differ from those reported based on U.S. accounting and reporting standards. See Note 26 to our Consolidated Financial Statements for a description of the principal differences between BCRA GAAP and U.S. GAAP and how they affect our financial statements and the reconciliation to U.S. GAAP of net income and total stockholders’ equity for the periods ended and as of the dates therein indicated.

 

Accordingly, the information available about us will not be the same as the information available about a U.S. company. The difference in the disclosure requirements between Argentine corporate governance and accounting standards and U.S. GAAP could limit foreign investors’ ability to evaluate our business, results of operations and financial condition, and influence foreign investors’ decisions whether to invest in Argentine securities, thereby limiting our access to international financial markets.

 

The special rules that govern the priority of different stakeholders of financial institutions in Argentina, which give priority to depositors with respect to most other creditors, may negatively affect other stakeholders in case of judicial liquidation or bankruptcy of the Bank.

 

Argentine Law No. 24,485, in force since April 18, 1995 and as amended by Law No. 25,089, provides that in case of judicial liquidation or bankruptcy of a financial institution such as BBVA Francés, all depositors, irrespective of the type, amount or currency of their deposits, will have general and absolute preferential rights with respect to all other creditors, except for certain labor credits and credits secured with a pledge or mortgage, to be paid with 100% of the funds deriving from the liquidation of our assets. In addition, depositors of any kind of deposits have special preferential rights over the remaining creditors of us, except for certain labor credits, to be paid with (i) any of our funds which may be held by the Central Bank as total reserves, (ii) any remaining funds of ours in existence as of the date on which our license is revoked, or (iii) any funds derived from the compulsory transfer of certain of our assets according to instructions of the Central Bank, in the following order of priority: (a) deposits made by legal entities up to Ps.5,000 per entity, or its equivalent in foreign currency, (b) deposits for terms exceeding 90 days and (c) all other deposits on a pro rata basis.

 

In case of a judicial liquidation or bankruptcy of a financial institution such as BBVA Francés, shareholders may not be able to partially or completely recover their investment due to the priority imposed by law.

 

There is uncertainty regarding the possible effects that the recently-approved pension and tax reform could have in the Argentine economy.

 

On December 19, 2017, the Argentine Congress enacted the pension reform law that reformulates the Integrated Pension System in Argentina (SIPA), proposing an adjustment of the valuations ​​of pensions and social benefits according to inflation and economic growth. The purpose of this law, together with the tax reform law, the labor reform bill and the capital markets law, is to increase the competitiveness of the Argentine economy by reducing both the fiscal deficit and poverty in a sustainable way.

 

On December 28, 2017, the Argentine Congress enacted the tax reform law. The main taxes that are modified are those related to social security contributions, taxes on corporate and personal profits, bank credits and debits, gross income, stamp tax, value added tax, elimination of internal customs (subject to agreement with the provinces), environmental taxes (CO2) on fuels, transfer taxes on real estate and modifications to the customs code. The reform is to be implemented within one and five years (depending on each modification), which is expected to provide predictability to the changes and support the fiscal sustainability of the reform. These tax reforms are designed to promote investment, competitiveness and quality employment, by reducing tax evasion, to comply with the proposed fiscal goals and to move towards sustained development of the Argentine economy.

 

We cannot assure you that these reforms adopted by the Argentine Congress will achieve their stated goals. If these reforms are unsuccessful, they could have an adverse effect on the Argentine economy and, consequently, on our business, results of operations and financial condition.

 

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There is uncertainty regarding financial sector reforms.

 

On January 10, 2018, the Argentine Executive Branch issued Decree No. 27/2018 (the “DNU”) whereby a series of new measures were implemented in order to facilitate public and private action by deregulating various markets and activities and simplifying standards. Much of the DNU is aimed at the financial sector, including Chapters II (on companies), III (on the trust fund for the development of entrepreneur capital MiPyMES), IX (which regulates the Argentine guarantee fund), X (on reciprocal guarantee companies), XVI (on the sustainability guarantee fund), XIX (on insurance), XX (on the actions of the financial information unit) and XXII (on access to credit and financial inclusion). The DNU aims in general to reduce government bureaucracy, simplify processes, improve the operation of the financial system and generate competition. We can provide no assurance that the DNU will achieve is intended results. Any failure of the DNU to achieve its goals could have a material adverse effect on our business, results of operations and financial condition.

 

The Restatement could have a material adverse effect on our business, results of operations and financial condition and result in a decline in our share price.

 

We have restated certain financial information for the years ended December 31, 2016 and 2015 included in the Consolidated Financial Statements pursuant to the Restatement. See “Presentation of Financial Information—Restatement”.

 

Preparing the Consolidated Financial Statements in light of the Restatement was a time- and resource-intensive process and involved substantial attention from management and significant legal and accounting costs. We cannot guarantee that our regulators will not inquire regarding our restated financial information or matters relating thereto or take any action in relation therewith. Any future inquiries as a result of the Restatement will, regardless of their outcome, likely consume a significant amount of our resources in addition to those resources already consumed in connection with the Restatement itself. Further, many companies that have been required to restate their historical financial statements have experienced a decline in stock price and stockholder lawsuits related thereto. We cannot predict whether the Restatement will adversely affect our reputation, result in a decline in our share price or lead to any regulatory inquiries or other actions or shareholder lawsuits or, if so, what the outcome of any such matters would be. Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

 

Our management has issued a report on its assessment of the effectiveness of our internal control over financial reporting as of December 31, 2017 and concluded that we did not maintain effective internal control over financial reporting as a result of material weaknesses. Although we have developed a remediation plan, we can provide no assurance that such plan will be successful or that we will be able to maintain effective control over financial reporting in the future, that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. See “Item 15. Controls and Procedures”.

 

Applicable Argentine and U.S. rules require us to prepare and present information in accordance with prescribed rules and standards. If we are unable to prepare and present our financial information in accordance with such rules, or if our financial information is subsequently restated, this could have a material adverse effect on our business, results of operations and financial condition.

 

ITEM 4. INFORMATION ON THE COMPANY

 

Recent Political and Economic Developments in Argentina

 

Activity indicators improved during 2017. Brazil’s partial recovery contributed to reactivating the Argentine economy during the year. According to GDP data through the third quarter of 2017, investment was the main growth driver in 2017, including public investment in infrastructure and private investment in agribusiness and renewable energies fueled by regulatory changes.

 

At the beginning of the year, a new minister of treasury was appointed, and he announced goals of lowering the fiscal deficit, increasing expenditure in infrastructure and reducing taxes. In this sense, the annual targets for the primary deficit were reviewed and redefined at 4.2%, 3.2% and 2.2% of GDP for 2017, 2018 and 2019, respectively. The observed preliminary deficit result for 2017 was 3.8% of GDP, exceeding the target set by the government.

 

The government maintained its gradual fiscal policy, and the fiscal deficit declined slightly relative to GDP, despite extra revenues resulting from the tax amnesty, which impacted the first quarter of the year. The government reduced subsidies to the energy sector, and improved access to debt markets contributed to the government’s ability to finance the deficit at decreasing interest rates.

 

In terms of inflation, the Central Bank set ambitious targets (12-17% year-on-year in 2017), maintaining positive real interest rates. Even so, these targets were not met, and in the last week of 2017, the government decided to revise them, postponing its 5% inflation target to 2020. As a result, the new inflation target for 2018 is 15%, 10% for 2019 and 5% for 2020. However, the market is

 

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expecting a higher inflation path from 2018 and 2020 (19.9% in 2018, 14% in 2019 and 9.7% in 2020) according to the Central Bank expectations survey as of March 2018.

 

Regarding the trade balance, domestic demand was dynamic and the peso appreciated in real terms, contributing to an increase in imports. Exports, however, did not show clear signs of recovery. Thus, after several years of surplus, there was a trade deficit in 2017.

 

In addition, the balance of real services remained negative, especially tourism, and interest paid abroad to finance the fiscal deficit increased. As a result, the current account deficit worsened and is expected to remain high in the coming years. The exchange rate tended to appreciate in real terms driven both by the inflow of foreign capital and by the restrictive monetary policy applied by the Central Bank.

 

2017 was an election year in Argentina. On August 13, 2017 the primary legislative elections were held and the ruling Cambiemos party won at the national level. This result was ratified in the final elections on October 22, 2017 giving the Macri Administration the necessary support to propose an agenda of structural reforms. These reforms include a fiscal agreement with the provinces and changes to tax, social security and labor laws, with the last one still pending discussion and enactment by Congress.

 

§Fiscal Agreement with the Provinces. This agreement consists of a commitment to reduce expenses and taxes to assure the solvency of the provinces’ public accounts. It was also agreed that the provinces would withdraw cross claims with the federal government. The province of Buenos Aires withdrew its legal claims for the so-called Greater Buenos Aires Fund in exchange for 10% of income tax proceeds.

 

§Tax Reform. The reform includes amendments to several taxes, mainly the income tax, bank debit and credit tax, turnover tax and a decrease in employers’ taxes. A new tax is to be levied on financial income. The reform anticipates a gradual reduction in the tax burden for the purpose of fostering investment, increasing competitiveness, boosting employment and ultimately achieving a more equitable, less distorted tax system.

 

§Social Security Reform. It includes the change in the formula for the adjustment of pensions and subsidies for struggling families. Those benefits were previously linked to the growth of social security revenues and after the reform are linked to the inflation rate and the growth of the wages of the economy. The minimum pension is set at 82% of the adjustable minimum living wage for beneficiaries who have reached 30 years’ payments and are not included in any late payment plan. Private sector workers who are not self-employed may opt to retire at the age of 70.

 

§Labor Reform. The labor reform has not yet been approved by the Argentine Congress. The bill consists of an employment regularization scheme, along with several measures to reduce lawsuits in the labor market. A fund to pay workers’ compensations for termination of employment would be created. There would also be changes in term of our employment arrangements.

 

Economic Data

 

In 2017, GDP grew 2.9% compared to a decline of 1.8% in the previous year. The Monthly Economic Activity Estimator (EMAE index) rose 3.0% year-on-year in December 2017 compared to December 2016.

 

With respect to the labor market, the latest official data was published for the fourth quarter of 2017, which reflected a slight decline in the unemployment rate, standing at 7.2% compared to 7.4% in the fourth quarter of 2016, according to the information published after the statistics review of the INDEC.

 

In 2017, the INDEC started publishing a new national CPI (with its base in December 2016 equal to 100), which covers 39 urban conglomerates of all the Argentine provinces, the City of Buenos Aires and 24 municipalities in Greater Buenos Aires. This index adds to the coverage of the CPI-GBA (covering the City of Buenos Aires and 24 municipalities of Greater Buenos Aires) which was published beginning in April 2016, following review of the INDEC price statistics.

 

The national CPI increased 24.8% in 2017, whereas the CPI-GBA increased 25% in the same period. According to the national CPI, the inflation for goods with seasonal price variations was 21.5%, whereas the inflation for goods with regulated prices was 38.7% year-on-year due to the scheduled rise in water, electricity and gas prices following the reduction in subsidies. Core inflation rose to 21.1% in the same period. Housing, water, electricity and other fuels rose to 55.6% year-on-year.

 

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In 2017, the national public sector had a primary deficit of Ps.404.1 billion, which accounted for 3.9% of 2017 GDP exceeding the fiscal target of 4.2% set for the year. This result was 17.6% higher than the Ps.343.5 billion deficit in 2016 according to the new methodology for presenting statistics for the non-financial public sector.

 

Primary public expenditure rose 21.8% in 2017 year-on-year, whereas the public sector income grew 22.6% over the same period. Public debt service rose 71.3%, while the total deficit rose Ps.629.1 billion, a 32.5% increase compared to 2016.

 

With respect to expenditure, year-on-year energy, transportation and other subsidies decreased 22.5% year-on-year. Social security services rose 36.7%, making it the sector with the highest increase as a result of the law for compensation of pensioners, and capital expenditure grew 14.2% in the same period.

 

On the other hand, tax revenues were supported by social security, which rose 30.2%, while total tax revenue increased 20.2%.

 

In 2017, the total national government revenue rose 24.6%. Income tax rose 28.5%, whereas VAT increased 31.2% in the same period. Export duties declined 7.5%, due to the rate reductions compared with 2016. On the other hand, there was a one-time outstanding tax revenue for the first three months of the year coming from the penalties imposed by the tax amnesty.

 

With respect to the balance of trade, the accumulated deficit in 2017 amounted to US$8,472 million compared to a surplus of US$2,114 million in 2016. This result stems from exports, which accumulated US$58,427 million, or 0.9% higher than in 2016. Primary product exports fell 5.6% and manufactured agricultural product exports fell 3.6%, whereas exports of industrial products rose 11.2% and fuels and energy increased 18.8%.

 

On the other hand, imports amounted to US$66,899 million, a 19.7% increase compared to 2016, with a 23% increase in fixed assets, a 15.2% increase in intermediate assets and a 15.8% increase in fuels and lubricants. Car imports rose 40.9%, accounting for 11.5% of the total imports in the year.

 

In the currency market, the peso devalued 18.5% in 2017 to Ps.18.7742 per US$ as of December 2017.

 

International reserves reached US$55.1 billion at December 31, 2017, an increase of US$15.7 billion year-on-year, mainly due to the issuance of public and private debt bought by the Central Bank.

 

Monetary Policy and Financial System

 

Central Bank authorities instrumented an inflation goals scheme announcing annual ranges of decreasing target inflation rates until 2020. The monetary policy rate is the average interest rate for lending and borrowing 7-day repo reference rate with financial institutions. The target inflation range for 2017 was 12%-17%. The Central Bank maintained the monetary policy rate during the first quarter of 2017 at 24.75% and increased it to 26.25% in April 2017. Then, the Central Bank kept it constant until October 25, 2017, when it underwent two consecutive increases up to 28.75%. This 250 b.p. increase was justified by arguing that, although core inflation was decreasing, it was not doing so at the expected pace, leading the Central Bank to seek a more pronounced deceleration. Aside from the rates policy, the Central Bank also performed open market transactions to manage liquidity conditions.

 

Monetary aggregates showed a strong rise in some cases, especially credit, driven by UVA mortgages, and by consumer loans. The monetary base expanded Ps.105.3 billion in 2017, an increase of 21.8% year-on-year. The M2, which includes cash held by the public and current account and savings account deposits of the private and the public sector, measured by balances, grew 25.8% during the same period.

 

The Central Bank adopted a sterilization policy to neutralize the expansion originated in the foreign sector, by issuing bills for Ps.481.5 billion, a 76.4% rise.

 

Total deposits in the financial sector grew by 26.8% in 2017. By contributors, the public sector increased deposits by 16.9%, and the funding originated in the private sector grew by 29.3% in 2017 as a result of an increase of 26.2% for peso deposits, and an increase of 39.4% for dollar denominated deposits (17.7% measured in dollars) in 2017.

 

The peso loan stock granted to the non-financial private sector grew 45.2% in 2017. Placements were led by mortgages, which increased 112.1%, followed by car loans which increased 66.3%. The normalization of the exchange market was a determining factor

 

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for the performance of dollar-denominated loans granted to the private sector, which increased 63.3% measured in dollars during the same period.

 

The private banks BADLAR interest rate, expressed in monthly averages, started 2017 at 19% and rose to 23.4% in December 2017, with most of that increase occurring during the last months of the year. The excess liquidity maintained by the financial system was able to sustain the higher growth rate of loans over deposits without sudden changes in either lending or borrowing interest rates.

 

With respect to exchange policy, the Central Bank maintains a flexible exchange rate scheme with occasional interventions in the exchange market when volatility increases or where inflation goals may be endangered. During 2017 there was only one important episode of high exchange rate volatility during July and August, prior to the legislative primary elections.

 

A.History and development of the company

 

BBVA Francés, an Argentine corporation (a sociedad anónima or “S.A.”), was duly incorporated under the name Banco Francés del Río de la Plata S.A. on October 14, 1886. The Bank has registered its office in Avenida Córdoba 111, C1054AAA, Ciudad Autónoma de Buenos Aires, Argentina; telephone number 54-11-4346-4000. The Bank’s agent in the United States for U.S. federal securities law purposes is CT Corporation System, currently with offices at 111 Eighth Avenue, New York, New York 10011.

 

BBVA Francés original by-laws (estatutos) were approved on November 20, 1886, by a decree recorded in the Public Registry of Commerce of Buenos Aires City on December 6, 1886, under No. 1,065 on Folio 359, Book 5, Volume “A” of National By-laws. The by-laws, including all amendments introduced to this date, were recorded in the Public Registry of Commerce (the governmental regulatory agency of corporations). The last amendment was recorded on October 25, 2017, under N° 21972 Book 86 of Corporations (sociedades anónimas). Pursuant to its current corporate by-laws, the Bank will terminate its activities on December 31, 2080, unless this term is extended by the shareholders.

 

The Bank is supervised by the Central Bank of Argentina, an entity that establishes valuation and accounting criteria, the rules on liquidity and capital requirements as well as the reporting systems of Argentine financial institutions. It is also subject to inspections by the Central Bank, based on which it is assigned a “rating”. See “Item 4. Information on the Company—F. The Argentine Banking System and its Regulatory Framework”.

 

Since 1886, the Bank has been recognized as a leading provider of financial services to large corporations. In the early 1980s, it broadened its customer base to include small and medium enterprises (“SMEs”) as well as individual customers. In response to demands from the corporate market and following the structural changes brought about by the stabilization process in Argentina, since 1991, the Bank added to its traditional commercial banking products a full range of services, such as investment banking, capital market transactions and international banking.

 

In the 1980s and 1990s, in order to achieve a wider market penetration, it expanded its distribution network by opening branches throughout Argentina.

 

In December 1996, when BBVA became the principal shareholder, the Bank reaffirmed its universal banking strategy with the goal of increasing the most profitable business segment: medium- and low-income individuals and SMEs in the middle market.

 

To this end, in August 1997, 71.75% of Banco de Crédito Argentino, a retail bank focused on the middle market and consumer banking sectors, was acquired. To effect the merger, BBVA Francés issued 14,174,432 ordinary shares to the existing shareholders of Banco de Crédito through a capital increase. On March 5, 1998 the Public Registry of Commerce registered the merger as well as the change in the name of the company from Banco Francés del Río de la Plata S.A. to Banco Francés S.A.

 

At the ordinary and extraordinary shareholders’ meeting held on April 27, 2000, a resolution was passed to change our name to BBVA Banco Francés S.A. On October 4, 2000, the Public Registry of Commerce registered our change from Banco Francés S.A. to BBVA Banco Francés S.A., and the amendment to our by-laws were made reflects the name change.

 

In the early 2000’s the Argentine Crisis and the ensuing economic and political instability led to a deep contraction in the intermediation volumes. In response, the Bank changed its short-term commercial strategy towards the transactional business, adjusted its operating structure and implemented a strict cost control plan. Actions were also focused on recovering asset quality levels, which had been strongly affected by the Argentine Crisis. By mid-2003, the economy began to recover and we returned to offering the full range of financial services, including credit facilities, albeit restricted to short-term financing. Commencing in 2004, BBVA Francés

 

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gradually strengthened its credit activity in the midst of economic solvency, and consolidated its transactional business. During the last years, the Bank has focused mainly in the most profitable segments, retail and small and medium size companies, while maintaining the leadership in the large corporations business.

 

On February 9, 2012, the board of directors of BBVA Francés and Inversora Otar S.A. approved the merger between both companies and on March 26, 2012, the shareholders’ meetings of both companies approved the transaction. On July 18, 2013, the Argentine Central Bank authorized the merger by Resolution No. 473 and on August 8, 2013 the CNV approved it by Resolution No. 17,155. On March 27, 2014, it was registered with the supervisory board of companies (the “IGJ”) under No. 5,302, Book 68 of Corporations.

 

On March 26, 2014, BBVA Francés cancelled 50,410,182 ordinary shares and issued simultaneously 50,410,182 ordinary shares of BBVA Francés, to be delivered in exchange to the former owners of Inversora Otar (BBV América S.L., Corporación General Financiera S.A. and Sucesión Romero) pursuant to the exchange ratio duly approved. As a result of this transaction as of December 31, 2014, the shareholders of Inversora Otar S.A. have the following ownership of BBVA Francés: BBV América S.L. 29.81%, Corporación General Financiera S.A. 0.47% and Sucesión Romero 0.0041%.

 

Because of this simultaneous increase and cancellation of the shares, the total amount of the corporate capital of the Bank remained unchanged. On April 1, 2012, as a result of the merger between BBVA Francés and Inversora Otar S.A., BBVA Francés acquired all the shares of BBVA Francés Valores S.A. previously held by Inversora Otar S.A., becoming its sole shareholder. On June 29, 2012, BBVA Francés S.A. sold a 3.0047% interest in BBVA Francés Valores S.A. to BBV America SL for Ps.441,194.

 

On July 10, 2013, BBVA Francés and Consultatio S.A. signed a sale and purchase agreement, under which the Bank acquired 23 of the 33 floors of the building under construction by Consultatio S.A., which became the “BBVA Tower”. This was the largest corporate headquarters real estate development project in the Republic and was part of the plan designed in 2010 by BBVA Francés to unify its core areas, currently divided among 10 buildings in the City of Buenos Aires. The goal is to have a building with the highest construction and environmental standards that will allow the Bank’s staff to work together in the same area, thus achieving greater efficiency. It is worth noting the building has been developed according to the highest international environmental and sustainability standards and with the commitment of the BBVA Group of preserving the environment. The investment of approximately Ps.1,200 million has a payment schedule associated with the work progress of the project. On December 27, 2016 the Bank took possession of the floors and started the relocation process. This process finished on April 17, 2017.

 

BBVA Francés considers the high income segment as strategic and for that reason the Bank has been working over the past three years on a long term plan in order to achieve a leading and differentiated position in this target. Accordingly, by the end of November 2013, the Bank launched the PREMIUM segment with an exclusive event at the Greek embassy in Argentina. This segment is composed of the 15,000 clients with the highest income, who have access to a new and different service experience: “Premium” executives, parking at branches with VIP spaces, free of charge subscriptions to magazines and newspapers, birthday presents and many other premium experiences at theatres, concerts and movies, with pre-sales on tickets and priority in invitations and exclusive brochures, among others.

 

In September 2014, BBVA Francés created the new Digital and Transformation Banking Division, following the guidelines of the BBVA Group. The new division was created in order to develop more convenient and relevant products for customers and to pursue more dynamic business, employing increasingly innovative communication channels. Furthermore, BBVA Francés implemented some organizational changes, redefining roles and simplifying the organizational chart, in order to adapt the Bank’s internal structure to its business needs. In September 2016, with the goal of promoting and consolidating the transformation process and advancing in the fulfillment of strategic objectives, the Digital and Transformation Banking Division became part of the Business Development Department. Under this new scheme, the Business Development Department has adopted a project-based structure to take full advantage of the opportunities presented in that context.

 

On May 20, 2015, BBVA Francés entered into a share purchase agreement with the Volkswagen Group for the acquisition of 51% of the issued and outstanding capital stock and voting rights of the Volkswagen Credit Compañía Financiera S.A., representing 23,970,000 registered, non-endorsable shares of common stock, par value Ps.1. On August 25, 2016, the Central Bank issued Resolution No. 332, authorizing the acquisition of 51% of the share capital of Volkswagen Credit Compañia Financiera S.A. by BBVA Francés. Moreover, on September 26, 2016, the shareholders of Volkswagen Credit Compañía Financiera S.A. amended its bylaws in order to include the new shareholders structure and approved the amendment of the company’s name to Volkswagen Financial Services Compañía Financiera S.A. The name change was registered with the IGJ on November 14, 2016, under No. 22302, Book 82 of Corporations. On January 18, 2018, Volkswagen Financial Services Holding Argentina S.A. and BBVA Banco Francés S.A., as shareholders, held an ordinary and extraordinary general meeting at which they decided to increase the share capital by Ps.400 million, going from Ps.497 million to Ps.897 million. The amount corresponding to the capital increase was subscribed in its entirety on the day

 

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of the shareholders’ meeting, in proportion to the shareholding of each shareholder. As a result, the 51% shareholding of BBVA Francés in the company is represented by 204 million common shares, nominative, non-endorsable, with a par value of Ps.1.00 each and entitled to one vote per share. The registration of the capital increase by the general inspection of justice is in process as of the date of this annual report.

 

In May 2015, BBVA Francés’ Board of Directors accepted the resignation of Ricardo Enrique Moreno as Executive Director (CEO), and appointed Martin Ezequiel Zarich to fill this position. The Board also decided that the resignation of Mr. Moreno shall be effective when the Central Bank of Argentina authorizes Mr. Zarich as the new Executive Director (CEO). Finally, our Board has also decided to appoint Gustavo Alonso as the new Director of Innovation & Development, replacing Mr. Zarich. On January 11, 2016 Mr. Martin Ezequiel Zarich was appointed Executive Director (CEO) after the BCRA issued the corresponding authorization through Resolution No. 9.

 

On June 30, 2015, the Board of Directors of BBVA Francés decided to carry out some changes in the Senior Management. The Board accepted the resignation of Mr. Juan Eugenio Rogero González as Risk Director and appointed Mr. Gerardo Fiandrino for this position. Throughout 2017, new changes were implemented in the Senior Management. Mr. Ernesto Gallardo was appointed as Director of the Financial and Planning Area, succeeding Mr. Ignacio Sanz y Arcelus; Mr. Eduardo González Correas was appointed as Director of Legal Services, succeeding Mr. Adrián Bressani; and Mrs. Mónica Etcheverry was appointed as Director of Normative Compliance, succeeding Mr. Walter Vallini. On October 13, 2017 the Nomination and Remunerations Committee decided to incorporate Mr. Eduardo González Correas and Mrs. Mónica Etcheverry into the Management Committee.

 

On June 13, 2017, the shareholders of BBVA Francés held an ordinary and extraordinary general meeting in which they approved the increase of share capital by public subscription for the sum of up to Ps.145 million of par value, through the issuance of up to 145,000,000 ordinary, book-entry shares with the right to one vote and par value one Ps.1.00 per share, delegating to the Board of Directors the powers to implement this share capital increase and determine the conditions of the offering.

 

On July 18, 2017, the Board of Directors approved the offering of 66,000,000 ordinary, book-entry shares with a subscription price of US$5.28 per share and US$15.85 per American Depositary Share (ADS), utilizing the reference exchange rate published by the BCRA on that date (Ps.17.0267) for the purposes of determining the price in pesos. On July 24, 2017 the offering was closed.

 

In accordance with the terms of the underwriting agreement for the offering, on July 26, 2017, the underwriters exercised the option to acquire 9,781,788 additional new shares (equivalent to 3,260,596 ADS) at the same offering price. On July 31, 2017 the offering of the additional shares closed. The proceeds from the offering were used to continue with the Bank’s growth strategy in the Argentine financial system.

 

BBVA Tower

 

The BBVA Tower is the image of leadership, innovation and excellence, and a clear evidence of the commitment of BBVA Francés to its employees as well as to the Republic.

 

This real estate development began in 2013 as part of a plan to centralize the Bank’s main areas.

 

The tower was built by Consultatio Real Estate and its 149m-high structure consists of 33 floors, 23 of which are owned by the Bank and is occupied by approximately 2,000 employees of the Bank. It meets the highest sustainability standards and was awarded a LEED Gold Certification (Leadership in Energy & Environmental Design), recognizing that the building is environmentally sustainable and a healthy space to work in.

 

With more technology and new services which improve workplace quality in line with open space corporate layout, the tower provides spaces that allow working in areas without limits or offices dividing the employees. It promotes more fluid and transparent communication, team work and the exchange of knowledge and experiences.

 

In the last quarter of 2016 personnel began moving to the new headquarters, a process that was completed in April 2017.

 

B.Business overview

 

BBVA Francés is a leading Argentine banking institution present in the local financial system since 1886. We are a subsidiary of the BBVA Group, our principal shareholder since 1996. We are the third largest bank in Argentina not controlled by a government entity

 

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in terms of total deposits, with 6.3% market share of total banking system deposits and the third largest private Argentine bank in terms of total loans, with 7.3% of total banking system loans, based on information published by the Central Bank as of December 31, 2017.

 

Most of the Bank’s operations, property and customers are located in Argentina. The Bank has traditionally accepted deposits and granted loans in pesos and in certain other currencies, primarily U.S. dollars. Foreign currency deposits can only be lent to companies that generate flows in the same currency.

 

The Bank was one of the first companies listed on the Argentine Stock Exchange (Bolsa de Comercio de Buenos Aires) (“BCBA”), quoting since 1888 (ticker: FRAN). Its shares in the form of American Depositary Shares have been listed on the New York Stock Exchange since 1993 (ticker: BFR) and on the Madrid-based LATIBEX (Mercado de Valores Latinoamericanos) since December 1999 (ticker: XBFR).

 

As of December 31, 2017, we had total assets of Ps.225.6 billion, a total loan portfolio of Ps.128.4 billion, total deposits of Ps.154.1 billion and total shareholders’ equity of Ps.26.1 billion, on a consolidated basis. Our consolidated net income for the year ended December 31, 2017 was Ps.3.9 billion and for the year ended December 31, 2016 was Ps.3.6 billion.

 

Through our universal banking platform, we provide a broad range of financial and non-financial services to both individuals and companies throughout Argentina, going across all the segments of the population, including retail and commercial banking, insurance, asset management, securities brokerage, and investment banking products and services. We believe the wide range of financial solutions we offer our customers, complemented with our unique strategic alliances and strategic partners, as well as our capacity to leverage the BBVA Group’s global expertise, relationships and technological platform, provide us with a significant competitive edge compared to other Argentine companies in the financial sector. Such competitive advantages place us in a privileged position to capture opportunities arising from recently implemented macroeconomic policies and reforms, which are expected to stimulate economic growth and reduce inflation, and to capitalize on the consolidation potential of the fragmented banking sector.

 

We conduct our operations through our three main reporting segments, which are: (i) BBVA Banco Francés S.A. (banking), (ii) PSA Finance S.A. (financial services) and (iii) Volkswagen Financial Services S.A. (financial services), out of which the banking business is the most relevant. We also manage the following entity-wide business lines:

 

§Retail banking, through which we offer financial services to individuals across all income segments. Our main retail banking products include checking and savings accounts, time deposits, credit cards, personal and auto loans, mortgages, insurance and investment products. Despite our historically strong presence within the middle-income and affluent segments of the population, our products and distribution channels are designed to attract clients across all client segments. As of December 31, 2017, we had approximately 2.6 million retail banking clients, compared with 2.3 million retail banking clients as of December 31, 2016. Our retail banking strategy is focused on growing our client base; expanding our product offering and services, particularly in underdeveloped products such as mortgages and in products where we see potential to increase our market share such as personal loans; and leveraging our technological platform to enhance our clients’ banking experience. As of December 31, 2017, we had total loans of Ps.60,550 million and total deposits of Ps.109,296 million within our retail banking business line, which increased 36.8% and 18.2%, respectively, when compared to December 31, 2016.

 

§Middle market, through which we offer financial services primarily to local private-sector companies. Our main middle market products include financing products, factoring, checking accounts, time deposits, transactional and payroll services, insurance and investment products. As of December 31, 2017, we had approximately 44 thousand middle market clients. We believe that SMEs are a key element for economic growth in Argentina, and we are focused on expanding the number of clients we serve and on being a strategic ally to our middle market clients, supporting them with tailored products and transactional solutions, as well as with differentiated customer support through our 251 branches. As of December 31, 2017, we had total loans of Ps.38,581 million and total deposits of Ps.31,526 million within our middle-market business line, which increased 97.5% and 109.0%, respectively, when compared to December 31, 2016.

 

§Corporate and investment banking (C&IB), through which we offer financial services to some of the largest Argentine corporations and multinational companies operating in Argentina. In addition to the products we offer to our middle market company clients, we provide our corporate and investment banking clients with global transaction services, global markets solutions such as risk management and securities brokerage, long term financing products including project finance and syndicated loans, and corporate finance services including mergers and acquisitions and capital markets advisory services. As of December 31, 2017, we had approximately 800 corporate banking clients, which included substantially all of the largest corporates and multinational companies in Argentina. Within our corporate and investment banking business line, we are

 

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focused on leveraging the deep expertise of our industry-focused relationship executives, supported by the BBVA Group’s global network, to continue to provide bespoke global financial solutions to our corporate client base. We believe that recently implemented macroeconomic policies and structural reforms have translated into expectations of an Argentine economy with lower inflation and currency volatility and higher economic growth. In this expected new business environment, we are focused on being a trusted partner for our corporate clients as they seek to finance investment opportunities, particularly within certain sectors of the economy where investment has lagged such as telecommunications, energy and infrastructure. As of December 31, 2017, we had total loans of Ps.29,236 million and total deposits of Ps.13,228 million within our corporate and investment banking business line, which increased 93.9% and 87.3%, respectively, when compared to December 31, 2016.

 

We offer our products and services through a wide multiple-channel distribution network with presence in all the Argentine provinces and in the City of Buenos Aires, servicing over 2.6 million customers as of December 31, 2017. This network includes 251 branches, which provide services to the retail segment and to small and medium companies and institutions. Corporate Banking is divided by industry sector into Consumer Goods, Heavy Industries and Energy, each of which provides personalized services to large companies. Complementing the distribution network, at December 31, 2017 there were 15 in-company branches, one point of sale outlet (a contact point that offers only automated services and commercial assistance, but does not have a license granted by the BCRA to operate as a branch) and two points of express support, 797 ATMs and 822 self-service terminals (“SSTs”).

 

Additionally, we provide an electronic banking service, a modern, secure and functional internet banking platform and a mobile banking app. The Bank had a total number of 6,082 employees as of December 31, 2017.

 

The distribution network is complemented by business alliances, including those with LATAM Airlines, the soccer clubs Boca Juniors, River Plate and Talleres de Córdoba and insurance companies, such as La Caja, as well as the agreements with the automobile companies Peugeot, Renault and Volkswagen, that have allowed us to expand our client reach cost efficiently and further expand our points of presence while enhancing our value proposition.

 

BBVA Francés has invested in its physical and digital distribution network, making it possible to offer a differential, flexible, convenient banking experience to its customers. In addition, we consider that with our existing distribution structure, we have the necessary reach and scale to facilitate our expected growth while improving our operating efficiency, number of customers and products.

 

We believe we have a privileged position to take advantage of the market opportunities that appear in a scenario of economic growth and declining inflation and in a financial system expected to grow and further consolidate.

 

Strategy

 

BBVA Francés has identified growth and transformation as the drivers of its strategy.

 

§Growth

 

BBVA Francés reaffirmed its goal to increase its market share and is now one of the leading banks in an expanding financial system in real terms. The Bank has implemented an ambitious growth plan which includes expanding the customer base, both for individuals and companies, as well as the size of the balance sheet. Low inflation is typically associated with a fall in interest rates. We believe it is essential to offset lower interest margins with higher intermediation volumes.

 

In order to support growth, BBVA Francés has launched digital campaigns as well as customer referral campaigns through its strategic partners, which allowed the Bank to acquire substantial numbers of new clients. In 2017 we added over 340 thousand new customers, reaching a total number of 2.6 million retail customers and 43.8 thousand corporate customers.

 

In terms of activity, total loans rose 62.7% in 2017, with private loans increasing by 62.2%, which has made it possible for the Bank to expand its private loans consolidated market share from 7.6% to 8.3% at December 31, 2017.

 

In retail banking, the Bank continued deepening and developing the strengths it has in each of its products.

 

During 2017, BBVA Francés successfully re-launched its personal loan line in the second semester. With respect to car loans, a rapidly growing market in Argentina, the Bank remains the leader through its partnerships with Peugeot, Renault and Volkswagen. With respect to mortgages, the Bank aims to be the leader in origination and during 2017 it had the highest mortgage sales among private

 

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Argentine banks. With respect to credit cards, BBVA Francés’ market share continued to grow. We believe our credit card offerings have the most attractive alliances and benefits in the local market.

 

Retail financing is expected to be a key aspect in the coming years to enable credit expansion. In 2017, deposits coming from the Tax Amnesty in Argentina proved to be stable following the end of the compulsory permanence period, and such deposits have provided a new source of funds to apply to productive credits. On the other hand, the Bank has offered UVA deposits, a product which offers significant advantages and which is expected to be vital for funding in the coming years. In this sense, the Bank’s challenge is to create attractive alternatives for customers which we expect to make it possible for the Bank to channel its expected growth.

 

Moreover, small- and medium-sized companies, essential for the development of the Argentine economy, are significant drivers of this growth plan. The Bank aims to be the leader in this segment, and for this purpose, it has reorganized the business line and the management model, expanding the service for such companies to the entire network of branches, which we expect to make it possible for the Bank to better serve smaller companies.

 

With respect to Corporate & Investment Banking (C&IB), through which the Bank offers financial services to some of the largest companies in Argentina and to multinational companies operating in Argentina, the Bank continued developing a strategy which made it possible to take new investment opportunities, backed by the strength and support of the BBVA Group and conducting financing operations in the capital markets, among others.

 

Additionally, in 2017, our mutual funds, as well as the Argentine mutual funds industry as a whole, showed a very good performance, more than doubling the equity under management. Local market circumstances enabled the launch of products for customers with various profiles aimed at a longer-term investment strategies. During 2017, new funds were launched covering all the conservative, moderate and aggressive risk-performance categories, and there were 16 funds by the end of the year. Both the funds with holdings in liquidity instruments and the mixed and variable income funds had good results and increased their equity under management.

 

The new scenario of economic growth and lower inflation may bring more stability and predictability to households. As a consequence, financial decisions are likely to focus on the longer term and financing will have to be adapted accordingly.

 

In Insurance, during 2017 the strong improvement of sales volumes that began in the previous year remained steady in almost every channel. The campaigns to attract customers continued and the range of products available was updated.

 

In line with the progress made in the digital range of products throughout the Bank, insurance incorporated four new products on Francés Net, and this range is expected to be completed by mid-2018, which will make it possible to launch new promotions for the portfolio.

 

Additionally and along with the strong growth in mortgages, a new specific line of Home Insurance was created for mortgage customers.

 

§Transformation

 

The second strategic driver for the Bank is Transformation.

 

BBVA Francés focuses on transformation based on the conviction that users’ experience will be the decisive differentiating factor in the success of the institution in the coming years. Moreover, the financial intermediation activity is aligned with the technological revolution reshaping most industries, forcing the Bank to reconsider and redesign the model to service, attract and interact with customers in general.

 

Customers want fast solutions to their problems, in real time. As such, the banks that manage to be present at the moment of deciding the purchase to be financed, with an attractive value proposition, will be the ones which will take advantage from this. That is why BBVA Francés is focused on improving and developing its digital platforms, fostering the acquisition of new customers, excellence in users’ experience and digital sales solutions. In the year ended December 31, 2017, 38.5% of the Bank’s products were sold through digital platforms, whereas 52.0% of the customers are already operating digitally, compared to 28.8% of products sold and 46.0% of customers operating digitally for 2016. Additionally, in the context of the Bank’s transformation process, quality remains a strategic

 

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priority. As such, the Bank is continuously measured through tools such as the Net Promoter Score (NPS), with the goal of being the leading bank in service and quality.

 

Transformation is not only about changing the users’ experience, but also reviewing processes, customer service models, interaction with customers and channels to solve issues. BBVA Francés is working to develop an omni-channel service model, where branches are only one among many ways of interacting with customers. Although the Bank has an extensive branch network with presence in every Argentine province, the role of the branch is changing and is expected to continue to evolve. Branches will be used for higher-value operations, and other types of operations will be increasingly directed to automatic channels. As a result of these initiatives, in 2017 BBVA Francés not only increased its operations through digital and automatic channels, but also saw a decline in operations made through a personal teller. Fewer operations through personal tellers means more resources can be devoted to commercial areas and, therefore, more opportunities for sales. In another example, the mailing of bank statements on paper declined 99% in 2017, which besides providing customers with a more agile, efficient service, allows substantial savings in terms of expenses.

 

In conclusion, the transformation process on which the Bank is working is of prime importance within the strategy, both from the commercial and growth points of view. This helps the Bank interact and assist customers according to their expectations. It is also essential from the efficiency point of view, as it paves the way for a better use of resources and it generates a competitive edge which is expected to help the Bank increase profits in the medium term.

 

2017 Highlights

 

BBVA Francés closed its fiscal year ended December 31, 2017 having met its goal of being one of the leading financial institutions in the Argentine financial system, increasing its customer portfolio and gaining market share in its credit portfolio.

 

2017 was a positive year in terms of activity for BBVA Francés. The total loan portfolio amounted to Ps.128,366.2 million as of December 31, 2017, which reflected a 62.7% increase year-on-year, while private loans amounted to Ps.127,208.9, increasing 62.2% increase year-on-year. As a result, the Bank reached a private loans consolidated market share of 8.3% as of December 31, 2017 (based on BCRA market information as of December 31, 2017).

 

The growth plan discussed above has focused on products and segments that the Bank considers vital for economic development of both customers and Argentina as a whole in the coming years.

 

Greater economic predictability is expected to encourage customers, both individuals and companies, to make more mid- and long-term financial decisions. Therefore, car loans and mortgages are expected to be increasingly important. Regarding car loans, the Bank is one of the market leaders through its affiliate companies; in the incipient mortgage market, our mortgages have shown a steady rise on a monthly basis throughout 2017, which meant finishing the year as one of the leaders among Argentine private banks with respect to monthly generation of those credits (based on BCRA market information as of December 31, 2017).

 

In 2017, the Bank also launched the personal loans for consumption, gaining market share in the second half of the year, reaching 4.64% at the end of the year (based on BCRA market information as of December 31, 2017).

 

Though credit card financing had a more moderate growth during 2017, both in the Argentine banking system generally and in the Bank, as a result of the customers’ demand for longer-term financing, BBVA Francés continued growing in this business with a market share increase both in financing and in consumption.

 

Moreover, the Bank currently believes that small and medium-sized companies will be the drivers of the Republic’s growth in the next years and thus it has reorganized its business lines and customer service models with the aim of reaching higher penetration in this segment.

 

In 2017, strong performance in commercial loans was driven by financing for small, medium and large corporations. Foreign trade operations, financial signature loans and discount on documents were the lines with the highest increase during the year, but lease options and collateral lines also regained momentum. This growth made it possible for the Bank to increase market share for commercial clients, reaching 8.6% as of December 31, 2017 (based on BCRA market information as of December 31, 2017).

 

With respect to liabilities, as of December 31, 2017 total deposits amounted to Ps.154,050.3 million, increasing 34.4% over the prior twelve months, over which period our sight account deposits grew 85.6%, whereas time deposits rose 25.7%. As of December

 

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31, 2017, saving and demand accounts accounted for 67.0% of total deposits. The Bank’s market share for private sector deposits rose 0.41 percentage points, reaching 7.7% as of December 31, 2017 (based on BCRA market information as of December 31, 2017).

 

The excess in the rate of growth of loans over deposits was financed with the Bank’s excess liquidity level. Going forward, liabilities and assets are expected to vary more in line with each other.

 

The Bank considers funding from deposits as a structural component in its financing, especially in the retail and middle market segments. In this line, UVA deposits were launched in 2017 and, in the coming fiscal year, this product is expected to become more significant, both at the retail and wholesale levels. There are also renewed opportunities in capital markets, both national and international, which are expected to present financing opportunities in the longer term.

 

In December 2017, the Bank issued notes for Ps.553.1 million for 24 months at a variable interest rate equivalent to the TM20 rate (interest rate for time deposits with term of 30 or 35 days for deposits above 20 million) plus an annual nominal 3.2% applicable margin, with quarterly interest payments, and notes for Ps.546.5 million for 36 months at a variable interest rate equivalent to BADLAR (Buenos Aires Deposits of Large Amount Rate) plus an annual nominal 4.25% applicable margin, also with quarterly interest payments.

 

Finally, as mentioned before, in July 2017 the Bank launched a new equity issuance of US$390 million. This operation made it possible for the Bank to close the year with a 14.8% capital ratio, which will help allow it to face the challenges of the coming fiscal years.

 

Below is an overview of each of our principal business lines and their evolution during 2017.

 

§Retail Banking

 

The Bank has a very strong presence in the retail banking segment where it offers a comprehensive set of financial services across all income segments and provides services to employees (payroll), professionals and merchants.

 

We offer our products and services through our extensive multi-channel distribution network that includes 251 branches, 797 ATMs, 822 self-service terminals, a telephone banking service, a modern, secure and functional internet banking platform with over one million active users representing over 52% of our total clients (including Premium World (Affluent), Premium (Mass Affluent) and Classic (Mass)), a mobile banking app with more than 563,000 users and a total of 6,082 employees, each as of December 31, 2017. Our distribution network is complemented by strategic partnerships that have allowed us to expand our client reach cost efficiently.

 

Our business alliances, which include for example LATAM Airlines, major soccer clubs such as Boca Juniors, River Plate and Talleres de Cordoba, car manufacturers such as Peugeot, Renault and Volkswagen, and insurance companies such as La Caja, allow us to not only offer an attractive and differentiated value proposition to our 2.6 million customers but also expand our customer base.

 

We have made our digital strategy a priority. In this respect, maintaining a cutting-edge digital banking platform has been a key element of our strategy as clients increasingly value the flexibility and convenience of digital channels. As of December 31, 2017, almost half of our total clients were active users of our website and/or our mobile banking app. We have established an ambitious internal goal of all of our clients experiencing our digital channels within three years and of originating a significant portion of our sales online. In addition to being convenient for our clients, digital channels yield other benefits for us such as improving our operating efficiency, reducing capacity utilization and resources used at our branches and other physical channels and generating business intelligence with respect to our clients’ behaviors and needs that facilitates innovation.

 

We are also committed to providing a differentiated and high quality service and user experience for our clients at our branches and throughout our entire distribution network. We believe that customer service is highly valued by users of financial services in Argentina and that providing high quality service is an important way of distinguishing ourselves from our competitors. In this respect, we constantly improve our branches and digital applications to further enhance our customers’ experience. In addition, we monitor regularly our performance through client surveys and other feedback mechanisms to ensure that we consistently provide a high quality experience. We will continue to be focused on deploying technology innovations and adapting our processes to reduce customer wait times at branches and improve the productivity of our workforce.

 

With the objective of providing the best possible value proposition to all our customers, we have segmented our retail business in the following groups:

 

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-Premium World (Affluent). This group includes our wealthiest customers and as of December 31, 2017 accounted for approximately 73,666 clients, a 51% increase from the previous year.

 

-Premium (Mass Affluent). As of December 31, 2017 this group accounted for approximately 167,480 clients, a 26% increase from the previous year.

 

-Classic (Mass). As of December 31, 2017 this group accounted for approximately 1,608,866 clients, a 9% increase from the previous year.

 

-Financial Inclusion (Express). As of December 31, 2017 this group accounted for approximately 780,258 clients, a 15% increase from the previous year. This group is defined by the limited interactions they currently have with us; however they also represent an attractive cross-selling opportunity. They usually have a single savings account and sometimes one credit card.

 

We strive to be our clients’ principal bank, and to that end have teams that actively work across each of these customer groups to obtain our customers’ payroll deposits. As of December 31, 2017 we had 539,347 customers with their payroll direct deposited with the Bank.

 

We continue to show strong consumer credit risk ratios. As of December 31, 2017, our non-performing loan (“NPL”) ratio (defined as loans with more than 90 days past due divided by total loans) for retail lending was 1.4%.

 

In terms of assets, as of December 31, 2017, the loan portfolio amounted to Ps.60,550 million, an increase of 30.8% in the year, whereas deposits amounted to Ps.109,296 million, an increase of 18.2%. 

 

In 2017, Retail Banking focused on the following products:

 

Personal Loans

 

In anticipation of higher demand and competition, an important campaign was launched during the second half of 2017, and its main drivers were transformation of the customer rating process and commercial management in the sales channels, supported by a communication campaign in the mass media for new products.

 

Within this context, specific loans were launched for different groups of customers, including fixed rate and inflation-adjusted loans, in each case up to Ps.500 thousand and up to 60 months and at a 0% rate for new customers whose salaries are paid through the Bank. As a result, placement grew by 74% in the year-ended December 31, 2017 with an increase in market share of 40 percentage points, closing the year with a total amount of Ps.12,500 million from 117,755 transactions, and a market share of 4.6% (according to BCRA information).

 

Mortgages

 

In the first quarter of 2017, the Bank focused on the improvement of its operating and commercial processes, including by providing training to the network of branches and real estate agencies for indirect sales and marketing of loans. At December 31, 2017 the Bank had an exclusive arrangement to service over 500 associated real estate agencies. Progressively, the number and volume of sales increased and, beginning in the second half of 2017, it reached a speed that allowed the Bank to position itself as the first private bank in the placement of transactions (number of loans sold) and the second in volume (the total amount of loans).

 

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By the end of the third quarter of 2017, the Bank launched the “Flexible Loan”, which allows financing, in similar terms to that of a mortgage, of the purchase of real estate before construction on the basis of a property sales contract, giving a higher dynamism to the market, speeding up the investment flows and enabling access to real property by more Argentines.

 

Car Loans

 

BBVA Francés was one of the leaders during 2017 in the placement of car loans, through its joint ventures with Peugeot-Citroën, Renault-Nissan and Volkswagen-Audi-Ducatti.

 

During 2017, more than 92,000 new creditworthy customers with active products were incorporated, and car loans were one of the primary channels to attract new customers. In addition, the Bank also embarked on wholesale financing, from the factories to the car dealers, integrating the business vertically and achieving a high level of cross-selling in each segment and business area.

 

Moreover the business agreement with BMW strengthened, and not only cars were financed but also motorbikes, a rapidly growing segment. In this line, business agreements were closed with different brands with the aim of increasing the Bank’s presence in the market. In order to complete the proposal for high-income customers, there is an agreement with Ditecar S.A. to market special products with respect to their Jaguar, Land Rover and Volvo cars.

 

In line with the strategy to develop digital tools, website tools were created for the online scoring of car loans both for cars and for motorbikes with our main business partners. Customers scored in the tool are referred to car dealers which have joined to offer car loans.

 

Credit Cards

 

In 2017, the alliance with LATAM was further strengthened through the LATAM Pass loyalty program, which makes it possible to obtain LATAM Pass kilometers from purchases made with VISA and Mastercard credit cards. In addition, promotional actions increased for customers both in discounts for redeeming LATAM Pass kilometers and in the sale of LATAM Pass kilometers with up to 50% discounts and several campaigns were implemented to attract new customers, fostering the acquisition of products with LATAM Pass kilometers as a gift.

 

BBVA Francés and Shell signed a business agreement in the latter part of 2017 to strengthen the alliance that they both have with the LATAM Pass loyalty program, allowing Shell customers to obtain the BBVA Francés LATAM Pass card through the Shell website.

 

Additionally, unique experiences were organized, in which over 2,500 holders of River, Xeneize and Talleres credit cards took part, receiving tickets to soccer matches, visits to training sessions and a match in the halftime specific events organized for clients, among others.

 

These actions allowed the Bank to increase credit card consumptions 41% in 2017 compared to the previous year, which implies an increase of 5% over the financial system growth during 2017 and reflects an increase in the credit cards consumption market share of 44 b.p., which closed the year at 12.5%. As of December 31, 2017, 68.6% of the credit accounts activated to operate in the Bank recorded activities, reflecting a 78 b.p. rise over a year ago. Finally, in 2017, 1.2 million cards were activated, with a 48% increase compared to the 0.8 million cards activated in 2016.

 

Time Deposits

 

For BBVA Francés, this is the core product in the funding strategy. The goal is to grow retail balances, which tend to be more stable and at a lower cost compared to time deposits from our corporate and investment banking business line, expanding the customer base with investment on the Classic (Mass) segment, and offering better options and convenience for the high income segment.

 

In 2017, retail term deposits, which are those lower than Ps.1 million, fell in comparison with 2016. Although balances in absolute terms went up, our market share fell. This was due both to a high excess of liquidity that the Bank had and to market conditions as a result of the competition caused by the bills issued by the Argentine Central Bank, generating an unfavorable environment in which to

 

38 

aggressively attract customers. Wholesale time deposits were above Ps.1 million and grew in balances and in market share, mainly due to a higher funding need as a consequence of the credit growth.

 

Our total market share of time deposits grew 13 percentage points in 2017, reaching 5.9% at the year close. Digital tools continued improving, bringing differential value propositions and new products, such as the LATAM Time Deposit, a saving in LATAM Pass kilometers to be redeemed for airplane tickets, UVA time deposits and time deposits at variable rates.

 

With respect to the customer service channels, we employ a multiple-channel approach to attend to clients, including executives in Branches, Private Banking, Francés Investments, Direct or Remote Executives and the web and mobile channels.

 

§Middle-market Banking

 

BBVA Francés maintains a leadership presence among corporations, agricultural producers and other institutions and continues working to maintain a strategic alliance with this sector in Argentina with a portfolio of Ps. 38.6 billion as of December 31, 2017. We have approximately 43,359 clients in this business area. In addition, we have recently made changes to our strategy to focus on capturing more small business clients. Our commercial lending portfolio NPL ratio, including our corporate lending portfolio, was 0.36% as of December 31, 2017 as compared with 0.20% as of December 31, 2016.

 

We offer a wide range of products covering the needs of this client segment, including a digital platform that allows our clients to process all types of transfers, billing, payments and foreign trade activity online. We are working to develop a system that would allow our clients to deposit checks via our smart phone apps, producing benefits both for our clients and for the Bank. We recently developed a loan simulator that allows companies that are not yet clients of the Bank to obtain a credit rating online that is automatically sent to a manager at one of our branches. We used to have 34 branches dedicated to companies and other institutions distributed throughout the country, and we are currently planning to implement a redesign of our customer service model in the third quarter of 2018 in order to offer services to these customers in 251 branches of our network including 23 business centers with managers fully dedicated to this client segment.

 

Among our principal lending products are cash advances, overdraft protection, financial loans and foreign trade. In addition, we offer services such as leasing and differentiated corporate and agriculture credit cards, among others. We also offer checking accounts and time deposits as well as investment management services through our mutual funds, transaction services, cash management solutions, collection services and payment services.

 

In recent years, we launched an integral program called “On the road to success”, which includes a digital platform where an small and medium enterprises (“SME”) can obtain access to a community and receive online training on finance, business administration and leadership free of charge.

 

In terms of assets, as of December 31, 2017, the active loan portfolio amounted to Ps.38,581 million, increasing by 97.5% in the year, whereas deposits amounted to Ps.31,526 million, a 109.0% increase, excluding mutual funds.

 

In 2017, middle-market banking focused on the following products:

 

Foreign Trade

 

The dollar portfolio doubled at December 31, 2017 year-on-year, and the average portfolio was US$1,031 million. US$2,350 were placed in new loans (an increase of 85% compared to 2016). According to the Argentine Central Bank ranking of banking institutions regarding import payments, the Bank led the market in the last three quarters with a 17.1% market share, while we reached the number three position with a 12.02% market share in export collecting. Various actions were taken including potential customer campaigns, thus capturing more transactions which were previously settled in other institutions and achieving, migration of physical transactions to Francés Net Cash Comex.

 

Agribusiness

 

During the year, Agribusiness also went through an important transformation process. The year’s landmarks included over 80 agreements for Visa Agro Card, machinery and equipment agreements, mutual guarantee institutions operations, dollar agreement operations and campaigns, all leveraged by a significant, competitive value proposition both in services and in special financing lines.

 

39 

Additionally, a promotional campaign was conducted with visits to branches, customers and participation in events as well as a complementary training for the officers of the branches network.

 

With strong competition from traditional banks, public banks joined very actively and aggressively for closing deals. Despite this competitive environment, market share rose and assets increased over 60% year-on-year.

 

Digital Products

 

In 2017, a comprehensive digital transformation and development plan began, which consisted of providing customers of all Middle Market, Agribusiness and Institution product lines with self-management tools.

 

In relation to digital offerings, a web engine was implemented allowing potential customers to be scored through the public website and various products were launched including digital deposit and check assignment through the mobile application Francés Net Cash.

 

Institutions

 

Given the liberalization of the market, the Bank’s relationships with public agencies were strengthened. The institutions segment accounted for 19.5% of payroll accounts and 30% of the deposits, with significant growth in mutual funds. We see significant potential for growth in this area in 2018. As a result, an increase in financing with public risk is expected.

 

§Corporate & Investment Banking (C&IB)

 

Through our corporate and investment banking business we offer banking services to approximately 844 multinational companies and local private-sector and state-owned enterprises. As of December 31, 2017, our C&IB group had a loan portfolio of Ps.29.2 billion in loans and Ps.13.2 billion in deposits.

 

In our corporate business line, we leverage the BBVA Group's global presence and interconnected structure covering the corporate business line across the globe. Our corporate and investment banking products include checking, savings, time deposits and bilateral loan products that allow for structured finance for our global clients. In addition, as part of our investment banking services, we offer advisory services on mergers and acquisitions and initial public offerings and corporate- and project financing.

 

In Argentina we cover local clients and international clients, and have designed the “Plan Argentina BBVA” to target the financing of the most relevant investments that we expect to be made in Argentina in the telecommunications, energy and infrastructure sectors.

 

Through our treasury unit we also offer trading services, we are also engaged in capital markets, money markets and foreign exchange markets, brokerage services in connection with fixed-income securities, derivatives, leasing and trust services.

 

Income from services continues to evolve favorably given the strengthening of transactional services and consolidating our relationship with clients. This strategy was the key to doubling payment volumes and significantly increasing collection volumes during 2017.

 

In recent years we have focused on gaining the client’s loyalty through a continuous development of non-credit products. Tools such as Francés Net Cash made it possible to improve the payments and collections system and integrate the relationship with Global and Distribution Markets, multiplying the offer of spot products and derivatives. The synergies with other areas of the Bank were also strengthened in order to give a boost to transactions in the middle market and retail business lines.

 

In terms of assets, as of December 31, 2017, the loan portfolio amounted to Ps.29,236 million, an increase of 93.9% in the year, whereas deposits amounted to Ps.13,228 million, an increase of 87.3%. 

 

One of our significant challenges in 2017 has been to make the opportunities of the new government and regulatory environment available to corporate clients, given the complexity and specialization of the business. In the case of domestic customers, a strategic model was implemented with the aim of understanding and communicating current changes in wholesale banking worldwide. In the

 

40 

case of the foreign customers, the Bank focused on understanding changes in customers’ businesses. As a result, understanding new business models allowed C&IB to reach customers with proposals which integrate the entire value chain of the corporate business.

 

In this business line, the anticipation, design and implementation of business plans have been essential, with key roles played by the Francés Net Cash Platform (including foreign exchange transactions), Liability Management and Debt Capital Markets services.

 

The following table sets forth the relative proportions of loans (receivables from finance leases, which represent less than 2%, 3% and 5% of total loans for the fiscal years ended December 31, 2017, 2016 and 2015, respectively, of total loans are not included as loans in accordance with BCRA GAAP) and deposits attributable to our principal business lines during the last three years.

 

  

Loans

  

December 31, 2017

 

December 31, 2016

 

December 31, 2015

   (in thousands of pesos, except percentages)
C&IB   29,235,624    22.78%   15,078,856    19.11%   9,424,979    16.66%
Middle-market Banking   38,581,073    30.06%   19,534,851    24.76%   14,028,539    24.80%
Retail Banking   60,549,505    47.17%   44,276,214    56.12%   33,109,803    58.54%
Total   128,366,202    100.00%   78,889,921    100.00%   56,563,321    100.00%

 

  

Deposits

  

December 31, 2017

 

December 31, 2016

 

December 31, 2015

   (in thousands of pesos, except percentages)
C&IB   13,228,055    8.59%   7,060,980    6.16%   12,945,953    16.84%
Middle-market Banking   31,526,243    20.46%   15,084,072    13.16%   9,735,030    12.67%
Retail Banking   109,296,004    70.95%   92,476,701    80.68%   54,183,510    70.49%
Total   154,050,302    100.00%   114,621,753    100.00%   76,864,493    100.00%

 

Management Model

 

The Bank’s comprehensive service concept was expanded in the branch network during 2017 for all customer segments through specialized agents. Additionally, specialized middle market servicing was extended to every branch during the year.

 

BBVA Francés works with a multiple-channel strategy focused on the user’s experience fostering the best practices for each contact channel and innovating with the technological advances available for each area.

 

On the one hand, it has a brick-and-mortar structure which includes branches, a call center and a network of ATMs and SSTs. On the other, it has digital channels, such as web and mobile. Both are complemented by partners and strategic alliances which make it possible to present the value proposition to a higher number of parties.

 

In the branches’ distribution network, the commercial strategy continued making progress in rolling out the Bank’s comprehensive service concept to all segments through specialized agents. In addition, dedicated service to middle market customers was extended to every branch.

 

In retail banking, the focus was on expanding digital banking and optimizing management tools in the following client segments:

 

-Premium World (Affluent) / Premium (Mass Affluent): This group includes high-income retail customers serviced by dedicated executives in branches which have a premium space to provide the highest customer service quality by executives who follow a specific protocol for customer service and management. Over the year, there was strong emphasis on the creation of a direct management model, which allows customers to be assisted without going to a branch.

 

-Classic (Mass): For retail customers with an identified business activity, the Bank is developing a management model based on business officers who can understand both their personal and business needs in order to offer them unified, simple assistance.

 

-Financial Inclusion (Express): Retail customers who do not fall into any of the previous segments are managed by commercial officers from the branches and, increasingly, through automatic or telephone channels.

 

41 

The middle market banking model was altered to create regional business centers with officers that assist their middle market and small- and medium-sized companies portfolios with the following objectives:

 

-Unifying small- and medium-sized companies and middle market banking: This implied a comprehensive view of the business regardless of the company size. For this purpose, follow-up and support to these segments were unified from central areas.

 

-Approaching customers and dynamism in management: In order to improve customer service, the structures were adapted and regional business centers were created and changes were made in processes so that the role of executives would focus on commercial tasks and every branch can assist customers in their needs.

 

-Measurement: It was expanded to follow the activity of companies and individuals for information processes in each branch.

 

-Digitalization: Significant innovations were generated for automatic management of customers.

 

In parallel with traditional channels, several optimizations are being undertaken to streamline the rest of the tasks with a productivity aim.

 

-Mass sales force: Through plans which strengthen synergy and adjustments to Bank processes, the indicators of this channel are substantially improved, both for retail and for small- and medium-sized companies.

 

-Call center: These are used as a cross-sell channel and for attracting new customers through specific campaigns, as well as for customers retention.

 

-Partners and business alliances: These are key aspects of the Bank’s strategy for attracting and interacting with customers.

 

The Bank is focused on customer service by improving servicing, and one of its goals is customers’ self- management through the development of multiple channels. In this line, over the past year, more than 250,000 transactions were migrated away from branches, which implied the transfer of significant operating resources to other commercial roles. In turn, waiting times in branches were lowered, leading to first place in the Net Promoter Score for customers’ experience in branches. The Net Promoter Score is a management tool that can be used to gauge the loyalty of the customer.

 

As a summary of the 2017 Comprehensive Servicing Plan, an internal plan to improve servicing, the progress made on the main action points and the results obtained are detailed below:

 

-Plan for replacement and growth of 80 ATM/SST and 400 new machines;

 

-Plan for availability of SST: 93%;

 

-Full time lobby: 69 branches implemented;

 

-Double-profile tellers (teller and operating/teller and commercial): 96% of tellers;

 

-Efficient lobby measuring the time ATM and SSTs are not available: 100% implemented;

 

-Opening of Tucumán express branch;

 

-Unified service model: in 70% of branches (177 branches);

 

-Digitalization in 30 seconds: 100% implemented in branches and call center;

 

-Francés Hotline: A comprehensive plan for improvements with optimization of functions, processes and dealing with the root cause of the calls; and

 

-Answer through social media and mailing through an online form.

 

42 

With the aim of boosting digital banking, the Bank has been focused on three core ideas: attracting new customers, excellence in users’ experience and digital sales solutions.

 

Both in internet banking and in mobile banking, a new look and feel was implemented to align with the Bank’s new global image. Additionally, the incorporation of new functionalities and services allows customers to simplify access to these channels and conduct their transactions through the digital platforms. In the second half of 2017, BBVA Francés reached the first level in the Net Promoter Score for web channel within its peer group. With respect to internet banking, this indicator reached 70%, which represents an improvement compared to 60% obtained in 2016. For mobile banking, it reached 65% compared to 60% the year before.

 

In order to ensure that the internet banking channel will be available, a solution was developed to know the channel status in real time and manage possible issues, achieving a 99.8% availability. For mobile banking, an analytic solution was implemented to obtain information on customers’ general usage activities and the performance of the application. These changes resulted in a 27% growth in the number of digital customers compared to the year before, with a 52% penetration among all customers while mobile banking reached a 30% penetration in 2017 among all active customers.

 

With respect to digital sales in 2017, the growth strategy was focused on the incorporation of new digital marketing tools, incorporating new solutions and optimizing those tools put in place in previous years. In 2017, this strategy was focused on the acquisition of new customers.

 

In retail banking, an online evaluation engine was also launched for personal loans and mortgages. This tool makes it possible to process customer inquiries through different channels. This concept is also capable of rating companies and allows loan officers to generate initial value propositions.

 

With respect to the Bank’s various products, the results and improvements developed during 2017 are detailed below:

 

-Personal Loans: These accounted for 33% of the total loans initiated in retail banking, increasing from 10% in 2016. In volume, the share of retail banking loans in the Bank was 25%.

 

-Credit Cards: The issuance of primary cards reached 37% of total card issuances, compared to 23% in 2016, and the issuance of additional cards accounted for 16% of total card issuances.

 

-Mortgages: These accounted for a 7% share of all transactions in terms of loans amount settled in the Bank.

 

-Investment: Represented 42% of digital sales over total time deposits in the Bank, and represented 92% of the total subscription of mutual funds in the Bank.

 

-Savings Accounts: By the end of 2017, solutions were put in place for the online opening both on Francés Net and on Mobile Francés, and these solutions along with other campaigns for attracting customers helped reach a 44% share of total savings accounts in the Bank.

 

-Insurance: The digital sales share was 20% over the total Bank’s sales. The new developments focused on the possibility of starting operating the following insurance lines and on an improvement of the range of products in the channel, including insurance for portable technology, protected bag, notebook computers and protected purchases.

 

Information Technology

 

Our information technology, or IT, area is responsible for our systems operation and availability as well as data security and integrity. Our main data center and our disaster recovery and back-up center are located in Buenos Aires, Argentina. Our modern technology platform is interconnected with the platform of the BBVA Group, which enables us to provide seamless coverage to our customers.

 

We have made significant investments in technology, and we plan to continue doing so to enable us to retain and enhance our competitive position in various markets and to improve the security and quality of our services.

 

Our operational platform efficiently combines our modern business-oriented IT systems with our multichannel distribution strategy, resulting in innovative ways to serve our clients. We have well-developed CRM tools that allow us to monitor our clients’

 

43 

behavior and provide them with targeted product offerings through diverse channels. As a result, we are able to efficiently leverage alternative distribution channels, such as ATMs, internet banking and our contact centers, which are complementary to our traditional proprietary branch network, which enables us to provide better service to our clients and to increase our sales ratios.

 

We have implemented multiple controls to respond to the new threat of cyber security, based on a comprehensive, multi-faceted security framework that include people, technology, processes and procedures.

 

Intellectual Property

 

In Argentina, ownership of trademarks can be acquired only through a validly approved registration with the National Institute of Industrial Property (Instituto Nacional de la Propiedad Industrial, or INPI), the agency responsible for registering trademarks and patents in Argentina. After registration, the owner has exclusive use of the trademark in Argentina for five years. Trademarks registrations can be renewed indefinitely for additional five-year periods, if the registrant proves that it has used such trademark within the last five years.

 

We have several trademarks, most of which are brand names of our products or services. All our material trademarks are registered or have been submitted to INPI for registration by the BBVA Group or us.

 

Business Segment Financial Information

 

As mentioned in Note 24.15 to our Consolidated Financial Statements, our business is mainly concentrated on banking and financial services. We organize our activities in three business segments: (i) BBVA Banco Francés S.A. (banking), (ii) PSA Finance S.A. (financial services) and (iii) Volkswagen Financial Services S.A. (financial services), each of which we consider an individual reportable segment. Across these segments we also have entity-wide business lines, for which we only review certain information regarding loans and deposits. We do not report information on the results of our entity-wide business lines.

 

During 2017, the Company updated its internal business segment information by adding the analysis of loans and deposits by business lines (retail banking, middle market banking and corporate and investment banking).

 

The following table shows assets and income derived from each segment for the fiscal years ended December 31, 2017, 2016 and 2015. As mentioned in Note 15 to our Consolidated Financial Statements, the Pension Fund Manager segment was affected by the reform of the integrated retirement and pension system and Consolidar AFJP has been undergoing liquidation proceedings since then. The Bank decided to discontinue the separate reporting for this segment since fiscal year 2016 and, instead, reports it within the BBVA Banco Francés S.A. (banking) segment included therein. Prior years’ segment information has been revised to reflect this change in reporting.

44 

 

  

As of and for the year ended December 31, 2017

  

BBVA Banco

Francés S.A.(4)

(Banking)

 

PSA Finance S.A.

(Financial Services)

 

Volkswagen Financial Services S.A.

(Financial Services)

 

Total

   (in thousands of pesos)
Total loans   118,574,829    4,840,322    4,951,051    128,366,202 
- C&IB   29,092,314    143,310    -      29,235,624 
- Middle-market Banking   38,581,073    -      -      38,581,073 
- Retail Banking   50,901,442    4,697,012    4,951,051    60,549,505 
Total assets   215,569,710    4,991,687    5,081,393    225,642,790 
Total deposits   153,928,288    122,014    -      154,050,302 
- C&IB   13,228,055    -      -      13,228,055 
- Middle-market Banking   31,526,243    -      -      31,526,243 
- Retail Banking   109,173,990    122,014    -      109,296,004 
Total liabilities   195,761,970    3,117,104    707,168    199,586,242 
Financial income   23,805,157    525,336    269,076    24,599,569 
Service income and other income   12,506,053    708,622    649,572    13,864,247 
Total income (1)   36,311,210    1,233,958    918,648    38,463,816 
Financial expenses   (9,068,468)   (462,358)   (21,735)   (9,552,561)
Provisions for loans losses   (1,498,112)   (27,410)   (35,198)   (1,560,720)
Operating expenses   (12,399,540)   (91,072)   (122,859)   (12,613,471)
Other expenses (2)   (10,347,788)   (256,121)   (149,601)   (10,753,510)
Total expenses (3)   (33,313,908)   (836,961)   (329,393)   (34,480,262)
Results on minority interest in subsidiaries   (4,163)   (74,690)   (26,436)   (105,289)
Total net income   2,993,139    322,307    562,819    3,878,265 

 

(1)Includes financial income, service charge income and other income.

(2)Includes service charge expense, other expenses and income tax.

(3)Includes financial expenses, allowances for doubtful loans, service charge expenses, operating expenses, other expenses and income tax.

(4)Includes BBVA Francés Asset Management S.A. Sociedad Gerente de Fondos Comunes de Inversión, BBVA Francés Valores S.A. and Consolidar AFJP (undergoing liquidation proceedings).

 

   As of and for the year ended December 31, 2016
  

BBVA Banco

Francés S.A.(4)

(Banking)

 

PSA Finance S.A.

(Financial Services)

 

Volkswagen Financial Services S.A.

(Financial Services)

 

Total

      (in thousands of pesos)
Total assets   146,804,631    3,154,836    1,793,244    151,752,711 
Financial income   22,251,586    414,316    14,036    22,679,938 
Service income and other income   8,949,566    429,729    38,758    9,418,053 
Total income (1)   31,201,152    844,045    52,794    32,097,991 
Financial expenses   (9,970,755)   (284,657)   (430)   (10,255,842)
Provisions for loans losses   (1,023,044)   (15,562)   (16,222)   (1,054,828)
Operating expenses   (9,456,435)   (70,397)   (30,801)   (9,557,633)
Other expenses (2)   (7,248,149)   (221,324)   (10,323)   (7,479,796)
Total expenses (3)   (27,698,383)   (591,940)   (57,776)   (28,348,099)
Results on minority interest in subsidiaries   2,334    (114,850)   6,296    (106,220)
Total net income   3,505,103    137,255    1,314    3,643,672 

 

(1)Includes financial income, service charge income and other income.

(2)Includes service charge expense, other expenses and income tax.

(3)Includes financial expenses, allowances for doubtful loans, service charge expenses, operating expenses, other expenses and income tax.

(4)Includes BBVA Francés Asset Management S.A. Sociedad Gerente de Fondos Comunes de Inversión, BBVA Francés Valores S.A. and Consolidar AFJP (undergoing liquidation proceedings).

 

45 

 

 

  

As of and for the year ended December 31, 2015

  

BBVA Banco

Francés S.A.(4)

(Banking)

 

PSA Finance S.A.

(Financial Services)

 

Total

   (in thousands of pesos)
Total assets   108,383,094    2,353,104    110,736,198 
Financial income   16,022,362    542,417    16,564,779 
Service income and other income   6,319,458    387,549    6,707,007 
Total income (1)   22,341,820    929,966    23,271,786 
Financial expenses   (6,962,151)   (158,850)   (7,121,001)
Provisions for loans losses   (627,854)   (9,163)   (637,017)
Operating expenses   (6,550,301)   (44,845)   (6,595,146)
Other expenses (2)   (4,805,250)   (192,814)   (4,998,064)
Total expenses (3)   (18,495,556)   (405,672)   (19,351,228)
Results on minority interest in subsidiaries   (5,681)   (130,390)   (136,071)
Total net income   3,390,583    393,904    3,784,487 

 

(1)Includes financial income, service charge income and other income.

(2)Includes service charge expense, other expenses and income tax.

(3)Includes financial expenses, allowances for doubtful loans, service charge expenses, operating expenses, other expenses and income tax.

(4)Includes BBVA Francés Asset Management S.A. Sociedad Gerente de Fondos Comunes de Inversión, BBVA Francés Valores S.A. and Consolidar AFJP (undergoing liquidation proceedings).

 

C.Organizational structure

 

Banco Bilbao Vizcaya Argentaria S.A. (BBVA)

 

As of December 31, 2017, BBVA owned 66.55% of our capital stock.

 

BBVA is a global financial group, organized in six geographical business segments: (i) Banking Activity in Spain, (ii) Non-Core Real Estate, (iii) Mexico, (iv) South America, (v) the United States, (vi) Turkey and (vii) Rest of Eurasia. In addition to these geographical business areas, BBVA has a separate “Corporate Center” segment. This segment handles certain general management functions. Some of the benefits we receive from the BBVA Group are:

 

§sharing of technology;

 

§development of new banking products that have been customized for the Argentine market;

 

§leveraging BBVA’s global client relationships to serve those clients operating in Argentina; and

 

§BBVA’s participation in BBVA Francés as a shareholder is both long term and strategic.

 

Subsidiaries and investees of BBVA Francés

 

The following chart reflects our subsidiaries and investees as of December 31, 2017:

 

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(1)Undergoing liquidation proceedings.

 

The following information is related to our subsidiaries and investees as of December 31, 2017:

 

Subsidiary or investees company 

 

Country of Incorporation/ Residence 

  BBVA Francés Ownership
and Voting Power (in percentages)
 

Principal Activity  

  Stockholders’ Equity (in millions of Ps.) (1) (2) 
BBVA Francés Asset Management S.A.(3) (4)  Argentina   95.00%  Investment fund manager   308.4 
BBVA Francés Valores S.A. (3)  Argentina   97.00%  Stock exchange brokerage   160.5 
Consolidar AFJP S.A. (undergoing liquidation proceedings) (3)  Argentina   53.89%  Pension fund manager   10.2 
Volkswagen Financial Services S.A. (3)  Argentina   51.00%  Financial institution   588.1 
PSA Finance Argentina Cía. Financiera S.A. (3)  Argentina   50.00%  Financial institution   634.2 
Rombo Compañía Financiera S.A.  Argentina   40.00%  Financial institution   791.8 
BBVA Consolidar Seguros S.A. (3)  Argentina   12.22%  Insurance   1,087.9 

 

 

(1)Total stockholders’ equity as of December 31, 2017.

(2)Statutory Stockholders’ Equity, adjusted for purposes of consolidation so as to apply an accounting criterion being uniform with that of BBVA Francés, if applicable.

(3)For information regarding the number of shares we hold in such entities, see Note 2 to the Consolidated Financial Statements.

(4)The Bank has an effective 95.00% ownership interest in the capital stock of the company and has an indirect 4.8498% ownership interest through BBVA Francés Valores S.A.

 

Below is a description of our subsidiaries and investees:

 

-BBVA Francés Valores S. A.

 

Capital Markets

 

During 2017, the local securities market was mainly affected by the dynamics started in December 2015 with the liberalization of the foreign exchange market, and a new flow of activity, mainly from abroad, driven by attractive peso interest rates compared with an exchange rate that showed little variation in the year. As a consequence, in 2017 the stock market finished with positive variations, with the three main indexes (Merval, M.Ar and Merval 25) finishing at their historic peaks.

 

Measured in pesos, the Merval rose 77.2%, with an annual dollar variation in excess of 46%. Within the Leading Panel, Transp Gas Norte - TGNO4 (431%) and BOLDT (237%) were the best performers. In addition, a greater decentralization took place, given that the ten securities with the highest trading volume accounted for 54.4% of the total, compared with 68.7% in 2016.

 

2017 was a year with historically high returns for Argentine equities, resulting in the capitalization of domestic companies representing at September 30, 2017 19.5% of GDP of the third quarter of 2017 (last available date) versus 11.5% of GDP of the fourth quarter of 2016.

 

Both the equity market and the bonds market reflect the change in political and economic expectations that began at the end of 2015 and were strengthened through the mid-term elections of 2017. In spite of the slow economic recovery, expectations continue to be positive, and the reduction in debt spreads generated lower financing costs both for the public and private sectors.

 

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BBVA Francés Valores S.A.'s Activity

 

Since Law No. 26,831 and CNV Resolution No. 622/13 came into force, the Francés Valores S.A. (ALyC – Integral) activity was residual under the expectations to generate new businesses to the extent the capital markets develop. In this respect, Francés Valores S.A. had negligible operating revenue and customer charges in 2017, since its activity has nearly ceased, and it has limited itself to investing its portfolio assets, maintaining its operating capacity, and seeking out new commercial and business opportunities. In this context, 2017 net income for BBVA Francés Valores S.A. amounted to Ps.63.8 million, mainly generated by the revaluation of its own portfolio investments, and minimum operational expenses.

 

-BBVA Francés Asset Management S.A. Sociedad Gerente de Fondos Comunes de Inversión.

 

During 2017, the mutual funds industry in Argentina continued to grow. As per preliminary information prepared by the Argentine Mutual Funds Association (CAFCI), the industry ended the fiscal year with assets under management amounting to Ps.544,109 million, an increase of Ps.222,157 million, or 69% compared with the level of December 31, 2016.

 

This increase was led by the market funds segment, which ended the year with a total of Ps.482,112 million, thus recording an increase of Ps.204,959 million, or 74%. In this category, the increase in fixed income funds stood out, with an increase in the assets under management of Ps.173,511 million year-on-year, or 86.3%%, reaching a total of Ps.374,684 million.

 

The money market segment ended the fiscal year with total assets under management amounting to Ps.61,997 million, an increase of Ps.17,198 million, or 38.4%, during the year.

 

As of December 31, 2017, the assets under management by BBVA Francés Asset Management amounted to Ps.35,461 million, an increase of Ps.17,475 million, or 102.9% in relation to 2016. Pursuant to the asset ranking prepared by the CAFCI, BBVA Francés Asset Management had a total market share in terms of mutual funds of 6.5%, thus ranking fourth.

 

Within the category of money market, the company ended the year with assets under management of Ps.4,977 million, an increase of Ps.2,357 million, or a 90%, in relation to 2016.

 

In the market funds segment, the company showed an increase of Ps.15,630 million, or 105.2%, during the fiscal year. These funds ended the year with total funds under management of Ps.30,485 million.

 

Within this latter category, the performance of the Fondo FBA Ahorro Pesos, increased assets by Ps.3,938 million, or 34.9%, finishing the fiscal year with Ps.15,207 million under management. In addition, the Fondo FBA Bonos Argentina finished 2017 with a total Ps.5,602 million under management, an increase of 100.6%. Lastly, the Fondos FBA Renta Fija and FBA Renta Fija Dólar Plus, which allow for subscription and redemption in US dollars, ended 2017 with assets under management amounting to Ps.3,571 million, and Ps.3,631 million, respectively.

 

As of December 31, 2017, the company had registered 18 mutual funds under management with the CNV, 9 of which were launched during the year.

 

As of the date of this Annual Report, the Bank’s funds are as follows:

 

§FBA Renta Pesos, FBA Ahorro Pesos, FBA Bonos Argentina, FBA Horizonte, FBA Horizonte Plus, FBA Bonos Globales, FBA Renta Mixta, FBA Retorno Total I, FBA Calificado, FBA Acciones Argentinas and FBA Acciones Latinoamericanas are currently operating normally, with subscriptions and redemptions in pesos.

 

§FBA Renta Fija Dólar, FBA Renta Fija Dólar Plus, FBA Bonos Latam and FBA Retorno Total II are also operating normally, and they admit subscription and redemption in US dollars.

 

§On July 7, 2016, the CNV, by means of Resolution No. 18121, registered the Fondo FBA Renta Pesos Plus under No. 830 and approved the relevant prospectus. This fund commenced activities on November 14, 2016, with the contribution of BBVA Francés Asset Management S.A. It is currently operating, but has not been commercialized yet.

 

§On July 20, 2017, the CNV, by means of General Resolution No. 698, authorized subscriptions and redemptions of shares in different currencies. For this purpose, it set an abbreviated procedure for the modification of the prospectus. In order to

 

48 

incorporate these new types of shares denominated in different currencies, the Bank complied with the CNV requirement by presenting the addenda that modify particular clauses of the following mutual fund Prospectuses: FBA Bonos Globales, FBA Acciones Argentinas, FBA Renta Fija Plus, FBA Bonos Argentinas, FBA Acciones Latinoamericanas, FBA Horizonte, FBA Ahorro Pesos, FBA Calificado, FBA Renta Pesos, FBA Renta Mixta, FBA Retorno Total II, FBA Retorno Total I, FBA Bonos Latam, FBA Renta Fija Dólar Plus, FBA Horizonte Plus, FBA Renta Fija Dólar, and FBA Renta Pesos Plus. The CNV, approved the modifications on December 21, 2017, by means of Resolution No. 19,212.

 

As of December 31, 2017, FBA Commodities had no equity volume. The rest of the Bank´s mutual funds at such date had the following equity volumes:

 

Name of Mutual Fund

 

Thousands
of pesos

FBA Ahorro Pesos   15,207,847 
FBA Bonos Argentina   5,602,270 
FBA Renta Pesos   4,965,075 
FBA Renta Fija Dólar Plus   3,631,659 
FBA Renta Fija Dólar   3,571,433 
FBA Calificado   617,636 
FBA Acciones Argentinas   615,530 
FBA Renta Mixta   327,777 
FBA Horizonte   317,162 
FBA Renta Fija (Ex FBA Commodities)   237,710 
FBA Acciones Latinoamericanas   193,867 
FBA Horizonte Plus   78,972 
FBA Retorno Total II   34,524 
FBA Bonos Latam   32,541 
FBA Renta Pesos Plus   11,894 
FBA Retorno Total I   9,104 
FBA Bonos Globales   6,837 
Total   35,461,838 

 

-Grupo Consolidar

 

Grupo Consolidar comprises Consolidar A.F.J.P. S.A, (Administradora de Fondos de Jubilaciones y Pensiones, undergoing liquidation proceedings) and BBVA Consolidar Seguros S.A., where BBVA Francés had stakes of 53.89% and 12.22%, respectively as of December 31, 2017.

 

Consolidar A.F.J.P. S.A. (undergoing liquidation proceedings)

 

Law No. 26,425 was enacted on December 4, 2008. It abolished the capitalization system that was part of the Integrated Pension and Retirement System (Sistema Integrado de Jubilaciones y Pensiones) which was merged into and substituted by a single public distribution system called SIPA (Sistema Integrado Previsional Argentino, i.e. Argentine Integrated Pension System). As a consequence, Consolidar A.F.J.P. S.A. no longer managed the resources in the individual capitalization accounts of its members, who were beneficiaries of the Argentine Integrated Pension System. These funds were transferred to the Sustainability Guarantee Fund of the Argentine Pension System in the same form as they were invested, and the Argentine Social Security Administration (ANSES (Administración Nacional de Seguridad Social)) became the only and single holder of its assets and rights.

 

On October 29, 2009 the ANSES issued Resolution No. 290/2009 granting pension and retirement fund managers the possibility of reconverting their corporate purpose to manage funds consisting of voluntary contributions and deposits of the members in their respective capitalization accounts. Interested companies had 30 business days to express their interest.

 

In view of all of the above, on December 28, 2009, and bearing in mind that it was impossible for Consolidar A.F.J.P. S.A. to maintain the corporate purpose for which it had been organized, the company held a unanimous special shareholders meeting. The resolution of this meeting was to dissolve and subsequently wind-up the company as of December 31, 2009. It was understood that this was the best alternative to preserve in the best possible way the creditors’ and shareholders’ interests. At the same time, and in accordance with the terms of the Argentine Corporations Law, the shareholders’ meeting resolved to appoint accountants Messrs. Gabriel Orden

 

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and Rubén Lamandia, to liquidate Consolidar A.F.J.P. S.A. These accountants are the legal representatives of the Company as of December 31, 2009 and are working in order to wind it up. As of this date, they are taking all necessary steps to carry out the liquidation of Consolidar A.F.J.P. S.A.

 

On January 28 2010, the dissolution of Consolidar A.F.J.P. S.A. (in liquidation) was registered with the IGJ, as were the names of the appointed liquidators.

 

The general and special shareholders’ meeting of Consolidar A.F.J.P S.A. (undergoing liquidation proceedings) approved on October 19 2009 a voluntary reduction of the corporate capital by Ps.75 million, which was approved by the Office of Corporations on January 11, 2010. Subsequently, on January 19, 2010, all capital contributions were transferred to the shareholders, in accordance with the above-mentioned reduction.

 

BBVA Francés, as shareholder, requested that Consolidar A.F.J.P. S.A. (undergoing liquidation proceedings) submit a request for negotiations with the Argentine Ministry of Economy and Public Finance (Ministerio de Economía y Finanzas Públicas de la Nación) and the ANSES. This was done in accordance with the terms of Law No. 26,425 in order to find solutions to the consequences of implementation of the Law. This request was filed by Consolidar A.F.J.P. S.A. (undergoing liquidation proceedings) on June 11, 2010.

 

In turn, on December 7, 2010, Consolidar A.F.J.P. S.A. (undergoing liquidation proceedings) filed a complaint for damages against the Federal government and the Ministry of Labor, Employment and Social Security at the Contentious-Administrative Federal Court number 4, Secretariat number 7, under case number 40,437/2010. The claim was confirmed by BBVA Francés as controlling shareholder of the company. On July 15, 2011 Consolidar A.F.J.P. S.A. (undergoing liquidation proceedings) and BBVA Francés filed an additional motion to determine the amount of damages. On March 9, 2012, the Court ordered the service of process to the National State.

 

In this connection, on May 13, 2013, the judge in charge ordered the commencement of the trial stage. The Company is collecting and submitting all witness, documentary and expert evidence and on May 28, 2013 the statements of its witnesses were submitted as evidence at court. There have been no further updates on the case since then.

 

At December 2017, the case is in a stage of producing accounting evidence.

 

BBVA Consolidar Seguros S.A.

 

BBVA Consolidar Seguros operates in fire, mixed family and comprehensive insurance, civil liability, theft, personal accidents, umbrella life, debtor balances, funeral services and other insurance risks.

 

During 2017, it issued premiums amounting to Ps.2,361.1 million, which represents a 12% growth in relation to the previous year. Since September, BBVA Consolidar Seguros ceased to collect the premium corresponding to life insurance of new issues of BBVA Francés debtor balances, which include personal loans, credit cards, car loans, and overdrafts. The increase of voluntary insurance premiums in 2017 compared with 2016 was 33%. This increase is the result of a strategy that combines a wide range of products with multiple distribution and assistance channels, all of which are based on the segmentation of customers’ needs. Accidents paid amounted to Ps.383.1 million in 2017, or 16% of premiums issued.

 

Net income amounted to Ps.588.1 million, representing a 54.1% return on net equity at December 31, 2017. As of September 30, 2017, the minimum capital surplus amounted to Ps.588.2 million, and the solvency index, measured as the quotient between cash and cash equivalents, investments and real estate, and technical commitments and debts with insured parties equaled 1.85.

 

On January 15, 2016, the National Superintendence of Insurance (the “SSN”) issued Resolution SSN No. 39645 that supersedes item k) of paragraph 35.8.1 of the Insurance Industry General Regulations, with the following amendments:

 

§It eliminates the obligation to hold minimum investment in assets of item k), but introduces a gradual schedule to enable undoing existing investments as mentioned in paragraph 3) of said Resolution;

 

§It keeps item k) investments as an eligible investment for the purpose of the insurance statement, and maintains maximum investment percentages allowed for in such assets. Consequently, retirement insurance companies remain with the same status as general insurance companies, life insurance companies, and underwriters;

 

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§It sets up a schedule to allow for the disposition of existing investments in item k), either under total or partial amortization, or under sale, considering for that sake the value of investments as of December 31, 2015.

 

-Up to 15% of total value of investments as of 06/30/2016;

 

-Up to 40% of total value of investments as of 12/31/2016;

 

-Up to 65% of total value of investments as of 6/30/2017; and

 

-Up to 100% of the value of investments as of 12/31/2017.

 

On January 22, 2016, the SSN issued Resolution SSN No. 39647, referred to Small and Medium Sized Enterprises Mutual Funds (authorized by the CNV), which establishes a minimum investment of 3% and a maximum investment of 20%.

 

On March 21, 2016, Central Bank Communication “A” 5928 was issued, which introduces modifications to Financial Users Protection Rules in relation to insurance. As regards debtor balance life insurance, it establishes, for financial institutions subject to such communication, the prohibition to collect from users any type of commission and/or charge related to debtor balance insurance that covers death or total permanent disability. In addition, it determines that financial institutions must acquire a debtor balance insurance to cover those contingencies or, alternatively, “self-insure” themselves, being a challenge for the insurance company to attract the greatest number of customers/banking and financial institutions to offer them such product.

 

In November 2017, the SSN issued Resolution SSN No. 41057, which establishes an adaptation of insurance companies' investments.

 

To comply with such resolution, acceptable investments will be those assets issued by the Central Bank, whose date of incorporation to the net worth be prior to the publication of this regulation (November 16, 2017), and up to its maturity. They may invest up to 40% in public-private partnership projects, infrastructure or real estate development projects, notarized real estate meant for rent. In addition, to existing provincial securities, municipal securities are added (up to 3%), and those from the City of Buenos Aires (up to 10%). For close-end mutual funds, the limit was extended from 18% to 60% of total investments.

 

For 2018, BBVA Consolidar Seguros intends to continue to develop its main business lines, particularly other risks, personal accident, collective life, and household and integral combo, by means of products that offer a differential to meet the needs of its main customers.

 

-PSA Finance Argentina Compañía Financiera S.A.

 

PSA Finance’s main business is focused on providing secured loans for the purchase and leasing of new Peugeot and Citroën vehicles. In addition, it offers financing for the purchase of used cars for customers proposed by the official Peugeot and Citroën dealer network, as well as other financial products and services related to the purchase, maintenance and insurance of vehicles.

 

The automotive industry closed the year 2017 with a total of 861 thousand registrations, a 26% increase in relation to 2016. During 2017, Peugeot and Citroën maintained a market share of 12.1% in 2017, and PSA Finance reached a market share of 12.0% in 2017 and improved its performance compared to the previous year, reaching a 26.0% penetration over registrations of both brands (measured based on the financing of new cars), which shows an increase of 4.3 percentage points compared to 2016. As such, it reached a total financing of new contracts for 32,311 transactions related to car loans of new, used and leasing-related units, equivalent to Ps.4,869 million.

 

The net income for PSA Finance was Ps.149 million for the year ended December 31, 2017, a decrease of 35% compared with 2016, as a consequence of the following factors: i) greater need of financing from third parties due to the increase in new loans, and to the use of fewer own funds as the result of the payment of dividends; ii) higher payment of commissions to dealers due to the higher production in the year and iii) greater charges for loan losses allowances due to growth of granted loans portfolio.

 

-Rombo Compañía Financiera S.A.

 

Rombo Compañía Financiera S.A. (“RCF”) is the main financing company of the Renault dealers, both for new and used vehicles. During 2017, Renault obtained a 13.35% market share in the automotive market (compared to 14.5% in 2016), being third in the sales

 

51 

ranking (source: Car Dealers Association). Since October, Nissan has an average market share of 2.2% (source: Car Dealers Association). Within a framework of a strong competition, it managed to improve its market share and position, supported by the launch and renewal of models, and with assistance from car loans granted by its financial company.

 

With this support, RCF reached a record of 42,969 financings for new Renault and Nissan units (compared to 33,262 in 2016), and a record of 11,255 used vehicles (compared to 8,927 in 2016), which implies a growth of 29% in the number of financed contracts. Thus, the total financing portfolio reached Ps.8,606 million, representing a 98.5% increase compared to Ps.4,335 million financed during 2016.

 

Regarding financing, during 2017, four series of notes were issued for a total Ps.1,680 million, with a total balance of notes at the fiscal year’s close of Ps.2,439.5 million. The amount of the program was extended to Ps.3,000 million during the 2017 fiscal year, with a “raAA” rating from Fix SCR S.A. Agente Calificadora de Riesgo, and “Aa1.ar”, from Moody’s.

 

Net income was Ps.53 million for the year ended December 31, 2017, lower than the previous year as a result of the sales increase that generated a higher expenses in fees paid.

 

-Volkswagen Financial Services Compañía Financiera S.A. (“VWFS”)

 

The main VWFS business focuses on granting car loans for the acquisition of new and used vehicles of makes belonging to the Volkswagen group, and on offering wholesale financing to the dealer network for the acquisition of new units of its brands.

 

VWFS increased the level of contracts compared to the previous year, with a 13.3% penetration compared to 9.6% of registrations of the Volkswagen group brands. It also increased loyalty, obtaining 70% of the total car loans granted in the market for vehicles of the group’s brands (compared to 65.5% in 2016). In 2017, the Volkswagen Group achieved a 16.6% market share in the automobile market, and was first in the sales ranking.

 

During 2017, VWFS recorded a total of 20,837 car loans, an increase of 75% with respect to the previous year.

 

For the year ended December 31, 2017, net income amounted to Ps.53.9 million, improving significantly compared with a net income of Ps.1.2 million for the year ended December 31, 2016.

 

Equity Investments

 

The following are all positions that we hold in non-financial institutions where we own more than 2% of the invested companies’ equity as of December 31, 2017.

 

Investment

 

Country

 

% of Shares
Owned

(in percentages)

 

Principal Activity

 

Total
Stockholders’
Equity (in
millions of pesos)

Coelsa S.A.(1)   Argentina    8.72%  Clearing house   35.3 
Interbanking S.A. (1)   Argentina    11.11%  Information services for financial markets   610.5 
Argencontrol S.A. (1)   Argentina    7.77%  Agent mandatory   4.3 
Sedesa S.A. (1)   Argentina    9.36%  Deposit guarantee fund   46.8 
Prisma Medios de Pagos S.A. (1)   Argentina    10.48%  Credit card issuer   1,760.5 

 

(1)Total Stockholders’ Equity as of December 31, 2017.

 

D.Property, plants and equipment

 

BBVA Francés is domiciled in Argentina and has its principal executive offices at Av. Córdoba 111, C1054AAA Buenos Aires, Argentina. The principal executive offices, which we own, are approximately 30,517 square meters in area.

 

At December 31, 2017, our branch network consisted of 251 retail branches, of which 112 were located in properties that we own and 139 were located in properties leased to us. The branches are located throughout all of the 23 Argentine provinces as well as the City of Buenos Aires.

 

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On July 10, 2013, BBVA Francés and Consultatio S.A. signed a sale and purchase agreement, under which the Bank acquired 23 of the 33 floors of the building under construction by Consultatio S.A., which will become the “BBVA Tower.” This is the largest corporate headquarters real estate development project in the Republic and is part of the plan designed in 2010 by BBVA Francés to unify its core areas. BBVA Tower was built with the highest construction and environmental standards that allowed the Bank’s staff to work together in the same area, thus achieving greater efficiency. The building was developed according to the highest international environmental and sustainability standards and with the commitment of the BBVA Group to preserving the environment. Construction was completed in 2016. In the last quarter of 2016 personnel began moving to the new headquarters, a process that was completed in April 2017.

 

E.Selected statistical information

 

The following information is included for analytical purposes and should be read in conjunction with the Consolidated Financial Statements as well as “Item 5. Operating and Financial Review and Prospects”. This information has been prepared from our financial records, which are maintained in accordance with the regulations established by the Central Bank and do not reflect adjustments necessary to state the information in accordance with U.S. GAAP. See Note 26 to the Consolidated Financial Statements for a summary of the significant differences between BCRA GAAP and U.S. GAAP.

 

Average Balance Sheets, Interest Earned on Interest-Earning Assets and Interest Paid on Interest-Bearing Liabilities

 

The average balances of interest-earning assets and interest-bearing liabilities, including the related interest earned or paid, were calculated on a daily basis for the year ended December 31, 2017 and on a month-end basis for the years ended December 31, 2016 and 2015. We believe that such averages are representative of our operations and we do not believe that monthly averages present trends materially different from those that would be presented by daily averages. Average balances have been separated between those denominated in pesos and in dollars.

 

The nominal interest rate is the amount of interest earned or paid during the period divided by the related average balance.

 

The nominal average rates for each fiscal year were converted to average real rates as follows:

 

        Rp = 1 + Np - 1           Rd = (1 + Nd)(1 + D) - 1
1 + I 1 + I

 

Where:

 

Rp: real average rate for Argentine peso-denominated assets and liabilities of BBVA Francés;

 

Rd: real average rates for dollar-denominated assets and liabilities of BBVA Francés;

 

Np: nominal peso average rate in peso-denominated assets and liabilities for the fiscal year;

 

Nd: nominal dollar average rate in dollar-denominated assets and liabilities for the fiscal year;

 

D: devaluation rate of the Argentine peso to the dollar for the fiscal year, which is shown below for the fiscal years ended December 31, 2017 and 2016; and

 

December 31, 2017 18.45%
December 31, 2016 21.88%

 

I: Argentine inflation rate (“WPI”), which is shown below for the fiscal years ended December 31, 2017 and 2016.

 

December 31, 2017 18.80%
December 31, 2016 34.50%

 

 

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The formula for the average real rates for dollar-denominated assets and liabilities (Rd), when compared with the corresponding nominal rates, reflects the loss, or gain, in purchasing power of the dollar caused by the difference between peso devaluation and inflation in Argentina for each fiscal year.

 

Included in interest earned are the net gains on our portfolio of government securities and related differences in market quotations. We manage our trading activities in government securities as an integral part of our business. We do not, as a matter of practice, distinguish between interest income and gain or loss on our government securities portfolio. Non-accrual loans have been included in the related average loan calculation.

 

Negative interest rates in real terms occur in periods when the inflation rate exceeds the nominal interest rate in pesos or exceeds the combination of the nominal interest rate on dollar-denominated assets or liabilities and the devaluation rate.

 

The following illustrates the calculation of the real interest rate in pesos for a dollar-denominated asset yielding a nominal annual interest rate of 20% (Nd=0.20) using different combinations of devaluation and inflation rates. If devaluation is 15% per annum (D=0.15) and inflation runs at a rate of 25% per annum (I=0.25), the result is as follows:

 

Rd=       (1+0.20)(1+0.15)        - 1 =   10.4% per annum
1+0.25

 

which in this case means that, because inflation exceeds devaluation, the real interest rate in pesos is less than the nominal interest rate in dollars. In this example, if the devaluation rate had been 30% per annum, and the other assumptions had remained the same, then the real interest rate in pesos would have been 24.8% per annum, which is more than the nominal interest rate in dollars. If the inflation rate were to exceed 38% per annum, then the real interest rate in pesos on this dollar denominated asset would become negative.

 

The following tables show average balances, interest amounts and average real rates for our interest-earning assets and interest-bearing liabilities for the fiscal years ended December 31, 2017, 2016 and 2015.

 

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   Year ended December 31,
   2017  2016  2015
  

Average balance (1)

  Interest
earned/
paid
 

Average

real rate (2)

 

Average balance (3)

  Interest
earned/
paid
 

Average

real rate (2)

 

Average balance (3)

  Interest
earned/
paid
 

Average

real rate (2)

   (in thousands of pesos, except percentages)
ASSETS                           
Interest-earning assets                           
Government securities (4)                           
Pesos   15,463,791    3,445,733    2.93%   15,677,666    4,552,875    (4.06)%   12,923,775    3,685,594    14.09%
Foreign currency   7,219,171    128,797    1.48%   1,311,842    11,830    (8.57)%   1,034,674    8,456    36.10%
Total   22,682,962    3,574,530    2.47%   16,989,508    4,564,705    (4.41)%   13,958,449    3,694,050    15.72%
Loans (5)                                             
Private Sector                                             
Pesos   76,547,931    17,276,566    3.17%   59,247,269    15,516,955    (6.18)%   45,436,586    11,263,271    10.78%
Foreign currency   19,127,396    473,209    2.17%   8,539,771    294,828    (6.26)%   2,900,642    127,178    40.91%
Total   95,675,327    17,749,775    2.97%   67,787,040    15,811,783    (6.19)%   48,337,228    11,390,449    12.58%
Public Sector                                             
Pesos   7,996    2,481    10.29%   744,689    858    (25.56)%   644,724    3,994    (10.68)%
Foreign currency   87    -      -      38    -      -      16    -      -   
Total   8,083    2,481    10.18%   744,727    858    (25.56)%   644,740    3,994    (10.68)%
Other assets                                             
Pesos   4,113,547    1,086,303    6.40%   4,325,810    898,137    (10.21)%   3,382,485    1,093,416    17.47%
Foreign currency   1,797,538    79,011    4.09%   37,036    1,635    (5.38)%   51    -      -   
Total   5,911,085    1,165,314    5.70%   4,362,846    899,772    (10.17)%   3,382,536    1,093,416    17.47%
Total interest-earning assets                                             
Pesos    96,133,265    21,811,083    3.27%   79,995,434    20,968,825    (6.16)%   62,387,570    16,046,275    11.60%
Foreign currency   28,144,192    681,017    2.12%   9,888,687    308,293    (6.56)%   3,935,383    135,634    39.65%
Total   124,277,457    22,492,100    3.01%   89,884,121    21,277,118    (6.21)%   66,322,953    16,181,909    13.27%

 

55 

 

 

   Year ended December 31,
   2017  2016  2015
  

Average balance (1)

  Interest
earned/
paid
 

Average

real rate (2)

 

Average balance (3)

  Interest
earned/
paid
 

Average

real rate (2)

 

Average balance (3)

  Interest
earned/
paid
 

Average

real rate (2)

   (in thousands of pesos, except percentages)
Non-interest-earning assets                           
Cash and due from banks                           
Pesos   16,403,508    -      -      12,801,032    -      -      9,156,399    -      -   
Foreign currency   24,481,166    -      -      16,672,599    -      -      6,294,942    -      -   
Total   40,884,674    -      -      29,473,631    -      -      15,451,341    -      -   
Investments in other companies                                             
Pesos   530,121    -      -      454,912    -      -      321,753    -      -   
Foreign currency   4,373    -      -      3,949    -      -      2,495    -      -   
Total   535,094    -      -      458,861    -      -      324,248    -      -   
Property and equipment and miscellaneous and intangible assets and items pending allocation                                             
Pesos   4,966,849    -      -      3,564,522    -      -      2,603,963    -      -   
Foreign currency   -      -      -      -      -      -      -      -      -   
Total   4,966,849    -      -      3,564,522    -      -      2,603,963    -      -   
Allowance for loan losses                                             
Pesos   (2,443,985)   -      -      (1,835,424)   -      -      (1,294,206)   -      -   
Foreign currency   (204,374)   -      -      (118,394)   -      -      (73,779)   -      -   
Total   (2,648,359)   -      -      (1,953,818)   -      -      (1,367,985)   -      -   
Other assets                                             
Pesos   5,975,491    -      -      3,711,795    -      -      2,732,283    -      -   
Foreign currency   2,201,922    -      -      1,372,099    -      -      630,322    -      -   
Total   8,177,413    -      -      5,083,894    -      -      3,362,605    -      -   
Total non-interest-earning assets                                             
Pesos   25,432,584    -      -      18,696,837    -      -      13,520,192    -      -   
Foreign currency   26,483,087    -      -      17,930,253    -      -      6,853,980    -      -   
Total   51,915,671    -      -      36,627,090    -      -      20,374,172    -      -   
TOTAL ASSETS                                             
Pesos   121,565,849    21,811,083    -      98,692,271    20,968,825    -      75,907,762    16,046,275    -   
Foreign currency   54,627,279    681,017    -      27,818,940    308,293    -      10,789,363    135,634    -   
Total   176,193,128    22,492,100    -      126,511,211    21,277,118    -      86,697,125    16,181,909    -   

 

 

(1)Average balances for 2017 are derived from daily-end balances.

(2)Annualized on a 360-days basis.

(3)Average balances for 2016 and 2015 are derived from monthly-end balances.

(4)Includes trading gains and losses in all fiscal years. Unrealized gains and losses arising from changes in the market value of our trading portfolio of government securities and yield on our investment portfolio of government securities are included.

(5)Loan amounts are stated before deduction of the allowance for loan losses. Non-accrual loans are included in loans as interest-earning assets.

 

56 

 

 

   Year ended December 31,
   2017  2016  2015
  

Average balance (1)

  Interest
earned/
paid
 

Average

real rate (2)

 

Average balance (3)

  Interest
earned/
paid
 

Average

real rate (2)

 

Average balance (3)

  Interest
earned/
paid
 

Average

real rate (2)

   (in thousands of pesos, except percentages)
LIABILITIES                           
Interest-bearing liabilities                           
Savings accounts                           
Pesos   24,312,040    561,792    (13.88)%   15,971,208    32,835    (25.50)%   12,195,649    22,504    (11.07)%
Foreign currency   25,279,891    2,140    (0.29)%   10,888,220    670    (9.38)%   3,414,786    179    35.00%
Total   49,591,931    563,932    (6.89)%   26,859,428    33,505    (18.96)%   15,610,435    22,683    (0.99)%
Time deposits                                             
Pesos   32,633,531    6,159,011    0.06%   30,592,404    7,628,780    (7.11)%   23,126,105    5,116,213    8.41%
Foreign currency   6,464,919    22,384    0.05%   5,301,300    61,787    (8.33)%   2,126,313    47,027    37.98%
Total   39,098,450    6,181,395    0.06%   35,893,704    7,690,567    (7.29)%   25,252,418    5,163,240    10.90%
Borrowings from the Central Bank                                             
Pesos   13,725    889    (10.37)%   198,826    2,962    (24.54)%   179,478    5,186    (8.66)%
Foreign currency   -      -      -      12,999    -      -      6,290    -      -   
Total   13,725    889    (10.37)%   211,825    2,962    (23.04)%   185,768    5,186    (8.37)%
Borrowings from other financial institutions                                             
Pesos   806,474    394,657    25.37%   722,017    397,857    15.32%   119,208    339,350    241.47%
Foreign currency   288,405    11,465    3.67%   784,532    39,851    (4.78)%   630,548    36,515    42.81%
Total   1,094,879    406,122    19.65%   1,506,549    437,708    4.85%   749,756    375,865    74.40%
Corporate bonds                                             
Pesos   1,949,132    470,054    4.47%   1,825,101    477,511    (6.20)%   1,792,624    393,905    8.28%
Total   1,949,132    470,054    4.47%   1,825,101    477,511    (6.20)%   1,792,624    393,905    8.28%
Other liabilities                                             
Pesos   138,917    35    (15,80)%   957,428    14,371    (24.53)%   639,270    (151,726)   (32.30)%
Foreign currency   1,309,058    436    (0.26)%   651,496    -      -      93,840    -      -   
Total   1,447,975    471    (4.96)%   1,608,924    14,371    (14.60)%   733,110    (151,726)   (28.16)%
Total interest-bearing liabilities                                             
Pesos   59,853,819    7,586,438    (5.16)%   50,266,984    8,554,316    (13.00)%   38,052,334    5,725,432    2.13%
Foreign currency   33,342,273    36,425    (0.19)%   17,638,547    102,308    (8.86)%   6,271,777    83,721    36.80%
Total   93,196,092    7,622,863    (3.38)%   67,905,531    8,656,624    (11.92)%   44,324,111    5,809,153    7.03%

 

57 

 

 

   Year ended December 31,
   2017  2016  2015
  

Average balance (1)

  Interest
earned/
paid
 

Average

real rate (2)

 

Average balance (1)

  Interest
earned/
paid
 

Average

real rate (2)

 

Average balance (1)

  Interest
earned/
paid
 

Average

real rate (2)

   (in thousands of pesos, except percentages)
Non-interest bearing liabilities and stockholders’ equity                           
Demand deposits                           
Pesos   22,273,890    -      -      20,644,679    -      -      17,429,167    -      -   
Foreign currency   11,932,036    -      -      6,037,571    -      -      1,377,380    -      -   
Total   34,205,926    -      -      26,682,250    -      -      18,806,547    -      -   
Other liabilities                                             
Pesos   20,421,511    -      -      14,029,701    -      -      10,194,647    -      -   
Foreign currency   6,954,233    -      -      2,243,718    -      -      1,423,064    -      -   
Total   27,375,744    -      -      16,273,419    -      -      11,617,711    -      -   
Minority interest                                             
Pesos   588,993    -      -      410,156    -      -      -      -      -   
Total   588,993    -      -      410,156    -      -      -      -      -   
Stockholders’ equity                                             
Pesos   20,826,373    -      -      15,239,855    -      -      11,948,756    -      -   
Total   20,826,373    -      -      15,239,855    -      -      11,948,756    -      -   
Total non–interest bearing liabilities and stockholders’ equity                                             
Pesos   64,110,767    -      -      50,324,391    -      -      39,572,570    -      -   
Foreign currency   18,886,269    -      -      8,281,289    -      -      2,800,444    -      -   
Total   82,997,036    -      -      58,605,680    -      -      42,373,014    -      -   
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                             
Pesos   123,964,586    7,586,438    -      100,591,375    8,554,316    -      77,624,904    5,725,432    -   
Foreign currency   52,228,542    36,425    -      25,919,836    102,308    -      9,072,221    83,721    -   
Total   176,193,128    7,622,863    -      126,511,211    8,656,624    -      86,697,125    5,809,153    -   

 

 

(1)Average balances for 2017 are derived from daily-end balances.

(2)Annualized on a 360-days basis.

(3)Average balances for 2016 and 2015 are derived from monthly-end balances.

 

58 

The following tables show average balances, interest amounts and average nominal rates for our interest-earning assets and interest-bearing liabilities for the fiscal years ended December 31, 2017, 2016 and 2015

 

   Year ended December 31,
   2017  2016  2015
  

Average balance (1)

  Interest
earned/
paid
 

Average

nominal rate (2)

 

Average balance (3)

  Interest
earned/
paid
 

Average

Nominal rate (2)

 

Average balance (3)

  Interest
earned/
paid
 

Average

nominal rate (2)

   (in thousands of pesos, except percentages)
ASSETS                           
Interest-earning assets                           
Government securities (4)                           
Pesos   15,463,791    3,445,733    22.28%   15,677,666    4,552,875    29.04%   12,923,775    3,685,594    28.52%
Foreign currency   7,219,171    128,797    1.78%   1,311,842    11,830    0.90%   1,034,674    8,456    0.82%
Total   22,682,962    3,574,530    15.76%   16,989,508    4,564,705    26.87%   13,958,449    3,694,050    26.46%
Loans (5)                                             
Private Sector