UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

ANNUAL REPORT

PURSUANT TO SECTION 13

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2018

Commission file number 001-37777

 

 

GRUPO SUPERVIELLE S.A.

(Exact name of Registrant as specified in its charter)

 

 

SUPERVIELLE GROUP S.A.

(Translation of Registrant’s name into English)

REPUBLIC OF ARGENTINA

(Jurisdiction of incorporation or organization)

Bartolomé Mitre 434, 5th Floor

C1036AAH Buenos Aires

Republic of Argentina

(Address of principal executive offices)

Alejandra Naughton

Bartolomé Mitre 434, 5th Floor

C1036AAH Buenos Aires

Republic of Argentina

Tel: 54-11-4340-3053

Email: Alejandra.Naughton@supervielle.com.ar

(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		Trading Symbol(s)		Name of each exchange on which registered
American Depositary Shares, each representing 5 Class B shares of Grupo Supervielle S.A.		SUPV		New York Stock Exchange
Class B shares of Grupo Supervielle S.A.		SUPV		New York Stock Exchange*

 

*	Not for trading, but only in connection with the registration of American Depositary Shares pursuant to the 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 issuer’s classes of capital or common stock as of December 31, 2018 was:

 

Title of class		Number of shares outstanding
Class B ordinary shares, nominal value Ps.1.00 per share		329,984,134
Class A ordinary shares, nominal value Ps.1.00 per share		126,738,188

 

 

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, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

 

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.  ☐

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

 

U.S. GAAP  ☐		International Financial Reporting Standards as issued by the International Accounting Standards Board  ☒		Other  ☐

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 17  ☐    Item 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

 

ITEM 1.		IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS			1
ITEM 2.		OFFER STATISTICS AND EXPECTED TIMETABLE			1
ITEM 3.		KEY INFORMATION			1
ITEM 3.A		SELECTED FINANCIAL DATA			1
ITEM 3.B		CAPITALIZATION AND INDEBTEDNESS			5
ITEM 3.C		REASONS FOR THE OFFER AND USE OF PROCEEDS			5
ITEM 3.D		RISK FACTORS			5
ITEM 4.		INFORMATION OF THE COMPANY			30
ITEM 4.A		HISTORY AND DEVELOPMENT OF THE COMPANY			37
ITEM 4.B		BUSINESS OVERVIEW			42
ITEM 4.C		ORGANIZATIONAL STRUCTURE			140
ITEM 4.D		PROPERTY, PLANTS AND EQUIPMENT			141
ITEM 5.		OPERATING AND FINANCIAL REVIEW AND PROSPECTS			175
ITEM 5.A		OPERATING RESULTS			175
ITEM 5.B		LIQUIDITY AND CAPITAL RESOURCES			209
ITEM 5.C		RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.			215
ITEM 5.D		TREND INFORMATION			216
ITEM 5.E		OFF-BALANCE SHEET STATEMENTS ARRANGEMENTS			217
ITEM 5.F		CONTRACTUAL OBLIGATIONS			217
ITEM 5.G		SAFE HARBOR			219
ITEM 6.		DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES			219
ITEM 7.		SHAREHOLDERS AND RELATED PARTY TRANSACTIONS			244
ITEM 7.A.		MAJOR SHAREHOLDERS			244
ITEM 7.B		RELATED PARTY TRANSACTIONS			245
ITEM 7.C		INTERESTS OF EXPERTS AND COUNSEL			248
ITEM 8.		FINANCIAL INFORMATION			248
ITEM 8.A.		CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION			248
ITEM 8.B		SIGNIFICANT CHANGES			251
ITEM 9.		THE OFFER AND LISTING			251
ITEM 9.A.		OFFER AND LISTING DETAILS			251
ITEM 9.B.		PLAN OF DISTRIBUTION			251
ITEM 9.C.		MARKETS			251
ITEM 9.D.		SELLING SHAREHOLDERS			251

ITEM 9.E.		DILUTION		252
ITEM 9.F.		EXPENSES OF THE ISSUE		252
ITEM 10.		ADDITIONAL INFORMATION		252
ITEM 10.A		SHARE CAPITAL		252
ITEM 10.B		MEMORANDUM AND ARTICLES OF ASSOCIATION		252
ITEM 10.C		MATERIAL CONTRACTS		259
ITEM 10.D		EXCHANGE CONTROLS		259
ITEM 10.E		TAXATION		260
ITEM 10.F		DIVIDENDS AND PAYING AGENTS		269
ITEM 10.G		STATEMENT BY EXPERTS		269
ITEM 10.H		DOCUMENTS ON DISPLAY		269
ITEM 10.I		SUBSIDIARY INFORMATION		269
ITEM 11.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		270
ITEM 12.		DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		276
ITEM 12.A		DEBT SECURITIES		276
ITEM 12.B		WARRANTS AND RIGHTS		276
ITEM 12.C		OTHER SECURITIES		276
ITEM 12.D		AMERICAN DEPOSITARY SHARES		276
ITEM 13.		DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES		277
ITEM 14.		MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS		277
ITEM 15.		CONTROLS AND PROCEDURES		277
ITEM 16.A		AUDIT COMMITTEE FINANCIAL EXPERT		278
ITEM 16.B		CODE OF ETHICS		279
ITEM 16.C		PRINCIPAL ACCOUNTANT FEES AND SERVICES		279
ITEM 16.D		EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES		279
ITEM 16.E		PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS		279
ITEM 16.F		CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT		280
ITEM 16.G		CORPORATE GOVERNANCE		280
ITEM 16.H		MINE SAFETY DISCLOSURE		283
ITEM 17.		FINANCIAL STATEMENTS		283
ITEM 18.		FINANCIAL STATEMENTS		283
ITEM 19.		EXHIBITS		284

 

CERTAIN DEFINED TERMS AND CONVENTIONS

In this annual report, we use the terms “we,” “us,” “our” and the “Group” to refer to Grupo Supervielle S.A. and its consolidated subsidiaries, including Banco Supervielle S.A., unless otherwise indicated. References to “Grupo Supervielle” mean Grupo Supervielle S.A. References to the “Bank” mean Banco Supervielle S.A. and its consolidated subsidiaries. References to “Tarjeta” mean Tarjeta Automática S.A. References to “SAM” mean Supervielle Asset Management S.A. References to “Sofital” mean Sofital S.A.F.e I.I. References to “CCF” mean Cordial Compañía Financiera S.A. References to “Supervielle Seguros” mean Supervielle Seguros S.A. References to “Espacio Cordial” or “Cordial Servicios” mean Espacio Cordial Servicios S.A. References to “IOL” mean InvertirOnline S.A.U. and InvertirOnline.com Argentina S.A.U. References to “MILA” mean Micro Lending S.A.U.

References to “Class B shares” refer to shares of our Class B common stock, all with a par value of Ps.1.00 per share, and references to “ADSs” are to American depositary shares, each representing five Class B shares, except where the context requires otherwise.

The term “Argentina” refers to the Republic of Argentina. The terms “Argentine government” or the “government” refers to the federal government of Argentina, the term “Central Bank” refers to the Banco Central de la República Argentina, or the Argentine Central Bank, and the term “CNV” refers to the Argentine Comisión Nacional de Valores, or the Argentine securities regulator. The term “ByMA” refers to the exchange Bolsas y Mercados Argentinos S.A. The term “MAE” refers to the exchange Mercado Abierto Electrónico S.A. The term “Argentine Capital Markets Law” refers to Law No. 26,831, as amended and supplemented. The term “Argentine Negotiable Obligations Law” refers to Law No. 23,576, as amended and supplemented. The term “AGCL” refers to Law No. 19,550, as amended and supplemented. The term “Argentine Productive Financing Law” refers to Law No. 27,440.

“Argentine GAAP” refers to generally accepted accounting principles in Argentina and “Argentine Banking GAAP” refers to the accounting rules of the Central Bank. “IFRS” refers to the International Financial Reporting Standards, as issued by the International Accounting Standards Board (“IASB”).

The term “GDP” refers to gross domestic product and all references in this annual report to GDP growth are to real GDP growth, the term “CPI” refers to the consumer price index and the term “WPI” refers to the wholesale price index.

The term “customers” refers to individuals or entities that have at least one of our products without any requirement of customer activity during any time period. The term “active customer” refers to customers that had activity in the previous 90 days.

Unless the context otherwise requires, the term “financial institutions” refers to institutions regulated by the Central Bank. The term “Argentine banks” refers to banks that operate in Argentina. The term “Argentine private banks” refers to banks that are not controlled or owned by the Argentine federal government or any Argentine provincial, municipality or city government.

The term “private domestically-owned banks” refers to private banks that are controlled by Argentine shareholders. For information up to December 31, 2017, the term “small businesses” refers to individuals and businesses with annual sales of up to Ps.40.0 million, the term “SMEs” refers to individuals and businesses with annual sales over Ps.40.0 million and below Ps.200.0 million, the term “middle-market companies” refers to companies with annual sales over Ps.200.0 million and below Ps.1.0 billion and the term “large corporates” refers to companies with annual sales over Ps.1.0 billion. For information since January 1, 2018, the term “small businesses” refers to individuals and businesses with annual sales up to Ps.70.0 million, the term “SMEs” refers to individuals and businesses with annual sales over Ps.70.0 million and below Ps.550.0 million, the term “middle-market companies” refers to companies with annual sales over Ps.550.0 million and below Ps.2.0 billion and the term “large corporates” refers to companies with annual sales over Ps.2.0 billion. For information since January 1, 2019, the term “small businesses” refers to individuals and businesses with annual sales up to Ps.100 million, the term “SMEs” refers to individuals and businesses with annual sales over Ps.100 million and below Ps.700 million, the term “middle-market companies” refers to companies with annual sales over Ps.700 million and below Ps.2.5 billion and the term “large corporates” refers to companies with annual sales over Ps.2.5 billion.

 

i

The term “ROAE” refers to return on average shareholders’ equity. ROAE is frequently used by financial institutions as a benchmark to measure profitability compared to peers but not as a benchmark to determine returns for investors, which is affected by multiple factors that ROAE does not consider.

The term “NIFFI” refers to Net Income from Financial Instruments.

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Financial Statements

This annual report contains our audited consolidated financial statements as of December, 2018 and 2017 and January 1, 2017, and for the years ended December 31, 2018 and 2017 (our “audited consolidated financial statements”), which have been audited by Price Waterhouse & Co. S.R.L., Buenos Aires, Argentina, a member firm of PricewaterhouseCoopers, an independent registered public accounting firm (“Price Waterhouse & Co.”), whose report is included herein.

We have prepared our audited consolidated financial statements under IFRS for the first time for our financial year ended December 31, 2018, which included comparative financial information for the year ended December 31, 2017. All IFRS standards issued by the IASB effective at the time of preparing the audited consolidated financial statements have been applied.

The opening IFRS statement of financial position was prepared as of our transition date of January 1, 2017. Prior to the adoption of IFRS, we prepared our audited consolidated financial statements in accordance with Argentine Banking GAAP.

The application of IFRS 1 “First Time Adoption of IFRS” required us to adopt accounting policies based on the standards and interpretations effective at the reporting date of our first IFRS financial statements (December 31, 2018). As a result of adopting IFRS, we have changed many of our previous accounting policies. These IFRS accounting policies have been applied consistently in preparing our audited consolidated financial statements, and in the preparation of the opening IFRS statement of financial position at transition date.

At the same time, IAS 29 “Financial Reporting in Hyperinflationary Economies” requires that the financial statements of an entity whose functional currency is one of a hyperinflationary economy be measured in terms of the current unit of measurement at the closing date of the reporting period, regardless of whether they are based on the historical cost method or the current cost method. This requirement also includes the comparative information of the financial statements.

In order to conclude on whether an economy is categorized as highly inflationary, IAS 29 outlines a series of factors to be considered, including the existence of an accumulated inflation rate in three years that is approximate or exceed 100%. As of July 1, 2018, Argentina reported a cumulative three-year inflation rate higher than 100% and therefore financial information published as from that date should be adjusted for inflation in accordance with IAS 29. Therefore, we have applied IAS 29 to our audited consolidated financial statements.

In preparing the opening IFRS statement of financial position, we have adjusted amounts reported previously in our audited consolidated financial statements prepared in accordance with Argentine Banking GAAP. An explanation of how the transition from Argentine Banking GAAP to IFRS has affected our financial performance and financial position is set out in note 2.3 of our audited consolidated financial statements.

Unless otherwise indicated, all financial information of our company included in this annual report is stated on a consolidated basis under IFRS.

Overview of IAS 29

Pursuant to IAS 29, the financial statements of an entity whose functional currency is that of a highly inflationary economy, as mentioned above, should be reported measured in terms of the measuring unit current as of the date of the financial statements. All the amounts included in the statement of financial position which are not stated in terms

 

ii

of the measuring unit current as of the date of the financial statements should be restated adjusted applying the general price index. All items in the statement of income should be stated in terms of the measuring unit current as of the date of the financial statements, applying the changes in the general price index occurred from the date on which the revenues and expenses were originally recognized in the financial statements.

Adjustment for inflation in the initial balances has been calculated considering the indexes based on the price indexes published by the National Institute of Statistics and Census (Instituto Nacional de Estadística y Censos or “INDEC”, per its initials in Spanish).

The principal inflation adjustment procedures are the following:

 

•

Monetary assets and liabilities that are recorded in the current currency as of the financial position’s closing date are not restated because they are already stated in terms of the currency unit current as of the date of the financial statements.

 

•

Non-monetary assets and liabilities are recorded at cost as of the financial position date, and equity components are restated applying the relevant adjustment ratios.

 

•

All items in the consolidated income statement are restated applying the relevant conversion factors.

 

•

The effect of inflation in the Company’s net monetary position is included in the consolidated income statement, in the item “Results from exposure to changes in the purchasing power of money.”

 

•

Comparative figures have been adjusted for inflation following the procedure explained in the previous paragraphs.

 

•

Upon initially applying inflation adjustment, the equity accounts were restated as follows:

 

•

Capital stock was restated as from the date of subscription or the date of the most recent inflation adjustment for accounting purposes, whichever is later.

 

•

The resulting amount was included in the “Results from exposure to changes in the purchasing power of money” account.

 

•

Consolidated Statement of Comprehensive Income were restated as from each accounting allocation.

 

•

The legal reserve and other reserves in the statement of income were not restated as of the initial application date.

Currencies and Rounding

The terms “U.S. dollar” and “U.S. dollars” and the symbol “U.S.$” refer to the legal currency of the United States. The terms “Peso” and “Pesos” and the symbol “Ps.” refer to the legal currency of Argentina.

We have translated certain of the Peso amounts contained in this annual report into U.S. dollars for convenience purposes only. Unless otherwise indicated, the rate used to translate such amounts as of December 31, 2018 was Ps.37.8083 to U.S.$1.00, which was the reference exchange rate reported by the Central Bank for U.S. dollars as of December 28, 2018. The Federal Reserve Bank of New York does not report a noon buying rate for Pesos. The U.S. dollar equivalent information presented in this annual report is provided solely for the convenience of investors and should not be construed as implying that the Peso amounts represent, or could have been or could be converted into, U.S. dollars at such rates or at any other rate. The reference exchange rate reported by the Central Bank was Ps.44.90 per U.S.$.1.00 as of May 6, 2019.

 

iii

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

Market Share and Other Information

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

In January 2007, the INDEC, which is the only institution in Argentina with the statutory authority to produce official nationwide statistics, modified the methodology used to calculate certain of its indices. On January 8, 2016, the Macri administration issued Decree No. 55/2016 declaring a state of administrative emergency with respect to the national statistical system and the INDEC until December 31, 2016. During this state of emergency, the INDEC suspended the publication of certain statistical data until it completed a reorganization of its technical and administrative structure capable of producing sufficient and reliable statistical information. Following the implementation of certain methodological reforms and the adjustment of macroeconomic statistics on the basis of these reforms, on June 15, 2016, the INDEC published the INDEC Report including revised GDP data for the years 2004 through 2015. As of the date of this annual report, the INDEC has resumed publishing certain revised data, including GDP, foreign trade, poverty and balance of payment statistics. As of the date of this annual report, the Argentine government has not renewed the state of administrative emergency declared by means of the Decree No. 55/2016.

 

iv

FORWARD-LOOKING STATEMENTS

This annual report contains estimates and forward-looking statements, principally in “Item 3.D Risk Factors”, “Item 5.A Operating Results”, and “Item 4.B Business Overview.” We have based these forward-looking statements largely on our current beliefs, expectations and projections about future courses of action, events and financial trends affecting our business. Many important factors, in addition to those discussed elsewhere in this annual report, could cause our actual results to differ substantially from those anticipated in our forward-looking statements, including, among others:

 

(i)

changes in general economic, financial, business, political, legal, social or other conditions in Argentina, including the upcoming presidential elections in October 2019, or elsewhere in Latin America or changes in either developed or emerging markets;

 

(ii)

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

 

(iii)

changes in regional, national and international business and economic conditions, including fluctuations in the exchange rate of the Peso and inflation;

 

(iv)

changes in interest rates and the cost of deposits, which may, among other things, affect margins;

 

(v)

unanticipated increases in financing or other costs or the inability to obtain additional debt or equity financing on attractive terms, which may limit our ability to fund existing operations and to finance new activities;

 

(vi)

changes in government regulation, including tax and banking regulations;

 

(vii)

adverse legal or regulatory disputes or proceedings;

 

(viii)

the interpretation by judicial courts of the Argentine Civil and Commercial Code;

 

(ix)

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

 

(x)

exposure to Argentine government liabilities, and fluctuations and declines in the value of Argentine public debt;

 

(xi)

increased competition in the banking, financial services, credit card services, asset management and related industries;

 

(xii)

a loss of market share by any of our main businesses;

 

(xiii)

increase in the allowances for loan losses;

 

(xiv)

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

 

(xv)

ability to implement our business strategy;

 

(xvi)

fluctuations in the exchange rate of the Peso; and

 

(xvii)

other factors discussed under “Item 3.D Risk Factors” in this annual report.

 

 

v

The words “believe,” “may,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “forecast” and similar words are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation and the effects of competition. Forward-looking statements speak only as of the date they were made, and we do not undertake any obligation to update publicly or to revise any forward-looking statements after we distribute this annual report because of new information, future events or other factors, except as required by applicable law. In light of the risks and uncertainties described above, the forward-looking events and circumstances discussed in this annual report might not occur and do not constitute guarantees of future performance. Because of these uncertainties, you should not make any investment decisions based on these estimates and forward-looking statements.

 

vi

PART I

 

Item 1.

Identity of Directors, Senior Management and Advisors

Not applicable.

 

Item 2.

Offer Statistics and Expected Timetable

Not applicable.

 

Item 3.

Key Information

 

Item 3.A

Selected Financial Data

The following selected consolidated financial data has been derived from our audited consolidated financial statements as of the dates and for each of the periods indicated below. This information should also be read in conjunction with our audited consolidated financial statements and related notes beginning on page F-1, the “Presentation of financial and other information” section and the discussion in Item 5 “Item 5.A Operating Results” included elsewhere in this annual report. The selected consolidated statement of income data for the years ended December 31, 2018 and 2017 and the selected consolidated statement of financial position data as of December 31, 2018 and 2017 and as of January 1, 2017 have been derived from our consolidated financial statements included in this annual report which have been audited by Price Waterhouse & Co., member firm of PricewaterhouseCoopers an independent registered public accounting firm.

Our consolidated financial statements were prepared and presented in accordance with IFRS, as issued by the IASB and the interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC). We applied IFRS for the first time for the year ended December 31, 2018 with a transition date of January 1, 2017. We have applied all IFRS issued by the IASB effective at the time of preparing our audited consolidated financial statements. The opening IFRS statement of financial position was prepared as of our transition date of January 1, 2017. Note 2 to our audited consolidated financial statements contains the details of our transition to IFRS and application of IFRS 1.

The consolidated financial statements and the financial information included in this Annual Report for all the periods reported are presented in Argentine pesos as of December 31, 2018, which is our functional currency.

IAS 29 establishes the conditions under which an entity shall restate its financial statements if it is located in an economic environment considered hyperinflationary. This Standard requires that the financial statements of an entity that reports in the currency of a highly inflationary economy shall be stated in terms of the measuring unit current at the closing date of the latest reporting period, regardless of whether they are based on a historical cost approach or a current cost approach. To this end, in general terms, the inflation rate must be computed in the non-monetary items as from the acquisition date or the revaluation date, as applicable. These requirements also comprise the comparative information of the financial statements.

In order to conclude on whether an economy is categorized as highly inflationary, IAS 29 outlines a series of factors to be considered, including the existence of an accumulated inflation rate in three years that is approximate or exceed 100%. As of July 1, 2018, Argentina reported a cumulative three-year inflation rate higher than 100% and therefore financial information published as from that date should be adjusted for inflation in accordance with IAS 29. Therefore, we have applied IAS 29 to our audited consolidated financial statements. See Note 1.2 to our audited consolidated financial statements.

Solely for convenience of the reader, we have translated certain Peso amounts as of and for the year ended December 31, 2018 into U.S. dollars at the reference exchange rate reported by the Central Bank as of December 31, 2018 which was Ps.37.8083 to U.S.$1.00. The reference exchange rate reported by the Central Bank was Ps.44.90 per U.S.$.1.00 as of May 6, 2019. U.S. dollar equivalent information should not be construed to imply that the Peso amounts represent, or could have been or could be converted into, U.S. dollars at such rates or any other rate.

 

1

These consolidated financial statements differ in certain material respects from our locally filed financial statements as of December 31, 2018 and 2017 and January 1, 2017 and for the years ended December 31, 2018 and 2017 prepared in accordance with Argentine Banking GAAP.

We are subject to the provisions of Article 2 – Section I – Chapter I of Title IV: Periodical Reporting Requirements of the CNV Rules and we are required to present its financial statements in accordance with the valuation and disclosure criteria set forth by the Argentine Central Bank.

The Argentine Central Bank, through Communications“A” 5541, as amended, set forth a convergence plan towards the application of IFRS as issued by the IASB and the interpretations issued by the IFRIC, for entities under its supervision, effective for fiscal years beginning on or after January 1, 2018. The convergence plan had two exceptions to the application of IFRS: (i) item 5.5 (Impairment) of IFRS 9 “Financial Instruments”, and (ii) IAS 29 “Financial Reporting in Hyperinflationary Economies”, both of which were waived until January 1, 2020, at which time entities will be required to apply the provisions of IFRS in full. We have presented our local financial statements under these rules on March 7, 2019. Shareholder’s equity under the rules of the Argentine Central Bank is presented in Note 25 of our audited consolidated financial statements.

 

		Grupo Supervielle S.A.
		As of December 31,
		2018								2017
		U.S.$.				$				$
		(in thousands of Pesos or U.S. dollars, as indicated)
Consolidated Income Statement Data IFRS:
Interest income			804,486				30,416,242				22,264,831
Interest expenses			(460,570	)			(17,413,360	)			(8,309,665	)
Net interest income			343,916				13,002,882				13,955,166
Net income from financial instruments (NIFFI) at fair value through profit or loss			166,904				6,310,371				3,545,647
Exchange rate difference on gold and foreign currency			29,800				1,126,705				393,112
NIFFI and Exchange Rate Differences			196,704				7,437,076				3,938,759
Net Financial Income			540,620				20,439,958				17,893,925
Service fee income			156,783				5,927,689				6,063,719
Service fee expenses			(37,510	)			(1,418,180	)			(1,220,427	)
Income from insurance activities			22,447				848,665				899,491
Net Service Fee Income			141,720				5,358,174				5,742,783
Subtotal			682,340				25,798,132				23,636,708
Result from exposure to changes in the purchasing power of money			(159,092	)			(6,015,001	)			(2,591,255	)
Other operating income			65,424				2,473,558				1,838,024
Loan loss provisions			(136,981	)			(5,179,033	)			(4,033,187	)
Net Operating Income			451,691				17,077,656				18,850,290
Personnel expenses			(232,187	)			(8,778,580	)			8,736,238
Administration expenses			(148,129	)			(5,600,508	)			4,918,531
Depreciations and impairment of non-financial assets			(11,436	)			(432,389	)			621,988
Other operating expenses			(114,047	)			(4,311,940	)			4,156,824
Income / (loss) before taxes			(54,108	)			(2,045,761	)			416,709
Income tax			(26,737	)			(1,010,888	)			(1,171,969	)
Net loss for the year			(80,845	)			(3,056,649	)			(755,260	)
Net loss for the year attributable to owners of the parent company			(80,088	)			(3,028,003	)			(754,370	)
Net loss for the year attributable to non-controlling interest			(757	)			(28,646	)			(890	)
Other Comprehensive Income			6,390				241,573				46,882
Other comprehensive income attributable to parent company			6,383				241,322				46,869
Other comprehensive income attributable to non-controlling interest			7				251				13
Comprehensive Loss			(74,457	)			(2,815,076	)			(708,378	)
Comprehensive loss for the year attributable to owners of the parent company			(73,706	)			(2,786,681	)			(707,501	)
Comprehensive loss for the year attributable to non-controlling interest			(751	)			(28,395	)			(877	)

 

2

 

		Grupo Supervielle S.A.
		As of December 31,												As of January 1st,
		2018								2017				2017
		U.S.$.				$				$				$
		(in thousands of Pesos or U.S. dollars, as indicated)
ASSETS
Cash and due from banks			891,010				33,687,553				16,384,924				14,795,794
Cash			126,684				4,789,701				4,486,951				3,463,786
Financial institutions and correspondents			764,326				28,897,852				11,897,973				11,332,008
Argentine Central Bank			724,412				27,388,784				10,408,716				10,358,422
Other local financial institutions			39,639				1,498,669				1,415,251				937,828
Others			275				10,399				74,006				35,758
Debt Securities at fair value through profit or loss			399,704				15,112,115				16,837,925				782,547
Derivatives			421				15,924				39,740				52,152
Repo transactions			—				—				4,945,864				—
Other financial assets			44,912				1,698,054				2,388,795				3,458,243
Loans and other financing			2,042,104				77,208,464				87,108,670				69,996,876
To the non-financial public sector			868				32,802				48,143				7,934
To the financial sector			10,541				398,551				586,358				710,798
To the Non-Financial Private Sector and Foreign residents			2,030,695				76,777,111				86,474,169				69,278,144
Other debt securities			114,025				4,311,095				529,891				3,802,747
Financial assets in guarantee			53,089				2,007,217				1,921,219				2,699,392
Current income tax assets			15,659				592,058				180,458				—
Inventories			1,849				69,918				156,306				55,829
Investments in equity instruments			275				10,404				68,881				6,197
Property, plant and equipment			57,758				2,183,734				2,060,551				1,630,618
Investment property			10,933				413,357				287,072				887,242
Intangible assets			71,700				2,710,837				459,420				639,705
Deferred income tax assets			21,736				821,818				1,156,980				985,294
Non-current assets held for sale			74				2,800				—				—
Other non-financial assets			23,504				888,648				703,454				328,103
TOTAL ASSETS			3,748,753				141,733,996				135,230,150				100,120,739
Average Assets			4,112,303				155,479,182				126,519,446				103,990,160
LIABILITIES
Deposits			2,510,190				94,906,014				83,284,983				66,075,709
Non-financial public sector			293,731				11,105,477				9,112,185				4,767,148
Financial sector			667				25,236				23,183				20,902
Non-financial private sector and foreign residents			2,215,792				83,775,301				74,149,615				61,287,659
Liabilities at fair value through profit or loss			7,091				268,086				—				—
Derivatives			2,492				94,222				—				—
Repo transactions			—				—				—				1,088,747
Other financial liabilities			112,865				4,267,239				5,774,555				5,584,663
Financing received from the Argentine Central Bank and other financial institutions			212,462				8,032,837				5,205,766				3,161,327
Unsubordinated negotiable Obligations			246,167				9,307,171				12,681,237				3,775,525
Current income tax liabilities			20,929				791,272				1,217,961				1,022,463
Subordinated negotiable obligations			36,601				1,383,817				1,012,661				2,540,433
Provisions			2,299				86,915				118,357				117,231
Deferred income tax liabilities			5,907				223,351				29,808				14,587
Other non-financial liabilities			142,958				5,404,998				5,613,054				4,689,194

 

3

		Grupo Supervielle S.A.
		As of December 31,												As of January 1st,
		2018								2017				2017
		U.S.$.				$				$				$
		(in thousands of Pesos or U.S. dollars, as indicated)
TOTAL LIABILITIES			3,299,961				124,765,922				114,938,382				88,069,879
Average Liabilities			3,605,783				136,328,538				110,304,908				91,485,235
SHAREHOLDERS’ EQUITY			448,793				16,968,074				20,291,768				12,050,860
Shareholders’ equity attributable to owners of the parent company			448,420				16,953,987				20,069,467				11,719,477
Shareholders’ equity attributable to non-controlling interests			373				14,087				222,301				331,383
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY			3,748,753				141,733,996				135,230,150				100,120,739
Average Shareholders’ Equity			506,520				19,150,644				16,214,538				12,504,925

 

		Grupo Supervielle S.A.
		As of December 31,
		2018				2017
SELECTED RATIOS
Return on average equity (1)			(14.6	)%			(4.4	)%
Return on average assets (2)			(1.8	)%			(0.6	)%
Net Interest Margin (3)			17.7	%			18.3	%
Net Financial Margin (4)			17.0	%			18.4	%
Net Fee Income Ratio (5)			28.6	%			31.4	%
Efficiency Ratio (6)			53.7	%			57.5	%
Cost/assets (7)			9.2	%			10.8	%
Basic earnings per share (in Pesos)(8)			(6.63	)%			(1.92	)%
Diluted earnings per share (in Pesos)			—				—
Basic earnings per share (in U.S.$.)			(0.18	)%			(0.05	)%
Diluted earnings per share (in U.S.$.)			—				—
Liquidity and Capital
Loans to Total Deposits (9)			86.6	%			110.1	%
Total Equity / Total Assets			12.0	%			14.8	%
Proforma Consolidated Capital / Risk weighted assets			14.0	%			19.6	%
Proforma Consolidated Tier1 Capital / Risk weighted assets			12.9	%			17.2	%
LCR Pro forma			173.4	%			113.9	%
Risk Weighted Assets/Assets			73.0	%			81.7	%
Asset Quality
NPL as a percentage of Total Loans			4.1	%			3.1	%
Allowances as a % of Total Loans			6.0	%			5.0	%
Cost of risk (10)			5.4	%			5.0	%
Cost of risk, net (11)			5.1	%			4.7	%
Coverage Ratio			147.2	%			162.3	%
Other Data
Dividends paid to the common shares (Ps.million)			303,000				328,363
Dividends paid to the preferred shares (Ps.million)			—				—
Dividends per common share (Ps.)			0.7				0.8
Dividends per preferred share (Ps.)			—				—
Employees			5,307				5,320
Branch and sales points			344				326
ATMs, Self Service Terminals and Cash Dispensers with biometric identification			920				704

 

(1)	Attributable Comprehensive Income divided by average shareholders’ equity, calculated on a daily basis and measured in local currency.

(2)	Attributable Comprehensive Income divided by average assets, calculated on a daily basis and measured in local currency.

(3)	Net interest income + Net income from Government & Corporate Securities at fair value through profit or loss+ divided by average interest-earning assets.

(4)	Net interest income + Net income from financial instruments at fair value through profit or loss + Exchange rate differences on gold and foreign currency, divided by average interest-earning assets.

 

4

(5)

Net services fee income + Income from insurance activities divided by the sum of Net interest income + Net income from financial instruments at fair value through profit or loss + Exchange rate differences on gold and foreign currency, net services fee income, income from insurance activities and ets

(6)

Personnel, Administrative expenses and Depreciation & Amortization divided by the sum of Net interest income + Net income from financial instruments at fair value through profit or loss + Exchange rate differences on gold and foreign currency, net services fee income, income from insurance activities and other net operating income.

(7)	Annualized Administration expenses divided by average assets, calculated on a daily basis.

(8)	Basic earnings per share (in Pesos) are based upon the weighted average of Grupo Supervielle’s outstanding shares, which were Ps.456.7 million for the year ended December 31, 2018 and 392.8 million for the year ended December 31, 2017.

(9)	Loans and Leasing before allowances divided by total deposits.

(10)	Annualized loan loss provisions divided by average loans, calculated on a daily basis.

(11)	Annualized loan loss provisions including recovered loan loss provisions divided by average loans, calculated on a daily basis.

 

Item 3.B

Capitalization and indebtedness

Not applicable.

 

Item 3.C

Reasons for the offer and use of proceeds

Not applicable.

 

Item 3.D

Risk Factors

You should carefully consider the risks described below, as well as the other information in this annual report. Our business, results of operations, financial condition or prospects could be materially and adversely affected if any of these risks occurs. In general, investors take more risk when they invest in the securities of issuers in emerging markets such as Argentina than when they invest in the securities of issuers in the United States and other more developed markets. The risks described below are those known to us and that as of the date of this annual report believe may materially affect us.

Risks Relating to Argentina

Substantially all of our operations, property and customers are located in Argentina. As a result, the quality of our assets, our financial condition and the results of our operations are dependent upon the macroeconomic, regulatory, social and political conditions prevailing in Argentina from time to time. These conditions include growth rates, inflation rates, exchange rates, taxes, foreign exchange controls, changes to interest rates, changes to government policies, social instability, and other political, economic or international developments either taking place in, or otherwise affecting, 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 with economic activity; civil unrest and local security concerns. You should make your own investigation into Argentina’s economy and its prevailing conditions before making an investment in us.

During 2001 and 2002, Argentina went through a period of severe political, economic and social crisis. Among other consequences, the crisis resulted in Argentina defaulting on its foreign debt obligations, 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. After recovering significantly from the 2001/2002 crisis, the pace of growth of Argentina’s economy diminished, suggesting uncertainty as to whether the growth experienced after the crisis was sustainable. Economic

 

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growth was initially fueled by a significant devaluation of the Peso, the availability of excess production capacity resulting from a long period of deep recession and high commodity prices. In spite of the growth following the 2001/2002 crisis, the economy has suffered a sustained erosion of direct investment and capital investment. The global economic crisis of 2008 led to a sudden economic decline in Argentina during 2009, accompanied by inflationary pressures, devaluation of the Peso and a drop in consumer and investor confidence. After the crisis of 2011/2002, Argentina’s GDP grew considerably in real terms, growing by 9.2% in 2005, 8.4% in 2006 and 8.0% in 2007. During 2008 and 2009, however, the Argentine economy suffered a recession attributable to local and external factors, including a severe drought that affected the agricultural sector, and the effects of the global economic crisis of 2008. Real GDP growth recovered in 2010 and 2011, with GDP increasing to 9.5% and 8.4%, respectively. However, GDP growth slowed to 0.8% in 2012 and then grew by 2.4% in 2013, contracted 2.5% in 2014, grew 2.7% in 2015 and decreased 2.1% in 2016 and grew 2.7% in 2017. In 2018 GDP contracted 2.5%.

With respect to GDP and other statistics, since 2007, the INDEC has experienced a process of institutional and methodological reforms that have given rise to controversy with respect to the reliability of the information that it produces, including inflation, GDP and unemployment data. This circumstance caused the official statistics to differ sometimes significantly from privately-sourced estimates until the methodological regularization of the INDEC was completed in mid 2016.

Presidential and Congressional elections in Argentina took place on October 25, 2015, and a runoff election (ballotage) 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. Congressional elections were held in October 22, 2017 and President Macri’s governing coalition obtained the largest share of votes at the national level. However, even when the number of coalition members in Congress increased (holding in the aggregate 107 of a total of 257 seats in the House of Representatives and 24 of a total of 72 seats in the Senate), it still lacks a majority in either chamber of the Argentine Congress. However, the Macri administration managed to implement several significant economic and policy reforms, including those related to foreign exchange, the INDEC, financial policy, foreign currency-denominated bonds, foreign trade reforms, amendment to the Argentine Capital Markets Law, Tax Amnesty Law, correction of monetary imbalances, retiree program, fiscal policy, national electricity state of emergency and reforms, tariff increases and increase in minimum income.

Presidential elections in Argentina are scheduled for October 2019. The impact that the presidential elections could have on Argentine politics and economy is uncertain. This uncertainty may also have a material adverse effect on Argentina’s economy.

The political uncertainty in Argentina about the measures that the Macri administration should take with respect to the economy could generate volatility in the price of the Argentine companies’ securities or even a decrease in their prices, in particular companies in the financial sector like us.

Furthermore, presidential and federal congressional elections in Argentina will be held in October 2019, and their impact on the future economic and political environment is uncertain, but likely to be material.

We can offer no assurances as to the policies that may be implemented by the next Argentine administration, or that political developments in Argentina will not adversely affect the Argentine economy and our financial condition and results of operations. In addition, we cannot assure you that future economic, regulatory, social and political developments in Argentina will not impair our business, financial condition or results of operations, or cause the market value of our shares to decline.

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

Economic conditions in Argentina from 2012 to the first quarter of 2018, included increased inflation, continued demand for wage increases, a rising fiscal deficit and a volatile economic growth. The current administration intends to implement measures with the aim of reversing these variables and stabilizing the economy. In this regard, with the aim of reducing fiscal deficit to 0% of GDP in 2019, the Argentine government will expand the tax base and promote a stricter control of the monetary base by restricting the issuance of local currency until December 2019,

 

6

foreseeing that the Central Bank would be able to withdraw Pesos from the market through daily tenders of liquidity bills (“LELIQs”) that only banks would buy, with a goal of controlling inflation and the demand for foreign currency which in turn could help mitigating the exchange volatility. However, in a restrictive context of monetary expansion, it is expected that access to productive credit will also be restricted. These measures, accompanied by high interest rates, could deepen the recession.

A decline in international demand for Argentine products, a lack of stability and competitiveness of the Peso against other currencies, a decline in confidence among consumers and foreign and domestic investors, a higher rate of inflation and future political uncertainties, among other factors, may affect the development of the Argentine economy, which could lead to reduced demand for our services and adversely affect our business, financial condition and results of operations.

If the current levels of inflation continue, the Argentine economy and our financial position and business could be adversely affected.

Argentina has confronted inflationary pressures since 2007. According to INDEC data, the CPI grew 9.5% in 2011, 10.8% in 2012, 10.9% in 2013, 24.0% in 2014 and 11.9% in the ten-month period ended October 31, 2015. The INDEC reported a cumulative variation of the CPI of 24.8% for 2017, 47.6% for 2018 and 11.8% for the first three months of 2019.

In January 2016, the new INDEC authorities appointed by the Macri administration announced the discontinuance of the methodology used by the previous administration to calculate national statistics and declared a state of administrative emergency, suspending the publication of all indexes by the INDEC until the INDEC was able to calculate such indexes based on accurate official data. During this period the INDEC continued to publish the inflation rate based on data provided by the province of San Luis and the City of Buenos Aires.

Also, on September 26, 2016, the Central Bank presented the inflation targeting regime, a system that seeks to offer a predictable and stable unit of value for inflation. In accordance with the data published by the Central Bank, the original year-on-year inflation targets were 12% to 17% for 2017; from 8% to 12% by 2018; and from 3.5% to 6.5% by 2019. However, on December 27, 2017, the Central Bank updated its inflation target regime by adopting the inflation targets set by the Ministry of the Treasury for the next three years, including targets of 15% for 2018, 10% for 2019 and 5% by the end of 2020. The Argentine government under took measures with the aim to reduce the preliminary fiscal deficit in accordance with the agreements entered into with the International Monetary Fund (“IMF”). Notwithstanding the foregoing, by virtue of the first agreement with the IMF, the government committed to the following inflation targets: 17% for the year 2019, 13% for the year 2020, and 9% for 2021, while an inflation of 27% was expected for 2018. However, by virtue of a second agreement with the IMF, the government and the IMF agreed to replace the inflation targeting scheme with a regime that establishes a stricter control of the monetary base by the Central Bank, which will remain in place until December 2019.

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

There can be no assurances that inflation rates will not continue to escalate in the future or that the measures adopted or that may be adopted by the current or upcoming Argentine government to control inflation will be effective or successful. Inflation remains a challenge for Argentina. Significant inflation could have a material adverse effect on Argentina’s economy and in turn could increase our costs of operation, in particular labor costs, and may negatively affect our business, financial condition and results of operations.

A high level of uncertainty with regard to these economic variables, and a general lack of stability in terms of inflation, could have a negative impact on economic activity and adversely affect our financial condition.

The Argentine government’s ability to obtain financing from international markets is limited, which may impair its ability to implement reforms and foster economic growth, which may negatively impact our financial condition or cash flows.

 

7

In 2005 and 2010, Argentina conducted exchange offers to restructure part of its sovereign debt that had been in default since the end of 2001. As a result of these exchange offers, Argentina restructured over 92% of its eligible defaulted debt. In April 2016, the Argentine government settled U.S.$4.2 billion outstanding principal amount of untendered debt.

As of the date of this annual report, litigation initiated by bondholders that have not accepted Argentina’s settlement offer continues in several jurisdictions, although the size of the claims involved has decreased significantly. As of December 31, 2018, the amount of the Argentine government’s non restructured debt was of approximately U.S.$ 2.9 billion based on the most recent publicly available data.

Although the vacating of the pari passu injunctions removed a material obstacle to access to capital markets by the Argentine government, as evidenced by successful bond issuances in April 2016, January 2017, and January 2018, future transactions may be affected as litigation with holdout bondholders continues, which in turn could affect the Argentine government’s ability to implement certain expected reforms and foster economic growth, which may have a direct impact on our ability to access international credit markets, thus affecting our ability to finance our operations and growth.

Fluctuations in the value of the Peso could adversely affect the Argentine economy, and consequently our results of operations or financial condition.

Fluctuations in the value of the Peso may also adversely affect the Argentine economy, our financial condition and results of operations. Since January 2002, the Peso has fluctuated significantly in value. The devaluation of the Peso in real terms in 2002 had a negative impact on the ability of certain Argentine businesses to honor their foreign currency-denominated debt, and also led to very high inflation initially and significantly reduced real wages. The devaluation has also negatively impacted businesses whose success is dependent on domestic market demand, and adversely affected the Argentine government’s ability to honor its foreign debt obligations. If the Peso depreciates significantly in real terms, all of the negative effects on the Argentine economy related to such devaluation could also have adverse consequences for our business. A substantial increase in the value of the Peso against the U.S. dollar also represents risks for the Argentine economy since it may lead to a deterioration of the country’s current account balance and the balance of payments which may have a negative effect on GDP growth and employment, and reduce the revenues of the Argentine public sector by reducing tax revenues in real terms, due to its current heavy dependence on export taxes.

After several years of moderate variations in the nominal exchange rate, in 2012 the Peso lost approximately 14.4% of its value with respect to the U.S. dollar. This was followed in 2013 and 2014 by a devaluation of the Peso with respect to the U.S. dollar that exceeded 32.5% in 2013 and 31.2% in 2014, including a loss of approximately 24.0% in January 2014. In 2015, the Peso lost approximately 52.0% of its value with respect to the U.S. dollar from January 1, 2015 to September 30, 2015 a 38.0% devaluation during the last quarter of the year, mainly concentrated after December 16, 2015. In 2016 and 2017, the Peso lost approximately 21.9% and 18.4% of its value against the U.S. dollar, respectively. In 2018, the Peso depreciated approximately 101% against the U.S. dollar.

As a result of the greater volatility of the Peso, the Argentine government announced several measures to restore market’s confidence and stabilize the value of the Argentine Peso. Among them, during 2018, the Argentine government negotiated two agreements with the IMF, increased the interest rates and the Central Bank decided to intervene in the exchange market in order to stabilize the value of the Peso. More recently, based on a new agreement with the IMF, the government established a new regime for a stricter control of the local monetary base, which would remain in place until December 2019, in an attempt to reduce the amount of Pesos available in the market and reduce the demand for foreign currency. In addition, the Argentine government originally established that the Central Bank has the power to intervene in the exchange market selling dollars when the exchange rate exceeds Ps.44 per dollar and buying when the exchange rate falls from Ps.34 per dollar (range that was adjusted daily at a rate of 3% per year until December) of 2018, and for the first quarter of 2019, is adjusted daily at a rate of 2% per year and later decreased to 1,75% per year, considering the intermediate zone, as a “non-intervention zone”. In April, 2019, among a set of measures designed to soften the impact of Argentina’s economic situation, the Central Bank fixed the “non-intervention zone” between Ps.39.75 and Ps.51.45 until December 2019 and eliminated the monthly adjustment. On April 29, 2019, the Monetary Policy Committee (Comité de Política Monetaria the “COPOM”) of the Central Bank decided to introduce changes to the monetary policy, with an aim to reducing

 

8

volatility in the foreign exchange market. According to the new scheme: (i) if the exchange rate is between Ps.39.755 and Ps.51.488, the Central Bank may intervene, subject to market conditions, in the foreign exchange market and sell U.S. dollars in the market, and (ii) if the exchange rate is above Ps.51.488, the Central Bank will sell foreign currency for up to U.S.$250 million (from U.S.$150 million). Also, the Central Bank could decide to perform additional interventions in the exchange market. The Argentine pesos resulting from such sales will be discounted from the monetary base. The COPOM also confirmed that the Central Bank will not intervene until June 2019 in the foreign exchange market if the exchange rate decreases below Ps.39.755.”

As of May 6, 2019, the exchange rate was Ps.44.90 per dollar. The success of the measures described is uncertain and the continued depreciation of the Peso could have a significant adverse effect on our financial condition and results of operations.

The implementation in the future of new exchange controls, restrictions on transfers abroad and capital inflow restrictions could limit the availability of international credit and could threaten the financial system, which may adversely affect the Argentine economy and, as a result, our business.

In 2001 and 2002, following a run on the financial system triggered by the public’s lack of confidence in the continuity of the convertibility regime that resulted in massive capital outflows, the Argentine government imposed exchange controls and transfer restrictions, substantially limiting the ability of companies to retain foreign currency or make payments abroad. Although several of such exchange controls and transfer restrictions were subsequently suspended or terminated, in June 2005 the federal government issued a decree that established new controls on capital inflows, which resulted in a decrease in the availability of international credit for Argentine companies, including a requirement that, for certain funds remitted into Argentina, an amount equal to 30.0% of the funds must be deposited into an account with a local financial institution as a U.S. dollar deposit for a one-year period without any accrual of interest, benefit or other use as collateral for any transaction.

In addition, from 2011 until President Macri assumed office, the Argentine 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 authorities or the Central Bank, the measures taken by the previous administration significantly curtailed access to the foreign exchange market (Mercado Libre de Cambios or “MLC”) by individuals and private sector entities. 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. For more information on foreign exchange restrictions see “Exchange Controls.”

Currently, as a result of the repeal of certain measures that limited access to the MULC, the exchange rate of the dollar, fluctuates freely, and it is expected that the parallel market will not be significant in volume and price.

Additionally, through Communications “A” 6037 and “A” 6244, the Central Bank structurally modified the current exchange regulations eliminating the set of restrictions for access to the MULC. Through the Decree 27/2018 and Communication “A” 6436 dated January 19, 2018, with the objective of providing greater flexibility to the financial system, favoring competition, allowing the entry of new operators to the foreign exchange market and reducing costs generated by this system, the free exchange market was established (the “MELI”), replacing the MULC. Through the MELI, exchange operations are carried out by financial entities and other persons authorized by the Central Bank to engage permanently or regularly in the trade of buying and selling foreign coins and banknotes, gold coins or gold bars and traveler’s checks, drafts, transfers or similar operations in foreign currency. For more information see “Item 10.D. Exchange Controls.”

Notwithstanding the measures adopted by the Macri administration eliminating a significant portion of the foreign exchange restrictions that developed under the Kirchner administration, in the future, the Argentine government or the Central Bank could reintroduce exchange controls and impose restrictions on capital transfers. Such measures may negatively affect Argentina’s international competitiveness, discouraging foreign investments and lending by foreign investors or increasing foreign capital outflow which could have an adverse effect on economic activity in Argentina, and which in turn could adversely affect our business and results of operations.

 

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The Argentine economy may be adversely affected by economic developments in other markets and by more general “contagion” effects, which could have a material adverse effect on Argentina’s economic growth, and consequently, could adversely affect our business, financial condition and results of operations.

Argentina’s economy is vulnerable to external shocks that could be caused by adverse developments affecting its principal trading partners. A significant decline in the economic growth of any of Argentina’s major trading partners (including Brazil, which is currently undergoing a recession, the European Union, China and the United States) could have a material adverse impact on Argentina’s balance of trade and adversely affect Argentina’s economic growth. In 2018, there were increases in exports of 14.8% to Chile, 18.5% to MERCOSUR (Brazil, Paraguay, and Uruguay (Venezuela is a state party but it has been currently suspended from the MERCOSUR)), 5.6% to the European Union, each as compared to 2017, while exports decreased 3.3% to NAFTA countries (United States, Canada and Mexico), and 2.6% to China, each as compared to 2017. Declining demand for Argentine exports could have a material adverse effect on Argentina’s economic growth.

Since 2015, the Brazilian economy, Argentina’s largest export market and the principal source of imports, has experienced heightened negative pressure due to the uncertainties stemming from the ongoing political crisis, including the impeachment of Brazil’s president, which resulted in the Senate of Brazil removing Ms. Dilma Rousseff from office for the rest of her term on August 31, 2016. Mr. Michel Temer, who previously held office as vice president of Brazil, subsequently took office until the end of the presidential period and in October 2018, Mr. Jair Bolsonaro was elected president. Mr. Bolsonaro has liberal, conservative and nationalist tendencies and assumed office on January 1, 2019. Currently the Brazilian economy faces several challenges such as achieving reverse the deterioration of public finances, stabilize a sustained growth and achieve greater commercial openness. Given that Brazil is the largest economy in Latin America, the measures taken to clean up its economy can have a great impact in the region. A further deterioration in economic conditions in Brazil may reduce the demand for Argentine exports to the neighboring country and, if this occurs, it could have a negative effect on the Argentine economy and potencially on our operations.

In addition, financial and securities markets in Argentina have been influenced by economic and market conditions in other markets worldwide. Although economic conditions vary from country to country, investors’ perceptions of events occurring in other countries have in the past substantially affected, and may continue to substantially affect, capital flows into, and investments in securities from issuers in, other countries, including Argentina. International investors’ reactions to events occurring in one market sometimes demonstrate a “contagion” effect in which an entire region or class of investment is disfavored by international investors.

The Argentine financial system and securities markets could be also adversely affected by events in developed countries’ economies, such as the United States and Europe. On June 23, 2016, the United Kingdom voted in favor of the United Kingdom exiting the European Union (“Brexit”). As of the date of this annual report, it is uncertain how Brexit may impact the relationship between the United Kingdom and the European Union, as the commercial terms under which the effective withdrawal of the United Kingdom from the European Union, which was officially notified on March 29, 2017 and is now expected to be completed by mid-2019, remain subject to negotiation. The effects of the Brexit vote and 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 and have a negative impact on the commercial exchange of Argentina with that region.

On November 8, 2016, elections were held in the United States, and a new administration, led by Mr. Donald Trump, took office on January 20, 2017. The results of the presidential election have created significant uncertainty about the future relationships between the United States and other countries, including with respect to the trade policies, treaties, government regulations and tariffs that could apply to trade between the United States and other nations. Even though President Trump’s protectionist measures are not, for the time being, aimed at Argentina, we cannot predict how will they evolve, nor will the effect that the same or any other measure taken by the Trump administration could cause on global economic conditions and the stability of global financial markets.

 

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During August 2018, an increase in inflation and a sustained deficit in current accounts, as well as the protectionist measures taken by the United States, doubling the tariffs on steel and aluminum from Turkey, caused a collapse of the Turkish lira against the dollar that triggered a wave of sales of assets from emerging markets and the significant fall in the prices of shares of companies from these markets, generating a contagion effect in international markets and several stock exchanges in the world, including Argentina.

Changes in social, political, regulatory and economic conditions in other countires or regions, or in the laws and policies governing foreign trade could create uncertainty in the international markets and could have a negative impact on emerging market economies, including the Argentine economy. Also, if these countries fall into a recession, the Argentine economy would be impacted by a decline in its exports, particularly of its main agricultural commodities. All of these factors could have a negative impact on Argentina’s economy and, in turn, our business, financial condition and results of operations.

Moreover, emerging markets have been affected by the change in U.S. monetary policy, resulting in the sharp unwinding of speculative asset positions, depreciations and increased volatility in the value of their currencies and higher interest rates. When interest rates rise significantly in developed economies, including the United States, it may be more difficult and burdensome for emerging market economies, including Argentina, to borrow capital and refinance their current debt, which could affect in a negative way its economic growth. The general appreciation of the U.S. dollar resulting from a more restrictive U.S. monetary policy contributed to the fall of the international price of raw materials, further increasing the difficulties of emerging countries which are exporters of these products.

Any of these factors could depress economic activity and restrict our access to suppliers and could have a material adverse effect on our business, financial condition and results of operations.

Government measures, as well as pressure from labor unions, could require salary increases or added benefits, all of which could increase the company’s operating costs.

In the past, the Argentine government has passed laws and regulations forcing privately owned companies to maintain certain wage levels and provide added benefits for their employees. Additionally, both public and private employers have been subject to strong pressure from the workforce and trade unions to grant salary increases and certain worker benefits.

Labor relations in Argentina are governed by specific legislation, such as labor Law No. 20,744 and Collective Bargaining Law No. 14,250, which, among other things, dictate how salary and other labor negotiations are to be conducted. Every industrial or commercial activity is regulated by a specific collective bargaining agreement that groups companies together according to industry sectors and by trade unions. While the process of negotiation is standardized, each chamber of industrial or commercial activity separately negotiates the increases of salaries and labor benefits with the relevant trade union of such commercial or industrial activity. In the banking activity, salaries are established on an annual basis through negotiations between the chambers that represent the banks and the banking employees’ trade union. The National Labor Ministry mediates between the parties and ultimately approves the annual salary increase to be applied in the banking activity. Parties are bound by the final decision once it is approved by the labor authority and must observe the established salary increases for all employees that are represented by the banking union and to whom the collective bargaining agreement applies.

In addition, each company is entitled, regardless of union-negotiated mandatory salary increases, to give its employees additional merit increase or variable compensation scheme.

Argentine employers, both in the public and private sectors, have experienced significant pressure from their employees and labor organizations to increase wages and to provide additional employee benefits. Due to the high levels of inflation, employees and labor organizations are demanding significant wage increases. In August 2018, the National Labor Ministry resolved to increase the minimum salary to Ps.12,500 in four stages: an increase (i) to Ps.10,700 in September 2018, (ii) to Ps.11,300 in December 2018, (iii) to Ps.11,900 in March 2019, and to 12,500 in June 2019.

Due to high levels of inflation, employers in both the public and private sectors are experiencing significant pressure from unions and their employees to further increase salaries. On February 28, 2019, the INDEC published new data regarding the evolution of private and public-sector salaries for the fiscal year 2018 . The total salaries index registered a growth of 29.7% during 2018, as a result of the 30.4% increase in the registered sector and an increase of 27.2% in the non-registered private sector.

 

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In the future, the Argentine government could take new measures requiring salary increases or additional benefits for workers, and the labor force and labor unions may apply pressure for such measures. Any such increase in wage or worker benefit could result in added costs and reduced results of operations for Argentine companies, including us. Such added costs could adversely affect our business, financial condition, results of operations and our ability to make payments under the notes.

Government intervention in the Argentine economy could adversely affect our results of operations or financial condition.

The two terms of President Fernández de Kirchner’s administration increased its direct state intervention in the Argentine economy, including the implementation of expropriation and nationalization measures, price controls and exchange controls.

In 2008, the Fernández de Kirchner administration absorbed and replaced the former private pension system for a public “pay as you go” pension system. As a result, all resources administered by the private pension funds, including significant equity interests in a wide range of listed companies, were transferred to a separate fund (Fondo de Garantía de Sustentabilidad, or “FGS”) to be administered by the National Social Security Administration (Administración Nacional de la Seguridad Social, or “ANSES”, per its acronym in Spanish). The dissolution of the private pension funds and the transfer of their financial assets to the FGS have had important repercussions on the financing of private sector companies. Debt and equity instruments which previously could be placed with pension fund administrators are now entirely subject to the discretion of the ANSES. Since it acquired equity interests in privately owned companies through the process of replacing the pension system, the ANSES is entitled to designate government representatives to the boards of directors of those entities. Pursuant to Decree No. 1,278/12, issued by the Executive Branch on July 25, 2012, the ANSES’s representatives must report directly to the Ministry of Public Finance are subject to a mandatory information-sharing regime, under which, among other obligations, they must immediately inform the Ministry of Public Finance of the agenda for each Board of Directors’ meetings and provide related documentation.

Former President Cristina Fernández de Kirchner adopted numerous measures to directly or indirectly control foreign trade operations and the foreign exchange market. From 2011 until President Macri took office in 2015, the national government adopted increasingly stricter exchange controls, which had the effect of greatly restricting access to the exchange market and generating a parallel market for the exchange of foreign currency with significant gaps with respect to the official exchange rate. Such exchange controls were largely eliminated or mitigated by the Macri administration.

In April 2012, the Fernández de Kirchner administration decreed the removal of directors and senior officers of YPF S.A. (“YPF”), the country’s largest oil and gas company, which was controlled by the Spanish group Repsol, and submitted a bill to the Argentine Congress to expropriate shares held by Repsol representing 51% of the shares of YPF. The Argentine Congress approved the bill in May 2012 through the passage of Law No. 26,741, which declared the production, industrialization, transportation and marketing of hydrocarbons to be activities of public interest and fundamental policies of Argentina, and empowered the Argentine government to adopt any measures necessary to achieve self-sufficiency in hydrocarbon supply. In February 2014, the Argentine government and Repsol announced that they had reached an agreement on the terms of the compensation payable to Repsol for the expropriation of the YPF shares. Such compensation totaled U.S.$5 billion payable by delivery of Argentine sovereign bonds with various maturities. The agreement, which was ratified by Law No. 26,932, settled the claim filed by Repsol before the International Centre for Settlement of Investment Disputes (“ICSID”).

Law No. 26,991 (the “Supply Law”) became effective on September 28, 2014. The Supply Law applies to all economic processes linked to goods, facilities and services which, either directly or indirectly, satisfy basic needs of the population (“Basic Needs Goods”) and grants broad delegations of powers to its enforcing agency to become involved in such processes. It also empowers the enforcing agency to order the sale, production, distribution and/or delivery of Basic Needs Goods throughout the country in case of a shortage of supply.

 

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In December 2012 and August 2013, the National Congress established new regulations related to domestic capital markets that, in general, establish greater intervention in the capital markets by the national government, authorizing, for example, the CNV, to designate inspectors with the ability to veto, under certain circumstances, the decisions of the board of companies that are listed in authorized markets and suspend the board for a period of up to 180 days. On November 17, 2016, the Macri government presented a bill to the National Congress to amend the Argentine Capital Markets Law, which could, among other significant changes, eliminate these powers to designate inspectors. On May 9, 2018, the Argentine Congress approved the Argentine Productive Financing Law, which amended the Argentine Capital Markets Law, the Mutual Funds Law No. 24,083 and the Argentine Negotiable Obligations Law, among other regulations and introduced substantial changes to regulations governing markets, stock exchanges and the various agents operating in capital markets, as well as certain amendments to the CNV’s powers.

Historically, actions carried out by the Argentine government concerning the economy, including decisions regarding interest rates, taxes, price controls, wage increases, increased benefits for workers, exchange controls and potential changes in the market of foreign currency, have had a substantial adverse effect on Argentina’s economic growth.

It is widely reported by private economists that expropriations, price controls, exchange controls and other direct involvement by the Argentine government in the economy have had an adverse impact on the level of investment in Argentina, the access of Argentine companies to international capital markets and Argentina’s commercial and diplomatic relations with other countries. If the level of government intervention in the economy continues or increases, the Argentine economy and, in turn, our business, results of operations and financial condition could be adversely affected.

High public expenditure could result in long lasting adverse consequences for the Argentine economy, which in turn could adversely affect our business, financial condition and results of operations.

During the last years of the Fernández de Kirchner administration, the Argentine government substantially increased public expenditure, resorting to the Central Bank and to the ANSES to source part of its funding requirements. In light of increasingly tight public finances, the Fernández de Kirchner administration adopted certain measures to finance its public expenditures such as revising its subsidy policies (particularly those related to energy, electricity and gas, water and public transportation) and implementing an expansionary monetary policy. These policies have led to high inflation and, therefore, adversely affected, and could further adversely affect, consumer purchasing power and economic activity.

However, since assuming office, the Macri administration has taken steps to mitigate the increase in its fiscal deficit and reduce the current level of the fiscal deficit, including a process of comprehensive review of the contracts of public sector employees, as well as the elimination of subsidies to public services and other fiscal measures, which reduced the primary fiscal deficit by approximately 1.8% of GDP in December 2015 and reported a primary fiscal deficit of 4.6% of GDP in 2016, mostly due to taxes collected under the Tax Amnesty Law program in the last two months of 2016.

For 2017, the government pursued a fiscal deficit target of 4.2% of GDP, while achieving a primary fiscal deficit of 3.9% of GDP, below such target. In 2018, the Argentine government updated the fiscal targets in order to achieve fiscal balance. The government’s goal for 2018 regarding the primary fiscal deficit was 2.7% of GDP. The fiscal result for 2018 showed a primary fiscal deficit of 2.4% of GDP, which represented a decrease of 1.4% with respect to 2017 and an over-compliance of 0.3% of GDP target with respect to the target tax rate of 1.1%. Although the objective of the Macri administration was to achieve a primary fiscal deficit equivalent to 1.3% of GDP in 2019, in the context of the recent negotiations with the IMF, the fiscal deficit target was adjusted to 0% of GDP for 2019 and a surplus of 1% for 2020. If the Macri administration were to seek to finance its deficit by increasing the exposure of local financial institutions to the public sector, our liquidity and assets quality could be affected, and as a consequence, impact negatively on clients’ confidence.

Notwithstanding the measures taken by the current government to anchor the fiscal deficit and increase the tax revenues, there is uncertainty as to what effects the adopted measures and other future policies on the Argentine economy and our business could have, as well as regarding effective compliance of the proposed goals. In addition, if the Macri government seeks to finance its deficit by increasing the exposure of local financial entities to the public sector, the liquidity and quality of the Bank’s assets could be affected and, consequently, adversely affect our clients confidence.

 

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A continuous decline in international prices for Argentina’s main commodity exports could have an adverse effect on Argentina’s economic growth, which could adversely affect our business, financial condition and results of operations.

Argentina’s financial recovery from the 2001-2002 crisis occurred in a context of price increases for Argentina’s commodity exports. High commodity prices contributed to the increase in Argentine exports since the third quarter of 2002 and to high government tax revenues from export withholdings. Consequently, the Argentine economy has remained relatively dependent on the price of its main agricultural products, primarily soy. This dependence has rendered the Argentine economy more vulnerable to commodity prices fluctuations.

A continuous decline in the international prices of Argentina’s main commodity exports could have a negative impact on the levels of government revenues and the government’s ability to service its sovereign debt, and could either generate recessionary or inflationary pressures, depending on the government’s reaction. Either of these results would adversely impact Argentina’s economy and, therefore, our business, results of operations and financial condition.

The Macri administration has implemented significant measures to solve the energy sector crisis, but the eventual outcome of such measures is unknown, and could affect our business, financial condition and results of operations.

Economic policies since the 2001-2002 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 2001-2002 economic crisis created a disincentive for investments in the energy sector. Instead, the Argentine government sought to encourage investment by subsidizing energy consumption. This 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 Argentine government engaged in increasing imports of energy, with adverse implications for the trade balance and the international reserves of the Central Bank.

In response to the growing energy crisis, the Macri administration declared a state of emergency with respect to the national electricity system, which ended on December 31, 2017. The state of emergency allowed the Argentine government to take actions designed to stabilize the supply of electricity. In this context, subsidy policies were reexamined and new electricity tariffs went into effect on February 1, 2016 with varying increases depending on geographical location and consumption levels. Additionally, the former Ministry of Energy and Mining issued Resolution No. 6/16 increasing the electricity tariff as of February 1, 2016. This Resolution was later complemented by Resolution No. 7/16 which, among other things, determined the requirements needed to be fulfilled in order to apply for a social tariff (tarifa social) which exempts its beneficiaries from paying the electricity tariff up to a total consumption of 150Kwh per month and establishes a special price scheme for those beneficiaries who exceed this amount.

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 have already increased and could increase further. However, certain of the government’s initiatives relating to the energy and gas sectors were challenged in Argentine courts and resulted in judicial injunctions or rulings against the government’s policies, which were later lifted. For instance, on March 10, 2017, a public hearing was held in order to discuss the increase in gas rates as of April 2017. On March 31, 2017, the new gas tariff for small and medium sized companies scheme was published by the Macri administration with an increase of 30% in February and 18% in March. In addition, to further address the potential impact of the new tariff scheme during the 2018 winter peak season of natural gas consumption by retail customers, an optional program was implemented through Resolution No. 97/2018 issued by the Argentine Gas Regulator (Ente Nacional Regulador del Gas) under which consumers would finance the payment of up to 25% of natural gas monthly bills for the 2018 winter peak season. Furthermore, on May 9, 2018, the lower house of the National Congress approved a bill to modify the current tariff scheme for natural gas for local companies and PyMES and the Senate approved it on May 30, 2018, however, the President vetoed it on the same day.

 

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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, approving subsidized tariffs for users that satisfy certain requirements. A failure 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 financial condition, lead to social unrest and political instability, and adversely affect our results of operations. There can be no assurance that the measures adopted by the Macri administration to address the energy crisis will not continue to be challenged in the local courts and/or will be sufficient to restore production of energy in Argentina within the short or medium term.

Failure to adequately address actual and perceived risks of institutional deterioration and corruption may adversely affect Argentina’s economy and financial condition, which in turn could adversely affect our business, financial condition and results of operations.

A 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 2018 Corruption Perceptions Index survey of 180 countries, Argentina was ranked 85, remaining unchanged from the previous survey in 2017. In the World Bank’s Doing Business 2019 report, Argentina ranked 119 out of 190 countries, down from 117 in 2018.

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 the reduction of criminal sentences in exchange for cooperation with the government in corruption investigations, increased access to public information, the seizing of 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 Argentine government’s ability to implement these initiatives is uncertain as it would require the involvement of the judicial branch, which is independent, as well as legislative support from opposition parties.

In addition, certain senior executive officers and directors of companies operating in the Argentine energy, infrastructure, oil and gas and other sectors, are currently facing judicial investigations in Argentina relating to payments allegedly made to government officials during the Kirchner and the Fernández de Kirchner administrations.

These investigations may have an adverse impact on the ability of the companies involved and their affiliates to access financing, on their ability to participate in significant projects and ultimately on their financial condition and results of operations.

Although we do not consider potential losses that could arise from our exposure to the individuals and the companies involved in the investigations to be material, if the universe of individuals and companies investigated on corruption related matters were to increase significantly, our exposure may increase and bring material losses to us.

We cannot predict for how long the corruption investigations will continue, or the effects on the different sectors in the Argentine economy.

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

On March 22, 2012, the Argentine Congress passed Law No. 26,739, which amended the charter of the Central Bank and the Convertibility Law. This law amended the objectives of the Central Bank (as established in its charter) and removed certain provisions previously in force. Pursuant to the terms of the law, the Central Bank focuses on promoting monetary and financial stability as well as development with social equity. In addition, the concept of “freely available reserves” was eliminated, granting the Argentine government access to additional reserves to pay debt. Further, this law provides that the Central Bank may set the interest rate and terms of loans granted by financial institutions.

 

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Regarding the reserves, if the government were to utilize such Central Bank’s reserves to make payments on its public debt or finance public spending, this may result in increased inflation, which would hinder economic growth. In addition, a decrease in the Central Bank’s reserves could adversely affect the Argentine financial system’s capacity to withstand and overcome the effects of an economic crisis (either domestic or international), negatively affecting economic growth and, in turn, our consolidated results and results of operations.

Risks Relating to the Argentine Financial System

The stability of the Argentine financial system depends upon the ability of financial institutions, including the Bank, to retain the confidence of depositors.

The measures implemented by the Argentine government in late 2001 and early 2002, in particular the restrictions imposed on depositors to withdraw money freely from banks and the pesification and restructuring of their deposits, resulted in losses for many depositors and undermined their confidence in the Argentine financial system.

Although the financial system has seen a recovery in the amount of deposits since then, this trend may not continue and the deposit base of the Argentine financial system, including the deposit base of our main subsidiary, the Bank, could be negatively affected in the future by adverse economic, social and political events. Furthermore, the Argentine financial system growth strongly depends on deposit levels, due to the small size of its capital markets and the absence of foreign investments during the previous years. Until the first months of 2018, numerous local financial entities, such as the Bank, have accessed the global financial markets for funding through the placement of debt securities, on satisfactory terms, but this trend may not endure, as the upcoming Argentina’s presidential elections give uncertainty as to whether the current availability of funds from the international markets will continue in coming years.

Although liquidity levels are currently reasonable, no assurances can be given that these levels will not be reduced in the future due to adverse economic conditions that could negatively affect the Bank’s business.

If, in the future, depositor confidence weakens and the deposit base contracts, such loss of confidence and contraction of deposits will have a substantial negative impact on the ability of financial institutions, including the Bank, to operate as financial intermediaries. If the Bank is not able to act as a financial intermediary and otherwise conduct its business as usual, the results of its operations could be adversely affected or limited, affecting its ability to distribute dividends to us, which in turn could affect our results of operations and financial condition.

The growth and profitability of Argentina’s financial system partially depend on the development of long-term funding.

In recent years, the Argentine financial system grew significantly in nominal terms. Loans to the private sector grew by approximately 30.8% in 2013, 20.3% in 2014, 37.1% in 2015, 31.4% in 2016, 51.7% 2017 and 32.9¹% in 2018 for the financial system as a whole.

Since most term deposits (more than 95%) are short-term deposits with a term of less than three months, a substantial portion of the loans have very short maturity, and there is a small portion of medium- and/or long-term credit lines.

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

 

1	Figures correspond to nominal values provided by the Central Bank in nominal values which have not been adjusted by inflation.

 

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

Increased competition and consolidation in the banking and financial industry could adversely affect our operations.

We expect competition in the banking and financial sector to continue to increase. Such increased competition in the banking and financial sector could reduce prices and margins and the volume of operations and our market share. Therefore, our results of operations could be adversely affected.

Enforcement of creditors’ rights in Argentina may be limited, costly and lengthy.

In order to protect debtors affected by the economic crisis in 2001-2002, the Argentine government adopted measures in the beginning of 2002 that suspended proceedings to enforce creditors’ rights upon debtor default, including mortgage foreclosures and bankruptcy petitions.

Although such measures have been rescinded, in the future they could be reinstated, or the government could take other measures that limit creditors’ rights. Any such measures limiting the ability of creditors, including us, to bring legal actions to recover unpaid loans or restricting creditors’ rights generally could have a material adverse effect on the financial system and on our business.

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

Argentine Consumer Protection Law No. 24,240, as supplemented or amended (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 contains general provisions that might be used as grounds to uphold such enforcement, as it has been previously interpreted in various legal precedents. Moreover, the Argentine Civil and Commercial Code has captured the principles of the Consumer Protection Law and established their application to banking agreements. Additionally, Law No. 25,065 (as amended by Law No. 26,010 and Law No. 26,361, the “Credit Card Law”) also sets forth several mandatory regulations designed to protect credit card holders.

The application of both the Consumer Protection Law and 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 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 or our subsidiaries 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 or our subsidiaries’ rights. For example, reducing our or their ability to collect payments due from services and financing provided us and adversely affect our or their financial results of operations.

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 to the hearings.

 

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Furthermore, the rules that govern the credit card business provide for variable caps on the interest rates that financial entities 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 the Bank’s and CCF’s revenues and therefore negatively affect our consolidated results.

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

Certain public and private organizations have initiated class actions against financial institutions in Argentina, including the Bank. See “Item 8.A Consolidated Statements and Other Financial Information.” The Argentine National Constitution and 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 entities 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 the fees and charges. If class action plaintiffs were to prevail against financial institutions, their success could have an adverse effect on the financial industry and on our business.

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, therefore affecting their business and results of operations.

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

Financial institutions 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 our main subsidiary, the Bank, as well as our subsidiary CCF, in case of any breach of applicable regulations. Similarly, the CNV, which authorizes our securities offerings and regulates the public markets in Argentina, has the authority to impose sanctions on us and our Board of Directors for breaches of corporate governance.

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 against us, our shareholders or directors and, accordingly, impose sanctions on us or any of our subsidiaries.

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.

Specifically, a series of regulations were enacted from the beginning of 2012 until President Macri assumed office, incorporating new requirements and restrictions for financial institutions, including: (i) mandatory credit lines for productive purposes, with a maximum interest rate established by regulation; (ii) rules limiting the reference interest rate for personal loans and car loans granted to retail customers that are not considered a micro, small or medium size company; (iii) a prior authorization requirement with respect to the introduction of new fees for new products and/or services offered and to increase existing fees; (iv) rules limiting minimum rates applicable to term deposits made by individuals; and (v) rules limiting the ability of financial institutions to receive remuneration or profits from any insurance product that customers are obligated to purchase as a condition for accessing financial services. However, after President Macri took office, some of these regulations were eliminated or modified in an effort to normalize the banking system and boost credit. On December 17, 2015, the limits imposed on interest rates applicable to transactions referred to in items (ii) and (iv) were eliminated and financial entities and their customers may now freely agree upon such interest rates. By virtue of Communication “A” 6680, the Central Bank established a maximum term of ten business days for financial entities to deposit payments to commerces and providers for sales made via credit cards or purchase cards, calculated from the sale date. See “Item 4.B Business overview—Argentine Banking Regulation—Interest Rate and Fee Regulations.”

 

 

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In 2012, the Central Bank increased the capital requirements for financial institutions following the Basel II standard as well as several other measures related to Basel III, including with respect to capital, leverage and liquidity. In addition, since January 2016, pursuant to Communication “A” 5827 issued by the Central Bank, there are additional capital margin requirements, composed of a capital conservation margin and a countercyclical margin. Pursuant to these regulations, the capital conservation margin is 2.5% of the amount of risk weighted assets, or RWA, and in the case of entities considered by the Central Bank to be systemically important, or D-SIB, the margin will be increased to 3.5% of RWA. The countercyclical margin must be within a range of 0% to 2.5% of RWA. Pursuant to Communication “A” 5938, as amended and supplemented, the applicable countercyclical margin is currently 0%. See “Item 4.B Business overview—Argentine Banking Regulation—Minimum Capital Requirements.”

In July 2016, by means of Communication “A” 6013, as amended by Communication “A” 6464, the Central Bank eliminated the requirement to maintain a certain regulatory capital threshold after the distribution of dividends by financial institutions and according to Communication “A” 6244 effective as of July 1, 2017, financial institutions can freely determine the level and use of their general foreign exchange position, allowing them to manage their currency positions, both in terms of composition of their assets and the possibility of managing the foreign cashflows in foreign currency.

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. On May 10, 2018, the Central Bank issued Communication “A” 6507 establishing that the net negative global position in foreign currency –on a monthly average of daily balances converted into Pesos at the reference exchange rate at the end of the previous month for the computation of this ratio- may not exceed 30% of the RPC (as defined below) of the previous month. Although currently the net positive global position in foreign currency may not exceed 5% of the RPC or liquid equity, whichever is less, by virtue of communication “A” 6526, effective as of June 18, 2018, the Central Bank permits that this position can reach up to 30% of the RPC or liquid equity, whichever is less, as long as the total excess with respect to the general limit originates as a consequence of: (i) position increase in National Treasury bills in United States Dollars with respect to those held on June 15, 2018; and/or (ii) position in National Treasury bills in US Dollars as of June 15, 2018, in excess of the current limit as of that date. For a more detailed description of changes, see “Item 4.B Business Overview—Argentine Banking Regulation—Foreign Currency Net Global Position.”

Furthermore, by virtue of Communcation “A” 6661, the Central Bank established that financial entities holdings of LELIQs (Letras de Liquidez) shall not exceed the greater amount between (1) its previous month’s RPC and (2) 100% of the monthly average of the total deposits in Pesos, excluding the financial sector’s and the notes in Pesos issued until February 8, 2019 in the current month.

In addition, pursuant to Communication “A” 5785, as amended by Communication “A” 5813”, sanctions imposed by the Central Bank, the UIF, the CNV and/or the National Superintendency of Insurance on financial institutions and/or their authorities, may result in the revocation of their 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 and (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 and limit the possibility of covering their positions against currency fluctuations, could result in important limitations with respect to the decisions of financial institutions, as is the case of us, in relation to the allocation of the asset. In turn, this situation could cause uncertainty and may adversely affect future financial activities and our result of operations. On the other hand, current or future laws and regulations may require substantial expenses or otherwise have an adverse effect on our consolidated operations.

 

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Even though the Macri administration has taken steps towards increasing the flexibility of the regulatory framework for the financial entities, including the elimination of several restrictions adopted by the previous government as described above, there can be no assurances that new and tighter regulations will not be implemented in the future, which could cause uncertainty and could negatively affect our future financial activities and results of operations. Also, the imposition of measures that may affect the profitability of financial institutions and limit the capacity to hedge against currency fluctuations could result in significant limits to financial institutions’ decisions, such as the Bank and CCF, regarding asset allocation. In addition, existing or future legislation and regulation could require material expenditures or otherwise have a material adverse effect on our consolidated operations.

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

Argentina has a federal system of government with 23 provinces and the Autonomous City of 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. Although we have not experienced any material adverse effects from this, future developments in provincial and municipal legislation concerning taxes, provincial regulations or other matters may adversely affect our business or results of operations.

Future governmental measures or regulations may adversely affect the economy and the operations of financial institutions.

The Argentine government has historically exercised significant influence over the economy, and financial institutions, in particular, have operated in a highly regulated environment. Laws and regulations currently governing the economy or the banking sector may continue to change in the future, and any changes may adversely affect our business, financial condition and results of operations.

In the past, several different bills to amend the Argentine Financial Institutions Law No. 21,526 (the “FIL”) have been put forth for review by the Argentine Congress, seeking to amend different aspects of the FIL, including the qualification of financial services as a public service, an increase in governmental regulations affecting the activities of financial entities and initiatives to make financial services more widely available. A thorough amendment of the FIL would have a substantial effect on the banking system as a whole. If such a bill were passed, or any other amendment to the FIL be made, the subsequent changes in banking regulations may have adverse effects on financial institutions in general, and on our business, financial conditions and results of operations.

The asset quality of financial institutions, including the Bank, our main subsidiary, may be affected by exposure to public sector debt and short term securities issued by the Central Bank.

Argentine financial institutions usually hold public sector debt issued by the National Government, Provinces and Municipalities and securities–generally short term–issued by the Central Bank as part of their portfolios. As of December 31, 2018, the financial institutions’ exposure to the public sector represented 10% of total assets and their holdings of short term securities issued by the Central Bank represented 13% of total assets. As of December 31, 2018, our exposure to the public sector amounted to Ps.8.0 billion, representing 6% of our total assets as of that date and our exposure to short term securities issued by the Central Bank amounted to Ps.11.3 billion or 8% of our total assets as of such date.

To some extent, the value of the assets held by Argentine financial institutions, as well as their income generation capacity, is dependent on the public sector’s creditworthiness, which is in turn dependent on the Argentine and the provincial government’s ability to promote sustainable long-term economic growth, generate tax revenues and control public spending. Should the public sector fail to fulfill its commitments in due time and proper form, this could have a negative adverse effect on our business, financial situation and results of operations.

 

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Risks Relating to Our Business

Due to our exposure to middle and lower-middle-income individuals and SMEs, the quality of our consolidated loan portfolio is more susceptible to economic downturns and recessions.

Our consolidated loan portfolio is concentrated in the segments of SMEs and middle and lower-middle-income individuals, which are more vulnerable to economic recessions than large corporations and higher income individuals. The quality of our portfolio of loans to SMEs and to individuals is therefore dependent to a large extent on domestic and international economic conditions. Consequently, we may experience higher levels of past due amounts, which could result in higher provisions for loan losses. See “Item 4.D Property, plants and equipment.”

The loan portfolio of the retail segment, which includes individuals and companies with annual sales of up to Ps.70 million, depending on commercial activity, represented approximately 40% of the consolidated loan portfolio (net of provisions) as of December 31, 2018. If the economy in Argentina experiences a significant downturn, this could materially and adversely affect the liquidity, businesses and financial condition of our customers, which may in turn cause us to experience higher levels of past due loans, thereby resulting in higher provisions for loan losses and subsequent write-offs. This may materially and adversely affect the credit quality of our loan portfolio, our asset quality, our results of operations and our financial condition.

We continue to seek potential acquisitions, but we may not be able to complete such acquisitions or successfully integrate businesses that we acquire.

In the past, in addition to organic growth, we have significantly expanded our business through acquisitions. We expect to continue considering acquisition opportunities that we believe may add value and are compatible with our business strategy.

In this respect, we may not be able to continue to identify opportunities or consummate acquisitions leading to economically favorable results or that any future acquisition will, if required, be authorized by the Central Bank, which would limit our ability to implement an important component of our growth strategy. In addition, in the event that an acquisition opportunity is identified and authorized, successful integration of the acquired business entails significant risks, including compatibility of operations and systems, unexpected contingencies, employee retention, compliance, customer retention, and delays in the integration process.

Changes in market conditions and any associated risks, including interest rate and currency exchange volatility, could materially and adversely affect our consolidated financial condition and results of operations.

We are directly and indirectly affected by changes in market conditions. Market risk, or the risk that values of assets and liabilities or revenues will be adversely affected by variations in market conditions, including interest rate and currency exchange volatility, is inherent in the products and instruments associated with our operations, including loans, deposits, long-term debt and short-term borrowings.

In particular, our results of operations depend to a great extent on our net financial income. Net financial income represented 85.2% of our net operating revenue in 2018 and 81.7% in 2017. Changes in market interest rates could affect the interest rates earned on our interest-earning assets differently from the interest rates paid on our interest-bearing liabilities, leading to a reduction in our net interest income or a decrease in customer demand for our loan or deposit products. In addition, increases in interest rates could result in higher debt service obligations for our customers, which could, in turn, result in higher levels of delinquent loans or discourage customers from borrowing. Interest rates are highly sensitive to many factors beyond our control, including the minimum reserve policies of the Central Bank, regulation of the financial sector in Argentina, domestic and international economic and political conditions and other factors.

Any changes in interest rates and currency exchange rates could adversely affect our business, our future financial performance and the price of our securities.

 

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Reduced spreads between interest rates on loans and those on deposits, without corresponding increases in lending volumes, could adversely affect the Bank’s and CCF’s profitability.

Historically, the Argentine financial system witnessed a decrease in spreads between the interest rates on loans and deposits as a result of a decrease in inflation or increased competition in the banking sector. The interest rate spreads of the Bank and CCF follow the same trend. If inflation reduces, competition continues or increases and interest rate spreads decrease, without corresponding increases in the volume of loans such decrease could adversely affect our consolidated results of operations and financial condition.

We are a holding company and we conduct our business through our subsidiaries. Our ability to invest in our business developments will depend on our subsidiaries’ ability to pay dividends to us.

As a holding company, we conduct our operations through our subsidiaries, the largest of which is the Bank. Consequently, we do not operate or hold substantial assets, except for equity investments in our subsidiaries and temporary liquidity. Except for such assets, our ability to invest in our business developments and to repay obligations is subject to the funds generated by our subsidiaries and their ability to pay cash dividends. In the absence of such funds, we may have to resort to financing options at unappealing prices, rates and conditions. Additionally, such financing could be unavailable when we may need it.

Each of our subsidiaries is a separate legal entity and due to legal or contractual restrictions, as well as to their financial condition and operating requirements, they may not be able to distribute dividends to us. Our ability to develop our business, meet our payment obligations and pay dividends to our shareholders could be limited by restrictions preventing our subsidiaries from paying us dividends. Investors should take such restrictions into account when analyzing our investment developments and our ability to cancel our obligations.

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

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

We estimate and establish reserves for credit risk and potential credit losses. This process involves subjective and complex judgments, including projections of economic conditions and assumptions on the ability of our borrowers to repay their loans.

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

The Bank’s revenues from its business with senior citizens could decrease or cease to grow if the Bank’s agreement with ANSES is terminated or not renewed.

Since 1996, the Bank has acted as one of the paying agents of social security payments to senior citizens on behalf of the government pursuant to an agreement with ANSES. In December 2014, pursuant to Resolution No. 648/14, ANSES renewed its agreement with the paying agents for a six-year period. In December 2018, the Bank made payments on behalf of ANSES to approximately 844,000 senior citizens and beneficiaries. Offering this service to senior citizens allows the Bank ready access to a pool of potential consumers of financial services. The Bank derives an important part of its revenues (30.0% as of December 31, 2018) from the sale of financial services through senior citizens dedicated branches. The Bank’s agreement with ANSES provides that it will continue in effect as long as the parties continue performing their obligations for a six-year term. ANSES has the right to terminate the agreement with 90 days prior notice.

 

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The termination of the agreement with ANSES, a decision by ANSES not to renew the agreement in December 2020, or ANSES’s failure to add new senior citizens to the payment service could have a negative effect on our business and results of operations.

Since deposits are one of our main sources of funds, a sudden shortage of the term of our deposits could cause an increase in costs of funding, affect our liquidity ratios and have an adverse effect on our revenues.

Deposits are one of our primary sources of funding, representing 67.3% of our total liabilities as of December 31, 2018. A significant portion of our assets has longer maturities, resulting in a mismatch between the maturities of liabilities and the maturities of assets. If a substantial number of our depositors withdraw their sight deposits or do not roll over their time deposits upon maturity, our liquidity position, results of operations and financial condition may be materially and adversely affected. In the event of a sudden or unexpected shortage of funds in the banking system, money markets in which we operate may not be able to maintain levels of funding without incurring high funding costs or the liquidation of certain assets. If this were to happen, we may be unable to fund our liquidity needs at competitive costs and our results of operations and financial condition may be materially adversely affected.

Because our main subsidiary, the Bank, as well as CCF, are financial institutions, any insolvency proceeding against them would be subject to the intervention of the Central Bank, which may limit the remedies otherwise available and extend the duration of any insolvency proceeding.

Under Argentine law, the commencement of bankruptcy or liquidation proceedings against financial institutions, until the revocation by the Central Bank of their banking license, may only be commenced by the Central Bank. If the Bank and/or CCF are unable to pay their debts as they come due, the Central Bank would intervene and revoke their respective banking and “compañía financiera” licenses, 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, as a result, could prioritize the claims of other creditors and third parties against the Bank and/or CCF. As a result of any such intervention, shareholders may realize substantially less on the claims than they would in a regular bankruptcy proceeding in Argentina, the United States or any other country.

Our controlling shareholder has the ability to direct our business, and potential conflicts of interest could arise.

Our controlling shareholder, Julio Patricio Supervielle, directly or beneficially owned as of March 31, 2019, 126,738,188 Class A shares and 35,062,713 Class B shares. Virtually all decisions made by shareholders will continue to be directed by our controlling shareholder. He may, without the concurrence of the remaining shareholders, elect a majority of our directors, effect or prevent a merger, sale of assets or other business acquisition or disposition, cause us to issue additional equity securities, effect a redemption of shares, effect a related party transaction and determine the timing and amounts of dividends, if any. According to our bylaws, a two-thirds vote by our Class A shares is required, regardless of the percentage of our total capital they represent, in order for us to duly resolve a merger with another company, a voluntary dissolution, our relocation abroad, and the fundamental change in our corporate purpose. Mr. Supervielle’s interests may conflict with your interests as a holder of Class B shares or ADSs, and he may take actions that might be desirable to him but not to other shareholders.

Early termination of CCF’s business agreement with Walmart could have an adverse effect on our revenue.

In April 2000, CCF (formerly GE Compañía Financiera) and Walmart entered into a commercial agreement pursuant to which CCF became the sole provider of financial services for Walmart’s customers in Argentina. The agreement was renewed in 2005, in 2010 and in December 2014. Such agreement is key to CCF’s overall performance. This agreement expires in August 2020 and while it contains an option for renewal, it may not be renewed on the same terms or at all. In addition, the agreement is subject under certain conditions to voluntary termination by Walmart Argentina. The decision by Walmart Argentina not to renew or to terminate the agreement could negatively affect our expected benefit from this alliance and could result in a material adverse effect on CCF’s financial condition and results of operations.

 

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

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

In addition, contingency plans in place may not be sufficient to cover liabilities associated with any such events, and we do not have insurance to cover cyber risks and breaches. Our operational systems and networks have been, and will continue to be, subject to an increasing risk of continually evolving cybersecurity or other technological risks.

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

Our business is highly dependent on properly functioning information technology systems and improvements to such systems.

Our business is highly dependent on the ability of our information technology systems and the third party managers of such systems to effectively manage and process a large number of transactions across numerous and diverse markets and products in a timely manner. In addition, we provide our customers with continuous remote access to their accounts and the possibility of transferring substantial financial assets by electronic means. The proper functioning of our financial control, risk management, accounting, customer service and other data processing systems is critical to our business and our ability to compete effectively. Our business activities may be materially disrupted if there were a partial or complete failure of any of our information technology systems communication networks. Such failures could be caused by, among other things, software bugs, computer virus attacks or intrusions, phishing, identity theft or conversion errors due to system upgrading. In addition, any security breach caused by unauthorized access to information or systems, or intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, could have a material adverse effect on our business, results of operations and financial condition.

Our ability to remain competitive and achieve further growth will depend in part on our ability to upgrade our information technology systems and increase our capacity on a timely and cost effective basis. Any substantial failure to improve or upgrade information technology systems effectively or on a timely basis could materially affect us.

We are susceptible to fraud, unauthorized transactions and operational errors.

As with other financial institutions, we are susceptible to, among other things, fraud by employees or outsiders, unauthorized transactions by employees and other operational errors (including clerical or record keeping errors and errors resulting from faulty computer or telecommunications systems). Given the high volume of transactions that may occur at a financial institution, errors could be repeated or compounded before they are discovered and remedied. In addition, some of our transactions are not fully automated, which may further increase the risk that human error or employee tampering will result in losses that may be difficult to detect quickly or at all. Losses from fraud by employees or outsiders, unauthorized transactions by employees and other operational errors could have a material adverse effect on us.

 

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Our policies and procedures may not be able to detect money laundering and other illegal or improper activities fully or on a timely basis, which could expose us to fines and other liabilities.

We are required to comply with applicable anti-money laundering laws, anti-terrorism financing laws and other regulations. These laws and regulations require us, among other things, to adopt and enforce “know your customer” policies and procedures and to report suspicious or large transactions to the applicable regulatory authorities. While we have adopted policies and procedures aimed at detecting and preventing the use of banking networks for money laundering activities and by terrorists and terrorist-related organizations and individuals generally, such policies and procedures may not completely eliminate instances where they may be used by other parties to engage in money laundering and other illegal or improper activities. If we fail to fully comply with applicable laws and regulations, the relevant government authorities to which they report have the power and authority to impose fines and other penalties. In addition, our businesses and reputation could suffer if customers use our financial institutions for money laundering or illegal or improper purposes. As of the date of this annual report, we have not been subject to fines or other penalties, and we have not suffered business or reputational harm, as a result of any money laundering activities in the past.

Adoption of IFRS (which includes adjustment for inflation) affects the presentation of our financial information, which had been historically prepared under Argentine Banking GAAP.

On January 1, 2018, we began preparing our financial statements in accordance with IFRS as issued by the IASB. Prior to and including the year ended December 31, 2017, we prepared our financial statements in accordance with Argentine Banking GAAP. Because IFRS differ in certain significant respects from Argentine Banking GAAP, our financial information prepared and presented in our previous annual reports under Argentine Banking GAAP rules is not directly comparable to IFRS financial data. The lack of comparability of the Company’s recent and historical financial data may make it difficult to gain a full and accurate understanding of its operations and financial condition. Our transition to IFRS as of January 1, 2018 affects the comparability of our financial information for periods prior to January 1, 2017.

In addition, as of July 1, 2018, the Argentine economy as an hyperinflationary economy, and in connection with IFRS, we are required to apply inflationary adjustments to our financial statements pursuant to IAS 29 (Financial Reporting in Hyperinflationary Economies).

IAS 29 does not prescribe when hyperinflation arises, but includes several characteristics of hyperinflation. The IASB does not identify specific hyperinflationary jurisdictions. However, in June 2018, the International Practices Task Force of the Centre for Quality (“IPTF”), which monitors “highly inflationary countries” categorized Argentina as a country with projected three-year cumulative inflation rate greater than 100%. Additionally, some of the other qualitative factors of IAS 29 were present, providing prima facie evidence that the Argentine economy is hyperinflationary for purposes of IAS 29. Therefore, Argentine companies using IFRS as issued by the IASB are required to apply IAS 29 to their financial statements for periods ending on and after July 1, 2018. See “Item 5.A Operating Results— Presentation of Financial Statements in Pesos. Inflation.”

Adjustments to reflect inflation, such as those required by IAS 29, were prohibited by law No.23,928 (the “Law 23,928”). Additionally, Decree No.664/03, issued by the Argentine government (“Decree 664”), instructed regulatory authorities, such as Public Registries of Commerce, the Superintendence of Corporations of the City of Buenos Aires and the CNV, to accept only financial statements that comply with the prohibition set forth in Law 23,928. However, on December 4, 2018, Law No.27,468 abrogated Decree 664/03 and amended Law 23,928 indicating that the prohibition of indexation no longer applies for financial statements. Notwithstanding the foregoing, pursuant to Argentine Banking GAAP, the Company cannot perform inflation adjustment in its financial statements for fiscal year 2018 or any other periods.

Consequently, due to the adoption of IFRS and adjustment for inflation our result differ significantly from the results determined on a nominal basis (historical results) by the application of such methodology, applicable mainly as a result of the composition of the accounting monetary positions and the evolution of the rates, the inflation and other components of the result, which could adversely affect our financial statements, results of operations and financial condition.

 

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Risks Relating to Our Class B Shares and the ADSs

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

We are a holding company and our ability to pay dividends depends on the cash flow and distributable income of our operating subsidiaries, particularly the Bank. We and our subsidiaries are subject to contractual, legal and regulatory requirements affecting our ability to pay dividends.

In particular, dividend distribution by the Bank is subject to the requirements established by the rules of the Central Bank, as amended from time to time. Pursuant to such regulations, dividend distributions shall be admitted as long as none of the following circumstances apply (i) the financial institution is subject to a liquidation procedure or the mandatory transfer of assets ordered by the Central Bank in accordance with section 34 or 35 bis of the FIL; (ii) the financial institution is receiving financial assistance from the Central Bank; (iii) the financial institution is not in compliance with its reporting obligations to the Central Bank; (iv) the financial institution is not in compliance with minimum capital requirements (both on an individual and consolidated basis and excluding any individual franchise granted by the Superintendency) and with minimum cash reserves (on average), whether in Pesos, foreign currency or securities issued by the public sector; (v) if the average minimum cash reserve is lower than the amount of cash required by the latest reported position or the pro forma position after making the dividend payment; and/or (vi) if the financial institution did not comply with the applicable Additional Capital Margins (as defined below). Financial institutions that comply with all of the above mentioned conditions may distribute dividends up to an amount equal to: (i) the positive balance of the account “unappropriated earnings” (resultados no asignados) at the end of the fiscal year, plus (ii) voluntary reserves for future payments of dividends, minus (iii) voluntary reserves and mandatory statutory reserves registered as of that date and other items, such as (a) 100% of the debit balance of each of the items recorded under “Other accumulated comprehensive income”, (b) the result from the revaluation of property, plant, equipment and intangible assets and investment properties, (c) the net positive balance of the book-value and the market-value of certain public debt securities and Central Bank notes that the financial institution owns that are not marked to market, (d) unrecorded adjustments of asset value informed by the Superintendency of Financial and Exchange Entities (Superintendencia de Entidades Financieras y Cambiarias, or “Superintendency”) or mentioned by external auditors on their report, and (e) individual exemptions for asset valuation granted by the Superintendency.

In addition, financial entities may not distribute profits with the profit arising from the application of IFRS for the first time, and must set up a special reserve that can only be canceled for capitalization or to absorb any negative balances from the item “Unassigned Results.” See “Item 4.B Business overview—Argentine Banking Regulation—Liquidity and Solvency Requirements—Requirements Applicable to Dividend Distribution.”

In 2018 and 2017, we received the following dividend payments in cash from our subsidiaries: (i) Ps.144.6 million in 2018 and Ps.115.6 million in 2017 from SAM, (ii) Ps.27.8 million in 2018 and Ps.36.5 million in 2017 from Espacio Cordial, (iii) Ps.97.4 million in 2018 and Ps.233.9 million in 2017 from Supervielle Seguros, and (iv) Ps.25.6 million in 2018 and Ps.0 million in 2017 from Sofital. Moreover we received an advance dividend payment from Supervielle Seguros for the period which will be ending on June 30, 2019 of Ps.152.0 million. We did not receive dividend payments from the Bank or our other subsidiaries during 2018 and 2017.

Although distribution of dividends to us by the Bank has been authorized by the Central Bank in the past, it is possible that in the future the Central Bank may limit the Bank’s ability to distribute dividends approved by its shareholders at the annual ordinary shareholders’ meeting without its prior consent, or such authorization may not be for the full amount of distributable dividends.

Changes in the Argentine tax laws may adversely affect the results of our operations and the tax treatment of our Class B shares and/or the ADSs for the period prior to December 31, 2018.

On September 23, 2013, Law No. 26,893, which amended the Income Tax Law, was enacted. According to the amendments, the distribution of dividends by an Argentine corporation was subject to income tax at a rate of 10.0%, unless such dividends were distributed to Argentine corporate entities (the “Dividend Tax”).

 

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The Dividend Tax was repealed by Law No. 27,260, enacted on June 29, 2016, and consequently no income tax withholding is applicable on the distribution of dividends in respect of both Argentine and non-Argentine resident shareholders, except when dividends distributed are greater than the income determined according to the application of the Income Tax Law, accumulated at the fiscal year immediately preceding the year on which the distribution is made. In such case, the excess is subject to a rate of 35%, for both Argentine and non-Argentine resident shareholders. This treatment applies only to dividends to be distributed at any time out of retained earnings accumulated until the end of the last fiscal year starting before January 1, 2018.

However, pursuant to Law No. 27,430, dividends to be distributed out of earnings accrued in fiscal years starting on or after January 1, 2018, and other profits paid in cash or in kind —except for stock dividends or quota dividends—by companies and other entities incorporated in Argentina referred to in the Income Tax Law, Sections 69 (a)(1), (2), (3), (6), (7) and (8), and Section 69(b) to Argentine resident individuals and foreign beneficiaries will be subject to income tax at a 7% rate on profits accrued during fiscal years starting January 1, 2018 to December 31 2019, and at a 13% rate on profits accrued in fiscal years starting 1 January 2020 and onwards. If dividends are distributed to Argentine corporate taxpayers (in general, entities organized or incorporated under Argentine law, certain traders and intermediaries, local branches of foreign entities, sole proprietorships and individuals carrying on certain commercial activities in Argentina), no dividend tax should apply. See “Item 10.E Taxation—Material Argentine Tax Considerations.”

In addition, capital gains realized from the disposal of shares and other securities, including securities representing shares and deposit certificates, are subject to capital gains tax.

Law No. 27,430 established that as from January 1, 2018, capital gains realized by Argentine resident individuals from the disposal of shares and ADSs are exempt from capital gains tax in the following cases: (i) when the shares are placed through a public offering authorized by the CNV, (ii) when the shares are traded in stock markets authorized by the CNV, under segments that ensure priority of price-time and interference of offers, or (iii) when the sale, exchange or other disposition of shares is made through an initial public offering and/or exchange of shares authorized by the CNV.

Such law also provides that the capital gains tax applicable to non-residents for transactions entered into until December 30, 2017 is still due, although no taxes will be claimed to non-residents with respect to past sales of Argentine shares or other securities traded in CNV’s authorized markets (such as ADSs) as long as the cause of the non-payment was the absence of regulations stating the mechanism of tax collection at the time the transaction was closed. AFIP General Resolution 4227, which came into effect on April 26, 2018, stipulates the procedures through which the income tax should be paid to the AFIP. The payment of capital gains tax applicable for transactions entered into before December 30, 2017 was due on June 11, 2018.

In addition, Law No. 27,430 and Decree 279/2018, maintain the 15% capital gains tax (calculated on the actual net gain or a presumed net gain equal to 90% of the sale price) on the disposal of shares or securities by non-residents. However, non-residents are exempt from the capital gains tax on gains realized from the sale of (a) Argentine shares in the following cases: (i) when the shares are placed through a public offering authorized by the CNV, (ii) when the shares were traded in stock markets authorized by the CNV, under segments that ensure priority of price-time and interference of offers, or (iii) when the sale, exchange or other disposition of shares is made through an initial public offering and/or exchange of shares authorized by the CNV; and (b) depositary shares or depositary receipts issued abroad, when the underlying securities are shares (i) issued by Argentine companies, and (ii) with authorization of public offering. The exemptions will only apply to the extent the foreign beneficiaries reside in, or the funds used for the investment proceed from, jurisdictions considered as cooperating for purposes of the exchange of tax information.

In case the exemption is not applicable and, to the extent foreign beneficiaries do not reside in, or the funds do not arise from, jurisdictions not considered as cooperative for purposes of fiscal transparency, the gain realized from the disposition of shares would be subject to Argentine income tax at a 15% rate on the net capital gain or at a 13.5% effective rate on the gross price. In case such foreign beneficiaries reside in, or the funds arise from, jurisdictions not considerd as cooperative for purposes of fiscal transparency, a tax at a 35% rate on the the net capital gain or at a 31.5% effective rate on the gross price should apply.

 

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Therefore, holders of our Class B shares or the ADSs, are encouraged to consult their tax advisors as to the particular Argentine income tax consequences of owning our Class B Shares or the ADSs. See “Item 10.E Taxation—Material Argentine Tax Considerations.”

Restrictions on transfers of foreign exchange and the repatriation of capital from Argentina may impair your ability to receive dividends and distributions on, and the proceeds of any sale of, the Class B shares underlying the ADSs.

Since the beginning of December 2001 until President Macri assumed office, the Argentine government implemented monetary and foreign exchange control measures that included restrictions on the withdrawal of funds deposited with banks and on the transfer of funds abroad, including dividends, without prior approval by the Central Bank, most of which were eliminated by the Macri administration.

Although the transfer of funds abroad by local companies in order to pay annual dividends only to foreign shareholders and the depositary for the benefit of the ADS holders based on approved audited financial statements no longer requires Central Bank approval, other exchange controls could impair or prevent the conversion of anticipated dividends, distributions, or the proceeds from any sale of Class B shares, as the case may be, from Pesos into U.S. dollars and the remittance of the U.S. dollars abroad. In particular, with respect to the proceeds of any sale of Class B shares underlying the ADSs, as of the date of this annual report, the conversion from Pesos into U.S. dollars and the remittance of such U.S. dollars abroad is not subject to prior Central Bank approval provided the foreign beneficiary is either a natural or legal person residing in or incorporated and established in jurisdictions, territories or associated states that are considered “cooperators for the purposes of fiscal transparency.” If such requirement is not met, prior Central Bank approval will be required.

The Argentine government could reinstate restrictive measures in the future. In such a case, the depositary for the ADSs may be prevented from converting Pesos it receives in Argentina for the account of the ADS holders. If this conversion is not possible, the deposit agreement allows the depositary to distribute the foreign currency only to those ADS holders to whom it is possible to do so. If the exchange rate fluctuates significantly during a time when the depositary cannot convert the foreign currency, you may lose some or all of the value of the dividend distribution. Also, if payments cannot be made in U.S. dollars abroad, the repatriation of any funds collected by foreign investors in Pesos in Argentina may be subject to restriction. See “Item 10.D Exchange Controls—Other Regulations—Sale of Foreign Currency to Non-residents.”

We are traded on more than one market and this may result in price variations; in addition, investors may not be able to easily move shares for trading between such markets.

In addition to the trading of our ADSs in the United States and countries other than Argentina, our Class B shares are traded in Argentina. Trading in the ADSs or our Class B shares on these markets will take place in different currencies (U.S. dollars on the New York Stock Exchange (“NYSE”) and Pesos on BYMA, and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Argentina). The trading prices of these securities on these two markets may differ due to these and other factors. Any decrease in the price of our Class B shares on the ByMA could cause a decrease in the trading price of the ADSs on the NYSE. Investors could seek to sell or buy our shares to take advantage of any price differences between the markets through a practice referred to as arbitrage. Any arbitrage activity could create unexpected volatility in both our share prices on one exchange, and the ADSs available for trading on the other exchange. In addition, holders of ADSs will not be immediately able to surrender their ADSs and withdraw the underlying Class B shares for trading on the other market without effecting necessary procedures with the depositary. This could result in time delays and additional cost for holders of ADSs.

Under Argentine Corporate Law, shareholder rights may be fewer or less well defined than in other jurisdictions.

Our corporate affairs are governed by our bylaws and by the AGCL, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States (such as Delaware or New York), or in other jurisdictions outside Argentina. Thus, your rights or the rights of holders of our Class B shares under the AGCL to protect your or their interests relative to actions by our Board of Directors may be fewer and less well defined than under the laws of those other jurisdictions. Although insider trading and price manipulation are illegal

 

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under Argentine law, the Argentine securities markets may not be as highly regulated or supervised as the U.S. securities markets or markets in some of the other jurisdictions. In addition, rules and policies against self-dealing and regarding the preservation of shareholder interests may be less well defined and enforced in Argentina than in the United States, or other jurisdictions outside Argentina, putting holders of our Class B shares and the ADSs at a potential disadvantage.

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

Under the AGCL, if we issue new shares as part of a capital increase, our shareholders may have the right to subscribe to a proportional number of shares to maintain their existing ownership percentage. Rights to subscribe for shares in these circumstances are known as preemptive rights, pursuant to the AGCL. In addition, shareholders are entitled to the right to subscribe for the unsubscribed shares remaining at the end of a preemptive rights offering on a pro rata basis, which are known as accretion rights. Upon the occurrence of any future increase in our capital stock, United States holders of Class B shares or ADSs will not be able to exercise the preemptive and related accretion rights for such Class B shares or ADSs unless a registration statement under the Securities Act is effective with respect to such Class B shares or ADSs or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to those Class B shares or ADSs. We may not file such a registration statement, or an exemption from registration may not be available. Unless those Class B shares or ADSs are registered or an exemption from registration applies, a U.S. holder of our Class B shares or ADSs may receive only the net proceeds from those preemptive rights and accretion rights if those rights can be sold by the depositary; if they cannot be sold, they will be allowed to lapse. Furthermore, the equity interest of holders of Class B shares or ADSs located in the United States may be diluted proportionately upon future capital increases.

Your voting rights with respect to the ADSs are limited by the terms of the deposit agreement.

Holders may exercise voting rights with respect to the Class B shares underlying ADSs only in accordance with the provisions of the deposit agreement. There are no provisions under Argentine law or under our bylaws that limit ADS holders’ ability to exercise their voting rights through the depositary with respect to the underlying Class B shares, except if the depositary is a foreign entity and it is not registered with the IGJ, and in this case, the depositary is registered with the IGJ. However, there are practical limitations upon the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with such holders. For example, Argentine Capital Markets Law requires us to notify our shareholders by publications in certain official and private newspapers of at least 20 and no more than 45 days in advance of any shareholders’ meeting. ADS holders will not receive any notice of a shareholders’ meeting directly from us. In accordance with the deposit agreement, we will provide the notice to the depositary, which will in turn, if we so request, as soon as practicable thereafter provide to each ADS holder:

 

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the notice of such meeting;

 

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voting instruction forms; and

 

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

To exercise their voting rights, ADS holders must then provide instructions to the depositary how to vote the shares underlying ADSs. Because of the additional procedural step involving the depositary, the process for exercising voting rights will take longer for ADS holders than for holders of Class B shares.

Except as described in this annual report, holders will not be able to exercise voting rights attaching to the ADSs.

 

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

Investing in securities that trade in emerging markets, such as Argentina, often involves greater risk than investing in securities of issuers in the United States. The Argentine securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets in the United States, and is not as highly regulated or supervised as some of these other markets. There is also significantly greater concentration in the Argentine securities market than in major securities markets in the United States. As of December 31, 2018, the ten largest companies in terms of market capitalization represented approximately 90% of the aggregate market capitalization of ByMA. Accordingly, although you are entitled to withdraw the Class B shares underlying the ADSs from the depositary at any time, your ability to sell such shares at a price and time at which you wish to do so may be substantially limited. Furthermore, if exchange controls are imposed by the Central Bank, these could have the effect of further impairing the liquidity of the ByMA by making it unattractive for non-Argentines to buy shares in the secondary market in Argentina. See “Item 10.D Exchange Controls.”

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

We have shareholders that own a substantial amount of our Class B shares or ADSs. If such shareholders decide to sell a substantial amount of our Class B shares or the ADSs, or if the market perceives they intend to sell a substantial amount of our Class B shares or the ADSs, the market price of our Class B shares or the ADSs could drop significantly.

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

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

 

Item 4.

Information of the Company

Recent Political and Economic Developments in Argentina

Presidential and congressional elections in Argentina took place in October and November 2015, resulting 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 announced and executed several significant economic and policy reforms and transactions, including:

Foreign exchange reforms. The current administration eliminated substantially all of the restrictions, including certain currency controls, that were imposed under the previous administration. These reforms are expected to provide greater flexibility and easier access to the MLC. On August 8, 2016, the Central Bank issued Communication “A” 6037 as amended, which eliminated certain additional foreign exchange restrictions that were still in effect and established new foreign exchange rules, including:

 

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the reestablishment of Argentine residents’ rights to purchase and remit foreign currency outside of Argentina without limit and without specific allocation (atesoramiento);

 

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the effective elimination of a mandatory, non-transferable and non-interest bearing deposit in connection with certain transactions involving foreign currency inflows by reducing the amount of the deposit from 30% of such transactions to 0%;

 

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the elimination of the requirement to transfer and settle the proceeds from new foreign financial indebtedness incurred by the foreign financial sector, the non-financial private sector and local governments through the MLC; and

 

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the elimination of the mandatory minimum stay period, applicable to the proceeds of any new financial indebtedness and renewal of existing indebtedness incurred by residents, held by foreign creditors and transferred through the MLC.

On May 19, 2017, the Central Bank eliminated most of the foreign exchange restrictions then in place by means of Communication “A” 6244, effective as of July 1, 2017. In addition, on November 1, 2017, President Macri enacted Decree No. 893/17 which partially repealed Decrees No. 2,581/64, No. 1,555/86 and No. 1,638/01, and eliminated the obligation of Argentine residents to transfer to Argentina and sell in the MLC the proceeds of their exports of goods. On November 10, 2017, the Central Bank issued Communication “A” 6363, that eliminated all restrictions applicable to Argentine residents related to the transfer and sale of proceeds in the MLC resulting from the export of goods. Furthermore, on December 26, 2017, by virtue of Communication “A” 6401, the Central Bank replaced the reporting regimes set forth by Communications “A” 3602 and “A” 4237 with a new, unified regime applicable for information as of December 31, 2017. The unified reporting regime involves an annual statement whose filing is mandatory for every person whose total flow of funds or balance of assets and liabilities is or exceeds U.S.$1 million during the previous calendar year. Under Communication “A” 6443, which entered into force on March 1, 2018, companies from any sector that operate in the foreign exchange market may operate as an exchange agency solely by submiting an electronic form entitled the “Registry of Exchange Operators” (Registro de Operadores de Cambio).

Foreign trade reforms. The Kirchner and Fernández de Kirchner administrations imposed export duties and other restrictions on several sectors, particularly the agricultural sector. The current administration eliminated export duties on wheat, corn, beef, mining, oil, and regional products, and reduced the duty on soybean exports by 5%, from 35% to 30%. Further, a 5% export duty on most industrial exports was also eliminated. With respect to payments for imports of goods and services to be performed abroad, the current administration eliminated the restrictions on access to the MLC. Importers were offered short-term debt securities issued by Argentina to be used to repay outstanding commercial debt for the import of goods. In addition, the import system was modified by the replacement of the Declaraciones Juradas Anticipadas de Importación system with a new import procedure that requires certain filings and import licences for certain goods (including textiles, footwear, toys, domestic appliances and automobile parts), which, unlike the previous system, does not contemplate discretionary federal government approval of payments for the import of products through the MLC. By Decree No. 893/2017, published in the Official Gazette on November 2, 2017, the Argentine government repealed article 1 of Decree No. 2581/1964, article 10 of Decree No. 1555/1986 and Decree No. 1638/2001. This action eliminated the obligation of Argentine exporters to repatriate and settle for Pesos in the MLC foreign currency proceeds derived from the export of goods. On January 2, 2017, the Argentine government enacted a further reduction of the export duties rate set for soybean and soybean products, setting a monthly 0.5% cut on the export duties rate beginning on January 2018 and until December 2019. In addition, importers were offered short-term debt securities issued by the Argentine government to repay outstanding commercial debt for the import of goods. Furthermore, as part of a reform package intended to reduce the fiscal deficit and enhance public accounts, the Argentine government issued Decree No. 793/2018, which established a 12% duty on all exported products and services which will remain in effect until December 31, 2020. Decree No. 793/2018 caps the exchange rate for export duties on most products at Ps.4.00/U.S.$1.00 based on the taxable base or free on-board value, depending on the product. However, the exchange rate cap for certain products (mainly manufactured goods) is Ps.3.00/U.S.$1.00 of the taxable base or free on-board value, depending on the product. Hydrocarbons are subject to the general cap of Ps.4.00/ U.S.$1.00. As an additional measure, Decree No. 793/2018 reduced export duties on soybean by-products to 18%, 16% or 11%, depending on the type of product.

Fiscal policy. The current administration took steps to anchor the fiscal accounts, to reduce the primary fiscal deficit and achieved a primary fiscal deficit of 4.6% of GDP in 2016 through the elimination of subsidies and the reorganisation of certain expenditures and the generation of increased revenue through the tax amnesty. The Argentine budget bill of the federal government projects a fiscal deficit representing 3.2% of GDP in 2017. Although the objective of the Macri administration was to achieve a primary fiscal deficit equivalent to 1.3% of GDP in 2019, in the context of the recent negotiations with the IMF, the fiscal deficit target was adjusted to 0% of GDP for 2019 and a surplus of 1% for 2020.

 

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Correction of monetary imbalance and changes in monetary policy. The Central Bank aims to ensure that, in the period from October 2018 until December 2019, the monetary base will register a zero growth (based on a monthly average), through its Monetary Aggregates Regime (Agregados Monetarios) as agreed in the 2018 IMF Agreement (as defined below).

Energy Sector. Following years of very limited investment in the energy sector, as well as the continued freeze on electricity and natural gas tariffs since the 2001-2002 economic crisis, Argentina began to experience energy shortages in 2011. In response to the growing energy crisis, the current administration declared a state of emergency with respect to the national electricity system, ceased to be in effect as of December 31, 2017. The state of emergency allowed the Argentine government to take actions designed to ensure the supply of electricity to the entire country, such as instructing the Ministry of Energy and Mining to design and implement, with the cooperation of all federal public entities a coordinated programme which guarantees the quality and safety of the electric system. Pursuant to Resolution No. 6/2016 of the Ministry of Energy and Mining and Resolution No. 1/2016 of the ENRE, the current administration announced the elimination of a portion of the energy subsidies and a substantial increase in electricity tariffs. Consequently, the average price of electricity has increased and could increase further. By correcting tariffs, modifying the regulatory framework and reducing the government’s role as an active market participant, the current administration sought to correct distortions in the energy sector and stimulate investment. However, certain governmental initiatives were challenged in the Argentine courts and resulted in judicial injunctions or rulings limiting the government’s initiatives.

During 2016, lower court injunctions suspended in certain provinces and cities end-user electricity tariff increases implemented as of February 1, 2016, and instructed the Ministry of Energy and Mining and the ENRE to conduct a non-binding public hearing prior to sanctioning any such increases. On October 28, 2016, a non-binding public hearing was conducted by the Ministry of Energy and Mining and ENRE to present tariff proposals submitted by distribution companies covering the greater Buenos Aires area (approximately, 15 million inhabitants) for the 2017-2021 period in the framework of the Integral Tariff Review (as defined below). On December 14, 2016, eight non-binding public hearings (in Buenos Aires, Mendoza, Neuquén, Mar del Plata, Formosa, Santiago del Estero and Puerto Madryn) were conducted by the Ministry of Energy and Mining and ENRE to present tariff proposals for electricity transmission at the national and regional level and the seasonal reference prices of capacity and energy in the wholesale electricity market, as well as a proposal to reduce subsidies for the 2017-2021 period.

Tariff increases in public services. With the aim of encouraging companies to invest and improve the services they offer and enabling the Argentine government to assist those in need, the current administration has begun updating the tariffs for electricity, transportation, gas and water services (the “Integral Tariff Review”). Each of the announced tariff increases includes the tarifa social (social tariff), which is designed to provide support to vulnerable groups, including beneficiaries of social programmes, retirees and pensioners that receive up to two minimum pensions, workers that receive up to two minimum salaries, individuals with disabilities, individuals registered in the Monotributo Social programme, domestic workers and individuals receiving unemployment insurance. Subsequent modifications to these announced tariff increases were made, including a 20% discount on the regular distribution price for 400 designated energy-intensive companies that purchase electricity directly from distributors.

On August 18, 2016, the Supreme Court in “Centro de Estudios para la Promoción de la Igualdad y la Solidaridad v/ Ministerio Federal de Energía y Mineria”, affirmed lower court injunctions suspending end-user gas tariff increases sanctioned as of April 1, 2016, and instructed the Ministry of Energy and Mining and the National Gas Regulator (Ente Nacional Regulador del Gas or “ENARGAS”) to conduct a non-binding public hearing prior to sanctioning any such increases. On September 16, 2016, a non-binding public hearing was conducted by the Ministry of Energy and Mining and ENARGAS to submit (i) transitional tariffs for transportation and distribution of natural gas at the national level in the framework of the Integral Tariff Review for the period 2017-2021, (ii) a new set of gas prices at the Point of Entry to the Transportation System (“PIST”) and (iii) a proposal to reduce subsidies for the period 2016-2022. Between October 2 and October 7, 2016, public hearings were also conducted at the national level with regard to tariff proposals for gas transportation and distribution throughout the country for the period 2017-2021 in the framework of the Integral Tariff Review.

 

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On October 6 and October 7, 2016, after conducting non-binding public hearings, the Ministry of Energy and Mining and ENARGAS published a new end-user gas tariff scheme. The scheme establishes a two tariff schedule for private residences, establishing lower tariffs for units that decreased consumption compared to the same period in the previous year by at least 15%.

On October 11, 2016, the Ministry of Energy and Mining (a) expanded the amount of eligible beneficiaries of social tariffs to include retirees and pensioners that receive pensions equal to up to two minimum salaries, certain war veterans and medically dependent customers, and (b) decreed that institutions that perform activities of public interest would be entitled to residential rates.

In June 2017, an administrative court of the city of La Plata issued an injunction suspending the increases in electricity tariffs for customers located within the Province of Buenos Aires pursuant to a petition filed by the provincial Ombudsman, Guido Lorenzino. As of the date of this annual report, the injunction has been appealed and the decision is pending.

The year-on-year increase in the price of energy in the wholesale electricity market for end-users, which excludes transportation and distribution costs and accounts for approximately 45% of the tariff to end-users in the City of Buenos Aires, totalled 233% (from Ps.96/MWh to Ps.320/MWh on average), while the increase in the price of natural gas for end-users was 68% (from Ps.37/MMBtu to Ps.62/MMBtu on average).

In addition, to further address the potential impact of the new tariff scheme during the 2018 winter peak season of natural gas consumption by retail customers, an optional program was implemented through Resolution No. 97/2018 issued by the Argentine Gas Regulator (Ente Nacional Regulador del Gas) under which consumers would finance the payment of up to 25% of natural gas monthly bills for the 2018 winter peak season.On May 9, 2018, the lower house of the National Congress passed a bill to modify the current tariff scheme for natural gas for local companies and PyMES. The project was approved by the Senate on May 30, 2018 and vetoed by the President on the same day.

Corporate Criminal Liability Law (Ley de Responsabilidad Penal Empresaria). On July 5, 2017, the Chamber of Deputies approved a bill providing for the criminal liability of corporate entities for criminal offenses against public administration and cross-border bribery committed by, among others, its shareholders, attorneys-in-fact, directors, managers, employees, or representatives. A company found liable under this bill may be subject to various sanctions, including, among others, fines ranging from 1% to 20% of its annual gross income and the partial or total suspension of its activities for up to ten years. In addition, the bill proposes to extend the criminal liability under the Argentine Criminal Code to cases of bribery committed outside Argentina by Argentine citizens or companies domiciled in Argentina. On September 27, 2017 the Senate approved the draft bill with modifications designed to reduce in part the impact of the statute, for instance by eliminating the inapplicability of the statute of limitations to certain of the criminal offenses originally proposed in the draft (the statute of limitations now has been set at six years). Further, the draft bill as modified by the Senate reduces the amount of fines originally proposed for criminal offenses that are not subject to a statute of limitations. On November 8, 2017, Congress passed the bill including those amendments as Law No. 27,401, which came into force on March 1, 2018.

Increase in minimum income thresholds. In December 2016, the Congress approved an increase in the minimum income threshold by approximately 23%, from Ps.25,000 to Ps.30,670 for married workers with two children and from Ps.18,880 to Ps.23,185 for single workers. The minimum income threshold will be subject to automatic adjustment going forward, by reference to increases in the average wages paid to public sector employees. The Congress also passed modifications to the income tax brackets to take into account the impact of inflation in recent years.

Tax on Financial Transactions (Impuesto al Cheque). On December 27, 2017, the National Congress extended the tax on financial transactions through 2022, and earmarked amounts collected for the Argentine Integrated Pension System.

Tax Reform (Reforma Tributaria). On December 27, 2017, the National Congress also approved a series of reforms intended to eliminate certain of the existing complexities and inefficiencies of the Argentine tax regime, diminish evasion, increase the coverage of income tax as applied to individuals and encourage investment while sustaining Argentina’s medium and long term efforts aimed at restoring fiscal balance. The reforms will gradually come into effect over the next five years. The fiscal cost of the reform is estimated at 0.3% of GDP. The reforms form part of a larger program announced by President Macri intended to increase the competitiveness of the Argentine economy (including by reducing the fiscal deficit) and employment, and diminish poverty on a sustainable basis. The main aspects of the tax reform are the following:

 

 

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Interest and capital gains derived from the sale or disposition of bonds issued by the federal government, the provinces and municipalities of Argentina and the City of Buenos Aires obtained by Argentine tax residents (individuals and undivided estates located in Argentina) will be subject to income tax at a rate of (a) 5%, in the case of Peso-denominated securities that do not include an indexation clause, and (b) 15%, in the case of Peso-denominated securities with an indexation clause or foreign currency denominated securities; gains realized by Argentine tax residents (individuals and undivided estates located in Argentina) from the sale of equity securities on a stock exchange will remain exempt, subject to compliance with certain requirements.

Holders of notes issued by the federal government, the provinces and municipalities of Argentina and the City of Buenos Aires that are not Argentine tax residents will be exempt from Argentine income taxes on interest and capital gains to the extent such beneficiaries do not reside in or channel their funds through non-cooperating jurisdictions. The non-cooperating jurisdictions list will be prepared and published by the executive branch. Short-term notes issued by the Central Bank (LEBACs) are outside the scope of these exemptions applicable to non-Argentine residents.

The aforementioned amendments have been in force since January 1, 2018.

Corporate income tax was reduced to 30% for the fiscal year commencing January 1, 2018, and will be further reduced to 25% for fiscal years commencing on or after January 1, 2020.

The tax reforms also provide for other amendments regarding social security contributions, tax administrative procedures law, criminal tax law, tax on liquid fuels and excise taxes.

Decree of de-bureaucratization and simplification. On January 10, 2018, the Macri administration issued Emergency Decree No. 27/2018 aimed at simplifying, expediting and promoting efficiency in the procedures within administrative entities and agencies, avoiding any unnecessary bureaucracy and expenses.

Fiscal Consensus. On December 22, 2017, the Chamber of Deputies passed into law the Fiscal Agreement (“Pacto Fiscal”), also known as the Fiscal Consensus (“Consenso Fiscal”). This law was based on an agreement signed on November 16, 2017 between the Argentine government and representatives from 23 out of Argentina’s 24 provinces, with the goal of implementing measures that favor sustained growth in economic activity, productivity and employment. The Fiscal Consensus includes a commitment to lowering distortive taxes by 1.5% of GDP over the next five years, a waiver of lawsuits against the Argentine government and a Ps.20,000 million payment to the province of Buenos Aires (which will increase over the next five years) as a partial and progressive solution to the conflict related to the Fondo del Conurbano Bonaerense. The Fiscal Consensus also set the basis for other policy reforms that were implemented by the Macri Administration in December 2017, such as the tax reform, the pension system reform and the Fiscal Responsibility Law (“Ley de Responsabilidad Fiscal”).

Productive Financing Law. On May 11, 2018, the National Congress passed the Argentine Productive Financing Law (Ley de Financiamiento Productivo), which introduced amendments to the Capital Markets Law, the Mutual Funds Law No. 24,083 and the Argentine Negotiable Obligations Law, among others, with the aim of modernizing and favoring the development of the domestic capital markets. Furthermore, the amendments seek to increase the number of investors and companies which take part in the capital markets, promoting productive financing, especially regarding SMEs, setting forth a regime to ease access to financing. Furthermore, the law eliminates certain controversial articles of the previous Argentine Capital Markets Law which gave the CNV the authority to intervene the management of publicly traded companies.

In addition the aforementioned law promotes a new regulation of derivates and repos and a registry of derivates and repo transactions is created. Furthermore, certain bankruptcy related provisions, the Civil and Commercial Code, the Financial Institututions Law and the Central Bank’s charter shall not apply to derivatives and repos with regard to early termination, settlement, compensation and enforcement of guarantees.

 

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Emerging Market Requalification. On June 20, 2018, Morgan Stanley Capital International (“MSCI”) re-qualified Argentina as an “emerging market”, foreseeing a promotion to the local capital markets, as well as attracting foreign investments from institutional investors. With this requalification, effective as of May 2019, Argentina will cease to be a “frontier” market, and rise to the same level as the main economies in the region.

IMF Agreement. On June 20, 2018, the IMF Board of Directors approved a three-year stand-by agreement for Argentina for an amount of U.S.$.50.0 billion (equivalent to approximately 1,110% of Argentina’s share in the IMF) (as amended and supplemented from time to time, the “IMF Agreement”). That decision authorized the immediate disbursement of U.S.$.15.0 billion, which was partly used to swell international reserves and thus sustain the price of the local currency and partly to budget support to address the fiscal deficit. The remaining amount was of a precautionary nature and could be disbursed during the term of the agreement, subject to quarterly revisions of the IMF Executive Board.

The economic plan supported by the IMF when negotiating the agreement described above, aimed at strengthening the Argentine economy by focusing on four pillars: (i) restoring markets confidence through the admninistrations commitment to reduce their financial public expenditure through a fiscal adjustment which would ensure that the national government reaches a primary balance by 2020, including a significant initial adjustment to ensure a primary fiscal deficit of 1.3% of GDP in 2019; (ii) protect the most vulnerable social sectors, taking steps to strengthen the social welfare system, including the redesign of current social programs and to increase female participation in the labor force (eliminating the most unfavorable tax treatment of the second income generator and granting assistance for the care of children to working families), among others; (iii) strengthen the credibility of the Central Bank’s ability to control inflation: the administration vowed to grant the Central Bank the necessary independence and institutional and operational autonomy in order to achieve the inflation control projections. In addition, the Central Bank had adopted a goal plan to reduce inflation to one digit over a period of three years; and (iv) progressive decrease of tensions in the balance of payments, which involves rebuilding international reserves and reducing the country’s vulnerability to external pressures on its capital accounts.

Despite the IMF Agreement and the subsequent disbursements thereunder, the Peso devaluation continued to worsen during the month of August 2018, even within a context of high interest rates. As a result, at the beginning of September 2018, the Argentine government restarted negotiations with the IMF in order to obtain a revised agreement upsizing the IMF Agreement in order to help obtain 2019’s financial needs, with the aim of improving confidence of investors in order to curb the volatility of the exchange rate. As a result of these negotiations, on September 26, 2018, the IMF Agreement was raised by an additional U.S.$7.1 billion, totaling U.S.$.57.1 billion of which U.S.$.15.0 billion were disbursed in June 2018. On October 30, 2018 the Argentine government received the first disbursement under the Revised Agreement from the IMF in an aggregate amount of U.S.$5.7 billion. The second disbursement for an aggregate amount of U.S.$10.8 billion was approved by the IMF’s board on April 5, 2019All of these funds are freely available, as opposed to the precautionary nature assigned to funds pending disbursement under the initial agreement. In return, the Argentine government covenanted to make progress in order to achieve fiscal balance by 2019, bringing the primary deficit to 0% of GDP in that year and surplus of 1% in 2020 and, in turn, the Central Bank will not be able to raise the base monetary policy until June 2019. On the other hand, in order to mitigate the exchange rate volatility, intervention zones were defined when the dollar exceeded Ps.44 or was below Ps.34 (range adjusted daily at an annual rate of 3% until December 2018), and the first quarter of 2019, is adjusted daily at a rate of 2% per year), considering the zone between these limits as a “non-intervention zone.” On April 29, 2019, the COPOM decided to introduce changes to the monetary policy, with an aim to reducing volatility in the foreign exchange market. According to the new scheme: (i) if the exchange rate is between Ps.39.755 and Ps.51.488, the Central Bank may intervene, subject to market conditions, in the foreign exchange market and sell U.S. dollars in the market, and (ii) if the exchange rate is above Ps.51.488, the Central Bank will sell foreign currency for up to U.S.$250 million (from U.S.$150 million). Also, the Central Bank could decide to perform additional interventions in the exchange market. The Argentine pesos resulting from such sales will be discounted from the monetary base. The COPOM also confirmed that the Central Bank will not intervene until June 2019 in the foreign exchange market if the exchange rate decreases below Ps.39.755.”

Changes in monetary policy. On September 28, 2018, in connection with the 2018 IMF Agreement, the Monetary Policy Committee of the Central Bank announced the goal of achieving a 0% growth rate in the monetary base until June 2019. This monetary goal would be achieved through daily operations of LELIQS, which began on October 1, 2018. LELIQS are seven-day Peso-denominated securities that can be purchased exclusively by banks. On the first tender offer of LELIQS, the Central Bank awarded Ps.71,060 million at a 67.1% average rate. On March 18, the president of the Central Bank announced that the 0% growth rate policy would be maintained until the end of 2019.

 

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Asset Seizure Decree: On January 22, 2019, the Macri administration published the Decree No.62/2019 related to asset seizure (Extinción de Dominio), which allows courts to seize assets found related to acts of corruption or drug smuggling, whether the defendant has been found guilty or not before a criminal court. This Decree also includes provisions for the creation of a special Ombudsman’s Office to monitor future asset seizures. On February 19, 2019 the decree was rejected by the permanent bicameral commission, but will remain in force until both chambers of the Argentine Congress have rejected it.

Recent Governmental Measures: recently, the Argentine government announced a wide range of measures to stabilize financial volatility and the current economic situation of the country, which includes among others, price agreements for the main products of the consumer basket, a revised public services and transport tariff increase scheme, social benefits and support for SMEs, notwithstanding the foregoing, as of the date of this annual report, certain of the aforementioned measures have not been instrumented yet, consequently, we cannot measure the impact in the Argentine economy of the aforementioned reforms.

Recent Developments

Shareholders General Meeting

On April 26, 2019, the General Ordinary and Extraordinary Shareholders’ Meeting of the Company (the “2019 Shareholders Meeting”), was held, in which, among others, the following items of the agenda were approved: (i) performance of the Board of Directors and the Supervisory Committee, for fiscal year ended December 31, 2018, (ii) remuneration of the Board of Directors and the Supervisory Committee, for fiscal year ended December 31, 2018, (iii) Determination of the number of Regular and Alternate Directors, and to accept the resignations submitted by the directors Laurence Mengin de Loyer, María Gabriela Macagni and Jorge Luis Mocetti, and lastly the appointment of Messrs. Julio Patricio Supervielle, Jorge Oscar Ramírez, Atilio María Dell’Oro Maini, Eduardo Braun, Victoria Premrou, Ricardo De Lellis and Hugo Enrique Santiago Basso as regular directors, for two fiscal years, (iv) appointment of Messrs. Enrique José Barreiro, Carlos Alberto Asato and Valeria Del Bono Lonardi as regular members of the Supervisory Committee and Messrs. Carlos Enrique Lose, Roberto Aníbal Boggiano and Carlos Alfredo Ojeda as alternate members of the Supervisory Committee, all of them for one fiscal year, (v) distribution of dividends for the fiscal year ended on December 31, 2018 which amounted to Ps.1,655,961,851.28 as follows: (a) Ps.303,000,000.00 to Dividends in Cash; and (b) Ps.1,352,961,851.28 to a discretionary reserve, aimed for future investments, for further information, please see: “—Dividends”, and the (vi) appointment of Messrs. Santiago José Mignone and Carlos Alberto Pace of the firm Price Waterhouse & Co. S.R.L. as regular and alternate Certifying Accountants, respectively, for the financial statements of the fiscal year to end on December 31, 2019.

Dividends

2019 Shareholders Meeting and the Board of Directors of the Company approved the distribution of a cash dividend which shall be distributed to shareholders in the amount of Ps.303,000,000.00 on May 15, 2019. The amount to be distributed is equivalent to 66.342279631% of the outstanding capital and the nominal value of its representative shares or Ps.0.66342279631 per outstanding share or Ps.3.31711398155 per ADS. The total amount of dividends to be distributed has its origin in results for the year ended on December 31, 2018.

Changes in Management

On April 9, 2019, the Company informed that on April 8, 2019 the Board of Directors of the Bank had unanimously appointed Mr. Alejandro Stengel as Deputy CEO and COO, reporting to Mr. Jorge Ramirez, CEO of the Bank and the Company. Mr. Alejandro Stengel is a board member of Grupo Supervielle since 2010.

 

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In addition, Mr. Stengel as of the aforementioned date, heads Personal and Business Banking, Corporate Banking, and the Banking Products area, as well as the Technology and Operations, Central Services, Processes and Data Management, and Business Intelligence. He will also be spearheading the Digital Transformation process ensuring its adequate implementation across the organization. In his new role, Alejandro Stengel will work along with the CEO in the execution of the Bank’s growth and transformation strategy which is centered on digital transformation, customer experience, efficiency and profitability.

In addition, the Bank’s Retail Banking area which has been redefined as Personal and Business Banking, is currently led by Mr. Silvio Margaría, replacing Mrs. Beatriz De la Torre who tendered her resignation on April 8, 2019.

Having joined the Bank in October 2016, Mr. Margaría has significant experience in managerial positions overseeing nationwide retail banking networks, as well as corporate banking in different international and local financial institutions.

As part of the operational streamlining that the Bank is undertaking, Mr. Eduardo Urdapilleta, Processes and Digital Transformation manager has also left Banco Supervielle on April 9, 2019. His areas of responsibility have been distributed between the Processes and Data Management, and Business Intelligence areas.

With these organizational changes, Banco Supervielle seeks to further increase its operational leverage, continue to gain market share among its customers and acquire new customers by offering tailor made financial services, enhancing the customer journey and loyalty through digital transformation and innovation.

Conversion of Class “A” shares

On April 24, 2019, and as per the request of Mr. Julio Patricio Supervielle, the Board of Directors of Grupo Supervielle authorized the conversion of 65,000,000 Class “A” common shares, with a face value of one peso each and entitled to five votes per share, held by Mr. Supervielle, into Class “B” common shares, with a par value of one peso each and entitled to one vote per share, in the the terms of article 6 (b) our Bylaws. On May 9, 2019, the aforementioned conversion was approved by the CNV.

 

Item 4.A

History and development of the Company

We are a financial group with a long-standing presence in the Argentine financial system and a leading competitive position in certain attractive market segments. We are controlled by Julio Patricio Supervielle. We trace our history back more than 130 years, when the Supervielle family, predecessors of our controlling shareholder, first entered the Argentine financial services industry in 1887. Below is a brief history of our company, including the participation of the Supervielle family.

 

 

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Supervielle y Cía. Banqueros

The predecessors of our controlling shareholder emigrated from France in the second half of the 19^th century and established L.B. Supervielle y Cía. Banque Francaise (later Banco de Montevideo S.A.) in Montevideo, Uruguay. In 1887, they established Supervielle y Cía. Banqueros (a subsidiary of L.B. Supervielle y Cía. Banque Francaise) in Buenos Aires. Supervielle y Cía. Banqueros offered demand deposits, time deposits, savings accounts, securities trading orders, purchases and sales of foreign currency and drafts and letters of credit payable in European financial centers. Luis Bernardo Supervielle managed the bank until his death in 1901, whereupon the bank’s management transferred to his son, Luis Supervielle, and subsequently to Esteban Barón, son-in-law of Luis Bernardo Supervielle, who in 1905 became president of Supervielle y Cía. Banqueros. Mr. Barón managed the bank from 1905 until 1930, and subsequently served on the board of the bank as an Honorary President until 1964. Mr. Barón’s son, Andrés Barón, joined the bank in 1925 and took over its general management in 1930, also becoming chairman of the board of the bank in 1940. He carried out these functions until 1964, and then served on the board of the bank as an Honorary President.

On December 30, 1940, Banco Supervielle de Buenos Aires S.A., a bank controlled by the Barón and Supervielle families, acquired the assets and liabilities of Supervielle y Cía. Banqueros and listed its shares on the Buenos Aires Stock Exchange. Esteban Barón and his son, Andrés Barón Supervielle, continued to manage the operations of this bank until 1964.

In 1964, Société Générale (Paris) acquired a majority of the capital stock of Banco Supervielle de Buenos Aires S.A. from the Baron and Supervielle families, transforming it into a universal bank with 60 branches and a significant presence in the corporate market. Following the acquisition of control by Société Générale, the Supervielle family had no role in the management of Banco Supervielle. In 1997, Banco Supervielle de Buenos Aires S.A. created Société Générale Asset Management Sociedad Gerente de FCI S.A. On March 20, 2000, the name Banco Supervielle de Buenos Aires S.A. was changed to Banco Société Générale S.A.

Banco Banex S.A.

In 1969, Jules Henri Supervielle, the father of Julio Patricio Supervielle, our controlling shareholder, and cousin of the Supervielle family members who had owned and managed Banco Supervielle de Buenos Aires S.A. until 1964, founded Exprinter de Finanzas S.A., which became Exprinter Banco S.A. in 1991. Exprinter Banco S.A. acquired 100% of the capital stock of Banco San Luis S.A. in 1996 pursuant to a public bidding process organized by its owner, the Province of San Luis. On July 25, 1996, the Province of San Luis entered into a financial agency agreement with Banco San Luis S.A. (the “Contrato de Vinculación”), pursuant to which the Province designated Banco San Luis as its financial agent. The acquisition of Banco San Luis S.A. by Exprinter Banco S.A. was part of a strategic plan aimed at growing in the interior of the country and penetrating the middle and lower-middle-income individual consumer and the SMEs segments. In 1998, Exprinter Banco S.A. and Banco San Luis S.A. merged to create Banco San Luis S.A. Banco Comercial Minorista, and was later renamed Banco Banex S.A. On December 15, 2006, the government of the Province of San Luis extended the term of this financial agency agreement until 2021. On September 6, 2016, Banco Supervielle and the Province of San Luis, pursuant to the their commitment to enhance the economic development of the Province of San Luis, amended said agreement. On January 17, 2017, the Province of San Luis notified us of its decision to exercise its right to terminate the agreement, as of February 28, 2017. Since February 2017, the Bank has continued to provide financial services to the Provincial government of the Province of San Luis and its employees despite the termination of the Financial Agency Agreement. In January 2019, the government of the Province of San Luis released the terms and conditions of the auction to be held by the Province for the new financial agency agreement. Only two proposals were presented on March 15, 2019, Banco de la Nacion Argentina and Supervielle. Both of them were accepted and after a short process of contest, the Evaluation Committee is analyzing which one is the more convenient for the Province to define which Bank will be nominated as Financial Agent. There is no date for the abovementioned committee to take the decision, up to that date, Supervielle will be rendering services as financial agent.

Creation of Holding Company

Grupo Supervielle was incorporated in the City of Buenos Aires on October 8, 1979, under the name Inversiones y Participaciones S.A., changing the name to Grupo Supervielle S.A. in November 2008.

 

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Acquisition of Banco Société Générale S.A. by Banco Banex S.A.

On March 3, 2005, the Central Bank approved the purchase by Banco Banex S.A. of a majority stake in Banco Société Générale S.A., Supervielle Asset Management Sociedad Gerente de FCI S.A. and Sofital S.A.F.e I.I. Upon consummation of this acquisition, Banco Société Générale S.A.’s corporate name was changed to Banco Supervielle S.A. At the time of the purchase, the total assets of Banco Banex S.A. were 61.3% of the total assets of Banco Societé Générale S.A.

Merger of Banco Banex S.A. and Banco Supervielle S.A.

On July 1, 2007, with the prior approval of the Central Bank, Banco Banex S.A. merged into the Bank.

Acquisition of Banco Regional de Cuyo S.A.

On September 19, 2008, the Bank finalized the acquisition of 99.94% of the capital stock of Banco Regional de Cuyo S.A. On September 30, 2010, the Central Bank approved the merger of Banco Regional de Cuyo S.A. with and into the Bank. The merger was completed on November 1, 2010.

Tarjeta Automática S.A.

In December 2007, we acquired 51% of Tarjeta’s capital stock. The remaining 49% was held by Acalar S.A., an Argentine sociedad anónima wholly owned by the Coqueugniot family (Gabriel A. Coqueugniot, Cecilia B. Coqueugniot, Mónica I. Coqueugniot, and Diana I. Coqueugniot), in equal parts. Following several stock transfers that took place in 2009 and 2010, Tarjeta’s capital stock is, as of the date of this annual report, held 87.5% by Grupo Supervielle, 10.0% by the Bank, and 2.5% by CCF.

Acquisition of Cordial Compañía Financiera S.A. (formerly known as “GE Compañía Financiera S.A.”)

On July 6, 2010, Grupo Supervielle and the Bank acquired 100% of Cordial Compañía Financiera S.A. (“Cordial Compañía Financiera”), a financial services company that specialized in credit cards, personal loans and the distribution of certain third-party insurance products. The transaction was approved by the Central Bank on June 29, 2011. On August 1, 2011, the purchase was completed through a stock transfer in which 5% and 95% of the total shares were transferred to Grupo Supervielle and the Bank, respectively.

Through a strategic alliance with Walmart Argentina, Cordial Compañía Financiera has exclusive rights to promote and sell financial and credit products in Walmart Argentina stores nationwide through August 2020.

We acquired Cordial Compañía Financiera to further our strategy of increasing our market share in the Argentine banking and financial services industry through the strategic purchase of financial services companies and financial institutions.

On August 1, 2011, the shareholders of Cordial Compañía Financiera approved the name change from GE Cordial Compañía Financiera S.A. to Cordial Compañía Financiera S.A. On August 29, 2011, the IGJ authorized the name change.

Espacio Cordial Servicios S.A.

On October 2, 2012, the Board of Directors created a new entity called ECM S.A., which was later renamed Espacio Cordial Servicios S.A. For business strategy purposes and with the intention of furthering our goods and services business plan.

Espacio Cordial was created to sell insurance plans and coverage, , health insurance and health services, tourism packages, electric appliances and furniture and alarm systems. Espacio Cordial deals with insurance services that can be delegated or assigned to third parties by insurance companies, such as Supervielle Seguros, in accordance with laws and regulations as of the date of this annual report.

 

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Acquisition of Supervielle Seguros S.A. (formerly known as Aseguradores de Créditos del Mercosur S.A.)

On February 5, 2013, we and Sofital accepted an offer for the acquisition of 100% of the shares of Aseguradores de Créditos del Mercosur S.A., which on October 30, 2013 was renamed Supervielle Seguros S.A.

On May 14, 2013, the National Superintendency of Insurance (Superintendencia de Seguros de la Nación) approved the transfer of the company’s shares. As a result, on June 6, 2013, 95% of the shares of Aseguradores de Créditos del Mercosur S.A. were transferred to us and the remaining 5% of the shares were transferred to Sofital.

Sale of Adval S.A.

On May 30, 2014, Grupo Supervielle S.A. and Sofital entered into an agreement for the sale of 100% of the shares of Adval S.A. to CAT Technologies S.A. The purchase price is scheduled to be paid in installments due between July 2014 and July 2019. Under this agreement, as of December 31, 2015, Grupo Supervielle and Sofital held credits with CAT Technologies S.A. of Ps.2.3 million and Ps.0.1 million, respectively.

Successful IPO on May 19, 2016

Since May 19, 2016, the ordinary Class B shares of Grupo Supervielle S.A. are listed on ByMA, and its American Depositary Shares (“ADSs”), representing five ordinary Class B shares, are listed in the NYSE under the ticker “SUPV”. Additionally, Grupo Supervielle made an initial public offer of its Class B shares in Argentina and of its ADSs in the international markets for an aggregate amount of U.S.$323 million. Through the offering, Grupo Supervielle placed 146,625,087 ordinary Class B shares of which 137,095,955 were placed internationally in the form of ADSs, and of which 114,807,087 were newly issued ordinary Class B shares while 31,818,000 were pursuant to a secondary offering.

Sale of Cordial Microfinanzas S.A.

On March 20, 2017, Grupo Supervielle and the Bank accepted an offer from Ciudad Microempresas S.A. to purchase Grupo Supervielle’s and the Bank’s shares of Cordial Microfinanzas S.A.. Ciudad Microempresas S.A. is a company owned by Corporación Buenos Aires Sur and Banco de la Ciudad de Buenos Aires. The decision to sell Cordial Microfinanzas S.A. was based on our need to focus our resources in designated strategic segments.

Grupo Supervielle and the Bank transferred on March 31, 2017 all their shares of Cordial Microfinanzas S.A. to Ciudad Microempresas as detailed below:

 

(i)

Grupo Supervielle S.A.: 12,219,472 shares, which represented 87.5% of total capital stock of Cordial Microfinanzas; and

 

(ii)

Banco Supervielle S.A.: 1,745,632 shares, which represented 12.5% of total capital stock of Cordial Microfinanzas.

As of December 31, 2016, Cordial Microfinanzas S.A. operated through five branches, had a total loan portfolio of Ps.192 million, and held assets representing 0.4% of the total assets of Grupo Supervielle. Its contribution to the net income of Grupo Supervielle in 2016 was 0.8%.

Cordial Microfinanzas S.A. was created in 2007 by Grupo Supervielle to service the microfinance market in Argentina and with the objective of providing technical and financial assistance to micro-entrepreneurs to meet the needs related to their productive, commercial and service activities, thereby contributing to the development of their entrepreneurial capacity.

 

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Capitalization of an in-kind contribution and resulting capital stock increase

At the ordinary and extraordinary shareholders’ meeting of Grupo Supervielle held on April 27, 2017, the shareholders of Grupo Supervielle approved the capitalization of an in-kind contribution of 7,672,412 shares of common stock of Sofital S.A.F. e I.I. with a par value of Ps.1 and one vote per share made by Mr. Julio Patricio Supervielle and an increase of the capital stock of Grupo Supervielle of up to Ps.8,032,032, through the issuance of up to 8,032,032 new Class B shares with par value Ps.1 and one vote per share, at a subscription price of Ps.49.91 per share. In connection with the capital increase, a total of 7,494,710 new Class B shares were subscribed as follows: on July 18, 2017, 4,321,208 were issued to Mr. Julio Patricio Supervielle in return for the in-kind contribution, representing 57.7% of the total capital increase, and 3,173,502 Class B shares were issued to existing shareholders of Grupo Supervielle who exercised their preemptive and accretion rights with respect to the capital increase, representing 42.3% of the total capital increase.

Sale of shares of Viñas del Monte S.A.

On May 26, 2017, Grupo Supervielle, Sofital S.A.F. e I.I. and Mr. Julio Patricio Supervielle completed the transfer of their shareholdings in Viñas del Monte S.A., which were sold for an aggregate amount of U.S.$1,500,000. Grupo Supervielle transferred a total of 904,142 common, registered, non-endorsable shares to Ramón Francisco Federico and Guillermo Héctor Federico; Sofital S.A.F. Sofital S.A.F. e I.I. transferred a total of 47,000 common, registered, non-endorsable common shares to Ramón Francisco Federico and Guillermo Héctor Federico; and Mr. Julio Patricio Supervielle transferred a total of 2,618 common, registered, non-endorsable shares to Ramón Francisco Federico and Guillermo Héctor Federico.

Successful completion of capital increase

In September 2017, Grupo Supervielle made an increase of the capital stock through a global offer of Class B shares at a price of U.S.$4.0 per share. The global offer consisted of an international offer in United States and other countries outside of Argentina and a local offer in Argentina. Simultaneously with the global offer, Grupo Supervielle made an offer of preemptive and accretive rights of Class B shares to existing shareholders. As a result of the offer, Grupo Supervielle issued a total of 85,449,997 new Class B shares for a total of U.S.$344.0 million.

Creation of Adquisición y Desarrollo S.A.

On December 18, 2017, our Board of Directors approved the creation of Adquisición y Desarrollo S.A. to sell credit and non-credit product and services through new indirect channels. As of the date of this annual report, Adquisición y Desarrollo S.A. registration process with the IGJ is dormant.

Creation of Fideicomiso Financiero Fintech Supervielle I

On February 16, 2018, the Board of Directors approved the creation of Fideicomiso Financiero Fintech Supervielle I (“FF Fintech I”) to invest in financial technology (fintech) and insurance technology (insurtech) start up projects for an amount up to U.S.$3 million.

Acquisition of the capital stock of Micro Lending S.A.

On April 6, 2018, our Board of Directors of Grupo Supervielle approved to issue an offer for the acquisition of 4,000,000 ordinary, nominative, non-endorsable shares of Ps.1 par value and entitled to one vote per share, representing 100% of the share capital of Micro Lending S.A. (“MILA”). MILA specializes in car financing, particularly for used cars. On May 2, 2018, Grupo Supervielle closed the acquisition of MILA for a total price os U.S.$ 20 million, subject to final adjustments.

Acquisition of the capital stock of InvertirOnline S.A. and InvertirOnline.com Argentina S.A.

On May 24, 2018, Supervielle acquired the capital stock of the online trading platform InvertirOnline (“IOL”), through the purchase of both InvertirOnline S.A. and InvertirOnline.com Argentina S.A.

Creation of Supervielle Broker de Seguros S.A.

On December 21, 2018, Supervielle Broker de Seguros S.A. was created, which will have the exclusive purpose of carrying out the insurance intermediation activity, promoting the contract of life insurance, weatlh and pension insurance premiums, and advising customers and potential customers. Grupo Supervielle S.A. owns 95% of the Share Capital directly and 100% directly and indirectly. As of the date of this report, the company is subject to the authorization of the Argentine Superintendency of Insurance in order to start operations.

 

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Executive Offices

Our principal executive offices are located at Bartolomé Mitre 434, 5^th floor, Buenos Aires, Argentina. Our general telephone number is +54-11-4340-3100. Our website is http://www.gruposupervielle.com. Information contained or accessible through our website is not incorporated by reference in, and should not be considered part of, this annual report.

We file reports, including our annual reports on Form 20-F, and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Any filings we make electronically with the SEC are available to the public over the Internet at the SEC’s web site at http://www.sec.gov.

Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York, 10011.

 

Item 4.B

Business Overview

Overview

We own the eight largest Argentine private bank in terms of loans and nineth in terms of assets. We maintain a strong geographic presence in the City of Buenos Aires and the Greater Buenos Aires metropolitan area, which is Argentina’s most commercially significant and highly populated area, and we are leaders in terms of our banking network in some of Argentina’s most dynamic regions, including Mendoza and San Luis. The Bank, which consolidated with CCF, is our main asset, comprising 96.6% of our total assets, and has a history of strong growth. As of December 31, 2018, we served 1.8 million active customers, and our assets totaled Ps.141.7 billion (approximately U.$.S. 3.7 billion), in addition to Ps.13.6 billion (approximately U.$.S. 361 million) of assets managed by SAM and Ps.7.3 billion (U.$.S.193 million) of assets managed by IOL. As of December 31, 2018, the Bank and CCF accounted for 90.9% and 5.7% of our total assets, respectively.

As of December 31, 2018 and December 31, 2017, according to calculations performed based on Central Bank and other third-party information, our share for the following products or segments was as follows:

 

•

Personal loans (advanced by the Argentine private financial system): our market share as of December 31, 2018 was 7.3%, compared to a 6.9% market share as of December 31, 2017;

 

•

Leasing (made by the Argentine private banks): a 17.6% market share as of December 31, 2018, compared to a market share of 15.2% as of December 31, 2017;

 

•

Our factoring market share of the Argentine private financial system as of December 31, 2018, was 7.4% compared to a 7.5% market share as of December 31, 2017; and

 

•

MasterCard credit cards for which billing statements were issuedas of December 31, 2018: a 8.6% market share as of December 31, 2018, compared to a 9.8% market share as of December 31, 2017;

Based on the latest information published by ANSES, we made 14.1% of all social security payments to senior citizens in Argentina in September 2018, compared to 14.1% in December 2017.

We have a leading position in both the provinces of Mendoza and San Luis, in which we have 291,000 and 232,000 customers respectively. According to calculations performed on Central Bank information, as of December 2018 we had a market share of loans among private banks of 19.4% and 23.8% respectively, and a market share of deposits among private banks of 11.0% and 20.2% respectively.

 

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We offer diverse financial products and services that are specifically tailored to cover the different needs of our customers through a multi-brand and multi-channel platform. We have developed a multi-brand business model to differentiate the financial products and services we offer to a wide spectrum of individuals, small businesses, SMEs, middle-market companies and large corporates in Argentina. Our infrastructure supports our multi-channel distribution strategy with a strategic national footprint through 325 access points which include 182 bank branches, 78 of these bank branches are fully dedicated to serve senior citizens, 22 banking payment and collection centers, and 79 CCF sales points located in Walmart supermarkets, Tarjeta’s 35 consumer finance sales points, and through other retailers, 7 Mila customer support offices, completing a network of 1,000 car dealer, and 526 ATMs, 217 self-service terminals and 180 Cash Dispensers with biometric identification.

As of December 31, 2018, the Bank’s loan portfolio to branches ratio, which we calculate by dividing the total amount of loans outstanding at the end of the period by the number of branches at the end of such period, was Ps.393.0 million, compared to Ps.300.8 million as of December 31, 2017. Based on the Peso amounts of the loan portfolios reported by the following Argentine private banks in their respective financial statements as of December 31, 2018, the loan portfolio to branches ratio of (i) Banco Macro S.A. was Ps.379.2 million, (ii) Banco de Galicia y Buenos Aires S.A. was Ps.739.4 million and (iii) BBVA Banco Francés S.A. was Ps.711.1 million. The loan portfolio to branches ratio as of December 31, 2017 of (i) Banco Macro S.A. was Ps.298.8 million, (ii) Banco de Galicia y Buenos Aires S.A. was Ps.532.1 million and (iii) BBVA Banco Francés S.A. was Ps.503.9 million.

The loan portfolio to branches ratio as of December 31, 2016 of (i) Banco Macro S.A. was Ps.194.8 million, (ii) Banco de Galicia y Buenos Aires S.A. was Ps.379.1 million and (iii) BBVA Banco Francés S.A. was Ps.309.3 million. According to publicly available information provided by the Central Bank, as of December 31, 2018, the loan portfolio to branches ratio for all Argentine private banks was Ps.477.2 million.

Building on our banking sector expertise, we identify cross-selling opportunities and offer targeted products to our customers at each point of contact.

As of December 31, 2018 and 2017 on a consolidated basis, we had:

 

•

Approximately 1.8 million active retail customers (including 1.4 million active retail customers of the Bank and approximately 0.4 million active consumer finance customers of our other subsidiaries), 21,905 small businesses and 4,934 SMEs, Middle-Market Companies and Large Corporates as of December 31, 2018, compared to approximately 1.9 million active retail customers (including 1.4 million active retail customers of the Bank and approximately 0.5 million active consumer finance customers of our other subsidiaries), 18,860 small businesses and 4,873 SMEs, Middle-Market Companies and Large Corporates as of December 31, 2017;

 

•

Ps.141.7 billion in total assets as of December 31, 2018, compared to Ps.135.2 billion in total assets as of December 31, 2017;

 

•

Ps.80.2 billion in loans as of December 31, 2018, compared to Ps.89.6 billion in loans as of December 31, 2017;

 

•

Ps.94.9 billion in deposits, including Ps.83.8 billion from the non-financial public sector, Ps.25.2 million from the financial sector and Ps.11.1 billion from the non-financial private sector as of December 31, 2018 compared to Ps.83.3 billion in deposits, including Ps.9.1 billion from the non-financial public sector, Ps.23.2 million from the financial sector and Ps.74.2 billion from the non-financial private sector as of December 31, 2017;

 

•

Ps.17.0 billion in attributable shareholders’ equity as of December 31, 2018 compared to Ps.20.3 billion in attributable shareholders’ equity as of December 31, 2017; and

 

•

5,307 employees as of December 31, 2018, compared to 5,320 employees as of December 31, 2017.

In our cross-selling segments we had as of December 31, 2018:

 

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•

Ps.13.6 billion (approximately U.S.$361 million) in assets under management through Supervielle Asset Management Sociedad Gerente de FCI S.A.;

 

•

Ps.7.3 billion (approximately U.S.$193 million) in assets under management through IOL;

 

•

Ps.1.2 billion in gross written premiums (approximately U.S.$31.7 million) calculated as December 31, 2018, through Supervielle Seguros S.A. for the twelve-month period ended December 31, 2018; and

 

•

Ps.390.5 million in net revenue (approximately U.$.S42.1 million), through Espacio Cordial Servicios S.A., our retail non financial products and services for the twelve month period ended December 31, 2017.

We have developed a segmentation strategy of our customer base to target the specific needs of each category of customers. Our business model has allowed us to deliver sustained levels of growth and profitability, that accelerated since our 2016 IPO and later the follow-on in September 2017. However, our growth and profitability levels have been negatively affected since May 2018 mainly due to the macroeconomic backdrop of Argentina in the second half of 2018.

The following charts set forth the breakdown of our loan portfolio by segment, and of the specific customer categories in our corporate banking and retail banking segments as of December 31, 2018.

 

 

(1)

As of December 31, 2018, the term “small businesses” refers to individuals and businesses with annual sales up to Ps.70.0 million, the term “SMEs” refers to individuals and businesses with annual sales over Ps.70.0 million and below Ps.550.0 million, the term “middle-market companies” refers to companies with annual sales over Ps.550.0 million and below Ps.2.0 billion and the term “large corporates” refers to companies with annual sales over Ps.2.0 billion. Since January 1, 2019, the term “small businesses” refers to individuals and businesses with annual sales up to Ps.100 million, the term “SMEs” refers to individuals and businesses with annual sales over Ps.100 million and below Ps.700 million, the term “middle-market companies” refers to companies with annual sales over Ps.700 million and below Ps.2.5 billion and the term “large corporates” refers to companies with annual sales over Ps.2.5 billion.

 

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The following charts set forth the breakdown of our deposits by type of account and customer category as of December 31, 2018.

 

Between 2016 and 2018, according to financial information made publicly available by the Central Bank and expressed following the Argentina Banking GAAP -nominal historic Peso amounts -not adjusted for inflation- and not including expected loss provisioning, our loan portfolio grew at a CAGR of 48.6%, as compared to 37.7% for the Argentine private financial system (excluding public banks). Our ROAE was 26.3%, 19.1% and 19.5% for the fiscal years ended December 31, 2016, 2017 and 2018, compared to an average ROAE of 27.5%, 25.0% and 33.5% for the Argentine private financial system over the same periods. We achieved net interest margins of 20.6%, 20.1% and 19.4% for the fiscal years ended December 31, 2016, 2017 and 2018, which compares favorably to averages for Argentine private financial system of 14.9%, 13.4% and 15.3% for the fiscal years ended December 31, 2016, 2017 and 2018, respectively. As of December 31, 2018, we accounted for 5.2% of all loans and leasing held by Argentine private financial sector (excluding public banks) and 4.1% of all deposits maintained with the Argentine private financial sector.

Our technology-based sales model enhances our ability to offer customers efficient, high quality service. The Bank has made significant investments in its ATMs, self-service terminals, and cash dispensers with biometric identification network, multiplying by five the network from 2010 to 2018. We were the first bank in Argentina to use biometrics technology as part of our distribution channels. We also have technology scoring systems that allow for an efficient credit-related decision-making process.

Segments

We conduct our operations through the following segments:

 

•

Retail Banking

 

•

Corporate Banking

 

•

Treasury

 

•

Consumer Finance

 

•

Insurance

 

•

Asset Management and Other Services

Retail Banking: The Bank offers its retail customers a wide range of banking products including personal loans, mortgage loans, car loans, short term advances, secured loans, payroll services through Plan Sueldo, credit cards, debit cards, savings accounts, time deposits, and checking accounts, as well as financing services and investments such as mutual funds, insurance coverage, guarantees and benefits payments to senior citizens and pensioners, among others.

Corporate Banking: The Bank, through its corporate banking segment, generally works with SMEs, middle-market companies and large corporates. The customer service model is based on regionalization. Services to SMEs and medium-large companies in the City of Buenos Aires and its vicinities are provided through regional branches located in the most densely populated areas, industrial areas and areas with commercial activity. The Bank believes that its proximity to its corporate banking customers gives it a competitive advantage.

 

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Treasury: It is primarily responsible for the allocation of the Bank’s liquidity according to the needs of the Retail Banking segment, the corporate banking segment and its own needs. The Treasury segment implements the Bank’s financial risk management policies, manages the Bank’s trading desks, distributes treasury products such as debt securities, and develops businesses with wholesale financial and non-financial clients. Below is a description of the services offered under this segment:

Consumer Finance: Through CCF and Tarjeta Automática, Supervielle offers credit card services and loans to the middle and lower-middle-income sectors. Product offerings also include consumer loans, credit cards and insurance products through an exclusive agreement with Walmart Argentina, as well as with other agreements with retailers such as Hiper Tehuelche and through Tarjeta Automática branch network. Moreover, through Espacio Cordial, which is reported in the consumer finance segment since 2018, Supervielle offers non-financial products and services. Since MILA acquisition, the new portfolio of used car loans and its respective results are recorded under Consumer Finance Segment.

Insurance: Through Supervielle Seguros, Grupo Supervielle offers insurance products, primarily personal accidents insurance, protected bag insurance, life insurance and Integral Insurance policies for Entyreprenuers and SMEs. In 2018 the Company incorporated the marketing of special multiple peril policies focused on the Entrepreneurs and SMEs segment. Supervielle Seguros is continuously offering new products to the different customer segments of Grupo Supervielle companies: high net worth individuals (Identité), senior citizens, Entrepreneurs and SMEs, customers of the Consumer Financing and Medium and Large companies segments

Asset Management and Other Services: Grupo Supervielle offers a variety of other services to its customers, including mutual fund products through Supervielle Asset Management. Since its acquisition in May 2018, Supervielle also offers products and services through InvertirOnline S.A.U. Also since MILA acquisition, the MILA portfolio outstanding at the moment of the acquisition and its respective results are recorded under Asset Management and Others Segment, while the new portfolio of used car loans and its respective results are recorded under Consumer Finance Segment.

Products and Services

We offer our products and services in Argentina’s main regions and cities through our main operating subsidiaries, which include:

 

•

Banco Supervielle S.A. a universal commercial banking institution,

 

•

Cordial Compañía Financiera S.A., a consumer financing company,

 

•

Tarjeta Automática S.A., consumer financing company and distribution network,

 

•

Supervielle Seguros S.A., an insurance company,

 

•

Supervielle Asset Management Sociedad Gerente de FCI S.A., an asset management company,

 

•

Espacio Cordial de Servicios S.A., a retail company selling non-financial products and services,

 

•

InvertirOnline S.A.U. and InvertirOnline.com Argentina S.A.U., an online broker, and

 

•

Micro Lending S.A.U., a company specialized in car financing.

 

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Organizational structure

The following diagram illustrates our organizational structure as of the date of this annual report. Percentages indicate the ownership interest held.

 

The following information is related to our subsidiaries and investees as of the date of this annual report:

 

Subsidiary		Jurisdiction of incorporation		Name under which the subsidiary does business
Banco Supervielle S.A.		Argentina		Supervielle
Cordial Compañía Financiera S.A.		Argentina		Walmart Servicios Financieros Servicios Financieros Hipertehuelche Pesos Ya
Tarjeta Automática S.A.		Argentina		Carta Automática Pesos Ya
Supervielle Seguros S.A.		Argentina		Supervielle Seguros
Supervielle Asset Management S.A. Sociedad Gerente de Fondos Comunes de Inversión S.A.		Argentina		Supervielle Asset Management
Espacio Cordial de Servicios S.A.		Argentina		Cordial
Sofital S.A.F. e I.I.		Argentina		N/A
Micro Lending S.A.U.		Argentina		MILA
InvertirOnline S.A.U.		Argentina		IOL
InvertirOnline.com Argentina S.A.U.		Argentina		IOL
Supervielle Broker de Seguros S.A.		Argentina		N/A

Our Competitive Strengths

We have achieved a strong competitive position in our core products (personal loans, factoring, leasing and social security payments to senior citizens), as well as a strong presence in certain geographical regions in Argentina.

 

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We have developed a leading position in the Argentine market in a number of attractive products to different customer segments.

We are leaders in the Argentine market in the following areas:

 

•

Individual Customers. We maintain leading positions in attractive retail banking and consumer financing segments, offering a variety of products, from personal loans and credit cards to social security payment services to senior citizens. As of December 31, 2018, we had approximately 1.8 million retail customers, accounting for Ps.51.7 billion (approximately U.S.$1.4 billion) in deposits. As of December 31, 2018, loans to retail customers of the Bank and of CCF represented 7.3% of the Argentine financial private system market for personal loans, which ranked fifth out of 65 private financial institutions in Argentina. Based on information published by ANSES, as of September 2018, the Bank made 14.1% of all monthly social security payments to senior citizens (who collect their payments on a monthly basis). Additionally, we have a leading position as issuer of Mastercard credit cards with billing statements and the exclusive on-site provider of financial services to Walmart Argentina customers, with a contract extended through August 2020, renewable at expiration subject to renegotiation with Walmart Argentina.

 

•

Corporate Customers. We are also a leading provider of specially tailored financial services and products to the corporate sector, with a particular focus on SMEs and middle-market companies. As of December 31, 2018, we had a 17.6% market share in leasing, ranking second out of 50 private banks in Argentina, according to our estimates based on Central Bank information. As of December 31, 2018, we had a 7.4% market share in factoring in terms of Argentine private banks.

 

•

Capital Markets. We have a leading position in Argentine capital markets, which we have developed as part of our funding strategy. In 2018, we had Ps.1.8 billion (approximately U.S.$ 47.6 million) in securitization and bond issuances for us and our subsidiaries and for third parties. Since our IPO and after the expansion of our capital base, we have reduced securitization of our originated assets, and intend to take advantage of our capital markets capabilities and expertise to serve corporate customers in connection with capital markets transactions.

Leading position in certain geographical regions in Argentina. being one of the most active players in the Cuyo region and also with a leading position in terms of our banking network

 

•

Mendoza: We have a leading position in the province of Mendoza, where we have 291,000 customers and a market share of loans and deposits amoing private banks of 19.4% and 11.0%, respectively. In terms of banking network we have 26 branches out of a total of 174 bank branches in the province and 7 collection centers.

 

•

San Luis: We have a leading position in the province of San Luis, where we have 232,000 customers and a market share of loans and deposits amoing private banks of 23.8% and 20.2%, respectively. In terms of banking network we have 23 branches out of a total of 48 bank branches in the province and 14 collection centers.

Solid sources of funding

We have access to diversified, competitive and stable sources of funding. Our low cost demand deposit base comprises 39.8% of our funding base (26.5% savings accounts and 8.6% checking accounts and 4.7% other accounts as of December 31, 2018) while our franchise allowed us also to capture interest bearing deposits according to our treasury management liquidity needs.

We ocassionally use medium-term debt securities and securitization operations of consumer loans among our funding strategies. Additionally, our consolidated pro forma Tier I ratio was 12.9% as of December 31, 2018 and we have maintained at the holding company level, excess liquidity for future capital injections to our subsidiaries in order to fund our growth strategy.

 

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Creation of value for shareholders through the implementation of prudent financial risk management policies and the primary focus on the intermediation activities.

Along the years, we have generated value and strong growth, while managing financial risks under policies designed to protect our capital and liquidity. In the past, in addition to our organic growth, we have successfully acquired and integrated strategic businesses. We have consistently limited our exposure to the non-financial public sector and limited term, currency and other mismatches in our assets and liabilities. We have high proportion of loans over total assets and we derive our net income primarily from financial intermediation activities rather than from trading or financial investments, which has resulted in more stable sources of income and reduced the exposure of our earnings to market volatility. Since mid 2018, and following the sudden changes in the macroeconomic key variables leading a drastic change in the monetary environment that derived, among other aspects, in an extraordinary increase in cash minimum reserve requirements -some of them allowed to be set up in Central Bank short term securities-, and sequential hikes in interest rates weakening economic activity and credit demand, we opportunistically increased our holdings in Central Bank short term securities applying our excess liquidity, decreasing our proportion of loans over total assets.

Access to multiple customer segments through differentiated brands and channels positions us to capture future growth in the Argentine financial system.

We target a broad spectrum of socioeconomic segments and companies of varying sizes using a multi-brand model to offer a wide range of financial services. The Bank offers customized financial products and services to corporate clients in SMEs and middle-market companies, as well as to high net worth and middle-income individuals and to middle and lower-middle-income senior citizens. CCF and Tarjeta focus their products and services on the middle and lower-middle-income segments of the urban population. Our multi-brand model allows us to access segments of the population that are underserved and we believe offer growth opportunities once the macroeconomic conditions in Argentina stabilize.

We consistently seek to leverage the strong cross-selling potential of our multi-brand and multi-channel business model and our stable pool of almost two million customers.

Through our multi-brand and multi-channel approach, we are able to cross-sell and create synergies across our segments. Bancassurance specifically allows us to cross-sell value added insurance products in compliance with the regulations of the National Superintendency of Insurance (Superintendencia de Seguros de la Nación) and of the Central Bank, as applicable. We offer an attractive platform for cross-selling certain credit cards and loans through 114 consumer finance points of sale (compared to 141 consumer finance points of sale as of December 31, 2017). We cross-sell non-financial services and products such as insurance products and plans, tourism packages, health insurance and health services, electric appliances and furniture, and alarm systems through Espacio Cordial and our senior citizens’ dedicated branches.

We believe our investment in developing a strategic national footprint positions us to capture profitable growth and benefit from economies of scale, once credit demand resumes.

Through the Bank, we have a focused presence in Argentina’s major regions and cities. Through our consumer finance business, we have presence in all the provinces of Argentina. Through our current infrastructure, we serve our customers through 325 access points including branches, bank branches fully dedicated to serve senior citizens, 22 banking payment and sales and collection centers, 79 consumer finance, branches and access points within Walmart stores, Tarjeta’s 35 consumer finance sales points and through other retailers, 7 MILA customer support offices, completing a network of 1,000 car dealer and 526 ATMs, 217 self service terminals and 180 Cash Dispensers with biometric identification, our call center and home banking and mobile services. The Bank has an important presence in the City of Buenos Aires and the Greater Buenos Aires metropolitan area (where approximately 20.3 million or 46% of Argentina’s population resides), through 114 branches and 1 collection center, and CCF has 26 sales points within Walmart locations in the City of Buenos Aires and Greater Buenos Aires. The Bank is also one of the most active players in the Cuyo region, which includes the Province of Mendoza, San Juan and San Luis where it operates through 51 branches and 21 collection centers. The Bank has approximately 291,000 customers in Mendoza and approximately 232,000 in San Luis. CCF has eight sales points in the Cuyo region. We offer consumer finance services through our Tarjeta distribution platform mainly in the Patagonia region, where we

 

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rely on 20 branches and 15 sales and collection centers. Given the strength of our network in commercially significant and high income regions in Argentina, we believe we are well positioned to benefit from economies of scale by leveraging our existing network and growing our revenues without significant investments in additional expansion of our platform.

Long-standing presence in Argentina’s financial sector, committed indirect controlling shareholder and experienced Board of Directors and management team.

Through our main subsidiary, the Bank, we trace our origins to the banking house Supervielle y Cía. Banqueros, established in 1887. Our long-standing presence in Argentina’s financial sector has allowed us to establish strong long-term relationships with our customer base, build a reputation for personalized customer service and establish the Supervielle brand as a recognized household name in the Argentine banking industry for both individuals and corporations, as well as in the securitization and corporate bond segments of the local capital markets. Our controlling shareholder has a strong commitment to the Argentine financial system. Julio Patricio Supervielle is the Chairman of the Board of Directors and has led Grupo Supervielle for over 17 years. During his tenure, we have experienced growth in terms of net worth, assets, deposits and our network, and we have successfully completed some of our most significant acquisitions. We rely on a Board of Directors whose members collectively have extensive experience in retail and commercial banking, a deep understanding of local business sectors and strong capabilities in risk management, finance, capital markets, M&A and corporate governance. In addition, our senior management team is comprised of seasoned officials and experts in their fields that foster a business culture of high performance.

Our Vision and Strategy

The Argentine market is one of the least penetrated financial systems in Latin America, with a fragmented, competitive landscape. We believe the Argentine market has significant underutilized financial infrastructure, in the form of checking and savings accounts, but also good mobile and internet penetration levels. This situation presents a number of growth opportunities, as the country resumes its stabilization process lowering inflation and consequently, interest rates. We believe we are positioned to capture these growth opportunities given our focus on a differentiated customer experience, product offerings, extensive distribution network and leading technology.

We plan to continue focusing on becoming the premier bank for certain specific customer segments including high net worth customers, senior citizens, middle and lower-income populations, entrepreneurs and small businesses, SMEs and middle market companies. We aim to achieve this objective through multiple brands, by delivering customized value propositions in retail banking, corporate banking, treasury, consumer financing, insurance and asset management and other services. We intend to differentiate by reducing time- to-cash and with agile and robust processes. We will strive to capture increased efficiency and synergies derived from cross sell, customer loyalty and payroll customers from our corporate banking segment.    

We believe we have the capabilities required to be successful, including, among others, a long-standing reputation; a strong franchise of 1.8 million active customers; an extensive and strategically located distribution network; a strong digital footprint; stable, atomized and diversified funding; a prudent risk management track record; and a strong culture based on shared values: leadership, innovation, simplicity, efficiency, commitment and respect.

We believe that our holistic approach to mortgage underwriting at the beginning of 2017 and until the sudden economic backdrop, exemplifies our strengths. We became one of the top 5 private market leaders in this segment, by, for example, forging alliances with real estate developers, offering customers a competitive value proposition and having an exclusivity agreement with Zona Prop, a popular online real estate website.

The “Superate” advertising campaign launched in 2017 and continued in 2018 and 2019, aims to continue differentiating our positioning by focusing on the potential for personal and collective lifestyle improvements and financial well-being among our customers. The campaign highlights that our mortgages, personal loans, SME loans, platform services and personal attention are tailored to our customers’ needs, and thereby become important tools for our customers to realize their goals.

 

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The key components of our strategy are as follows:

Increase our market presence among attractive customers through an effective segmentation strategy and strengthened value proposition

We seek to increase revenues through cross-selling enabled by CRM:

High net worth customers: We successfully launched the Identité brand in 2014 with an attractive value proposition designed to capture and monetize the high net worth customer segment. That value proposition includes a wide range of components like premium credit cards, loyalty programs and exclusive events for customers. To reach high net worth individuals, the bank leverages three key assets: a premium, differentiated brand, a highly trained workforce and an excellent branch network in high income neighborhoods.

Senior citizens: We intend to maintain our leadership position in the senior citizen segment, providing unique services and benefits catered to its specific needs. Leveraging our network of fully dedicated branches we seek to expand our credit card and personal loan business, finance travel packages and consumer goods and services, and distribute insurance products, including life, burial, health, personal accident insurance and home insurance. This segment is adopting technology rapidly, which we anticipate will increase efficiency of service delivery.

Middle and lower-middle-income population: This segment has one of the lowest banking penetration rates in Latin America and represents an important opportunity to attract new customers. CCF’s exclusivity agreements with Walmart Argentina and Hipertehuelche Supermarkets position us to reach this segment with a powerful value proposition, particularly consumer finance loans and credit cards. This customer base also offers opportunities for cross-selling of other banking products. Additionally, we continuously analyze opportunities for new product launches to serve this segment, as well as opportunities to forge new alliances with other retailers.

Entrepreneurs and Small Businesses: We aim at continuing expanding our market share within our customer base of entrepreneurs and small businesses. We intend to leverage our branch network as a primary means of attracting business and focus on building our customized cash management services.

SMEs: Our aim is to become the premier bank for SMEs by deploying outstanding transactional and cash management services. We intend to continue developing strategic partnerships with key industry players to provide financial services through direct lending or factoring transactions to their critical providers and suppliers along their value chains. We will target specific opportunities and customers in the agroindustry sector, energy, infrastructure, construction and other specific sectors. With respect to the agri-industrial sector, we strive to deepen our existing relationships with leading industry players, providing financing to their customer base. In San Luis, Mendoza, and Tucumán, where we have a well-established distribution base, we intend to continue targeting clients and value chains related to their main regional economies. With respect to the wine industry, we seek to continue developing partnerships with premium wine producers and key industry suppliers. With respect to the energy and infrastructure sectors, we target SMEs and middle-market companies along the supply chains of oil and gas (exploration and production), renewable energy projects and medium and large construction companies.

Middle markets and large corporate customers: We intend to offer a full range of products and services, including financial advisory, transactional services, treasury management, short, medium and long term financing to the middle market and large corporate customers that we have historically targeted. We aim to achieve this goal through quick decision-making with respect to our credit evaluation process, personal attention, increasing transactional services (such as check maintenance, payroll management, payments to suppliers and tax payment services) and building upon our cash management products, payroll management and other products that translate into higher balances of immediately available deposits. As we follow a customized approach across the value chain, suppliers and clients of our large corporate customers will be another source of SMEs client origination for the bank.

Leverage our proximity to customers through our extensive distribution network of branches and sales points to provide a superior customer experience

We have a direct presence in Argentina’s major regions and cities. The Bank has a particularly important presence in the Greater Buenos Aires metropolitan area and the Cuyo region, which includes the provinces of Mendoza, San Juan and San Luis. Given the geographical concentration of our network in commercially significant and high-income regions in Argentina, we believe we are well positioned to benefit from economies of scale by growing our revenues without significant investments in additional platform expansion.

 

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We may selectively expand the Bank’s network of branches, emphasizing services for high net worth and upper-middle income individuals, small businesses and SMEs, with a focus on the City of Buenos Aires and the Greater Buenos Aires metropolitan area.

We intend to build upon our leadership position in retail and corporate banking services in the provinces of Mendoza and San Luis. We plan to continue our partnerships with premium retail stores and shopping outlets to obtain differentiated discounts and benefits for our retail customers, relying on our existing network, which is the largest in the region.

We plan to continue to expand our dedicated sales force with a focus on new entrepreneurs, small businesses and payroll services, to drive revenues and cross-selling ratios.

We intend to seek new strategic partnerships in the agribusiness sector to provide financial services to leading national and international players catered to their customer base. We plan to broaden our offering of commodity warrants and livestock leasing, leveraging our strong market leadership in San Luis and Córdoba, in the north of Argentina.

Continue capitalizing on synergies by developing new businesses to increase our share of wallet

Our two million customers provide a base from which to expand our share of wallet and increase customer loyalty. The Bancassurance business allows us to cross-sell historically profitable and low-claims products to our existing customer base. We have access through our distribution networks and aim to further develop our bancassurance distribution model by expanding the variety of insurance products offered by Supervielle Seguros. Espacio Cordial allows us to reach our clients with a wide variety of non-financial products and services, including travel and home appliance financing and health services.

Grow our statement of financial position while maintaining our conservative risk management policies

Over the past 15 years we have differentiated ourselves from our competition by systematically securitizing assets, becoming the leader in Argentine capital markets in this segment. Since our IPO and after the expansion of our capital base, we have reduced securitization of our originated assets relative to our total assets, and we have been growing systematically above industry growth levels until the loan demand slowdown and the sudden economic backdrop.

Our conservative financial policies based on a diversified deposit base, low portfolio concentration, short term high liquidity and low interest rate, term and currency mismatches have allowed us to build a strong franchise in retail and corporate banking. Since the IPO, we increased our deposits following the pace of loan growth, and we will continue to cross-sell to retail and consumer customers and attract cash management deposits from corporate clients. We also intend to continue to access long-term funding from the international capital markets as the Bank did in February 2017 through the issuance of a Peso denominated 3.5 years floating rate note for the equivalent amount of U.S.$300 million.

Continue to improve our efficiency by focusing on innovation and technology

We will seek to increase commercial productivity by optimizing sales time using online and mobile banking, sales and collection centers, streamlining risk assessment and CRM technology. We also plan to continue working with world-class business intelligence tools to increase sales productivity and to improve relationships with clients through better predictive sales actions and communications.

Our strong culture of innovation supports our constantly keeping abreast of customer needs and global trends, creating and efficiently implementing solutions focused on local customer preferences.

 

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We intend to expand our digital banking channel and online banking platform. Our goal is to offer an outstanding digital experience to our clients. We intend to continue increasing the number of active online users and migrating our services to digital channels, which we expect will allow us to increase low-cost distribution and convert service centers into full bank branches. We also intend to continue launching mobile banking applications, which will enable “one click” payment and “one click” loan functionalities, with anytime and everywhere financial services and provide alerts and messages to customers in order to achieve cost efficiencies through low-cost social network advertising. We have significantly improved the digital experience of our factoring product line, cash management and payroll services.

We expect the future of financial services to be marked by a transformation towards a digital business model. The challenge for organizations is to optimize the technological innovation of traditional banking to attract new consumers of financial services, with the aim of creating the bank of tomorrow, today.

As a further step towards the acceleration of Supervielle’s digital transformation, during 2018 we hired a top management consulting firm to boost our approach. The core idea relies on simple and modular propositions for selected customer episodes. Those value propositions will seek to design an agile operating model for each relevant customer episode as a way of working for customer-centric change based on digital adaptable and radically lower cost TI and Operations environment. As a counterpart, our funding, growth and efficiency targets will be benefited. Currently we are working with empowered and focused Agile teams.    

Segment Reporting

The following table sets forth the breakdown of our net revenue and net income by segment for the periods indicated.

 

		As of December 31, 2018
Segment		Net Revenue				Percentage				Net Income				Percentage
		(in thousands of Pesos)
Retail Banking			13,574,042				55.11	%			(503,105	)			22.44	%
Corporate Banking			5,676,646				23.05	%			1,177,834				(52.53	)%
Treasury			248,113				1.01	%			(1,639,577	)			73.13	%
Consumer Financing			3,684,310				14.96	%			(1,460,638	)			65.15	%
Insurance			878,436				3.57	%			200,469				(8.94	)%
Asset Management and Other Services			569,154				2.30	%			(17,054	)			0.75	%
Total Allocated to Segments			24,630,701				100.00	%			(2,242,071	)			100.00	%
Adjustments(1)			1,167,431								(814,578	)
Total Consolidated			25,798,132								(3,056,649	)

 

(1)	Includes financial expenses incurred by Grupo Supervielle at the holding level in connection with its funding arrangements the net interest income received from the investment of liquity at the holding company, as well as transactions between segments.

The following table sets forth the breakdown of our assets by segment as of December 31, 2018.

 

		As of December 31, 2018
		Retail Banking				Corporate Banking				Bank Treasury				Consumer Finance				Insurance				Asset Management and Other Services				Adjustments(1)				Consolidated Total
		(in thousands of Pesos)
Assets
Cash and due from banks			4,706,116				325,248				28,505,898				61,414				3,135				582,102				(496,360	)			33,687,553
Debt Securities at fair value through profit or loss			—				—				14,941,290				—				100,041				70,784				—				15,112,115
Loans and other financings			30,785,552				38,850,543				2,824,590				6,411,427				459,404				602,207				(2,725,259	)			77,208,464
Other assets			1,141,320				80,182				5,663,252				1,735,186				372,487				630,880				6,102,557				15,725,864
Total Assets			36,632,988				39,255,973				51,935,030				8,208,027				935,067				1,885,973				2,880,938				141,733,996

 

(1)	Includes elimination of inter-segment loans and assets not directly allocated to a single segment, such as unlisted equity investments, miscellaneous receivables, premises and equipment, miscellaneous assets and intangible assets.

 

 

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		As of December 31, 2017
		Retail Banking				Corporate Banking				Bank Treasury				Consumer Finance				Insurance				Asset Management and Other Services				Adjustments(1)				Consolidated Total
		(in thousands of Pesos)
Assets
Cash and due from banks			4,132,699				384,037				11,769,085				107,691				4,447				352				(13,387	)			16,384,924
Debt Securities at fair value through profit or loss			—				—				16,285,616				111,979				—				—				440,330				16,837,925
Loans and other financings			31,805,596				44,801,483				3,336,981				9,824,802				140,953				25,564				(2,826,709	)			87,108,670
Other assets			623,355				17,877				7,741,867				2,113,635				750,829				283,211				3,367,857				14,898,631
Total Assets			36,561,650				45,203,397				39,133,549				12,158,107				896,229				309,127				527,761				135,230,150

 

(1)	Includes elimination of inter-segment loans and assets not directly allocated to a single segment, such as unlisted equity investments, miscellaneous receivables, premises and equipment, miscellaneous assets and intangible assets.

The following table sets forth the breakdown of our active customers in 2018 and 2017.

 

		Active Customers
		As of December 31,
		2018				2017
Retail Banking			1,403,460				1,433,187
Corporate Banking			4,934				4,873
Consumer Finance			397,440				463,416
IOL			16,994				—
MILA			18,988				—
Total			1,841,816				1,901,476

Retail Banking

The Bank offers its retail customers a wide range of banking products including personal loans, mortgage loans, short term advances, secured loans, payroll services through Plan Sueldo, credit cards, debit cards, savings accounts, time deposits, and checking accounts, as well as financing services and investments such as mutual funds, insurance coverage, guarantees and benefits payments to senior citizens and pensioners, among others.

The Bank has focused on automatic channels that provide greater functionality in face-to-face and digital automatic platforms, with a view to expediting transactions and generating new sales channels

Products and services are tailored to the needs of the different segments with which the bank works, focused on continuous improvement of customers’ experience. Two of our more strategic segments are the small companies, grouped in Emprendedores & Pymes (Entrepreneurs and Small Businesses), and high net worth customers, which we refer to as our Identité segment. Additionally, products and services are offered to meet the needs of senior citizens.

In 2018 the network’s area of influence was expanded with the opening of three new branches. These openings were intended to consolidate the Bank’s presence in areas with high density of stores and achieve full coverage in commercial corridors where SMEs are established.

 

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Additionally, we implemented substantial changes in some of our service centers, modernizing daily operations and meeting the needs of senior citizens. With the development and expansion of automatic solutions for queries and cash withdrawals that include biometric identification, the bank has paved the way for future generations of senior citizen customers.

Our Retail Banking services are focused on the customer segments discussed below.

 

•

Entrepreneurs and Small Businesses. The Bank considers small businesses to be fundamental drivers for strengthening of productivity in the Argentine economy. For this reason, the Bank redefined its approach to the small business segment in order to develop the necessary tools and services to help small businesses grow and to respond to their needs with convenient and simple solutions. We service small businesses through our Retail Banking segment and SMEs and Middle-Market Companies through our corporate banking segment.

In order to enhance strategic sub-segments, the Bank worked on lead generation through different sources, including agreements with small business associations and a presence at specific franchises and transportation events. Together with these actions, new tools were implemented to improve response speed to customers. Protocols for referral towards different channels were also implemented to improve efficiency.

Development of the differentiated service model continued to include over 80% of the branches and over 90% of the Retail Banking segment’s customers. The Bank focused on two specific executive profiles, offering specialized services to larger SMEs and streamlined services to smaller SMEs. As regards lead generation, the Bank has a special sales force trained through the “Universidad PyME” with a fully developed commercial management model.

In 2018, we launched media campaigns (“Lo Grande de ser una Pyme”) as well as new products (such as the new occupational risk insurance).

 

•

High Net Worth Customers. We offer our high net worth customers exclusive services such as priority access to our branches with minimal waiting time, concierge services, exclusive back offices for conducting banking activities, dedicated customer service representatives at the call center, a remote investment center and dedicated locations at our branches.

 

•

The High Net Worth customers’ segment of Banco Supervielle continued to strengthen in 2018. we implemented significant chenges with respect to interaction and, assistance to customers. Based on the knowledge of the customers’ life cycle and their distinctive characteristics, the redesign of the commercial management model was promoted with focus on the penetration in High Net Worth customers and the implementation of specific policies to obtain the greatest risk/benefit ratio in low income segments.This change of vision required revisiting the way of thinking and doing, adopting the good practices developed in other segments and improving the segment’s distinctive aspects.

In this context, focus was placed on the customers’ life cycle, with the emphasis on the first stages with a view to quickly activating and digitalizing each customer, reducing maturities and promoting the redirectioning of transactions to automatic channels at an early stage. This resulted in the creation of new service protocols compatible with these actions, and training sessions were carried out at different structure levels and new internal service agreements were executed to render lead generation and assistance circuits more fluid and consistent, reduce response times and, therefore, enhance the customers’ satisfaction from the first contact.

In 2018 we launched of the Bank’s referral program, using homebanking as a primary means of communication. The program is based on significant incentives for the referring party and more benefits for the referred party, including product rebates, preferential rates and savings on credit card consumptions, seeking additionally to favor cross selling of the newly referred customers.

During 2018, new developments were implemented for the consolidation of holdings and investments, so as to boost the growth of the Hig Net Worth customers segment.

 

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•

Senior Citizens. The Bank facilitates ANSES payments to close to 1 million beneficiaries per month, including senior citizens and pensioners, and it believes it is the private bank with the largest presence in this segment.

In 2018, the Bank continued offering products and services addressing the needs of senior citizens, while further improving its value proposition and service model. Based on the knowledge of the customers’ life cycle and their distinctive characteristics, we promoted the redesign of the commercial management model with focus on the penetration in high net worth customers and the implementation of specific policies to obtain the greatest risk/benefit ratio in low income segments.

We enhanced the service model enhanced through Caja Rápida (Cash dispenser with biometric identification) in its Service Centers, reaching a 100% coverage of the network and directing the necessary effort to communication and training of its handling to favor acceptance and acquaintance by senior citizens, with clear benefits in terms of waiting times and operation agility. Based on the good results obtained, we conducted pilot tests to make this equipment available at Service Center lobbies, allowing 24-hour use, thus reducing the customers flow during bank hours.

In line with the efforts to improve our service level, a new customers flow manager was implemented from which allow for a better management, control and study of transactions and customer segments, as well as referral to the most favorable transaction channel according to the transaction requested, streamlining daily transactions.

 

•

Middle-Income Persons. In 2018, focus continued on the portfolio digitalization process, to further develop these channels for placement of products and transactions of customers.

Ambitious objectives were maintained but special focus was placed on retention processes taking into account the economic situation, by providing benefits to retained higher value customers.

By the beginning of 2018, we reviewed credit policies of the Plan Sueldo sub segment which allowed better approval ratios of credit products, improving cross sell and activation ratios. With the strategy of being the first choice bank, by the end of the year the loyalty program was relaunched as the new Club Supervielle, with more and better benefits.

In line with the first choice bank and activation objectives, by mid-year, the new “journey of customers” was defined, improving communication and the proposal within the first 90 days after admission.

Through our Retail Banking segment, we offer retail customers a wide range of products and services as described below.

Packages of banking services. As of December 31, 2018, the Bank maintained almost 2.9 million savings accounts and more than 120,000 checking accounts. In 2018, the Bank serviced more than 832,000 product bundles for senior citizens, more than 419,000 Plan Sueldo accounts and more almost 63,000 product bundles for high net worth customers.

During 2018 the Bank promoted access to banking services at all levels, promoting streamlined transactions and enhancing the use of automatic channels.In line with the development of strategic segments we evaluated the specific needs of customers were evaluated with a view to designing products and services that meet the requirements of each sub-segment. In order to actively support the development of customers, their community and foster employment generation. In the senior citizens segment, the coverage and functionalities of the biometric network was enhanced so as to make face-to-face service processes more efficient, thus achieving significant improvements in transactional times, a positive perception of the bank-customer relationship and a better experience for senior citizens.

 

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In 2018 the programs Aeris, Aeris Empresas and Club Supervielle merged, giving rise to a new loyalty program with a new brand and visual identity of the public site, extending the benefits to the Bank’s general portfolio and making access options to tourism products and services more flexible through greater synergies with the suppliers. The next steps include the integration with Tienda Supervielle Productos and the development of a specific program aimed at the senior citizens.

Investments. With focus on the efficiency of operations, the Bank continued strengthening and developing autonomous channels for a comprehensive management of investments operations. Following the past year’s development of the Centro Integral de Inversión for a customized service, in 2018 the Bank started preparations for the merger of management platforms, to offer more efficient products and better investment alternatives to its customers, which we expect may lead to a greater penetration in terms of management of funds of current customers and an increase of lead generation of high net worth customers.

A high percentage of time deposits, mutual funds and purchase and sale of shares, bonds and currency was made through automatic channels, supported by communicational actions and the establishment of specific benefits. In addition, denominated time deposits in “unidad de valor adquisitivo” (“UVA”) an inflation adjusted unit that allows capital loans to be adjusted daily, were launched, with an attractive proposal to use automatic channels.

Insurance. The Bank has continued to grow in the insurance business. During 2018, the Bank launched products such the Comprehensive Commercial Insurance which completes the services offered mainly to entrepreneurs and SMEs, which service is fully processed by Supervielle Seguros. Digital development is the new paradigm for our insurance sales. To be available to customers, so that at any time they can purchase, give an opinion, simulate and compare through digital channels. Insurance policies for Protected Bag, Protected Technology, Protected Contents and ATM Robberies are available in Online Banking. The Banking segment worked hard on the incorporation of greater and more expanded offers in digital channels and in the continuous improvement of processes to ensure savings and a greater efficiency, promoting usability to guarantee the best customer experience.

Loans. The Bank offers personal loans, mortgage loans, car loans, short-term advances and salary advances to payroll customers. The placement of personal loans was boosted by a renewed offer and special facilities in line with the needs of each segment, together with the sale through digital channels..

During 2018, in view of the widening of the market following the implementation of the UVA Mortgage Loans, a communicational and management strategy was launched to increase its market share. The Bank posted banners and mortgage calculators in one of the major real estate portals of Argentina and entered into agreements with brokers, large developers and realtors to strengthen generation.

With a view to generating a better customers experience, the bank engaged in a detailed study of the mortgage management end-to-end process, which resulted in considerable benefits both for the Bank and the customers. Including a better understanding of the web and the operating flow and improvements in management performance. Also we could identify and automatize key process. The customers obtained a more fluid communication as well as real time visualization of the proceeding status, streamlined mortgage management and a significant reduction in times from the first contact to loan settlement.

These achievements had a significantly positive impact on the product’s performance during the first half of the year. However, as the product is highly dependent on the changes in the country’s economic situation, in the second half of 2018 the product’s performance remained well below expectations. Nevertheless, the Bank continued to focus on the increase of its market share.

By mid-year, the pioneer “Bank Guarantee for Tenants” product started to be offered also in areas outside the Greater Buenos Aires area. The product was developed taking advantage of the change in customers’ preferences and needs, and relying on the management of its own mortgage nodes, represented by officers specialized in real estate products and by a wide network of brokers, which gave the product a national scope.

The Bank also restructured the car financing loans focusing mainly on pricing redefinition, a new initial cross selling model for borrowers, expansion of marketing channels through the incorporation of several car dealers and the commencement, by the end of the year, with the transactions for UVA loans.

 

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Focusing on efficiency, the Bank redefined policies, the contract framework of transactions and macro processes with special emphasis on critical issues. By the end of the year, the sections related to the definition of credit policies applying to the product were under way.

Credit and Debit Cards. As of December 31, 2018, the Bank maintained approximately 778,000 Visa and MasterCard accounts. During 2018, traditional debit cards were replaced by chip debit cards for the segments more exposed to the skimming. The Bank thus managed to rank high in the system due to the introduction of chip debit cards.

In line with the digital transformation, strong focus was placed on the incorporation of contactless technology in Mastercard Platinum and Black cards. By late 2018, the International and Gold cards were added, thus completing the whole Mastercard portfolio, offering innovating products to meet the demand of customers and facilitate their daily transactions.

Still focusing on digital transformation, migration continued from paper to digital card statements, and automatic processes were developed for delivery of card statements by email.

Total deposits from the Retail Banking segment as of December 31, 2018 amounted to Ps.51.7 billion (U.S.$1.4 billion) Retail branch deposits and Senior Citizens deposits continued to represent a high portion of total deposits. In 2018, retail branch deposits plus Senior Citizen deposits represented 44.3% of total deposits compared to 53.8% in 2017.

Corporate Banking

The Bank, through its corporate banking segment, generally works with SMEs, middle-market companies and large corporates. The customer service model is based on regionalization. Services to SMEs and medium-large companies in the City of Buenos Aires and its vicinities are provided through regional branches located in the most densely populated areas, industrial areas and areas with commercial activity. The Bank believes that its proximity to its corporate banking customers gives it a competitive advantage.

As of December 31, 2018, the corporate banking segment had Ps.38.9 billion of outstanding loans and financial leases, and contributed almost 20% of our net revenues before adjustments.

The main financial and transactional products and services that the Bank’s corporate banking segment offers are factoring, leasing, employee payroll services (through which it offers solutions to meet its customers’ working capital needs), foreign trade and cash management and transaction services. In addition, the Bank’s corporate banking segment also offers checking account short-term advances, factoring, secured and unsecured loans, Sociedad de Garantía Recíproca (SGR)-guaranteed loans, pledge loans, supplier payment services, check custody services, armored transportation services, collections services, corporate credit cards, pension services, deposit accounts (including time deposits and short-term deposits).

The following sets forth additional information on the main products and services offered by our corporate banking segment:

Leasing. The Bank’s leasing area meets the leasing needs of all commercial banking areas of the Bank. While leasing remains a very attractive instrument for companies to finance investments related to business growth and operating efficiency, the rise in interest rates and the contraction of the economy in 2018 caused a significant fall in the volume of contracts executed. As of December 31, 2018, we had a 17.6% market share in leasing in terms of private banks in Argentina.

Factoring (check discounting, invoices and public work certificates). The Bank participates in the check discounting market by offering three categories of products: (i) with recourse, where the customer who discounts the check with the Bank assumes the insolvency risk, (ii) first loss, where the customer assumes part of the insolvency risk, and (iii) non-recourse, where the Bank assumes all insolvency risk. The share of the factoring market of Argentine financial system as of December 31, 2018 was approximately 7.4%, according to the most recent publicly available information published by the Central Bank.

 

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Foreign Trade. The Bank is an active participant in foreign trade financing and offer personalized advice regarding technical, commercial and regulatory matters related to foreign trade. The Bank draws on a trained staff to advise customers on foreign trade, foreign exchange transactions, international transfers, credit assistance in connection with products offered, and operating issues.

During 2018, the simplified exchange regulations prevailing in the previous two years for foreign trade continued, which has led to a more agile settlement process.

As regards the financing of foreign trade, the rising trend of 2017 continued during the first half of 2018. However, since the third quarter of 2018, the imports segment started to contract as a result of the first Peso devaluation. Over the end of the year a strong recovery was recorded in the exports business of the Bank’s customers.

By the end of October and with a view to promoting Argentine exports and the inflow of foreign currency, the Ministry of Production and Labor invited Banco Supervielle to take part in the Argentina Exporta Program oriented to prefinance sales abroad of Argentine SMEs. The program grants financing for up to U.S.$.200 thousand. As from November 2018, the Bank launched a lead generation campaign under this program, which will continue throughout 2019.

As to settlements and foreign trade transactions, in 2018 the Bank continued with the digitalization of its transactions and achieved an 80% paperwork reduction.

Following on this digital trend, the E-Comex channel continued to consolidate. Importer and/or exporter customers make inquiries on their ongoing transactions and manage payments and/or collections through Corporate Online Banking. The digital tool was updated during 2018 for the purposes of agility and simplicity.

The Bank remains the only bank in the Argentine financial system to operate in the International Factoring market, through FCI (formerly called Factor Chain International).

Cash Management and Transaction Services. The Banks offers a range of products and services designed to assist in the corporate administration process, including payments to suppliers, electronic banking, payments and collections, cash management and armored transportation. Supplier payment services ensure timely payment, optimize the use of customers’ funds and simplify our customers’ administrative tasks. The various payment options are designed to meet each company’s needs and include short-term advances based on deferred payment checks, with their respective statements and tax payment receipts, as well as transfers and payments against revolving credit facilities. Additionally, the Bank offers a convenient integrated check issuance, delivery and discounting service. Under various collection agreements entered into with service providers and public sector agencies, the Bank offers a comprehensive invoice and tax collection service using tellers, as well as a range of electronic payment options. Moreover, in the event that a company is paid for its products or services by credit card or voucher, the Bank serves as a payor bank for the major brands in the market, which enables credit card or voucher payments to be credited to the company’s account with us.

As members of the Red Interbanking (a network comprised of Argentina’s major financial institutions), the Bank offers an electronic communications system which enables our customers to optimize their banking transactions. The Bank’s corporate customers can connect to the service from their personal computers at any time and review their accounts at any member bank, send us messages, transfer funds, make electronic wage payments, supplier payments and tax payments, and display market data. The Bank offers different electronic products for each segment of its corporate clientele, for example, Datanet Plus, Datanet Manager and InterPYME. Datanet Plus and Manager target SMEs, middle-market companies and large corporates and InterPYME is a product designed for small businesses. The Bank processes online transfers, allowing debit and credit transactions to be settled automatically and to be reflected in the relevant accounts in real time.

The Bank offers corporate electronic home banking services, which allows customers to access their bank accounts and information regarding our primary products and services online without having to leave their offices. People and businesses can access their account balance information and monitor account activity, factoring transactions, payments, deferred checks in custody and the status of checks written through the supplier payments service.

 

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Customers can also check the status of payments to leasing and foreign trade transactions, request checkbooks, carry out account transfers, pay paychecks, suppliers and corporate credit card bills, access electronic payment services for foreign trade services and discount checks remotely through the e-Factoring service with the electronic platform.

During 2018, the Bank continued with the investment process of previous years, improving the offer of collection and payment products, with a view to increasing transactional banking activities with customers.

Sociedad de Garantía Recíproca (Mutual Guarantee Agents or “SGRs”, per its initials in Spanish). In 2018, the Bank remained the market leader, operating with approximately 69% of the SGRs authorized in the country (24 out of 35 authorized SGRs and Guarantee Funds). The Bank is recognized as the bank of the SGRs by the Cámara Argentina de Sociedades y Fondos de Garantías and the Ministry of Production/Sepyme, the authority that supervises SGRs.

Banco Supervielle was also a leader in innovation for being the first private Bank to operate with the Digital Guarantee Certificate issued by Garantizar SGR and also for executing an agreement with this SGR to offer a Business Credit Card with guaranteed purchase limit.

Due to the its expertise and the sector’s recognition, Banco Supervielle was elected by the Ministry of Production to execute with the BICE the Agreement for receipt of guarantees issued by the Fondo de Garantía Argentina, thus becoming the first private Bank in the country to develop these operations basically oriented to loans for SMEs.

Together with some SGRs, financing facilities were developed for SMEs, members of the value chain, entrepreneurs and franchises.

Wines Division. During 2018, the Wines Division of Banco Supervielle continued to strenghthen its strategy to become a specialized financial advisor to the wine industry.

The Bank’s target market consists of wine estates with high added value products, that focus mainly on the export market. However, Banco Supervielle continued supporting all industry players, from leading grape producers to major wine estates as well as suppliers of wine manufacturing and bottling supplies.

The Bank’s strategy targets participants in the entire value chain of wine production, from grape producers through wineries. This broad based strategy also allows us to develop our Retail Banking products with these customers.

Customized Value Proposition

The proposals of the franchises and transportation sub-segments launched in 2017 consolidated in 2018. Moreover, in line with the Bank’s intent to become the Bank for SMEs, a value proposition was launched in November 2018 aimed at the health sector, in line with the positioning started in 2017. During 2019, Supervielle plans to continue launching special proposals for different sectors.

Franchises. The Bank has introduced innovative loan models including franchise system variables to support the growth of entrepreneurship in Argentina through a professional system. The Bank finances up to 40% of the initial investment (capped at Ps.800,000 for new franchisees), offering preferential rates and a six month grace period on principal payments.     

Transportation. The Bank has developed products for the cargo transportation segment activities and the value chain that enhances the growth of entrepreneurs and SMEs in general. For example, one of the attributes deemed key for a value proposition for this segment is the prompt response for the approval of loans for expansion of their truck fleet. The Bank has implemented single-day approvals of preferential rate financing for secured loans and leasing for the purchase of trucks and/or semitrailers. This allows SMEs to face new business opportunities and plan their activities more accurately.

Health. In November, a new value proposition was presented, intended to cater for the needs of health and diagnostic centers, outpatient doctors’ offices, laboratories and pharmacies and to that end, focus groups were

 

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held with sector companies and customers. The proposal is featured by promptness in loan granting and agreements with vendors. As regards to credit, requests for amounts less than Ps.10 million were answered within 24 hours and requests for amounts above Ps.10 million were answered within 72 hours.

Oil & Gas Project

The Bank considers that the oil and gas sector has a high growth potential. Therefore, in 2018, the Bank decided to lay the bases for the development of a project in this sector. The Bank worked together with an international consulting firm specialized in the sector and a multi-disciplinary team. The implementation of this project began in 2018 and is planning to extend throughout 2019. Oil and gas activities record a sustained growth. The most attractive oil and gas areas, the Neuquén and San Jorge gulf basins, are located in the Patagonia.

An important milestone was the opening in April 2018 of a new branch in the city of Neuquén, in addition to the existing customer service model. This allows for a close contact with the value chain of large operators and an improved competitiveness through the incorporation of new Planes Sueldo of individuals with high purchasing power residing in the area.

According to estimates, the development of the Vaca Muerta oilfield has a significant potential for several value chains, including: services for extraction, operation, maintenance and transportation, to mention the main three.

Corporate Digital Banking

2018 was a turning point for Banco Supervielle’s Digital Banking due to the merging of the Corporate Digital Banking and the Individual Digital Banking areas. The most important milestones for corporates were the opening of two new operation channels, the New Corporate Mobile Banking and a new Corporate Digital Banking platform which will replace the current Corporate Home Banking.

In addition to the implementation of new technologies, a new form of work, Agile, was implemented, and the Corporate Digital Banking was the first Project of the Bank developed according to this methodology. It was implemented in 2018 and was gradually applied to all customers, entering a new construction and functionality migration stage.

The most relevant achievements include the new Business Online Banking, with a new design and technology, a menu with everything only 2 clicks away, a modern consolidated position, new paper-less self-management processes, a better help and search module, user surveys and health monitoring modules and Analytics.

Treasury

The Treasury segment is primarily responsible for the allocation of the Bank’s liquidity according to the needs of the Retail Banking segment, the corporate banking segment and its own needs. The Treasury segment implements the Bank’s financial risk management policies, manages the Bank’s trading desks, distributes treasury products such as debt securities, and develops businesses with wholesale financial and non-financial clients. Below is a description of the services offered under this segment:

Trading Desk

The Bank’s trading desks trade financial assets on a proprietary and third-party basis, sell financial products, and implement the Asset and Liability Management Committee (“ALCO”) decisions, within the board’s policies, regarding the Bank’s liquidity and financial risk management policies. The Bank’s trading operations include money market instruments, which include institutional investor deposits, public debt instruments, Central Bank debt notes, foreign exchange, stocks, futures, swaps and repos. Trades develop within the limits of a comprehensive risk map which sets limits on counterparty risk and on long and short positions for each asset class, depending on volatility, traders’ seniority level, and other factors. The risk map also determines stop-loss policies. Banco Supervielle managed to grow in volume in all products operated, including foreign currency, public and private securities, stocks and derivatives. The Bank managed to position itself as one of the benchmarks of the market among institutional investors in all types of operations.

 

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Correspondent Banking

During 2018, the volume of foreign credit facilities increased, both as regards applications received and used, which resulted support by international banks regarding foreign trade and working capital facilities.

International entities offered short and medium term loans, with three year disbursements under the IDB program by the second half of the year.

Capital Markets

The Bank’s capital markets department is responsible for structuring and placing debt and securitization instruments, primarily financial trusts, both for third parties and for all our subsidiaries. The Bank is one of the leading entities in the Argentine capital market.

During 2018, the Bank acted as arranger and underwriter of securitizations for Ps.1,832 million, and domestic bonds for Ps.2,424 million, in both cases combining the Bank’s and third party’s transactions, accounting for a 4.23% market share.

Public Sector and Intermediaries

The Bank has maintained a presence in the Province of San Luis for more than 20 years. In 1996 the Bank acquired Banco de San Luis and was appointed as exclusive paying agent for the government of the Province of San Luis to provide financial agency and tax collection services to the Province and serve as payor bank for provincial government employees. This financial agent contract was renewed twice and was due to expire on 2021.

On January 17, 2017, the Province of San Luis notified the Bank of its decision to terminate, effective as of February 28, 2017, the Financial Agency Agreement. Since February 2017, the Bank has continued to provide Financial Services to the Provincial government of the Province of San Luis and its employees despite the termination of the Financial Agency Agreement in February 2017.

On June 7, 2018, the Province ratified an agreement signed with the Bank for a term of 12 months formalizing its role as exclusive paying agent which the Bank has continued to provide since the termination of the Financial Agency Agreement with the Province in February 2017.

In January 2019, the government of the Province of San Luis released the terms and conditions of the auction to be held by the Province for the new financial agency agreement. Proposals were presented on March 15, 2019. The award date has not been published yet. Banco Supervielle has acquired RFP documents and presented an offer.

Also, on May 23, 2018, the Municipality of the city of San Luis appointed the Bank as financial agent for a term of 2 years with automatic renewal for 2 additional years, commencing with the first payroll payment on June 29 of the current year which could result in the migration of approximately 2,450 customers from other institutions. With the appointment by the City of San Luis, the Bank became financial agent for all the municipalities in the Province.

As of the date of this annual report, the Bank continues to provide financial services to the provincial government of the Province of San Luis and its employees.

The Bank has a private sector business franchise in the Province of San Luis as well and provides full banking services to individual consumers and SMEs and middle-market companies. Further, the Bank provides its corporate customers in the Province of San Luis with a wide range of financial services and has a primary focus on infrastructure and construction projects.

 

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As of December 31, 2018, the Bank’s exposure in the Province of San Luis was as follows:

 

As of December 31, 2018 (in thousands of Pesos, except for ratios and operating data)
Loans
Banco Supervielle Total Loan Portfolio			71,528
Payroll loan to the Province of San Luis employees			792
Payroll loans to the Province of San Luis employees / Banco Supervielle Total Loan Portfolio			1	%
Loans to the provincial government			—
Deposits
Consolidated Total Deposits			94,025
Deposits made by the Province of San Luis			7,893
Deposits made by the Province of San Luis / Consolidated Total Deposits			8	%
Net Revenue
Related Net Revenue / Banco Supervielle’s Consolidated Net Revenue			3	%
Operating Data
Employees			315
Branches			20
Senior Citizen Service Center			3
ATM’s & Self Service Terminals			143

Of the Bank’s approximately 236,000 customers in San Luis, it offers payroll services to about 30,000 employees that were covered by the services provided under the Financial Agency Agreement.

Additionally to the services rendered in San Luis, the Bank works with the public sector in municipalities in the provinces of Mendoza, San Juan, Cordoba, and Buenos Aires. It also works with some National Universities.

Consumer Financing

The Consumer Finance business of Grupo Supervielle is developed through its subsidiaries CCF and Tarjeta Automática S.A, Mila and Espacio Cordial de Servicios. Mila and Espacio Cordial were annexed to this segment in 2018.

Through CCF and Tarjeta Automática, the Bank offers credit card services and loans to the middle and lower-middle-income sectors. Product offerings also include consumer loans, credit cards and insurance products through an exclusive agreement with Walmart Argentina, as well as with other agreements with retailers such as Hiper Tehuelche and through Tarjeta Automática branch network. Moreover, through Espacio Cordial, Supervielle offers non-financial products and services. Since the MILA acquisition, the new portfolio of used car loans and its respective results are recorded under Consumer Finance Segment.

Consumer Finance business focuses its operations on two key tenets:

 

(i)

Accessibility: flexible proposals focused on the client and adapted to the multichannel concept.

 

(ii)

Diversification: products that satisfy the needs of customers at each stage of their lives with personalized offerings and differential value proposals depending on the different clusters to which they belong.

The Consumer Financing segment’s loan portfolio totaled approximately Ps.7.5 billion (U.S.$199.2 million) at December 31, 2018.

Results varied largely throughout 2018, with a first quarter in which CCF consolidated as one of the three main companies in the sector. During that period the CCF continued with its plan to increase the personal loan sector, plus a strategy oriented to increase the number of credit cards and the level of consumption and activity. To achieve this goal, new advertising dynamics, a strong BTL campaign (having the FIFA World Cup as core idea) and an improved global value proposition were developed.

However, in March 2018 CCF started to experience a portfolio deterioration as a result of the macroeconomic backdrop, which affected mainly the company’s target segments and increased the non performing portfolios. In order to mitigate the risk, as from the second half of March 2018, strong adjustments were introduced in credit policies, increasing cut-off points and restricting the borrowing capacity of customers and leads. During the second quarter of 2018 two additional negative effects were added: rising bank funding rate and a strong decrease in demand, which affected the profitability of the different channels.

 

 

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In that scenario, in August 2018 a reorganization of the commercial department was carried out to face the new macroeconomic environment of Argentina. The restructuring included staff downsizing, the unification of channels and reduction of businesses with higher risk potential. Besides, the use of shared services was optimized and costs were subject to strict control.

The commercial strategy focused on the customer portfolio, strengthening the basic promotional dynamics and reducing those proposals that might lead its customers to over indebtedness.

Once this process was over, the CCF focused on the preparation of a strategic plan to be implemented in the last months of 2018 and during 2019, which is aimed at improving CCF position as benchmark in the consumer financing segment, through the controlled development of certain products.

In said plan the company’s main products were not discontinued but they were adapted to the new reality.

A breakdown follows of the main products offered by the segment:

Open Credit Card: it is a financial tool that may be used for purchases in the stores of merchants accepting MasterCard and for cash advances, within the limits determined by the entity, which may be obtained in the Permanent Promotion Booths located in Walmart stores, Hipertehuelche and Tarjeta Automática stores.

Retail Store Credit Card: these are credit cards issued by a retailer for purchases only in Pesos in that retailer’s stores. They are mainly intended to obtain customer loyalty and incremental sales. As of the date of this annual report, CCF operates this product only with Walmart stores.

The agreement as exclusive provider of financial services to Walmart’s customers in its stores is in force until August 2020, pursuant to the third consecutive renewal of this agreement executed in December 2014. This is the fourth consecutive period in which this agreement has been in effect.

Personal Loans: fixed rate cash loans using the french amortization system.

Consumer Loans: Credit lines for the purchase of certain products, the transaction is completed upon delivery of the purchased products.

Insurance

Through Supervielle Seguros, Grupo Supervielle offers insurance products, primarily personal accidents insurance, protected bag insurance, life insurance and integral insurance policies for entrepreneurs and SMEs. In 2018 the Company incorporated the marketing of special multiple peril policies focused on the entrepreneurs and SMEs segment. Supervielle Seguros is continuously offering new products to the different customer segments of Grupo Supervielle companies such as: high net, worth individuals (Identité), senior citizens, entrepreneurs and SMEs, customers of the consumer financing and medium and large companies segments.

Supervielle Seguros began issuing its policies in October 2014 starting with a few non-credit related insurance products, such as “protected bag” insurance and “personal accident” insurance.

By the end of year 2015, Supervielle Seguros began issuing credit-related policies. Supervielle Seguros’s business substantially grew since then, partly because of the growth of the loans and credit card portfolio balances and partly because of the migration of some of the portfolio previously booked in a third party insurance company.

In March 2016, the Central Bank issued a new resolution, effective as of September 1, 2016, which prohibits financial institutions from charging individuals any fee and/or charge associated with credit related insurance policies. This resolution also specifies that financial institutions must purchase life insurance and total and permanent disability insurance for debit balances for their clients. As a result, since September 1, 2016 the Bank and CCF assume these risks by self-insuring and no longer contract new credit related insurances.

 

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In 2018, Supervielle Seguros began offering integral insurance policies for SMEs.

Supervielle Seguros focuses on the marketing of insurance policies through the networks of the Bank and CCF, as well as on credit related and other insurance intended to meet the needs of our different channels and customers.

In 2018, Supervielle Seguros consolidated its offers in the following products:

Protected Bag Insurance. Protected bag insurance is insurance for personal property contained in a bag, backpack, wallet, fanny pack or other bag that is either lost or stolen. Protected bag insurance can cover items such as cellular phones, makeup, planners, lost documents, keys and locks. In addition, protected bag insurance may cover a certain amount of charges from fraudulent credit card use as a result of a lost or stolen bag.

Personal Accident Insurance. Personal accident insurance covers policy holders in the event that they suffer an accident, subject to certain exclusions.

Life Insurance. Supervielle Seguros markets its life insurance products to the Bank’s senior citizen customers and sells its products through its own sales force that works within the Bank’s service center network. The basic life insurance product includes coverage for death, and customers can add varying degrees of coverage for accidents, serious and terminal illnesses and transplants.

Life Insurance and Total and Permanent Disability Insurance for Debit Balances. In the third quarter of 2015, Supervielle Seguros began to offer an insurance product that covers debit balances in the event of death or total and permanent disability. However, as mentioned above, since September 1, 2016, Banco Supervielle and CCF assume these risks by self-insuring and no longer contract new credit related insurances.

Home Insurance. Home insurance coverage includes fire insurance (building and content), theft of content, theft and damage of appliances, glass breakage, civil liability, personal accident coverage for domestic staff and home assistance service in cases of emergencies.

Technology Insurance. Technology insurance covers theft or accidental damage as a result of theft of electronic equipment (includes notebooks, cell phones, tablets, smartphones, cameras and GPSs). In case of theft or accidental damage as a result of theft, the cost of the stolen property or the cost of repair will be compensated up to the maximum insured amount (once the repair invoice is provided).

ATM Insurance. ATM insurance covers robbery at ATMs, death at the time of the assault and reimbursement of the costs of stolen documentation.

Protected Content. Protected content insurance covers theft and accidental damage of the personal effects that are inside a vehicle.

Broken Bones. The broken bones insurance covers death as result of an accident up to the amount of the insured capital. A certain amount will be paid in the event of quadriplegia or paraplegia, according to the respective insurance plan and once such condition has been verified by a medical audit. This insurance also covers the simple breakage of bones produced as an immediate consequence of an accident.

Integral insurance product for Entrepreneurs and SME: Integral insurance product for entrepreneurs and SMEs completes the offer of services for our priority segment entrepreneurs and SMEs, with the particularity that is fully processed by Supervielle Seguros.

Supervielle Seguros reported gross written premiums of Ps.325.3 million in the first quarter of 2018, Ps.316.9 million in the second quarter of 2018, Ps.304.3 million in the third quarter of 2018 and Ps. 282.0 million in the fourth quarter of 2018.

The following table sets forth the breakdown of Supervielle Seguros’s gross written premiums per quarter as of December 31, 2018.

Gross written premiums by product

(in millions of Pesos)

 

																						% Change
		4th quarter 2018				3rd quarter 2018				2nd quarter 2018				1st quarter 2018				4th quarter 2017				4th quarter 2018 vs. 3rd quarter 2018				4th quarter 2018 vs. 4th quarter 2017
Life insurance and total permanent disability insurance for debit balances			8.5				18.8				30.2				42.6				54.1				-54.7	%			-84.3	%
Personal Accident Insurance			19.5				22.0				24.8				25.7				26.7				-11.5	%			-27.1	%
Protected Bag Insurance			39.8				44.4				46.0				52.2				55.0				-10.2	%			-27.5	%
Broken Bones			10.1				10.6				11.8				10.1				10.1				-4.5	%			0.1	%
Others			7.5				8.6				11.2				12.0				10.6				-12.4	%			-29.4	%
Home Insurance			37.5				39.4				43.9				38.2				42.3				-4.8	%			-11.2	%
Technology Insurance			12.1				13.6				14.5				14.7				16.4				-11.1	%			-26.0	%
ATM Insurance			7.9				8.0				8.5				7.9				9.0				-0.5	%			-11.7	%
Mortgage Insurance			26.7				19.9				2.5				2.1				4.1				33.8	%			547.5	%
Life Insurance			112.3				119.0				123.5				119.8				123.1				-5.6	%			-8.8	%
Total			282.0				304.3				316.9				325.3				351.4				-7.3	%			-19.7	%

 

 

 

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