20-F 1 d58474d20f.htm FORM 20-F Form 20-F
Table of Contents

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 2021

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20–F

 

 

(Mark One)

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

or

 

Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended December 31, 2020

or

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

or

 

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

Commission File Number 000-30852

 

 

GRUPO FINANCIERO GALICIA S.A.

(Exact name of Registrant as specified in its charter)

 

 

GALICIA FINANCIAL GROUP

(Translation of Registrant’s name into English)

REPUBLIC OF ARGENTINA

(Jurisdiction of incorporation or organization)

Grupo Financiero Galicia S.A.

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

C1038 AAJ-Buenos Aires, Argentina

(Address of principal executive offices)

Bruno Folino, Chief Financial Officer

Tel: 54 11 4 343 7528 / Fax: 54 11 4 331 9183, bfolino@gfgsa.com

Perón 430, 25° Piso C1038AAJ Buenos Aires ARGENTINA

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

 

 

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

American Depositary Shares, each representing ten Class B ordinary Shares

Name of each exchange on which registered

Nasdaq Capital Market

Title of each class

Class B Ordinary Shares, Ps.1.00 par value, (not for trading but only in connection with the listing of the American Depositary Shares on the Nasdaq Capital Market)

 

 

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 the

right to receive ten ordinary shares, par value

Ps.1.00 per share New York Stock Exchange

  GGAL   NASDAQ
Ordinary shares, par value Ps.1.00 per share*   GGAL   NASDAQ

 

*

Not for trading, but only in connection with the registration of the American Depositary Shares representing such ordinary shares on the NASDAQ.

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

 

 

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

 

Class A Ordinary Shares, Ps.1.00 par value    281,221,650
Class B Ordinary Shares, Ps.1.00 par value    1,193,470,441

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 (§232.405 of this chapter) 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, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

      Accelerated filer      Non-accelerated filer   
           Emerging growth company   

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒

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        Other  ☐
  As issued by the International Accounting Standards Board  ☒   

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

TABLE OF CONTENTS

 

PRESENTATION OF FINANCIAL INFORMATION

     3  

FORWARD LOOKING STATEMENTS

     4  

PART I

     6  

Item 1. Identity of Directors, Senior Management and Advisers

     6  

Item 2. Offer Statistics and Expected Timetable

     6  

Item 3. Key Information

     6  

A. Selected Financial Data

     6  

B. Capitalization and Indebtedness

     10  

C. Reasons for the Offer and Use of Proceeds

     11  

D. Risk Factors

     11  

Item 4. Information on the Company

     29  

A. History and Development of the Company

     29  

B. Business Overview

     38  

C. Organizational Structure

     100  

D. Property, Plants and Equipment

     101  

Item 4A. Unresolved Staff Comments

     102  

Item 5. Operating and Financial Review and Prospects

     102  

A. Operating Results

     102  

B. Liquidity and Capital Resources

     140  

C. Research and Development, patents and Licenses

     148  

D. Trend Information

     148  

E. Off-Balance Sheet Arrangements

     148  

F. Contractual Obligations

     149  

G. Safe Harbor

     149  

Item 6. Directors, Senior Management and Employees

     149  

Item 7. Major Shareholders and Related Party Transactions

     165  

A. Major Shareholders

     165  

B. Related Party Transactions

     166  

C. Interest of Experts and Counsel

     167  

Item 8. Financial Information

     168  

A. Consolidated Statements and Other Financial Information

     168  

B. Significant Changes

     171  

Item 9. The Offer and Listing

     171  

Item 10. Additional Information

     173  

A. Share Capital.

     173  

B. Memorandum and Articles of Association

     173  

C. Material Contracts

     180  

D. Exchange Controls

     180  

E. Taxation

     180  

F. Dividends and Paying Agents

     188  

G. Statement by Experts.

     188  

H. Documents on Display

     189  

I. Subsidiary Information

     189  

Item 11. Quantitative and Qualitative Disclosures About Market Risk

     189  

Item 12. Description of Securities Other Than Equity Securities

     196  

A. Debt Securities

     196  

B. Warrants and Rights

     196  

C. Other Securities

     196  

D. American Depositary Shares

     196  

PART II

     198  

Item 13. Defaults, Dividend Arrearages and Delinquencies

     198  

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

     198  

Item 15. Controls and Procedures

     198  

Item 16A. Audit Committee Financial Expert

     199  

 

1


Table of Contents


Table of Contents

PRESENTATION OF FINANCIAL INFORMATION

Grupo Financiero Galicia S.A. (“Grupo Financiero Galicia”, “Grupo Galicia”, “GFG” or the “Company”) is a financial services holding company incorporated in Argentina and is one of Argentina’s largest financial services groups. In this annual report, references to “we”, “our”, and “us” are to Grupo Financiero Galicia and its consolidated subsidiaries, except where otherwise noted. Our consolidated financial statements consolidate the accounts of the following companies:

 

   

Grupo Financiero Galicia;

 

   

Banco de Galicia y Buenos Aires S.A.U. (“Banco Galicia” or the “Bank”), our largest subsidiary, consolidated with (i) Tarjetas Regionales S.A. and its operating subsidiaries, until December 31, 2017 (effective January 1, 2018, Tarjetas Regionales S.A. was transferred to be an operating subsidiary of Grupo Financiero Galicia), (ii) Inviu S.A.U. (“Inviu” formerly known as Galicia Valores S.A.U.) until August 31, 2019 (effective September 1, 2019, Inviu was sold to Grupo Financiero Galicia and transferred to IGAM LLC), and (iii) Fideicomiso Saturno Créditos until December 31, 2018;

 

   

Tarjetas Regionales S.A. (“Tarjetas Regionales”) and its subsidiaries (which has been reported on a consolidated basis with Grupo Financiero Galicia since January 1, 2018);

 

   

Sudamericana Holding S.A. (“Sudamericana”) and its subsidiaries;

 

   

Galicia Warrants S.A. (“Galicia Warrants”);

 

   

Galicia Administradora de Fondos S.A. (“Galicia Administradora de Fondos” or “Fima”);

 

   

IGAM LLC (“IGAM”) and its subsidiaries; and

 

   

Galicia Securities S.A. (“Galicia Securities”).

These consolidated financial statements have been prepared in accordance and in compliance with the International Financial Reporting Standards (“IFRS”) issued by the International Financial Reporting Standards Board (“IASB”) and the interpretations of the International Financial Reporting Interpretations Committee. IFRS in force as of the date of preparation of these consolidated financial statements for the fiscal years ended December 31, 2020, 2019 and 2018 have been applied. We maintain our financial books and records in Argentine Pesos and prepare our financial statements in conformity with IFRS, as issued by the IASB, effective as of the fiscal year beginning on January 1, 2018.

As of July 1, 2018, Argentina qualified as a hyperinflationary economy for accounting purposes. Grupo Galicia’s functional currency is the Argentine peso and its financial statements have been prepared in accordance with IAS 29 Financial Reporting in Hyperinflationary Economies as if the Argentine economy had always been hyperinflationary. The financial position and results of operations as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018 are reflected in terms of current purchasing power using the Consumer Price Index (“CPI”) as of December 31, 2020.

In this annual report, references to “US$” and “Dollars” are to United States Dollars and references to “Ps.” or “Pesos” are to Argentine Pesos. The exchange rate used in translating Pesos into Dollars and used in calculating the convenience translations included in the following tables is the “Reference Exchange Rate” that is published by the Argentine Central Bank (commonly referred to as “BCRA” based on its Spanish acronym) and that was Ps.84.1450, Ps.59.8950 and Ps.37.8083 per US$1.00 as of December 31, 2020, December 31, 2019 and December 31, 2018, respectively. The exchange rate translations contained in this annual report should not be construed as representations that the stated Peso amounts actually represent or have been or could be converted into Dollars at the rates indicated or at any other rate.

 

3


Table of Contents

Our fiscal year ends on December 31, and references in this annual report to any specific fiscal year are to the twelve-month period ended December 31 of such year.

Unless otherwise indicated, all information regarding deposit and loan market shares and other financial industry information has been derived from information published by the BCRA, which is not adjusted according to the IAS 29.

We have expressed all amounts in millions of Pesos, except percentages, ratios, multiples and per-share data.

Certain figures included in this annual report have been rounded for purposes of presentation. Percentage figures included in this annual report have been calculated on the basis of such rounded figures. Certain numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them due to rounding.

FORWARD LOOKING STATEMENTS

This annual report contains forward-looking statements that involve substantial risks and uncertainties, including, in particular, statements about our plans, strategies and prospects under the captions Item 4. “Information on the Company”-A.”History and Development of the Company”-“Capital Investments and Divestitures,” Item 5. “Operating and Financial Review and Prospects”-A.“Operating Results-Principal Trends” and B.“Liquidity and Capital Resources.” All statements other than statements of historical facts contained in this annual report (including statements regarding our future financial position, business strategy, budgets, projected costs and management’s plans and objectives for future operations) are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of such words as “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “continue” or other similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, no assurance can be provided with respect to these statements. Because these statements are subject to risks and uncertainties, actual results may differ materially and adversely from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially and adversely from those contemplated in such forward-looking statements include but are not limited to:

 

   

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

 

   

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

 

   

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

 

   

financial difficulties of the Argentine government (“Government”) and its ability (or inability) to reach to an agreement to restructure or rollover its outstanding debt that is held by international credit entities;

 

   

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

 

   

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

 

   

fluctuations in the Argentine rate of inflation, including hyperinflation;

 

4


Table of Contents
   

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

 

   

Grupo Financiero Galicia’s subsidiaries’ inability to sustain or improve their performance;

 

   

a loss of market share by any of Grupo Financiero Galicia’s main businesses;

 

   

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

 

   

changes in the saving and consumption habits of its customers and other structural changes in the general demand for financial products, such as those offered by Banco Galicia;

 

   

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

 

   

Banco Galicia’s inability to obtain additional debt or equity financing on attractive conditions or at all, which may limit its ability to fund existing operations and to finance new activities;

 

   

technological changes and changes in Banco Galicia’s ability to implement new technologies;

 

   

impact of COVID-19 (or other future outbreaks, epidemics or pandemics) on the global, regional and national economy, on financial activity on global trade -both in terms of volumes and prices-, and on the Company’s ability to recover from the negative effects of the pandemic (or other future outbreak);

 

   

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

You should not place undue reliance on forward-looking statements, which speak only as of the date that they were made. Moreover, you should consider these cautionary statements in connection with any written or oral forward-looking statements that we may issue in the future. We do not undertake any obligation to release publicly any revisions to forward-looking statements after completion of this annual report to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

In light of the risks and uncertainties described above, the forward-looking events and circumstances discussed in this annual report might not occur and are not guarantees of future performance.

 

5


Table of Contents

PART I

 

Item 1.

Identity of Directors, Senior Management and Advisers

Not applicable.

 

Item 2.

Offer Statistics and Expected Timetable

Not applicable.

 

Item 3.

Key Information

A. Selected Financial Data

The following table presents summary historical financial and other information about us as of the dates and for the periods indicated.

The selected consolidated financial information regarding statement of financial position as of December 31, 2020 and December 31, 2019, and the financial information regarding the statement of income for the fiscal years ended December 31, 2020, December 31, 2019 and December 31, 2018 has been derived from our audited consolidated financial statements included in this annual report.

The selected consolidated financial information regarding statement of financial position as of December 31, 2018, as of December 31, 2017 and as of December 31, 2016 and the financial information regarding the statement of income for the fiscal years ended December 31, 2017 and December 31, 2016 has been derived from our audited consolidated financial statements not included in this annual report.

You should read this data in conjunction with Item 5. “Operating and Financial Review and Prospects” and our audited consolidated financial statements included in this annual report.

The tables included below have been prepared in accordance with IFRS.

 

6


Table of Contents
                                                                   
     Year Ended December 31,  
     2020     2019     2018     2017  
     (in millions of  Pesos, except as noted)  

Consolidated Statement of Income in Accordance with IFRS

        

Net Income from Interest

     76,632       47,417       69,873       62,565  

Net Fee Income

          36,558          38,233            44,756            44,332  

Net Income from Financial Instruments

     69,332       99,151       36,342       17,720  

Loan and Other Receivables Loss Provisions

     (34,680     (30,228     (34,136     (15,275

Net Operating Income

     182,711       200,475       153,081       144,459  

Loss on Net Monetary Position

     (36,963     (41,929     (37,831     (14,290

Operating Income

     43,503       50,178       7,067       30,571  

Income Tax from Continuing Operations

     (17,845     (17,751     (14,477     (15,328

Income (Loss) for the Year Attributable to GFG

     25,192       32,276       (7,258     14,228  

Other Comprehensive Income

     (210     548       (183     (911

Total Comprehensive Income (Loss) Attributable to GFG

     24,982       32,824       (7,442     13,317  

Ordinary Shares Outstanding for the year

     1,443       1,427       1,427       1,427  

Basic Earnings per Share (in Pesos)

     17.46       22.62       (5.09     9.97  

Diluted Earnings per Share (in Pesos)

     17.46       22.62       (5.09     9.97  

Cash Dividends per Share (in Pesos)

     (1  )      1.33       2.54       2.37  

Book Value per Share (*) (in Pesos)

     126.36          108.70          88.24          94.70     

 

(1)

The cash dividend distribution for the fiscal year ended at December 31, 2020, is pending approval. For more information see Item 8. “Financial Information”-A.“Consolidated Statements and Other Financial Information”-“Dividend Policy and Dividends”-“Dividends” -“Grupo Financiero Galicia”.

(2)

Total Shareholders’ Equity attributable to GFG divided Ordinary Shares Outstanding for the year.

 

                                                                   
     For the Year Ended December 31,  
     2020     2019     2018     2017  
     (in millions of Pesos, except as noted)  

Consolidated Statement of Financial Position in Accordance with IFRS

        

Cash and Due from Banks

     175,423       177,866       300,131       182,297  

Debt Securities at Fair Value Through Profit or Loss

     155,420       89,431       159,030       89,526  

Loans and Other Financing

     526,434       488,144       592,075       595,519  

Total Assets

     1,055,279       933,270       1,193,096       1,025,447  

Deposits

     676,396       536,034       754,146       620,677  

Other Liabilities

     97,472       97,153       132,432       263,451  

Shareholders’ Equity attributable to GFG

     182,334       155,121       125,919       135,133  

Percentage of Period-end Balance Sheet Items Denominated in Dollars:

        

Loans and Other Financing

     18     23     35     21

Total Assets

     20     25     39     26

Deposits

     22     26     45     35

Total Liabilities

     9     22     34     30

 

7


Table of Contents
     For the Year Ended December 31,  
     2020     2019     2018     2017  

Selected Ratios (*)

      

Profitability and Efficiency

      

Net Yield on Interest Earning Assets (1)

     19.80     16.84     13.33     10.71

Financial Margin (2)

     14.68     11.87     8.43     11.48

Return on Assets (3)

     2.39     3.46     (0.61 )%      1.39

Return on Shareholders’ Equity (4)

     13.82     20.81     (5.76 )%      10.53

Efficiency ratio (5)

     47.39     50.55     63.99     63.62

Capital

        

Shareholders’ Equity as a Percentage of Total Assets

     17.28     16.62     10.55     13.18

Total Liabilities as a Multiple of Shareholders’ Equity

     4.79     4.99     8.45     6.54

Total Capital Ratio

     22.16     17.53     15.11     10.69

Liquidity

        

Cash and Due from Banks as a Percentage of Total Deposits

     25.93     33.18     39.80     29.37

Loans and other financing, Net as a Percentage of Total Assets

            49.89         52.30            49.63            58.07

Credit Quality

        

Non-Accrual Instruments (6) as a Percentage of Total Financial Instruments Portfolio

     1.43     3.96     3.51     2.20

Allowance for Financial Instruments as a Percentage of Non-accrual Financial Instruments (6)

     392.36     152.21     137.46     129.77

Net Charge-Offs as a Percentage of Financial Instruments Portfolio

     5.19     5.12     4.98     2.24

Inflation and Exchange Rate

        

Wholesale Price Index

     35.38     58.49     73.50     18.80

Consumer Price Index

     36.14     53.83     47.65     24.80

Exchange Rate Variation (7)

     40.49     58.42     101.38     18.42

CER (8)

     25.49       18.70       12.34       8.38  

UVA (9)

     64.32       47.16       31.06       21.15  

 

(*)

All of the ratios disclosed above are included because they are considered significant by the management of Grupo Financiero Galicia.

(1)

Net interest earned divided by interest-earning assets. For a description of net interest earned, see Item 4. “Information on the Company”-A.“Business Overview”-“Selected Statistical Information”-“Average Balance Sheet and Income from Interest-Earning Assets and Expenses from Interest-Bearing Liabilities”.

(2)

Financial margin represents net interest income plus net result from financial instruments plus income from derecognition of assets measured at amortized cost plus foreign currency quotation differences plus certain items included in other operating income and expenses, divided by the average balance of interest-earning assets.

(3)

Net income attributable to GFG as a percentage of total assets.

(4)

Net income attributable to GFG as a percentage of shareholders’ equity.

(5)

Personnel expenses plus administrative expenses plus depreciation and devaluations of assets, divided by net interest income plus net fee income plus net result from financial instruments plus income from derecognition of assets measured at amortized cost plus foreign currency quotation differences plus income from insurance business plus certain items included in other operating income and expenses plus loss on net monetary position.

(6)

Non-Accrual Financial Instruments are defined as those Financial Instruments in default. For a definition and description of default, see Item 4. “Information on the Company”-A.“Business Overview”-“Selected Statistical Information”-“Financial Instruments Classification and Loss Provisions”- “Definition of Default”.

(7)

Annual change in the end-of-period exchange rate expressed in Pesos per Dollar.

(8)

The “CER” is the “Coeficiente de Estabilización de Referencia”, an adjustment coefficient based on changes in CPI.

(9)

The “UVA” is the “Unidad de Valor Adquisitivo”, an adjustment coefficient based on changes in the CER.

 

8


Table of Contents

The tables below reflect Grupo Galicia’s financial results for the fiscal year ended December 31, 2016, were not adjusted for inflation, and were prepared in accordance with Argentine Banking GAAP (“Previous GAAP”). The information based on Previous GAAP included below and elsewhere is this annual report is not comparable to information prepared in accordance with IFRS.

 

     Fiscal Year Ended
December 31,
 
     2016  
     (in millions of Pesos,
except
  as noted)
 

Consolidated Income Statement in Accordance with Argentine Banking  GAAP

  

Financial Income

     36,608  

Financial Expenses

     20,239  

Gross Brokerage Margin (1)

     16,369  

Provision for Losses on Loans and Other Receivables

     3,533  

Income before Taxes

     9,371  

Income Tax

     (3,353

Net Income

     6,018  

Basic Earnings per Share (in Pesos)

     4.63  

Diluted Earnings per Share (in Pesos)

     4.63  

Cash Dividends per Share (in Pesos)

     0.18  

Book Value per Share (in Pesos)

     15.66  

Amounts in Accordance with U.S. GAAP

  

Net Income

     6,037  

Basic and Diluted Earnings per Share (in Pesos)

     4.64  

Book Value per Share (in Pesos)

     15.45  

Financial Income

     34,549  

Financial Expenses

     19,410  

Gross Brokerage Margin

     15,139  

Provision for Losses on Loans and Other Receivables

     3,192  

Income Tax

     3,195  

Consolidated Balance Sheet in Accordance with Argentine Banking GAAP

  

Cash and Due from Banks

     61,166  

Government Securities, Net

     13,701  

Loans, Net

     137,452  

Total Assets

     242,251  

Deposits

     151,688  

Other Funds (2)

     70,210  

Total Shareholders’ Equity

     20,353  

Average Total Assets (3)

     184,395  

Percentage of Period-end Balance Sheet Items

  

Denominated in Dollars:

  

Loans, Net of Allowances

     12.77  

Total Assets

     27.56  

Deposits

     33.63  

Total Liabilities

     30.82  

Amounts in Accordance with U.S. GAAP

  

Trading Securities

     17,196  

Available-for-Sale Securities

     5,423  

Total Assets

     260,403  

Total Liabilities

     240,316  

Shareholders’ Equity

     20,087  

 

(1)

Gross Brokerage Margin primarily represents income from interest on loans and other receivables resulting from financial brokerage plus net income earned from government and corporate debt securities holdings, minus interest on deposits and other liabilities from financial intermediation. It also includes the CER/UVA adjustment.

(2)

Primarily includes debt securities, loans with other banks and international entities and amounts payable for spot and forward purchases to be settled.

(3)

Average Total Assets, including the related interest that is due thereon is calculated on a daily basis for Banco Galicia and for Galicia Uruguay, as well as for Tarjetas Regionales consolidated with its operating subsidiaries, and on a monthly basis for Grupo Financiero Galicia and its non-banking subsidiaries.

 

9


Table of Contents
     Fiscal Year Ended
December 31,
 
     2016  

Selected Ratios in Accordance with Argentine Banking GAAP

  

Profitability and Efficiency

  

Net Yield on Interest Earning Assets (4)

     13.26

Financial Margin (5)

     12.10  

Return on Average Assets (6)

     3.48  

Return on Average Shareholders’ Equity (7)

     35.03  

Net Income from Services as a Percentage of Operating Income (9)

     39.63  

Efficiency ratio (9)

     64.98  

Capital

  

Shareholders’ Equity as a Percentage of Total Assets

     8.40

Total Liabilities as a Multiple of Shareholders’ Equity

     10.9x  

Total Capital Ratio

     15.04

Liquidity

  

Cash and Due from Banks(10) as a Percentage of Total Deposits

     47.18

Loans, Net as a Percentage of Total Assets

     56.74  

Credit Quality

  

Past Due Loans (11) as a Percentage of Total Loans

     2.43

Non-Accrual Loans (12) as a Percentage of Total Loans

     3.31  

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

     100.06  

Net Charge-Offs (13) as a Percentage of Average Loans

     1.67  

Ratios in Accordance with U.S. GAAP

  

Capital

  

Shareholders’ Equity as a Percentage of Total Assets

     7.71  

Total Liabilities as a Multiple of Total Shareholders’ Equity

     11.96x  

Liquidity

  

Loans, Net as a Percentage of Total Assets

     52.76

Credit Quality

  

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

     128.53  

Inflation and Exchange Rate

  

Wholesale Inflation (14)

     34.59

Consumer Inflation (15)

     41.05

Exchange Rate Variation (16) (%)

     21.88  

CER (17)

     35.79  

UVA (18)

     17.26  

 

(1)

Net interest earned divided by interest-earning assets.

(2)

Financial margin represents gross brokerage margin divided by average interest-earning assets.

(3)

Net income excluding non-controlling interest as a percentage of average total assets.

(4)

Net income as a percentage of average shareholders’ equity.

(5)

Operating income is defined as gross brokerage margin plus net income from services.

(6)

Administrative expenses as a percentage of operating income as defined above.

(7)

Liquid assets of Banco Galicia include cash and receivables, Lebacs, net call money, short-term loans to other Argentine financial institutions, special guarantee accounts at the BCRA, and repurchase and reverse repurchase transactions in the Argentine financial market.

(8)

Past-due loans are defined as the aggregate principal amount of a loan plus any accrued interest that is due and payable for which either the principal or any interest payment is 91 days or more past due.

(9)

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

(10)

Direct charge-offs minus amounts recovered.

(11)

As of December 31, 2015, as measured by the interannual change between the October 2014 and the October 2015 Wholesale Price Index (“WPI”), published by INDEC (as defined herein), because the measurement of this index was discontinued for the remainder of 2015. In 2016 the measure was reinstated.

(12)

In 2015, annual variation of the Consumer Price Index (CPI) was calculated using the Consumer Price Index of the City of Buenos Aires, an alternative measure of inflation proposed by INDEC after it discontinued its index.

(13)

Annual change in the end-of-period exchange rate expressed in Pesos per Dollar.

(14)

The “CER” is the “Coeficiente de Estabilización de Referencia”, an adjustment coefficient based on changes in the CPI.

(15)

The “UVA” is the “Unidad de Valor Adquisitivo”, an adjustment coefficient based on changes in the CER.

B. Capitalization and Indebtedness

Not applicable.

 

10


Table of Contents

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

You should carefully consider the risks described below in addition to the other information contained in this annual report. In addition, most, if not all, of the risks described below must be evaluated bearing in mind that our most important asset is our equity interest in Banco Galicia. Thus, a material change in Banco Galicia’s shareholders’ equity or income statement would also adversely affect our businesses and results of operations. We may also face risks and uncertainties that are not presently known to us or that we currently deem immaterial, which may impair our business. Our operations, property and customers are located in Argentina. Accordingly, the quality of our customer portfolio, loan portfolio, financial condition and results of operations depend, to a significant extent, on the macroeconomic and political conditions prevailing in Argentina. In general, the risk assumed when investing in the securities of issuers from countries such as Argentina is higher than when investing in the securities of issuers from developed countries.

Risk Factors Relating to Argentina

The current state of the Argentine economy, together with uncertainty regarding the Government, may adversely affect our business and prospects.

Grupo Financiero Galicia’s results of operations may be affected by inflation, fluctuations in the exchange rate, modifications in interest rates, changes in the Argentine government’s policies and other political or economic developments either internationally or in Argentina.

During the course of the last decades, Argentina’s economy has been marked by a high degree of instability and volatility, periods of low or negative economic growth and high, fluctuating levels of inflation and currency devaluation. Grupo Financiero Galicia’s results of operations, the rights of holders of securities issued by Grupo Financiero Galicia and the value of such securities could be materially and adversely affected by a number of possible factors. Some of these factors include Argentina’s inability to achieve a sustainable economic growth path, high inflation rates, Argentina’s ability to obtain financing, a decline in the international prices for Argentina’s main commodity exports, fluctuations in the exchange rates of other countries (which affects local commercial competitiveness) and the vulnerability of the economy to external shocks.

During the past decade Argentina experienced economic stagnation as a result of unstable monetary, fiscal and economic regulatory policies. This, combined with a lack of institutional transparency, led to increasing inflation rates, lack of economic growth, currency instability and low investment levels, among others. As there will be Congressional elections in 2021, additional risks may arise if new policies are implemented by the newly elected Congress that further exacerbate the existing macroeconomic imbalances. In addition to such possible new Congressional policies, no assurance can be provided regarding other events, such as the enactment of other governmental policies, that may occur in the future and their impact on the Argentina economy and on the results of Grupo Financiero Galicia’s operations.

As a result of the current state of the Argentine economy as described above and herein and the uncertainty regarding the Government and policies it may enact, the financial position and results of operations of private sector companies in Argentina, including Grupo Financiero Galicia, the rights of the holders of securities issued by such institutions and the value thereof may be negatively and adversely impacted.

Economic conditions in Argentina may deteriorate, which may adversely impact Grupo Financiero Galicia’s business and financial condition.

Economic conditions in Argentina may deteriorate. In particular, a less favorable international economic environment, a decrease in the competitiveness of the Peso as compared to foreign currencies, low consumer confidence and low confidence from both local and foreign investors together with high inflation rates, among other factors, may affect the development and growth of the Argentine economy and cause volatility in the local capital markets. Such events may adversely impact Grupo Financiero Galicia’s business and financial condition.

 

11


Table of Contents

In particular, the Argentine economy has proven to be and continues to be vulnerable to several factors, including:

 

   

economic growth rate volatility;

 

   

high inflation rates;

 

   

regulatory uncertainty for certain economic activities and sectors;

 

   

volatility in Argentina’s main export commodities’ prices;

 

   

external financial conditions;

 

   

fluctuations in the BCRA’s international reserves; and

 

   

uncertainty with respect to exchange and capital controls.

No assurance can be provided that a decline in economic growth or certain economic instability will not occur. Any stagnation, slowdown or economic and political instability could have a significant adverse effect on Grupo Financiero Galicia’s business, financial position and results of operations, and the trading price for its ADSs.

The ability of the current administration to implement economic policy reforms, and the impact that these measures and any future measures taken by a new administration will have on the Argentine economy, remains uncertain.

As the date of this annual report, the impact that the reforms adopted by the Government will have on the Argentine economy as a whole, and the financial sector in particular, cannot be predicted. In addition, it is currently unclear what additional measures the current administration may implement in the future and what the effects of the same may be on the Argentine economy.

Since taking office, the Fernández administration has announced and implemented several significant economic measures and policy reforms, the impact of which are uncertain at this time. For example, on December 20, 2019, the Argentine National Congress passed Law No. 27,541, which declared a public emergency in economic, financial, fiscal, administrative, pension, energy, health and social matters. It also delegated to the Executive Branch broad authority and power to take actions designed to, among other things, ensure the sustainability of the level of public debt, restructure the rate the energy system charges its customers through a renegotiation of the current comprehensive tariff regime and restructure the regulatory entities for the energy system. Throughout 2020, other important Laws were passed, such as Law 27,609, in which the pension-adjustment formula was modified, and Law 27,605, that imposed a one-off tax on high net worth individuals.

Further, beyond the above noted reforms and policies, foreign exchange market (the “FX market”) restrictions, in combination with a relatively loose monetary and fiscal policy and additional restrictions on foreign trade could result in lower economic growth rates in Argentina for the coming years. In addition, an adverse result in the debt negotiation that the Government is carrying out with external creditors, such as the International Monetary Fund (“IMF”), could affect access to capital markets, and may affect the growth of the country, provinces and private companies. It is impossible to predict the impact of these measures, as well as any future measures that may be adopted, on the Argentine economy overall and the financial sector in particular.

In particular, interventionist measures adopted by the Government or future measures implemented may be disruptive to the economy and may fail to benefit, or may harm, our business. In particular, Grupo Financiero Galicia has no control over the implementation of the reforms to the regulatory framework that governs its operations and cannot guarantee that these reforms will be implemented or that they will be implemented in a manner that will benefit its business. The failure of these measures to achieve their intended goals could adversely affect the Argentine economy and Grupo Financiero Galicia’s business, financial position and results of operations and the trading price for its ADSs.

 

12


Table of Contents

If the high levels of inflation continue or if inflation figures are not trusted, the Argentine economy and Grupo Financiero Galicia’s financial position and business could be adversely affected.

Since 2007, Argentina has experienced high inflation. According to private estimates, inflation has been systematically above 20% since 2007, reaching a maximum of 53.8 % in 2019. Accumulated inflation during 2020 was 36.1%. Moreover, between 2007 and 2015 official figures became unreliable and private estimates of inflation were more frequently used (as further described below).

As noted above, between 2007 and 2015, official inflation figures became unreliable. Specifically, the national statistics agency INDEC (Instituto Nacional de Estadística y Censos; “INDEC” for its acronym in Spanish), is the only institution in Argentina with legal power to produce official national statistics. During the referenced time period, INDEC went through a process of major institutional and methodological reforms that led to concerns related to the reliability of the information produced by INDEC. In 2016, an administrative emergency regarding the national statistical system was declared and INDEC stopped publishing certain data until a complete reorganization of its structure was undertaken in order to reestablish its ability to produce relevant, sufficient and trustworthy information.

Despite the fact that due to the reforms implemented in recent years, inflation rates calculated by INDEC are generally accepted, the possibility that they may be manipulated in the future cannot be ruled out. Any such future manipulation could affect the Argentine economy in general and the financial sector in particular.

In addition to concerns related to the trustworthiness of inflation figures, in the past, inflation has materially undermined the Argentine economy and the Government’s ability to generate conditions that fostered economic growth. In particular, high inflation rates or a high level of volatility with respect to the same, may materially and adversely affect the business volume of the financial system and prevent the growth of financial intermediation activity. This, in turn, could adversely affect economic activity and employment.

Combined with high inflation rates, Argentina has also displayed high volatility in its currency, as a consequence of local imbalances and external shocks. Both high inflation rates and high levels of volatility in the inflation rate affect Argentina’s competitiveness abroad, as well as real salaries, employment rates, consumption rates and interest rates. A high level of uncertainty with regard to these economic variables, and lack of stability in terms of inflation, could lead to shortened contractual terms and affect the ability to plan and make decisions. This may have a negative impact on economic activity and the income of consumers and their purchasing power. All of the above could materially and adversely affect Grupo Financiero Galicia’s financial position, results of operations and business, and the trading price for its ADSs.

Argentina’s and Argentine companies’ ability to obtain financing and to attract direct foreign investment is limited and may adversely affect Grupo Financiero Galicia’s financial position, results of operations and business.

Argentina and Argentine companies have had limited access to foreign financing in recent years, primarily as a result of a default in December 2001 by Argentina on its debt to foreign bondholders, multilateral financial institutions and other financial institutions. Argentina settled all of its outstanding debt with the IMF in 2006, carried out a variety of debt swaps with certain bondholders between 2004 and 2010, and reached an agreement with the Paris Club in 2014. After several years of litigation, on March 1, 2016, an agreement was reached between the Argentine government and certain creditors to which the Argentine government was previously in default.

On April 18, 2016, in order to make a payment owed to similarly situated bondholders, Argentina issued bonds in an amount of US$16.5 billion, with interest rates between 6.25% and 8% and maturities of three, five, ten and thirty years. The payment of approximately US$9.3 billion to the bondholders was made on April 22, 2016, thus reaching a solution to the Argentine debt in default.

During the remainder of 2016, 2017 and the first four months of 2018, the Argentine government continued to seek financing from international markets. Following the exchange rate crisis beginning in April 2018, however, Argentina was not able to access the international capital markets, resulting in the Argentine government requesting a loan from the IMF (pursuant to a Stand-By Agreement for a total of US$57 billion).

 

13


Table of Contents

In 2019, Argentina’s bonds plummeted and the country risk soared after the Primary Presidential Elections that took place on August 11, in which the Fernandez-Fernandez platform won by a landslide, making the country unable to refinance its existing debt with the private sector. As a result, the Macri administration decided to unilaterally restructure the maturity dates on short-term debt issued by the Argentine Government and denominated both in Argentine pesos and in Dollars. When President Fernandez took office, his administration commenced debt-restructuring negotiations for debt held by the Government that was held by foreign creditors. This restructuring was completed in September 2020. Argentina is also seeking to restructure its IMF loan in 2021, as principal payments from the 2018’s Stand-By Agreement begin to fall due in October 2021. A new agreement with the IMF may require a commitment to implement reforms and changes to economic policy, which could have a significant adverse effect on Argentina’s economy and on Argentine companies including Grupo Financiero Galicia’s ability to obtain international financing and could also adversely affect local credit conditions. If Argentina is not able to reach an agreement with the IMF, the country may default on such debt. Any such default on the IMF debt or other current outstanding debt would likely inhibit or prevent access by the Government and Argentine companies to the international financial markets and may also compromise the ability of such entities to obtain bilateral financing. This would have an adverse effect on the Argentine economy, including Grupo Financiero Galicia, and would likely cause a negative impact the ability of companies, including Grupo Financiero Galicia, to obtain foreign financing.

A decline in the international prices of Argentina’s main commodities exports and a real appreciation of the Peso against the Dollar could affect the Argentine economy and create new pressures on the foreign exchange market and have a material adverse effect on Grupo Financiero Galicia’s financial condition, prospects and operating results.

The reliance on the export of certain commodities, (particularly soybeans and its by products, corn and wheat), has made the country more vulnerable to fluctuations in their prices. A decrease in commodity prices may adversely affect the Argentine government’s fiscal revenues and the Argentine economy as a whole. Given its reliance on such agricultural commodities, the country is also vulnerable to weather events—such as 2018’s drought—that may negatively affect production, reducing fiscal revenues and the inflow of Dollars.

In order to counterbalance and diversify its reliance on the above noted agricultural commodities as well as to add another source of revenue, Argentina has focused on increasing its oil and gas exports. Nevertheless, a long-term decrease in the international price of oil would negatively impact such prospects and result in a decrease in foreign investment in such sectors.

Additionally, a significant increase in the real appreciation of the Peso could affect Argentina’s competitiveness, substantially affecting exports, prompting new recessionary pressures on Argentina’s economy and a new imbalance in the foreign exchange market, exacerbating exchange rate volatility. A significant appreciation of the real exchange rate could adversely affect the Argentine public sector’s tax revenues in real terms, since around 7% of the country’s total revenues depend on export taxes. The occurrence of the foregoing could intensify the existing inflationary environment and potentially materially and adversely affect the Argentine economy, as well as Grupo Financiero Galicia’s financial condition and operating results and, thus, the trading prices for its ADSs.

Volatility in the regulatory framework could have a material and adverse effect on Argentina’s economy in general, and on Grupo Financiero Galicia’s financial position, specifically.

From time to time the Argentine government has enacted several laws amending the regulatory framework governing a number of different activities as a measure to stimulate the economy, some of which have had adverse effects on Grupo Financiero Galicia’s business. Although former administration has eliminated some of these regulations, political and social pressures could inhibit the Argentine government’s implementation of policies designed to generate growth and enhance consumer and investor confidence.

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

 

14


Table of Contents

The Argentine economy and its goods, financial services and securities markets remain vulnerable to external factors, which could affect Argentina’s economic growth and Grupo Financiero Galicia’s prospects.

The financial and securities markets in Argentina are influenced, to varying degrees, by economic and market conditions in other countries. Although such conditions may vary from country to country, investor reactions to events occurring in one country may affect capital flows to issuers in other countries, and consequently affect the trading prices of their securities. Decreased capital inflows and lower prices in the stock market of a country may have a material adverse effect on the real economy of those countries in the form of higher interest rates and foreign exchange volatility.

During periods of uncertainty in international markets, investors generally choose to invest in high-quality assets (“flight to quality”) over emerging market assets. This has caused and could continue to cause an adverse impact on the Argentine economy and could continue to adversely affect the country’s economy in the near future.

The monetary and fiscal policies implemented by the world’s leading economies, such as the US, China and the European Union have an affect on the Argentine economy through interest rates, commodity prices and economic growth rates. The COVID-19 pandemic has had a negative effect on economic growth worldwide, negatively impacting Argentine exports due to a contraction of foreign demand for the same. Current lower interest rates in leading economies favor emerging markets such as Argentina; however, high levels of overall economic uncertainty may result in factors that offset any positive impact from such lower interest rates.

The economic activity of Brazil, one of Argentina’s main trade partners, also has an impact on Argentina’s economy. A depreciation of the Brazilian Real against the Dollar has in the past and would again in the future put additional pressure on the exchange rate for the Argentine Peso against the Dollar. Likewise, a weak economic performance from Brazil would affect Argentine exports, particularly in the case of industrial goods, many of which Argentina exports to Brazil.

Adverse climate conditions and events may also affect Argentina’s economy, either by negatively impacting the local harvest and thus reducing export volumes or by impacting other competing countries and affecting international commodities’ prices, which determine Argentine agricultural exports’ value.

The international financial environment may also result in a devaluation of regional currencies and exchange rates, including the Peso, which would also cause economic volatility in Argentina. A new global economic or financial crisis or the effects of deterioration in the current international context, could negatively affect the Argentine economy and, consequently, Grupo Financiero Galicia’s results of operations, financial conditions and the trading price for its ADSs.

A potential additional devaluation of the Peso may hinder or potentially prevent Grupo Financiero Galicia from being able to honor its foreign currency denominated obligations.

The Argentine Peso depreciated 15.6% as compared to the Dollar in 2017, 50.3% in 2018, 36.9% in 2019 and 28.8% in 2020, according to the official quotation of the BCRA. If the Peso further depreciates against the Dollar, as has recently occurred and which could occur again in the future, this could have an adverse effect on the ability of Argentine companies to make timely payments on their debts denominated in or indexed or otherwise connected to a foreign currency, generate very high inflation rates, reduce real salaries significantly, and have an adverse effect on companies focused on the domestic market, such as public utilities and the financial industry. Such a potential devaluation could also adversely affect the Argentine government’s capacity to honor its foreign debt, with adverse consequences for Grupo Financiero Galicia’s and Banco Galicia’s businesses, which could affect Grupo Financiero Galicia’s capacity to meet obligations denominated in a foreign currency which, in turn, could have a material adverse effect on the trading prices for Grupo Financiero Galicia’s ADSs.

Additionally, the BCRA may intervene in the foreign exchange market to influence exchange rates. Purchases of Pesos by the BCRA could result in a decrease of its international reserves. A significant decrease in the BCRA’s international reserves may have an adverse impact on Argentina’s ability to withstand external shocks to the economy, and any adverse effects to the Argentine economy could, in turn, adversely affect the financial position and business of Grupo Financiero Galicia and its subsidiaries.

 

15


Table of Contents

In order to control the depreciation of the Peso, on September 1, 2019 the Executive Branch introduced capital controls through decree No. 609/2019, whose validity was extended indefinitely by the government of Fernández through Decree No. 91/2019 and Communication “A” 6854 and 6856 of the BCRA. These controls include the need to obtain authorization from the BCRA to purchase foreign currency in excess of US$200 per month per person, and the mandatory liquidation of exporters’ foreign exchange earnings in the local market within five days, among other measures. This allows the BCRA to exercise control over the Peso and therefore to prevent the Argentine currency from depreciating. Throughout 2020, the capital controls initially imposed in 2019 were bolstered. Additionally, restrictions limited personal and corporate access to foreign currencies in the official market. Despite the imposition of such controls, the BCRA continued to lose monetary reserves throughout most of 2020, ending 2020 with a US$5.37 billion contraction in international reserves. A depreciation of the Peso could adversely affect the Argentine economy and Grupo Financiero Galicia’s financial condition, its business, and its ability to service its existing debt obligations. Moreover, an acceleration of inflation caused by an exchange rate crisis would raise the costs associated with Grupo Financiero Galicia’s subsidiaries servicing their foreign currency-denominated, which could increase Grupo Financiero Galicia’s costs and therefore have a material adverse effect on Grupo Financiero Galicia’s financial condition and results of operations.

Changes or new regulations in the Argentine foreign exchange market may adversely affect the ability and the manner in which Grupo Financiero Galicia repays its obligations denominated in, indexed to or otherwise connected to a foreign currency.

Since December 2001, different government administrations have established and implemented various restrictions on foreign currency transfers (both in respect of transfer into and out of Argentina). Such is the case of the current measures that limit the ability of residents to purchase foreign currency for saving purposes and by capping the amount that can be purchased by the general public at US$200 per month and imposing a 30% tax on all such foreign currency purchases, as well as on any purchases in foreign currency made with debit or credit cards and on the purchase of international flights, hotels or tourism packages. Moreover, as of September 15, 2020, a 35% tax has been imposed on foreign currency that is purchased in order to be saved and on credit card expenses incurred in a foreign currency. This tax is structured to be a credit in advance for income and property taxes be paid.

The impact that these measures or potential future measures will have on the Argentine economy and Grupo Financiero Galicia is uncertain. No assurance can be provided that the regulations will not be amended, or that no new regulations will be enacted in the future imposing greater limitations on funds flowing into and out of the Argentine foreign exchange market. Any such new measures, as well as any additional controls and/or restrictions, could materially affect Grupo Financiero Galicia’s ability to access the international capital markets and may undermine its ability to make payments of principal and/or interest on its obligations denominated in a foreign currency or transfer funds abroad (in total or in part) to make payments on its obligations (which could affect Grupo Financiero Galicia’s financial condition and results of operations). Therefore, Argentine resident or non-resident investors should take special notice of these regulations (and their amendments) that limit access to the foreign exchange market. In the future Grupo Financiero Galicia may be prevented from making payments in Dollars and/or making payments outside of Argentina due to the restrictions in place at that time in the foreign exchange market and/or due to the restrictions on the ability of companies to transfer funds abroad.

It may be difficult to effect service of process against Grupo Financiero Galicia’s executive officers and directors, and foreign judgments may be difficult to enforce or may be unenforceable.

Service of process upon individuals or entities which are not resident in the United States may be difficult to obtain in the United States. Grupo Financiero Galicia and its subsidiaries are companies incorporated under the laws of Argentina. Most of their shareholders, directors, members of the Supervisory Syndics’ Committee, officers, and some specialists named herein are domiciled in Argentina and the most significant part of their assets is located in Argentina. Although Grupo Financiero Galicia has an agent to receive service of process in any action against it in the United States with respect to its ADSs, none of its executive officers or directors has consented to service of process in the United States or to the jurisdiction of any United States court. As a result, it may be difficult to effect service of process against Grupo Financiero Galicia’s executive officers and directors. Additionally, under

 

16


Table of Contents

Argentine law, the enforcement of foreign judgments will only be allowed if the requirements in sections 517 to 519 of the National Code of Civil and Commercial Procedures or the applicable local code of procedures are met, and provided that the foreign judgment does not infringe on concepts of public policy in Argentine law, as determined by the competent courts of Argentina. As such, an Argentine court may find that the enforcement in Argentina of a foreign judgment (including a U.S. court) that requires payment be made by an Argentine individual to holders of its foreign currency-denominated securities outside of Argentina is contrary to the public policy if, for instance, there are legal restrictions in place prohibiting Argentine debtors from transferring foreign currency abroad to pay off debts.

The intervention of the Argentine government in the electric power sector could have a material adverse impact on the Argentine economy, which may have a material adverse impact on Grupo Financiero Galicia’s results of operations.

Historically, the Argentine government has played an active role in the electric power sector through the holding and management of state-owned companies engaged in the generation, transmission and distribution of electric power. To address the Argentine economic crisis of 2001 and 2002, the Government adopted regulations which made several material changes to the regulatory framework applicable to the electric power sector and distorted supply and demand in the sector. These changes included the freezing of distribution margins, the reversal of adjustment and inflation indexation mechanisms for tariffs, a limitation on the ability of electric power distribution companies to pass on to the consumer increases in costs and the introduction of a new price-setting mechanism in the wholesale electricity market, all of which had a significant impact on electric power generators and caused substantial price differences within the market.

The former administration began significant reforms in the electric power sector. As part of such reforms, the administration took actions designed to guarantee the supply of electric power in Argentina, instructing the Ministry of Energy and Mining to develop and implement a coordinated program to guarantee the quality of the electric power system and ration individuals’ and public entities’ consumption of energy by increasing tariffs. .

As of the date hereof, the tariffs that electrical power companies can charge have not been “modified” for more than two years. As such, the increasing costs incurred by these electrical power companies that are not covered by the current tariffs have been paid for using governmental subsidies. This use of governmental subsidies instead of increases in tariffs has led to an increase in the level of public spending by the Government. Looking ahead, any reduction by the Government in such public subsidies (and corresponding increase in the electrical power tariffs charged) could have a material adverse effect on inflation and, thus, on Argentine consumers’ disposable income and the financial and operating performance of Argentine companies. As a result, it could affect Grupo Financiero Galicia’s financial condition and results of operations and the trading price of our ADSs as well.

The measures adopted by the Argentine government and the claims filed by workers on an individual basis or as part of a labor union action may lead to pressures to increase salaries or additional benefits, which would increase companies’, including Grupo Financiero Galicia’s, operating costs. Additionally, labor union activity could lead to strikes or work stoppages, which may materially and adversely affect Grupo Financiero Galicia’s results of operations.

In the past, the Argentine government has passed laws and regulations requiring private sector companies to maintain certain salary levels and provide their employees with additional work-related benefits. Furthermore, employers, both in the public sector and in the private sector, have been experiencing intense pressure from their personnel, or from the labor unions representing such personnel, demanding salary increases and certain benefits for the workers, given the prevailing high inflation rates.

For example, during the early months of 2019 the Argentine union that represents banking sector employees declared general strikes. These strikes did not have a direct effect on banks but did impact banks’ clients who were not able to access branches. Strikes such as the one that took place in 2019 can also lower the perception the public has of banks, which could have a reputational cost for us. Labor movements are active in Argentina and can potentially lead to further strikes or work stoppages if demands are not satisfied, which could have a material and adverse effect on Grupo Financiero Galicia’s operations and operating costs.

 

17


Table of Contents

There can be no assurance that the Argentine government will not adopt measures in the future mandating salary increases or the provision of additional employee benefits, or that employees or their unions will not exert pressure on companies, such as Grupo Financiero Galicia, in demanding the implementation of such measures. The implementation of any such measures could have a material and adverse effect on Grupo Financiero Galicia’s expenses and business, results of operations and financial condition and, thus, on the trading prices for its ADSs.

High levels of government expenditures in Argentina could generate long lasting adverse consequences for the Argentine economy.

Since 2007, Argentina increased its spending to Gross Domestic Product (“GDP”) to reach a maximum of 24% in 2015, quite above the ratio of the rest of the countries in the region. Since then, a decreasing trend in expenditures was observed until the year 2019. However, in 2020 the spending-to-GDP ratio increased again, as the fiscal stimulus package implemented to deal with COVID-19 and the mobility restrictions put pressure on the fiscal balance resulted in increased expenditures. In 2020, the primary deficit amounted to 6.5% of GDP, and was mainly financed by assistance from the BCRA.

If the fiscal deficit is not reduced and debt financing is insufficient, the Government may be forced to continue its reliance on BCRA financing.

Any such increase in Argentina’s deficit could have a negative effect on the Government’s ability to access to the long-term financial markets, and in turn, could limit the access to such markets for Argentine companies, such as Grupo Financiero Galicia and its subsidiaries. The same may have a material and adverse effect on Grupo Financiero Galicia’s financial condition and results of operations and the trading price for its ADSs.

Exposure to multiple provincial and municipal tax legislation and regulations could adversely affect Grupo Financiero Galicia’s business or results of operations.

Argentina has a federal system of government with 23 provinces and the Autonomous City of Buenos Aires. Each of these, under the Argentine national constitution, has full power to enact legislation concerning taxes. Likewise, within each province, municipal governments have broad powers to regulate said matters. Given that the bank branches of our subsidiary, Banco Galicia, are located in multiple provinces, we are subject to various provincial and municipal legislation and regulations that may vary from time to time. Future developments in provincial and municipal legislation concerning taxes, provincial regulations or other matters could have a material and adverse effect on Grupo Financiero Galicia’s expenses and business, results of operations and financial condition and, thus, on the trading prices for its ADSs.

The novel coronavirus has had and could continue to have an adverse effect on our business operations.

In late December 2019 a notice of pneumonia originating from Wuhan, Hubei province (COVID-19, caused by a novel coronavirus) was reported to the World Health Organization, with cases soon confirmed in multiple provinces in China, as well as in other countries. Several measures were undertaken by the Chinese government and other countries to control the coronavirus, including the use of quarantine, lockdown and severe restrictions on the movement of their respective populations by certain air carriers and foreign governments. Since such initial outbreak, COVID-19 has been declared a pandemic and the virus spread and continues to spread globally, as of the date of this annual report, affecting more than 148 countries and territories around the world, including Argentina. Also, new variants of COVID-19 were reported during 2020 and 2021. Particularly, variants from the United Kingdom, South Africa and Brazil appear to be spreading more quickly and easily, which has led to an increase in COVID-19 cases. In addition, as of the date of this report, some vaccines have been granted emergency use authorizations worldwide. In Argentina, up to the date of this report, 4 vaccines have been approved for distribution (Sputnik V, Russia; Covishield, India; Sinpharm, China; and AstraZeneca, UK) and 1.8% of the national population has been vaccinated with two doses, according to the Argentine Ministry of Health.

COVID-19 has caused and may continue to cause significant social and market disruption. The long-term effects to the global economy and to Grupo Financiero Galicia of epidemics, pandemics and other public health crises, such as COVID-19, are difficult to assess or predict, and may include risks to employee’s health and safety, and reduce our business operations. Any prolonged restrictive measures put in place to control an outbreak of a contagious disease or virus or other adverse public health development in any of our targeted markets may have a material and adverse effect on our business operations.

 

18


Table of Contents

In addition to the foregoing, in 2020, the general macroeconomic conditions worsened as a result of the COVID-19 pandemic. According to INDEC, during the fourth quarter of 2020, GDP declined by 4.3% year over year. Further, during the fourth quarter of 2020, economic activity declined by 9.9% year over year. These conditions also led to an increase in poverty, which, according to INDEC, as of second half of 2020 had affected more than 42% of the population.

Additionally, we may also be affected by a decline in the demand of our services, or the need to implement policies limiting the efficiency and effectiveness of our operations, including the implementation of work from home policies. The impact epidemics, pandemics and other health crises, such as COVID-19 may have on the methods we use to sell and distribute our products and services, on our human capital resources productivity, and on the ability of our suppliers and consultants to provide goods and services and other resources in a timely manner to support our business, are also impossible to assess or predict at this moment.

According to a report published by PricewaterhouseCoopers1, in which the main Argentine financial institutions participated in order to measure the impact of COVID-19 on the industry during 2020, it is estimated that the economic/financial situation will worsen in the short term and could slightly improve on 2021. Likewise, according to Moody’s Argentina2 in its report issued on April, 2021 despite the stress scenario due to the pandemic, the Argentine financial system has shown a high resilience to the decrease in the level of activity, maintaining default ratios in line with what has been reported historically and high levels of capitalization and liquidity.

Furthermore, certain measures imposed by the Government, such as travel restrictions, border closures and lock-down measures which have forced us to set in place work from home arrangements for our employees, may also have a material impact on our ability to operate and achieve our business goals.

Considering the current health crisis, and the related halt in economy the world is facing, we may also experience higher default rates on the financings granted to our clients, liquidity deficiencies, difficulties in our ability to service our debts and other financial obligations. We may also face difficulties in trying to access to debt and capital markets and be forced to refinance preexisting financing arrangements. Although the actual impact is impossible to assess, the occurrence of any of such events could have a material adverse effect on our operations.

Finally, it is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions in the long term. Neither can we predict how the disease will evolve and spread in Argentina, nor forecast the impact of the new variants of the virus. We are not able to anticipate whether Argentina can successfully and widely distribute COVID-19 vaccines in 2021. Finally, the measures implemented by the Government since March 2020 to address the COVID-19 pandemic have resulted in a slowdown in economic activity that adversely affected economic growth in 2020 and will continue to do so in 2021, to a degree that we cannot quantify as of the date of this report. The prior and ongoing impact of COVID-19 could have a material and adverse effect on Grupo Financiero Galicia’s business, results of operations and financial condition and, thus, on the trading prices for its ADSs.

The Argentine economy could be negatively affected by external factors that have an impact in the entire world, such as COVID-19’s spread and the subsequent implementation of measures designed to deal with the mentioned pandemic, and its economic impact both on a local and an international level.

The Argentine economy is vulnerable to external factors. In this sense, most economies in the world (including Argentina and its main trade partners) are being affected by the spread of COVID-19. The virus’ progression, which has been declared a pandemic by the World Health Organization, has led to the application of measures throughout 2020 that have had a severe economic impact.

 

 

1 

https://www.pwc.com.ar/es/servicios/consultoria/infografia-sondeo-covid-entidades-financieras.pdf

2 

https://www.moodyslocal.com/c086ca95-c9ec-4147-9846-ba1027ac4f5c

 

19


Table of Contents

In Argentina, these measures included the implementation of a generalized quarantine with the intention of hindering the virus’ spread and to avoid the collapse of the local health system. This entailed a halt in most economic activities (excluding essential ones, such as healthcare services, manufacturing of food products, medical equipment or pharmaceuticals, supermarkets and pharmacies, and the provision of security forces) and the suspension of road and air travel, among others.

These measures, and any others the Argentine government might implement in the future, have had a negative and direct impact on the country’s economy, by reducing both aggregate supply and demand.

Additionally, the progression of the virus and the resulting measures destined to fight the virus affected and could continue to affect economic growth in Argentina’s trade partners (such as Brazil, the European Union, China, and the United States). In 2020, the contraction of the economies of trade partners had a sizeable and adverse impact on Argentina’s trade balance and economy through a fall in the demand for Argentine exports of 15.7% as compared to the previous year.

On the other hand, higher uncertainty levels associated with the progress of a global pandemic could exacerbate financial conditions’ volatility, particularly in emerging markets, which could pose a threat to Argentina’s currency and financing availability.

Any of these potential risks to the Argentine economy could have a material and adverse effect on Grupo Financiero Galicia’s business, results of operations and financial condition and, thus, on the trading prices for its ADSs.

Failure to adequately address actual and perceived risks arising from institutional deterioration and corruption could adversely affect Argentina’s economy and financial position and the ability of Argentine companies to attract foreign investment.

The lack of a solid institutional framework and corruption have been identified as serious problems for Argentina and may continue to be. In Transparency International’s Corruption Perceptions Index 2020, which measures corruption in 180 countries, Argentina ranked No. 78. In the World Bank’s “Doing Business” report in 2020, which measures the regulations that enhance business activity and those that constrain it, Argentina Ranked No.126 out of 190 countries. The failure to address these issues could increase the risk of political instability, distort the decision-making process, adversely affect Argentina’s international reputation and its ability and the ability of its companies to attract foreign investment.

A deterioration in the Argentine reputation could have a material and adverse effect on Grupo Financiero Galicia’s financial condition and results of operations and, thus, on the trading price for the its ADSs.

Risk Factors Relating to the Argentine Financial System

The stability of the Argentine financial system is dependent upon the ability of financial institutions, including Banco Galicia, the main subsidiary of Grupo Financiero Galicia, to maintain and increase 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, were strongly opposed by depositors due to the losses on their savings and undermined their confidence in the Argentine financial system and in all financial institutions operating in Argentina.

If depositors once again withdraw their money from banks in the future, there may be a substantial negative impact on the manner in which financial institutions, including Banco Galicia, conduct their business, and on their ability to operate as financial intermediaries. Loss of confidence in the international financial markets may also adversely affect the confidence of Argentine depositors in local banks.

An adverse economic situation, even if it is not related to the financial system, could trigger a massive withdrawal of capital from local banks by depositors, as an alternative to protect their assets from potential crises. Any massive withdrawal of deposits could cause liquidity issues in the financial sector and, consequently, a contraction in credit supply.

 

20


Table of Contents

The occurrence of any of the above could have a material and adverse effect on Grupo Financiero Galicia’s expenses and business, results of operations and financial condition and, thus, on the trading prices for its ADSs.

If financial intermediation activity volumes relative to GDP are not restored to significant levels, the capacity of financial institutions, including Banco Galicia, the main subsidiary of Grupo Financiero Galicia, to generate profits may be negatively affected.

As a result of the 1999-2002 financial crisis (in which the Argentine economy fell 18.4%), the volume of financial intermediation activity dropped dramatically: private sector credit plummeted from 24% of GDP in December 2000 to 7.7% in June 2004 and total deposits as a percentage of GDP fell from 31% to 23.2% during the same period. The depth of the crisis and the effect it had on depositors’ confidence in the financial system created uncertainty regarding its ability to act as an intermediary between savings and credit.

Furthermore, the ratio of the total financial system’s private-sector deposits and loans to GDP remains low when compared to international levels. Private-sector deposits and loans amounted to 19.1% and 10.3% of GDP, respectively, as of December 31, 2020.

There is no assurance that financial intermediation activities will continue in a manner sufficient to reach the necessary volumes to provide financial institutions, including Banco Galicia, with sufficient capacity to generate income, or that those actions will be sufficient to prevent Argentine financial institutions, such as Banco Galicia, from having to assume excessive risks in terms of maturity mismatches. Under these circumstances, for an undetermined period of time, the scale of operations of Argentine-based financial institutions, including Banco Galicia, their business volume, the size of their assets and liabilities or their income-generation capacity could be much lower than before the 1999-2002 crisis which may, in turn, impact the results of operations of Banco Galicia and, potentially, the trading price for Grupo Financiero Galicia’s ADSs.

The Argentine financial system’s growth and income, including that of Banco Galicia, the main subsidiary of Grupo Financiero Galicia, depend in part on the development of medium- and long-term funding sources.

In spite of the fact that the financial system’s and Banco Galicia’s deposits continue to grow, they are mostly demand or short-term time deposits and the sources of medium- and long-term funding for financial institutions are currently limited. If Argentine financial institutions, such as Banco Galicia, are unable to access adequate sources of medium and long-term funding or if they are required to pay high costs in order to obtain the same and/or if they cannot generate profits and/or maintain their current volume and/or scale of their business, this may adversely affect Grupo Financiero Galicia’s ability to honor its debts.

Argentine financial institutions (including Banco Galicia) continue to have exposure to public sector debt (including securities issued by the BCRA) and its repayment capacity, which in periods of economic recession, may negatively affect their results of operations.

Argentine financial institutions continue to be exposed, to some extent, to the public sector debt and its repayment capacity. The Argentine government’s ability to honor its financial obligations is dependent on, among other things, its ability to establish economic policies that succeed in fostering sustainable growth and development in the long term, generating tax revenues and controlling public expenditures, which could, either partially or totally, fail to take place.

Banco Galicia’s exposure to the public sector as of December 31, 2020 was Ps.238,654 million, representing approximately 25% of its total assets and 160% of its shareholders’ equity. Of this total, Ps.58,141 million were BCRA debt instruments, Ps.128,325 million corresponded to Argentine government securities, while the remaining Ps.60,996 million corresponded to other receivables resulting from financial brokerage. As a result, Grupo Financiero Galicia’s income-generating capacity may be materially impacted or may be particularly affected by the Argentine public sector’s repayment capacity and the performance of public sector bonds, which, in turn, is dependent on the factors referred to above. Banco Galicia’s ability to honor its financial obligations may be adversely affected by the Argentine government’s repayment capacity or its failure to meet its obligations in respect of Argentine government obligations owed to Banco Galicia.

 

21


Table of Contents

The Consumer Protection Law may limit some of the rights afforded to Grupo Financiero Galicia and its subsidiaries.

Argentine Law No.24,240 (as amended by Law No. 26,361, Law No. 27,250, Law No. 27,265 and Law No. 27,266, the “Consumer Protection Law”) sets forth a series of rules and principles designed to protect consumers, which include Banco Galicia’s customers. Additionally, Law No.25,065 (as amended by Law No.26,010 and Law No.26,361, the “Credit Card Law”) also sets forth public policy regulations designed to protect credit card holders. Additionally, the Civil and Commercial Code captured the principles of Consumer Protection Law and established their application to banking agreements.

On September 17, 2014, Law No.26,993 was enacted, which created a “System to Solve Disputes in Consumer Relationships”, introducing new administrative and legal procedures within the framework of the Consumer Protection Law; namely, an administrative and a judicial regime for such matters. Additionally, the BCRA issued Communication “A” 6072, as supplemented and amended, granting broad protection to financial services customers, limiting fees and charges that financial institutions may validly collect from their clients.

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. This trend has led to an increase in general consumer protection levels. In the event that Grupo Financiero Galicia and its 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 Grupo Financiero Galicia and its subsidiaries’ rights, for example, with respect to their ability to collect payments due from services and financing provided by Grupo Financiero Galicia or its subsidiaries, and adversely affect their financial results of operations. There can be no assurance that court and administrative rulings based on the newly enacted regulation or measures adopted by the enforcement authorities will not increase the degree of protection given to its debtors and other customers in the future, or that they will not favor the claims brought by consumer groups or associations. Finally, in October 2020, a committee of the Argentine Senate started to debate a draft law intended to fully modify the Consumer Protection Law, the outcome of which is currently uncertain.

The above changes as well as potential future changes may prevent or hinder the collection of payments resulting from services rendered and financing granted by Grupo Financiero Galicia’s subsidiaries, which may have an adverse effect on their results and operations and, in turn, on the trading price for the ADSs.

The maintenance or implementation of measures regarding the charging of fees and regulated rates could materially and adversely affect Grupo Financiero Galicia’s consolidated financial condition and results of operations

The BCRA has various regulations regarding the fees and interest rates that entities can charge in the banking business. One of Grupo Financiero Galicia’s primary subsidiaries, Banco Galicia, is required to comply with the applicable regulations. Interest rates and regulated fees (e.g. setting caps on the rates and fees that an entity can charge its customers) could affect the interest rates and fees earned by Banco Galicia, which could result in a reduction in Grupo Financiero Galicia’s consolidated income or a decrease in customer demand for Banco Galicia’s loan or deposit products. In addition, if Banco Galicia were permitted to (and actually did) increase the interest rates and fees it charged (or if the same were otherwise raised by the BCRA or otherwise), such increases could result in higher debt service obligations for Banco Galicia’s customers; which could, in turn, result in higher levels of delinquent loans or discourage customers from borrowing. Interest rates and regulated fees are highly sensitive to many factors beyond Banco Galicia’s control, such as regulation of the financial sector in Argentina, domestic and international economic and political conditions, among other factors. Changes in the demand for our subsidiaries services and/or increases in the levels of delinquency of their customers could have a material and adverse effect on their businesses and, in turn, on Grupo Financiero Galicia’s business, results of operations and financial condition and on the trading price for it ADSs.

 

22


Table of Contents

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

Certain public and private organizations have initiated class actions against financial institutions in Argentina, including Banco Galicia. Class actions are contemplated in the Argentine National Constitution and the Consumer Protection Law, but their use is not regulated. The courts, however, have admitted class actions in spite of lacking specific regulations, providing some guidance with respect to the procedures for the same. These courts have admitted several complaints filed against financial institutions to defend collective interests, based on arguments that object to charges applied to certain products, applicable interest rates and the advisory services rendered in the sale of government securities, among others.

Final judgments entered against financial institutions under these class actions may affect the profitability of financial institutions in general and of Banco Galicia specifically in relation to class actions filed against Banco Galicia. For further information regarding class actions brought against Banco Galicia, please refer to the Item 8. “Financial Information”—A. “Consolidated Statements and Other Financial Information”—“Legal Proceedings”— “Banco Galicia”. To the extent that the profitability of Banco Galicia is impacted by the foregoing, the same could have a material and adverse effect on Grupo Financiero Galicia’s business, results of operations and financial condition and on the trading price for it ADSs.

Administrative procedures filed by the tax authorities of certain provinces against financial institutions, such as Banco Galicia (the primary subsidiary of Grupo Financiero Galicia) and amendments to tax laws applicable to Grupo Financiero Galicia could generate losses for Grupo Financiero Galicia.

In the last years, City of Buenos Aires tax authorities, as well as certain provincial tax authorities, have initiated administrative proceedings against financial institutions in order to collect higher gross income taxes from such financial institutions.

Although Banco Galicia believes it has met its tax obligations regarding current regulations and has properly recorded provisions for those risks based on the opinions and advice of its external legal advisors and pursuant to the applicable accounting standards, certain risks may render those provisions inadequate. Tax authorities may not agree with Grupo Financiero Galicia’s tax treatment, possibly leading to an increase in its tax liabilities.

Moreover, amendments to existing regulations may increase Grupo Financiero Galicia’s tax rate and a material increase in the tax burden could adversely affect its financial results, results of operations and the trading price for its ADSs.

Risk Factors Relating to Us

Grupo Financiero Galicia may be unable to repay its financial obligations or dividends due to a lack of liquidity it may suffer because of being a holding company.

Grupo Financiero Galicia, as a holding company, conducts its operations through its subsidiaries. Consequently, it does not operate or hold substantial assets, except for equity investments in its subsidiaries. Except for such assets, Grupo Financiero Galicia’s ability to invest in its business development and/or to repay obligations is subject to the funds generated by its subsidiaries and their ability to pay cash dividends. In the absence of such funds, Grupo Financiero Galicia may be forced to resort to financing options at unappealing prices, rates and conditions. Additionally, such financing could be unavailable when Grupo Financiero Galicia may need it.

Grupo Financiero Galicia’s subsidiaries are under no obligation to pay any amount to enable Grupo Financiero Galicia to carry out investment activities and/or to cancel its liabilities or to give Grupo Financiero Galicia funds for such purposes. Each of the subsidiaries is a legal entity separate from Grupo Financiero Galicia, and due to certain circumstances, legal or contractual restrictions, as well as to the subsidiaries’ financial condition and operating requirements, Grupo Financiero Galicia’s ability to receive dividends and its ability to develop its business and/or to comply with payment obligations could be limited. Under certain regulations, Banco Galicia has restrictions relating to dividend distributions. In addition, as of the date hereof, due to the regulations recently passed

 

23


Table of Contents

by the BCRA within the framework of the measures taken by the government to respond to the COVID-19, the capacity of the Argentine financial system to pay cash dividends has been suspended until June 30, 2021. As such, no dividends will be paid to Grupo Financiero Galicia prior to such date and such prohibition could be extended.

Investors should take notice of the above, prior to deciding on their investment in equity in Grupo Financiero Galicia as a failure to receive the noted dividends may materially and adversely impact the ability of Grupo Financiero Galicia to pay any amounts in respect of the ADSs. For further information on dividend distribution restrictions, see Item 5. “Operating and Financial Review and Prospects”—B. “Liquidity and Capital Resources”.

In the context of the COVID-19 outbreak, the BCRA restricted the ability of Argentine financial institutions to distribute dividends

In the context of the ongoing COVID-19 pandemic, the BCRA issued, on March 19, 2020, Communication “A” 6939, which suspended the ability of Argentine financial institutions to distribute dividends until June 30, 2020, in order to maintain the lending capacity of the financial institutions. This suspension was later extended by communication “A” 7035 until December 31, 2020, and then by communication “A” 7181 until June 30, 2021.

As the measures taken by the administration to control the fallout from COVID-19 are recent, uncertain, and changing rapidly, it is difficult to predict the full impact of full measures on Grupo Financiero Galicia and its subsidiaries, nor can we predict whether Grupo Financiero Galicia would be able to make contributions to its subsidiaries as a consequence of this measure. Investors should take notice of the above, prior to deciding on their investment in equity in Grupo Financiero Galicia as a failure to receive the noted dividends may materially and adversely impact the ability of Grupo Financiero Galicia to pay any amounts in respect of the ADSs. For further information on the effects of COVID-19, see Item 3. “Key Information” – D. “Risk Factors” - “The novel coronavirus could have an adverse effect on our business operations”. For further information on dividend distribution restrictions, see Item 5. “Operating and Financial Review and Prospects”—B. “Liquidity and Capital Resources”.

Corporate governance standards and disclosure policies that govern companies listing their shares pursuant to the public offering system in Argentina may differ from those regulating highly developed capital markets, such as the U.S. As a foreign private issuer, Grupo Financiero Galicia applies disclosure policies and requirements that differ from those governing U.S. domestic registrants.

Argentine disclosure requirements are more limited than those in the United States and differ in important respects. As a foreign private issuer, Grupo Financiero Galicia is subject to different disclosure policies and other requirements than a domestic U.S. registrant. For example, as a foreign private issuer in the U.S., Grupo Financiero Galicia is not subject to the same requirements and disclosure policies as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue financial statements, report on significant events and the standards applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules applicable to domestic U.S. registrants.

In addition, although Argentine laws provide for certain requirements that are similar to those prevailing in the U.S. in relation to publicly listed companies (including, for example, those related to price manipulation), in general, applicable Argentine laws are different to those in the U.S. and in certain aspects may provide different or fewer protections or remedies as compared to U.S. laws. Further, Grupo Financiero Galicia relies on exemptions from certain Nasdaq rules that are applicable to domestic companies.

Accordingly, the corporate information available about Grupo Financiero Galicia is not the same as, and may be more limited than, the information available to shareholders of a U.S. company.

 

24


Table of Contents

The price of Grupo Financiero Galicia’s ordinary shares may fluctuate significantly, and your investment may decline in value.

The price of Grupo Financiero Galicia´s ordinary shares may fluctuate significantly in response to several factors, many of which are beyond our control, including those described in this annual report under “Risk Factors Relating to Argentina” and “Risk Factors Relating to the Argentine Financial System”.

The stock markets in general, and the shares of emerging market in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the companies involved. Grupo Financiero Galicia cannot assure that any trading price or valuation will be sustained. These factors may materially and adversely affect the market price of our ordinary shares, which may limit or prevent investors from readily selling Grupo Financiero Galicia’s ordinary shares and may otherwise affect liquidity, regardless of Grupo Financiero Galicia’s operating performance.

Market fluctuations, as well as general political and economic conditions in the markets in which we operate, such as recessions or currency exchange rate fluctuations, may also adversely affect the market price of Grupo Financiero Galicia’s ordinary shares and the ADSs.

Adverse conditions in the credit, capital and foreign exchange markets may have a material adverse effect on Grupo Financiero Galicia’s business, financial position and results of operations and adversely impact it by limiting its ability to access funding sources.

Grupo Financiero Galicia may sustain losses relating to its investments in fixed- or variable-income securities on the exchange market and its monetary position due to, among other reasons, changes in market prices, defaults and fluctuations in interest rates and in exchange rates. A deterioration in the capital markets may cause Grupo Financiero Galicia to record net losses due to a decrease in the value of its investment portfolios, in addition to losses caused by the volatility in financial market prices, even if the economy overall is not affected. Any of these losses could have an adverse effect on Grupo Financiero Galicia’s results of operations, business and financial condition and, in turn, on the trading price for the ADSs.

The occurrence of an operational risk impacting any of Grupo Financiero Galicia’s businesses, could disrupt its business functions and have a negative impact on its results of operations.

As with other financial institutions, operational risks could arise in any of Grupo Financiero Galicia’s businesses. These risks may include losses resulting from inadequate or failed internal and external processes, systems or human error, fraud, the effects of natural or man-made catastrophic events (such as natural disasters or pandemics) or from other external events. Exposure to such events could disrupt Grupo Financiero Galicia’s systems and operations significantly, which may result in financial losses and reputational damage.

Pandemics and other material public health problems could result in social, economic or labor instability in the world and domestically and disrupt the operations of our business. For example, the COVID-19 pandemic has resulted in travel restrictions and extended shutdowns of certain businesses in many regions.

The main risk factors identified in the last risk assessment undertaken by our Risk Management Division were system failures, adverse legal decisions and economic losses generated by fraud. Although we have implemented numerous controls to avoid the occurrence of inefficient or fraudulent operations, errors can occur and compound even before being detected and corrected. In addition, some of our transactions are not fully automatic, which may increase the risk of human error or manipulation, and it may be difficult to detect losses quickly. The occurrence of any one or more of the above events could have a material adverse impact on our business, financial condition, and results of operations and, in turn, on the trading price for the ADSs.

An increase in cybersecurity breaches or fraudulent and other illegal activity involving Grupo Financiero Galicia or its subsidiaries could lead to reputational damage to Grupo Financiero Galicia’s (or its subsidiaries’) brands and could reduce the use and acceptance of its and its subsidiaries’ products, therefore adversely affecting its business and results of operations.

The business of many of Grupo Financiero Galicia’s subsidiaries depends on the efficient and uninterrupted operation of its data processing systems, its platforms for the exchange of information and its digital networks.

 

25


Table of Contents

Many of Grupo Financiero Galicia’s subsidiaries have access to a large amount of confidential information about their respective clients. Therefore, cybersecurity breaches represent a potential risk for Grupo Financiero Galicia.

Cybersecurity breaches can result in, for example, identity fraud, phishing, ransomware, information leaks, APT (Advanced Persistent Threat), DDoS Attacks (Distributed Denial of Service) or the theft of sensitive and confidential information, and may affect negatively the security of information that is stored and transmitted through the information systems and network infrastructure of Grupo Financiero Galicia and negatively affect the reputation of Grupo Financiero Galicia’s brands, thereby causing existing and potential clients to refrain from conducting business with Grupo Financiero Galicia’s subsidiaries.

In spite of all existing security measures, Grupo Financiero Galicia cannot provide any assurance that the systems are invulnerable to cybersecurity breaches or that the mentioned measures will be successful in protecting against any such breach. In addition, any of the aforementioned events could lead to an increase in compliance costs for Grupo Financiero Galicia’s subsidiaries. If any of the above described events were to occur, it could lead to monetary losses and reputational damage to Grupo Financiero Galicia’s brands, which could reduce the use and acceptance of its products, greater regulation, and increased compliance costs, therefore adversely affect its business and results of operation and the trading price for its ADSs.

Grupo Financiero Galicia’s subsidiaries estimate and establish reserves for potential credit risk or future credit losses, which may be inadequate or insufficient, and which may, in turn, materially and adversely affect its financial position and results of operations.

Pursuant to the implementation of IFRS 9, Grupo Financiero Galicia’s subsidiaries establish reserves for potential credit risk and losses related to changes in the levels of income of debtors/borrowers, increased rates of inflation, increased levels of non-performing loans or an increase in interest rates. This process requires a complex methodology mixing probability of default (“PD”), loss given default (“LGD”) and exposure at default (“EAD”), including economic projections and assumptions regarding the ability of debtors to repay their loans.

Therefore, if in the future Grupo Financiero Galicia’s subsidiaries are unable to effectively control the level of quality of their loan portfolio, if loan loss reserves are inadequate to cover future losses, or if they are required to increase their loan loss reserves due to an increase in the amount of their non-performing loans, the financial position and the results of operations of Grupo Financiero Galicia’s subsidiaries may be materially and adversely affected and, in turn, the trading prices for the ADSs.

If Grupo Financiero Galicia’s subsidiaries should fail to meet regulatory standards or expectations or detect money laundering and other illegal or inappropriate activities in a comprehensive or timely manner. Grupo Financiero Galicia´s subsidiaries may incur fines, penalties, reputational harm and other negative consequences.

Grupo Financiero Galicia’s subsidiaries must be in compliance with all applicable laws against money laundering, funding of terrorist activities and other regulations. These laws and regulations require, among other things, that Grupo Financiero Galicia’s subsidiaries adopt and implement control policies and procedures which involve “know your customer” principles that comply with the applicable regulations and reporting suspicious or unusual transactions to the applicable regulatory authorities. As such, Grupo Financiero Galicia’s subsidiaries maintain systems and procedures designed to ensure that they comply with applicable laws and regulations. However, Grupo Financiero Galicia’s subsidiaries are subject to heightened compliance and regulatory oversight and expectations, particularly due to the evolving and increasing regulatory landscape that they operate in. Further, Grupo Financiero Galicia’s subsidiaries could become subject to future regulatory requirements beyond those currently proposed, adopted or contemplated. The cumulative effect of all of the legislation and regulations on their business, operations and profitability remains uncertain. This uncertainty necessitates that Grupo Financiero Galicia’s subsidiaries make certain assumptions with respect to the scope and requirements of the proposed rules in their business planning. If these assumptions prove incorrect, Grupo Financiero Galicia’s subsidiaries could be subject to increased regulatory and compliance risks and costs as well as potential reputational harm.

In addition, a single event or issue may give rise to numerous and overlapping investigations and proceedings in different jurisdictions. Also, the laws and regulations in jurisdictions in which Grupo Financiero Galicia’s subsidiaries operate may be different or even conflict with each other as to the products and services

 

26


Table of Contents

offered by Grupo Financiero Galicia’s subsidiaries or other business activities Grupo Financiero Galicia’s subsidiaries may engage in, which can lead to compliance difficulties or issues. Furthermore, many legal and regulatory regimes require Grupo Financiero Galicia’s subsidiaries to report transactions and other information to regulators and other governmental authorities’ self-regulatory organizations, exchanges, clearing houses and customers. Grupo Financiero Galicia´s subsidiaries may be subject to fines, penalties, restrictions on our business, or other negative consequences if they do not timely, completely, or accurately provide regulatory reports, customer notices or disclosures, or make tax-related withholdings or payments, on behalf of themselves or their customers.

While Grupo Financiero Galicia’s subsidiaries have adopted policies and procedures intended to detect and prevent the use of their networks for money laundering activities and by terrorists, terrorist organizations and other types of organizations, those policies and procedures may fail to fully eliminate the risk that Grupo Financiero Galicia’s subsidiaries have been or are currently being used by other parties, without their knowledge, to engage in activities related to money laundering or other illegal activities. Moreover, some legal/regulatory frameworks provide for the imposition of fines or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though there was in place at the time, systems and procedures designed to ensure compliance. For example, Grupo Financiero Galicia’s subsidiaries are subject to regulations issued by the Office of Foreign Assets Control (“OFAC”) that prohibit financial institutions from participating in the transfer of property belonging to the governments of certain foreign countries and designated nationals of those countries. OFAC may impose penalties or restrictions on certain activities for inadvertent or unintentional violations even if reasonable processes are in place to prevent the violations. Any violation of the applicable laws or regulatory requirements, even if inadvertent or unintentional, or any failure to meet regulatory standards or expectations, including any failure to satisfy the conditions of any consent orders, could result in fees, penalties, restrictions on Grupo Financiero Galicia’s subsidiaries ability to engage in certain business activities, reputational harm, loss of customers or other negative consequences all of which could have a material and adverse effect on Grupo Financiero Galicia’s business, financial condition and operations and, in turn, on the trading price for the ADSs.

A disruption or failure in Grupo Financiero Galicia’s information technology system could adversely affect its operations and financial position.

The success of Grupo Financiero Galicia’s subsidiaries is dependent upon the efficient and uninterrupted operation of their communications and computer hardware systems, including those systems related to the operation of their ATM networks and digital channels. Grupo Financiero Galicia’s communications, systems or transactions could be harmed or disrupted by power failures, data breaches, cyber-attacks, acts of terrorism, physical theft, reputational damage and similar events or disruptions. Any of the foregoing events may cause disruptions in Grupo Financiero Galicia’s systems, delays in the provision of and/or the loss of critical data and could prevent it from operating at optimal levels. In addition, the contingency plans in place may not be sufficient to cover all those events and, therefore, this may mean that the applicable insurance coverage is limited or inadequate, preventing Grupo Financiero Galicia (or its subsidiaries) from receiving full compensation for the losses sustained as a result of such a global disruption. If any of these events occur, it could damage the reputation, entail serious costs and affect Grupo Financiero Galicia’s transactions, as well as its results of operations, business and financial position and, in turn, the trading price for the ADSs.

The Argentine Peso qualifies as a currency of a hyperinflationary economy, and Grupo Financiero Galicia is required to apply inflationary adjustments to its financial statements, which adjustments could adversely affect its financial statements, results of operations and financial condition.

Pursuant to IAS 29 (Financial Reporting in Hyperinflationary Economies), the financial statements of entities whose functional currency is that of a hyperinflationary economy must be restated using a suitable general price index to control for the effects of changes. Further, such regulation 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. In June 2018, the International Practices Task Force of the Centre for Quality, which monitors “highly inflationary countries”, categorized Argentina as a country with a projected three-year cumulative inflation rate greater than 100%. Additionally, some of the other qualitative factors of IAS 29 were present. Argentine companies applying IFRS are required to apply IAS 29 to their financial statements for periods ending on and after July 1, 2018. In addition, the Argentine Securities Commission (Comisión Nacional de Valores) (“CNV”), through Resolution No. 777/18 established the method to restate financial statements in constant currency to be applied by issuers subject to oversight of the CNV, in accordance with IAS 29.

 

27


Table of Contents

Law No. 27,468 delegated to the BCRA, in the case of financial entities, the entry into force of new regulations. Likewise, for purposes of the determination of the indexation for tax purposes, Law No.27,468, enacted on December 4, 2018, substituted the Wholesale Price Index for CPI and modified the standards triggering tax indexation procedures. During the first three fiscal years after January 1, 2018, the tax indexation will be applicable if the variation of the CPI exceeds 55% in 2018, 30% in 2019 and 15% in 2020. The tax indexation determined during any such year will be allocated as follows: 1/6 in that same year, and the remaining 5/6 in equal parts in the following five years. From January 1, 2021, the tax indexation procedure will be triggered under similar standards as those set forth by IAS 29.

Grupo Financiero Galicia cannot predict the full impact of the application of such tax indexation procedures and the related adjustments on its financial statements or the effects of such tax indexation procedures on its business, results of operations and financial condition (or on the trading price for its ADSs).

Small spreads in interest rates between loans and deposits, could harm our financial position and results of operations.

We carry out our operations in a country that is subject to frequent regulatory changes, high inflation and frequent currency devaluations. As a result, interest rates fluctuate frequently with direct impacts on the main source of income for the business of our subsidiaries.

These fluctuations may generate losses based on the type of financing granted, the value of the interest rate for the financing and the other terms of the loans extended. For example, in such a volatile country, the granting of long-term loans with fixed rates can result in severe monetary losses if the interest rate earned on the loans extended does not exceed the interest that we (or our subsidiaries) pay on deposits we or they hold.

In addition to this, the increasing competition we face from digital banks has forced us to offer lower interest rates than we otherwise would in order to remain competitive in the market. If we are not able to maintain profitable spreads between interest that we earn on the loans that we and our subsidiaries grant and the interest that we pay on the deposits that we and our subsidiaries hold, our results of operations and financial condition may be materially adversely impacted and, in turn, the trading price for our ADSs.

Problems in operations due to failures in services contracted from external suppliers.

Due to the nature of the business and the size of our business, many of our computer systems and operations depend on services contracted from external suppliers. This prevents us from controlling, in depth, the operation and provision of such services. Performance or operational failures of outsourced services may result in operational losses or system failures, with subsequent negative impacts on our reputation, financial condition and results of operations and, in turn, on the trading price for our ADSs.

Payments on class B shares or ADSs may be subject to FATCA withholding.

Pursuant to certain provisions of the U.S. Internal Revenue Code of 1986, as amended, commonly known as FATCA, a “foreign financial institution” may be required to withhold on certain payments it makes (“foreign pass thru payments”) to persons that fail to meet certain certification, reporting, or related requirements. We are a foreign financial institution for these purposes. A number of jurisdictions have entered into, or have agreed in substance to, intergovernmental agreements with the United States to implement FATCA (“IGAs”), which modify the way in which FATCA applies in their jurisdictions. Certain aspects of the application of the FATCA provisions to instruments such as the class B shares and the ADSs, including whether withholding would ever be required pursuant to FATCA with respect to payments on instruments such as the class B shares or the ADSs, are uncertain and may be subject to change.

Even if withholding would be required pursuant to FATCA with respect to payments on instruments such as the class B shares and the ADSs, proposed regulations have been issued that provide that such withholding would

 

28


Table of Contents

not apply prior to the date that is two years after the date on which final regulations defining “foreign passthru payments” are published in the U.S. Federal Register. In the preamble to the proposed regulations, the U.S. Treasury Department indicated that taxpayers may rely on these proposed regulations until the issuance of final regulations. Holders should consult their own tax advisors regarding how these rules may apply to their investment in the class B shares and the ADSs.

 

Item 4.

Information on the Company

A. History and Development of the Company

Our legal name is Grupo Financiero Galicia S.A. Our commercial name is Grupo Financiero Galicia or Grupo Galicia. We are a financial services holding company that was incorporated on September 14, 1999, as a sociedad anónima (which is a stock corporation) under the laws of Argentina. As a holding company we do not have operations of our own and conduct our business through our subsidiaries. Banco Galicia is our main subsidiary and one of Argentina’s largest full-service banks.

Ecosistema NaranjaX is a commercial umbrella that is comprised of the operating subsidiaries of Tarjetas Regionales. Through it we provide proprietary brand credit cards, consumer finance and digital banking services to the underbanked population of Argentina. For further information, see Item 4. Information on the Company – B. History – iii) Ecosistema NaranajaX below.

Through Sudamericana Holdings and its subsidiaries, we provide insurance products in Argentina.

Through Galicia Securities and Inviu we provide financial and brokerage related products as explained herein.

We are one of Argentina’s largest financial services groups with consolidated assets of Ps.1,055,279 million as of December 31, 2020.

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

We are domiciled in Buenos Aires, Argentina. Under our bylaws, our corporate duration is until June 30, 2100. Our duration may be extended by a resolution passed at the extraordinary shareholders’ meeting. Our principal executive offices are located at Teniente General Juan D. Perón 430, Twenty-Fifth floor, (C1038AAJ), Buenos Aires, Argentina. Our telephone number is (54-11) 4343-7528 and our website is www.gfgsa.com.

Our agent for service of process in the United States is CT Corporation System, presently located at 111 8th Avenue, New York, New York 10011.

A.1 History

i) Grupo Financiero Galicia

Grupo Financiero Galicia was formed on September 14, 1999 as a financial services holding company to hold all the shares of the capital stock of Banco Galicia held by members of the Escasany, Ayerza and Braun families. Its initial nominal capital amounted to 24,000 common shares, 12,516 of which were designated as class A ordinary (common) shares (the “class A shares”) and 11,484 of which were designated as class B ordinary (common) shares (the “class B shares”).

 

29


Table of Contents

Following Grupo Financiero Galicia’s formation, the holding companies that held the shares in Banco Galicia on behalf of the Escasany, Ayerza and Braun families were merged into Grupo Financiero Galicia. Following the merger, Grupo Financiero Galicia held 46.34% of the outstanding shares of Banco Galicia. In addition, and due to the merger, Grupo Financiero Galicia’s capital increased from 24,000 to 543,000,000 common shares, 281,221,650 of which were designated as class A shares and 261,778,350 of which were designated as class B shares. Following this capital increase, all of our class A shares were held by EBA Holding S.A., an Argentine corporation that is 100% owned by our controlling shareholders, and our class B shares were held directly by our controlling shareholders in an amount equal to their ownership interests in the holding companies that were merged into Grupo Financiero Galicia.

On May 16, 2000, our shareholders held an extraordinary shareholders’ meeting during which they unanimously approved a capital increase of up to Ps.628,704,540 and the public offering and listings of our class B shares. All the new common shares issued as a result of such capital increase were designated as class B shares, with a par value of Ps.1. During this extraordinary shareholders’ meeting, all of our existing shareholders waived their preemptive rights. In addition, the shareholders determined that the exchange ratio for the exchange offer would be one class B share of Banco Galicia for 2.5 of our class B shares and one ADS of Banco Galicia for one of our ADSs. The exchange offer was completed in July 2000 and the resulting capital increase was of Ps.549,407,017. Upon the completion of the exchange offer, our only significant asset was our 93.23% interest in Banco Galicia.

On January 2, 2004, our shareholders held an extraordinary shareholders’ meeting during which they approved a capital increase of up to 149,000,000 preferred shares, each of them mandatorily convertible into one of our class B shares on the first anniversary of the date of issuance. Such shares were to be subscribed for in up to US$100 million of face value of subordinated notes to be issued by Banco Galicia to its creditors in the restructuring of the foreign debt of its head office in Argentina (the “Head Office”) and its Cayman Branch, or in cash. This capital increase was carried out in connection with the restructuring of Banco Galicia’s foreign debt. On May 13, 2004, we issued 149,000,000 preferred non-voting shares, with preference over the ordinary shares in the event of liquidation, each with a face value of Ps.1. The preferred shares were converted into class B shares on May 13, 2005. With this capital increase, our capital increased to Ps.1,241,407,017.

In August 2007, Grupo Financiero Galicia exercised its preemptive rights in Banco Galicia’s issuance of shares and subscribed for 93.6 million shares of Banco Galicia. The consideration paid for such shares consisted of: (i) US$102.2 million face value of notes due 2014 issued by Banco Galicia in May 2004, and (ii) cash. After the capital increase, Grupo Financiero Galicia increased Banco Galicia’s shares from 93.60% to 94.66%.

In September 2013, Grupo Financiero Galicia announced that it had reached an agreement to absorb Lagarcué S.A. and Theseus S.A. (entities that were shareholders of Banco Galicia at the moment of the merger). The consolidated financial statements prepared specifically for this merger were issued as of June 30, 2013 and the effective date of such merger was September 1, 2013.

This merger resulted in an increase of the ownership interest Grupo Financiero Galicia had in its principal subsidiary Banco Galicia in the amount of 25,454,193 class B shares, which also represented all of the total capital stock (4.526585%) Lagarcué S.A. and Theseus S.A. had in Banco Galicia.

Consequently, Grupo Financiero Galicia agreed to increase its capital stock by issuing 58,857,580 new class B shares representing 4.526585% of the outstanding capital stock of Grupo Financiero Galicia to be delivered to the shareholders of Lagarcué S.A. and Theseus S.A.

Additionally, Grupo Financiero Galicia, together with Banco Galicia and the shareholders of Lagarcué S.A. and Theseus S.A., signed a supplemental agreement governing operational issues of and providing for the settlement and mutual withdrawal of any pending claims.

All documentation related to the merger by absorption of Lagarcué S.A. and Theseus S.A. by Grupo Financiero Galicia was approved at the extraordinary shareholders’ meeting of Grupo Financiero Galicia held on November 21, 2013, including the exchange ratio and the above mentioned capital increase of Ps.58,857,580 through the issuance of 58,857,580 class B shares, with a face value of Ps.1, one vote per share, entitling its owners to participate in the profits of the financial year beginning on January 1, 2013.

 

30


Table of Contents

On December 18, 2013, the definitive merger agreement contemplating the absorption of Lagarcué S.A. and Theseus S.A. was registered in a public deed pursuant to the terms of paragraph 4 of article 83 of the Ley General de Sociedades (Law No. 19,550, as amended, the General Corporations Law or “Corporations Law”), and effective as of September 1, 2013. Therefore, 25,454,193 class B shares of Banco Galicia, representing 4.526585 % of its capital stock previously owned by Lagarcué S.A. and Theseus and S.A. were transferred to Grupo Financiero Galicia. As a result, Grupo Financiero Galicia owns 560,199,603 shares of Banco Galicia, representing 99.621742% of its capital stock and voting rights.

On February 27, 2014, by Resolution No. 17,300, the Board of the Comisión Nacional de Valores (the “National Securities Commission”, or the “CNV”) consented to the absorption of Lagarcué S.A. and Theseus S.A and to the above mentioned increase in capital of Grupo Financiero Galicia.

On February 25, 2014, the Board of Directors of Grupo Financiero Galicia resolved to offer to acquire all of the remaining shares of Banco Galicia owned by third parties, amounting to 2,123,962 shares, at an amount of Ps.23.22 per share, which was approved by the CNV on April 24, 2014.

In compliance with Argentine regulations, Grupo Financiero Galicia made all required communications and paid the amounts corresponding to the remaining shares of Banco Galicia held by third parties. On August 4, 2014, Grupo Financiero Galicia became the owner of 100% of the outstanding capital stock of Banco Galicia when the relevant unilateral declaration to acquire the remaining shares of Banco Galicia held by third parties was recorded as a public deed pursuant to Article 95 of the Law No. 26,831 (the “Capital Markets Law”, in Spanish “Ley de Mercado de Capitales”).

On January 12, 2017, Grupo Financiero Galicia together with its main subsidiary, Banco Galicia, decided to accept an offer made by Mr. Julio A. Fraomeni and Galeno Capital S.A.U. to purchase 100% of Banco Galicia’s subsidiary, Compañía Financiera Argentina S.A. On December 4, 2017, through Resolution No. 414, the BCRA authorized the sale of Compañía Financiera Argentina S.A. During the first quarter of fiscal year 2018, payments were completed, so Grupo Financiero Galicia received a total amount of Ps.30,771,146 (which, as adjusted for inflation, is equal to Ps.89,623,576 as of December 31, 2020) for its 3% of participation in Compañia Financiera Argentina S.A.

On May 16, 2017, the Board of Directors of Grupo Financiero Galicia accepted an offer to acquire 10,000 book-entry shares with a nominal value of Ps.1 per share, representing 1% of the share capital of Inviu owned by Compañía Financiera Argentina S.A. for Ps.906,524.15 (which, as adjusted for inflation, is equal to Ps.3,164,856 as of December 31, 2020).

During August 2017, Grupo Financiero Galicia accepted a series of irrevocable sales offers for the acquisition of a 6% of the issued and outstanding share capital of the subsidiary Tarjetas Regionales. On January 5, 2018, a total price of US$49,000,000 was paid and the transaction was completed on January 8, 2018, with the transfer of 22,633,260 Class A common shares, book-entry, with a par value of Ps.1 per share and 5 votes per share, and 42,033,196 Class B common shares, book-entry, with a par value of Ps.1 per share and 1 vote per share.

On October 12, 2017, the Board of Directors of the Company approved the corporate reorganization of Grupo Financiero Galicia and Banco Galicia. Such reorganization consisted of the divestiture of Banco Galicia’s shares in Tarjetas Regionales (77% of its share capital), and the incorporation of such shares into the assets of Grupo Financiero Galicia effective January 1, 2018. On January 19, 2018, the BCRA, through Note No. 312/04/2018, confirmed that it did not object to such corporate reorganization. Following such reorganization, Grupo Financiero Galicia held an 83% ownership interest in Tarjetas Regionales.

On August 15, 2017, the shareholders of Grupo Financiero Galicia approved an increase of its share capital by issuing up to a maximum of 150,000,000 of new Class B shares, book-entry, with a right to one vote and a face value of Ps.1 per share.

On September 26, 2017, the global primary follow-on offering period for Grupo Financiero Galicia’s new Class B shares ended and 109,999,996 class B shares were subscribed for a price of US$5 per share. Such shares

 

31


Table of Contents

were issued on September 29, 2017. The Company granted the underwriters the option to purchase additional class B ordinary shares at the offering price, and on October 2, 2017, the underwriters exercised such option and 16,500,004 additional class B shares at US$5 per share were issued on October 4, 2017.

As a result of the foregoing offering, a total of 126,500,000 ordinary class B shares, book-entry, with a right to one vote and a face value of Ps.1 per share were issued. The new issued and outstanding capital of Grupo Financiero Galicia was therefore Ps.1,426,764,597, represented by 281,221,650 ordinary class A shares, book-entry, entitled to five votes per share and a face value of Ps.1 per share and 1,145,542,947 ordinary class B shares, book-entry, entitled to one vote and a face value of Ps.1 per share.

On December 27, 2017, Grupo Financiero Galicia made a capital contribution to Banco Galicia of Ps.10,000,000,000, (which, as adjusted for inflation, is equal to Ps.30,921,170,298 as of December 31, 2020).

On May 28, 2019, the Board of Directors of Grupo Financiero Galicia approved a capital contribution to Tarjetas Regionales for Ps.500,000,000 (which, as adjusted for inflation, is equal to Ps.878,727,016 as of December 31, 2020) to fund the creation of a new digital financial company, called “Naranja Digital Compañía Financiera S.A.U.” designed to reach and offer digital banking services to the underbanked population of Argentina. Said capital contribution was effective in two payments of Ps.250,000,000 each, the first one made in June 2019 and the second one made in December 2019. The formation of said company was approved on September 16, 2019, by Resolution 205 of the BCRA.

On July 2, 2019, the Board of Directors of Grupo Financiero Galicia accepted an offer made by Inviu, to acquire 5% of the stock of Galicia Administradora de Fondos for US$920,000. Such acquisition made Grupo Financiero Galicia the sole shareholder of Galicia Administradora de Fondos. Likewise, on the same date, the Board of Directors of Grupo Financiero Galicia approved the creation of a new company denominated IGAM LLC, to be registered in the state of Delaware, United States of America, to provide brokerage, investing and other financial services in Argentina and in other countries. The registration of IGAM LLC took place on July 3, 2019.

On August 15, 2019, the Board of Directors of Grupo Financiero Galicia accepted a purchase offer made by Banco Galicia to sell 10,000 shares, representing 1% of the capital stock of Inviu , for Ps.695,308.54 (which, as adjusted for inflation, is equal to Ps.1,119,778 as of December 31, 2020). With this share purchase, Inviu is 100% owned by our subsidiary Banco Galicia.

On September 20, 2019, the Board of Directors of Grupo Financiero Galicia approved a capital contribution to IGAM LLC for Ps.71,000,000, (which, as adjusted for inflation, is equal to Ps.107,988,030 as of December 31, 2020), to be applied to the purchase of the total stake in Inviu owned by Banco Galicia. Said operation was closed at a total price of Ps.69,530,854 (which, as adjusted for inflation, is equal to Ps.105,753,520 as of December 31, 2020).

On May 5, 2020, the Board of Directors of Grupo Financiero Galicia, with the goal of strengthening its brokerage service offerings approved a sale offer to purchase the entire capital stock of a brokerage company (an ALYC company -Agente de Liquidación y Compensación- meaning those Argentine entities with a broker-dealer license given by the Argentine Market Regulator) called 34 Grados Sur Securities S.A. Said operation was closed for a total price of US$441,230 and the company was re named Galicia Securities S.A.

On May 28, 2020, the Board of Directors of Grupo Financiero Galicia S.A. agreed with the minority shareholders of Tarjetas Regionales to proceed with a corporate reorganization process. Through this corporate reorganization, the minority shareholders of Tarjetas Regionales, Fedler S.A. and Dusner S.A., holders of 17% of Tarjetas Regionales’s shares spun- off its shares in Tarjetas Regionales and they were absorbed, through a merger by Grupo Financiero Galicia. On September 14, 2020, Grupo Financiero Galicia and the companies Dusner S.A. and Fedler S.A. signed the Preliminary Spin off - Merger Agreement and on December 15, 2020 the definitive Spin off - Merger Agreement was executed. As a result of said corporate reorganization, the shareholders of Fedler S.A. and Dusner S.A received GFG’s 47,927,494 Class B common shares, book-entry, with a par value of Ps.1 per share and 1 vote per share, representing their equity interest in Tarjetas Regionales and Grupo Financiero Galicia acquired the control of the 100% equity of Tarjetas Regionales.

 

32


Table of Contents

ii) Banco Galicia

Banco Galicia is a banking corporation organized as a stock corporation under Argentine law and supervised and licensed to operate as a commercial bank by the Superintendencia de Entidades Financieras y Cambiarias (Superintendency of Financial Institutions and Exchange Bureaus or, the “Superintendency”).

Banco Galicia was founded in September 1905 by a group of businessmen in Argentina and began operations in November 1905. Banco Galicia’s business and branch network increased significantly by the late 1950s and continued expanding in the following decades, after regulatory changes allowed Banco Galicia to exercise its potential and gain a reputation for innovation, thereby achieving a leading role within the domestic banking industry.

In the late 1950s, Banco Galicia launched the equity mutual fund FIMA Acciones and founded the predecessor of the asset manager Galicia Administradora de Fondos.

As part of its growth strategy, Banco Galicia began expanding into rural areas in the Interior, where there was believed to be a high potential for growth. Historically, the Interior was underserved relative to Buenos Aires and its surroundings with respect to access to financial services, and its population tends to use fewer banking services. Between 1995 and 1999, Banco Galicia acquired equity interests in entities and formed several non-banking companies providing financial services to individuals in the Interior through the issuance of proprietary brand credit cards. See “—Ecosistema NaranjaX” below.

On January 12, 2017, Grupo Financiero Galicia and Banco Galicia accepted an offer made by Mr. Julio A. Fraomeni and Galeno Capital S.A.U. to purchase 100% of CFA, a subsidiary of Banco Galicia. On December 4, 2017, pursuant to Resolution No.414, the BCRA authorized such transaction, which was completed on February 2, 2018.

On March 31, 2017, Banco Galicia’s Board of Directors approved the sale of its stake (58.8% of the issued and outstanding shares) in its subsidiary Tarjetas del Mar S.A. (“Tarjetas del Mar”) to Sociedad Anónima Importadora y Exportadora de la Patagonia (which already owned 40% of the total shares of Tarjetas del Mar). CFA also sold its stake (1.2% of the issued and outstanding shares) in Tarjetas del Mar to Federico Braun. Banco Galicia received approximately US$5,000,000 in respect of such sale.

On December 27, 2017, Grupo Financiero Galicia, in its capacity as sole shareholder and holder of 100% of the capital of Banco Galicia, integrated a capital contribution of Ps.10,000,000,000 (which, as adjusted for inflation, is equal to Ps.30,921,170,298 as of December 31, 2020). The BCRA, through its Resolution No.35 dated January 11, 2018, approved the capital contribution and its consideration as computable capital.

On January 21, 2019 Banco Galicia, sold to AI Zenith (Netherlands) B.V. 3,182,444 book-entry common shares, with face value of Ps.1 each and one vote per share, representing 7.7007% of Prisma Medios de Pago S.A. (“Prisma”) capital stock. Banco Galicia continues to hold 3,057,642 shares in Prisma, which represents 7.3988% of its capital stock.

In September 2019, Banco Galicia accepted an offer to acquire 100% of the shareholding in Inviu made by IGAM. The price of the operation amounted to Ps.69,530,854 (which as adjusted for inflation, is equal to Ps.105,753,520 as of December 31,2020). See “—Grupo Financiero Galicia”.

During the fiscal year 2020, Banco Galicia, together with other financial institutions, formed a company named Play Digital S.A. (“Play Digital”) with the corporate purpose of developing and marketing a payment solution linked to the bank accounts of the financial system users, which will significantly enhance their payment experience. As of the date hereof, Banco Galicia held 12.976% of Play Digital.

 

33


Table of Contents

iii) Ecosistema NaranjaX

In the mid-1990s, Banco Galicia made the strategic decision to target the “non-account holding” individuals market, which, in Argentina, typically includes the low and medium-low income segments of the population who live in the Interior of the country, in addition to certain parts of Greater Buenos Aires. To implement this strategic decision, in 1995 Banco Galicia began investing in non-bank companies (the “Regional Credit Card Companies”) operating in certain regions of the Interior. These companies provided financial services to individuals through the issuance of credit cards with proprietary brands and extended credit to its customers through such cards.

In 1995, Banco Galicia made the first investment in this business by acquiring a minority stake in Tarjeta Naranja S.A. (“Naranja”) and in 1997 increased its ownership to 80%. This company had begun operations in 1985 in the city of Córdoba, where it marketed “Naranja”, its proprietary brand credit card, and had enjoyed local growth.

In 1996, Banco Galicia formed Tarjetas Cuyanas S.A. (“Tarjetas Cuyanas”), to operate in the Cuyo Region (the provinces of Mendoza, San Juan and San Luis) in partnership with local businessmen. This company launched the “Nevada Card” in May 1996 in the city of Mendoza. Also, in 1996, Banco Galicia formed a new company, Tarjetas del Mar, to operate in the city of Mar del Plata and its area of influence. Tarjetas del Mar began marketing the “Mira Card” in March 1997.

In early 1997, Banco Galicia purchased an interest in Comfiar S.A., a consumer finance company operating in the provinces of Santa Fe and Entre Ríos, which was merged into Naranja in January 2004.

In 1999, Banco Galicia reorganized its participation in this business by forming Tarjetas Regionales S.A (“Tarjetas Regionales”). Tarjetas Regionales became the holding company, of Naranja, Comfiar S.A., Tarjetas Cuyanas, and Tarjetas del Mar. In addition, between 1999 and 2000, Tarjetas Regionales acquired Tarjetas del Sur S.A. , a credit card company operating in southern Argentina. In March 2001, Tarjetas del Sur S.A. merged into Naranja.

During 2012, the ownership interests in Tarjetas Regionales and its operating subsidiaries were modified due to the following events:

 

   

Naranja’s board of directors approved the merger of Tarjeta Mira S.A. (merged company) into Naranja (merging company).

 

   

Tarjetas Regionales carried out a capital increase that was mainly paid by the contribution of the minority shareholders’ holdings in its subsidiaries Naranja and Tarjetas Cuyanas. Therefore, Banco Galicia’s direct and indirect interest decreased to 77% of the capital stock and the remaining 23% is held by the shareholders who, by means of the above-mentioned contribution, became Tarjetas Regionales’ minority shareholders.

As of December 31, 2016, Banco Galicia held a 77% ownership interest in Tarjetas Regionales. Tarjetas Regionales directly and indirectly held 100% of Naranja and 100% of Tarjetas Cuyanas.

On March 31, 2017, Banco Galicia’s Board of Directors approved the sale of its stake (58.8% of the issued and outstanding shares) in its subsidiary Tarjetas del Mar to Sociedad Anónima Importadora y Exportadora de la Patagonia (which already owned 40% of the total shares of Tarjetas del Mar). CFA also sold its stake (1.2% of the issued and outstanding shares) in Tarjetas del Mar to Federico Braun. Banco Galicia received approximately US$5,000,000 in respect of such sale.

On August 10, 2017, the Board of Directors of each of Naranja and Tarjetas Cuyanas approved the merger of such subsidiaries, by which Tarjetas Cuyanas would merge into Naranja. On September 5, 2017, Naranja and Tarjetas Cuyanas executed a supplemental merger agreement pursuant to which Naranja acquired the assets and liabilities of Tarjetas Cuyanas effective as of October 1, 2017. Such merger was approved by the shareholders of each subsidiary at Extraordinary General Shareholders’ Meetings in October 2017.

Additionally, in October 2017, Grupo Financiero Galicia publicly announced its plan to undertake a corporate reorganization between Grupo Financiero Galicia and Banco Galicia as discussed above in “History and Development of the Company”.

 

34


Table of Contents

Finally, in February 2019 and December 2019, Cobranzas Regionales S.A. received capital contributions from its shareholders, Naranja and Tarjetas Regionales, with the main purpose of maximize the growth of the “NPOS”(a new service of Naranja mainly used by merchants to accept payments made from clients with any debit or credit card through a wireless device) business and the subsequent launch of the virtual wallet “NaranjaX”. As a result of such capital contributions, Cobranzas Regionales S.A. capital stock increased from Ps.1 million to Ps.391 million, represented by 391,000,000 shares of face value of Ps.1 each.

In 2019, Tarjetas Regionales, created a new digital financial company, called “Naranja Digital Compañía Financiera S.A.U.” designed to reach and offer digital banking services to the underbanked population of Argentina. The formation of said company was approved by the BCRA on September 16, 2019, by Resolution 205 of the BCRA. Naranja Digital Compañía Financiera obtain the license to commenced operations from BCRA. For further information see “Item 4. “Information on the Company” – A. “History and Development of the Company” – A.1 “History” -Grupo Financiero Galicia”.

On May 28, 2020, the Board of Directors of Grupo Financiero Galicia S.A. agreed with the minority shareholders of Tarjetas Regionales to proceed with a corporate reorganization process. Through this corporate reorganization, the minority shareholders of Tarjetas Regionales, Fedler S.A. and Dusner S.A., holders of 17% of Tarjetas Regionales’s shares, spun-off their shares and were absorbed, through a merger by Grupo Financiero Galicia. On September 14, 2020, Grupo Financiero Galicia and the companies Dusner S.A. and Fedler S.A. executed the Preliminary Spin off - Merger Agreement and on December 15, 2020 took place the definitive spin off - Merger Agreement. For further information see “Item 4. “Information on the Company” – A. “History and Development of the Company” – A.1 “History” - “—Grupo Financiero Galicia”.

In September 2020 and October 2020, Cobranzas Regionales S.A. received from its shareholders, Naranja and Tarjetas Regionales, irrevocable equity contributions that were designed to absorb losses in a total amount of Ps.368,421,052.64 (which, as adjusted for inflation, is equal to Ps.402,719,002 as of December 31, 2020). At the same time Cobranzas Regionales launched “toque” a new service of Naranja mainly used by merchants to accept payments made from clients with any debit or credit card through a wireless device and totally integrated with the electronic wallet, Naranja X.

On September 15, 2020, Tarjetas Regionales signed an irrevocable equity contribution agreement with Grupo Financiero Galicia for a total amount of Ps.1,000,000,000 (which as adjusted for inflation is equal to Ps.1,113,270,500 as of December 31, 2020) to be paid in two tranches. On the aforementioned date, Tarjetas Regionales received the first tranche of the irrevocable contribution in a total amount of Ps.175,000,000 (which as adjusted for inflation is equal to Ps.194,822,338 as of December 31, 2020). Tarjetas Regionales received the second tranche on October 30, 2020, in a total amount of Ps.825,000,000 (which as adjusted for inflation is equal to Ps.885,157,650 as of December 31, 2020).

In terms of funding, Naranja, has historically used one or more of the following third-party sources of financing: merchants, bond issuances, bank loans and other credit lines, financial leases and securitizations using financial trust vehicles. This diversification has allowed Naranja to maintain and expand their business without depending excessively on one single source or provider.

The business operation of Naranja is exposed to foreign exchange rate fluctuations and interest rate fluctuations; however, Naranja mitigates the foreign exchange rate risk in respect of its business and operations through hedging transactions and tries to offset its interest rate exposure with assets that bear interest at similar floating rates. In addition, Naranja has an overall liquidity policy requiring it to maintain sufficient liquidity to cover at least three months of future operations and to formulate a cash flow projection for each upcoming year. These internal policies and practices ensure adequate working capital through which Naranja protects its operations against short-term cash shortages, allowing Naranja to focus on expanding its business and continuously better serving their clients. During 2020, Naranja continued to experience a significant expansion of its customer base, in absolute terms

 

35


Table of Contents

and with respect to the range of customers served, number of cards issued, distribution networks and size of operations, as well as a technological upgrade and general modernization. As of December 31, 2020, Naranja, had approximately 8.6 million issued cards and was the largest proprietary brand credit card operation in Argentina.

Finally, with all the businesses that Tarjetas Regionales oversees, during 2020 and going forward, the goal is to become the preferred technological and financial platform by Argentines. In order to work towards this goal, during 2020 Tarjetas Regionales redefined its purpose. It is now focused on meeting the noted goal, which it believes will allow it to offer new products and services in a streamlined and straightforward manner that will result in mass appeal and facilities an efficient customer and best-in-class customer experience. Related to this new approach, during 2020 Tarjetas Regionales launched a new umbrella brand for the entire business called Ecosistema NaranjaX, which includes all the businesses such as credit card, merchants and financial services.

iv) Sudamericana Holding

In 1996, Banco Galicia entered the bank insurance business, through the establishment of a joint venture with Hartford Life International to sell life insurance and annuities, in which it had a 12.5% interest. In December 2000, Banco Galicia sold its interest in this company and purchased 12.5% of Sudamericana, a subsidiary of Hartford Life International. As a result of various acquisitions, Grupo Financiero Galicia owns 87.5% of Sudamericana (with the remaining 12.5% being held by Banco Galicia) which offers life, retirement, property and casualty insurance products in Argentina through its subsidiaries Galicia Seguros S.A. (“Galicia Seguros”), which provides property, casualty and life insurance, Galicia Retiro Compañía de Seguros S.A., which provides retirement insurance and Galicia Broker Asesores de Seguros S.A., an insurance broker.

v) Galicia Administradora de Fondos

Incorporated in 1958, Galicia Administradora de Fondos manages the FIMA family mutual funds that are distributed by Banco Galicia through its multiple channels (network of branches and home banking and investment centers, among others). Galicia Administradora de Fondos’ team is comprised of asset management professionals whose goal is to manage the FIMA family funds in order to meet the demand of individuals, companies and institutions. The assets of each fund are distributed across a variety of assets, such as bonds, negotiable obligations, trusts, shares and deposits, among others, in line with the fund’s investment objective.

On April 15, 2014, Banco Galicia sold its 95% interest in Galicia Administradora de Fondos to Grupo Financiero Galicia.

On July 2, 2019, Banco Galicia sold its 5% interest in Galicia Administración de Fondos to Grupo Financiero Galicia.

vi) Galicia Warrants

Incorporated in 1993, Galicia Warrants provides financing services, secured by property in its custody, to the agricultural, industrial and agri-industrial sectors, as well as exporters and retailers. Its main objective is to provide access to credit to such sectors and customers. Its shareholders are Grupo Financiero Galicia, which holds 87.5% of the outstanding equity interests of Galicia Warrants, and Banco Galicia, which holds the remaining 12.5% outstanding equity interests.

While the corporate headquarters of Galicia Warrants is located in Buenos Aires, its office in San Miguel de Tucumán carries out transactions in the warrants market, as well as other financing services related to its main sectors and customers it services as described above, throughout Argentina.

vii) IGAM / Inviu

Incorporated in 2019, IGAM is the holding company of Inviu and IGAM Uruguay Agente de Valores S.A. (formerly known as Nargelon S.A.). IGAM is registered in Delaware, USA.

 

36


Table of Contents

Inviu operates in the investment management industry. Its purpose is to provide broker and financial advisory services while working to build trustworthy and long-term relationships with its clients and prospects. Inviu scope of business is mostly local.

As of 2019, Inviu became a Mercado Abierto Electrónico (MAE) Agent. MAE is one of Argentina’s electronic markets and its main trading parties are institutional investors such as banks, insurance companies, investment brokers and mutual funds. As a MAE Agent, Inviu can trade bonds, currency, futures and other derivatives within MAE.

viii) Galicia Securities

Galicia Securities was incorporated on December 23, 2015, under the name of 34 Grados Sur Securities S.A. and was acquired by Grupo Financiero on May 5, 2020.

On May 6, 2020, during an Extraordinary Shareholders’ Meeting of Galicia Securities, the shareholders of Galicia Securities approved a name change to Galicia Securities S.A.

Galicia Securities is authorized to act as a settlement and compensation agent and placement and distribution agent of mutual funds in Argentine. The stated purpose of Galicia Securities is to conduct on its own behalf, on behalf of third parties, or through agents, agencies or branches, the operations which are typically performed by settlement and compensation agents and distribution agents and those authorized by current Argentine laws.

Galicia Securities is a member of the Argentine Stock Exchange Market (“BYMA”) and the Argentine Electronic Open Market.

A.2 Capital Investments and Divestitures

During 2020, our capital expenditures amounted to Ps.7,124 million, allocated as follows:

 

   

Ps.3,716 million in fixed assets (real estate, machinery and equipment, vehicles, furniture and fittings); and

 

   

Ps.3,408 million in licenses and other intangible assets.

During 2019, our capital expenditures amounted to Ps.10,752 million, allocated as follows:

 

   

Ps.4.828 million in fixed assets (real estate, machinery and equipment, vehicles, furniture and fittings); and

 

   

Ps.5,924 million in licenses and other intangible assets.

During 2018, our capital expenditures amounted to Ps.8,581 million, allocated as follows:

 

   

Ps.4,894 million in fixed assets (real estate, machinery and equipment, vehicles, furniture and fittings); and

 

   

Ps.3,687 million in licenses and other intangible assets.

These capital expenditures were primarily made in Argentina.

 

37


Table of Contents

For a description of our divestitures in 2020, 2019 and 2018, please see “—History” — “Grupo Financiero Galicia”, “Banco Galicia” and “Tarjetas Regionales”.

A.3 Investment Planning

We have budgeted capital expenditures for the fiscal year ending December 31, 2021, for the following purposes and amounts:

 

     December 31, 2021  
     (in millions of Pesos)  

Infrastructure of Corporate Buildings, Tower and Branches (construction, furniture, equipment, phones and other fixed assets)

     1,832  

Organizational and IT System Development

     8,315  
  

 

 

 

Total Investment Planning

     10,147  
  

 

 

 

These capital expenditures will primarily be made in Argentina. Management believes that internal funds will be sufficient to finance capital expenditures for the year ending December 31, 2021.

B. Business Overview

B.1 Business

i) Banking

Banco Galicia is one of Argentina’s largest full-service banks and is a leading provider of financial services in Argentina. It is also our largest subsidiary. According to information provided by the BCRA, as of November 30, 2020, Banco Galicia ranked first in terms of loan portfolio and second in terms of assets and deposits within private-sector banks in Argentina. As of the same date, Banco Galicia also ranked first among private-sector domestic banks in terms of assets, loans and deposits. Its market share of private sector deposits and of loans to the private sector was 10.07% and 13.03%, respectively, as of December 31, 2020. As of December 31, 2020, Banco Galicia had total assets of Ps.946,019 million, total loans and other financing of Ps.439,306 million, total deposits of Ps.678,103 million, and its shareholders’ equity amounted to Ps.151,821 million.

Banco Galicia provides a full range of financial services through one of the most extensive and diversified distribution platforms amongst private-sector financial institutions in Argentina. This distribution platform, as of December 31, 2020, was comprised of 326 full service banking branches, located throughout the country, 2,054 ATMs and self-service terminals owned by Banco Galicia, phone banking and e-banking facilities. Banco Galicia’s customer base was comprised of approximately 3 million customers, who were comprised of mostly individuals but who also included 25,092 companies. Banco Galicia has a strong competitive position in retail banking, both with respect to individuals and SMEs. Specifically, based on internal studies undertaken by Banco Galicia, it is estimated that Banco Galicia is one of the primary providers of financial services to individuals, one of the largest providers of credit cards, one of the primary private-sector institutions serving SMEs, and has traditionally maintained a leading position in the agriculture and livestock sectors. Banco Galicia’s primary clients are classified into two categories or segments, Empresas (Companies) and Retail, as explained further below in the Segment Tribes subsection.

In 2018, and as a result of its strategy focused on growth, customer experience and efficiency, Banco Galicia began to transform its operating model with the aim of enhancing its operational flexibility and ability to adapt to changes. In 2020, Banco Galicia believes that it achieved this transformation, ending with an agile organization that is both able to adapt to changes on a dynamic basis while maintaining its organizational stability. The traditional bank departments were replaced by new organizational departments and Banco Galicia’s organizational structure now includes various multidisciplinary teams that seek to constantly adapt and evolve to better meet their customer’s needs, adjust to market demands and allocate and reallocate resources in order to provide comprehensive customer solutions while also focusing on business continuity. These teams are organized in so-called “tribes”, expertise centers, back-end services and support areas, according to the type of value that each team adds to Banco Galicia and to the organizational services and tasks that they provide, all of which seeks to enhance the financial results of Banco Galicia. “Segment Tribes”

 

38


Table of Contents

a) Segment Tribes

Segment tribes are multidisciplinary teams that are organized around one single objective: to offer clients a value proposition that meets their needs and behavior. Segment tribes are focused on Banco Galicia’s clients everyday operations and focus on, ensuring an agile and simple relationship between Banco Galicia and its clients that is designed to result in sustained customer growth. In order to best tailor its everyday client support and offerings, Banco Galicia has divided its clients in two “tribes” as described below.

a.i) Retail tribe

As of December 31,2020, the “retail tribe” was comprised of 3,037,104 clients. Clients forming part of this tribe can be either individuals or corporate entities, both, with annual sales of up to Ps.600 million.

The retail tribe works to achieve the following matters:

 

   

The acquisition and retention of new clients, pursuing the achievement of the highest recognition as a financial platform.

 

   

Offering end-to-end business solutions in order to provide the best market experience for each one of the cluster indicated below and through differentiated value propositions.

 

   

Understanding Banco Galicia’s customer lifecycle, by identifying and understanding their needs and providing customized offers when it comes to product and financial services.

Clients in the Retail tribe are divided according to the type of services that they are given in the following clusters as described below:

 

   

Personas (Individuals)

 

   

MOVE

 

   

Prefer

 

   

EMINENT

 

   

Banca Privada (Private Banking)

 

   

Negocios & Profesionales (Business and Professionals)

 

   

PyMEs (Small and Medium Enterprisess “SMEs”)

 

  1.

Personas, MOVE and Prefer Cluster: Banco Galicia serves more than 3 million clients, and 78% of those clients belong to this cluster. All of the clients not included in the other clusters are considered to be included within these 3 clusters. For the universe of Personas, MOVE and Prefer, during 2020, Banco Galicia decided to focus on its digital client strategy. In particular, during such year, Banco Galicia grew its ability to over 7 days per week, 24 hours service by offering digital initiatives that focused on the entire lifecycle of these clients, starting with digital registration and welcome steps through biometric processes that protect the clients’ identity, to digital access to solve their after-sales needs and requests.

 

  2.

EMINENT Cluster:Banco Galicia seeks to satisfy the needs of its most demanding and outstanding clients through three pillars of service: exclusive attention, personalized benefits and experiences, and agile and simple processes. With the aim of establishing long-term and trustworthy relationships, Banco Galicia offers the Galicia ÉMINENT premium service, which provides differential and exclusive attention to its clients through ÉMINENT Executives in the branch network and also digitally through Galicia Conecta, using personal WhatsApp messages or e-mails, no matter the location.

 

  3.

Banca Privada Cluster: Banca Privada (Private Banking) provides professional financial service to people with high net worth/equity through the administration of their investments and financial advice

 

39


Table of Contents
  provided by highly trained officers. It offers its clients an assorted portfolio for investment comprised of domestic financial investments, such as Fima mutual funds (for further information about Fima, please see “Sales and Marketing” – “Fima Funds”, below) and deposits, public and private securities, and shares and trusts in which the Bank acts as underwriter.

 

  4.

Business & Professionals (NyPs) and SMEs Cluster: For Business & Professionals and SMEs, Banco Galicia’s digital strategy is focused on providing a “One Stop Shop” service. It is aimed at satisfying clients’ needs from one single place, using one single platform, to enhance the client’s experience of self-management through digital channels, something that has helped achieve greater efficiency in both the service and the results of Banco Galicia. Banco Galicia believes that these clients are focused on self-financing growth and simplifying their day-to-day operations. Banco Galicia encourages and supports the growth of SMEs, businesses and, professionals with products and services that accompany the continued growth and training of such entity’s management, and it does so by offering funding, professional advice and tools that will expedite their operations, and also by promoting the exchange of experiences among the business owners that work along with strategic partners. In 2020, Banco Galicia was recognized by IDB Invest for its support to SMEs in the Southern Cone region. Within the service circles of “Business and Professionals” and “SMEs”, Banco Galicia further divides these clients into merchants and asset-based clients. For asset-based clients, during 2020 Banco Galicia focused on providing services to these clients taking into account two objectives: achieving greater coverage in terms of using Banco Galicia’s payroll services for more of these clients and helping those SMEs that already had a product to grow their business through cross-selling. A total of 28,828 SMEs began to use Banco Galicia’s pay roll services in 2020. As a consequence of the cross-selling of pay roll services, those SMEs that pay salaries through Banco Galicia had an increase in the number of products they hired with Banco Galicia, which went from 3.31 average products sold at the end of September to 3.37 by the end of November. This difference in the number of average cross-selling is equivalent to the placement of 2,832 new products for the universe of SMEs that have hired the pay roll services. During 2020 there was an increase in the volume of purchase transactions and the total amount of such purchases that the Bank pays to its merchant clients after the final costumer has made a purchase from the merchants with a credit card from the Bank, both for SMEs and NyPs, achieving an average monthly volume of Ps.11,125 million and $2,900 million respectively (representing a growth of 25% as compared to 2019). Lastly, together with allies such as the ASEA (“Asociacion de Emprendedores e Argentina”, the entrepreneurs association), ADIRAS (“Asociacion de Directorios Asociados” a civil non-profit group, formed by business men, business leaders and board members of SMEs.) and Grupo Set (an Argentine development group), Banco Galicia has been working with more than 10,000 entrepreneurs from all over the country to facilities training and provide business management tools, providing more than 30 online talks and more than 20 webinars through which hundreds of entrepreneurs were able to train and acquire some specific management and business tools that they can use to grow their own businesses.

b.i) Companies tribe

The “companies tribe” was comprised of 25,092 customers as of December 31,2020 (both individuals and legal entities) with an annual turnover higher than Ps.600 million.

The company’s tribe is focused on providing its client with a business platform that offers specialized financial and business advise. This tribe works to provide a flexible and straightforward experience to its clients. Banco Galicia hopes that the provision of these services helps to form lasting bonds with its clients and yield recurring usage by clients and growing financial results.

As described above, the companies tribe focuses on three core areas: customer experience, efficiency and business growth, and, based on these three areas, the following objectives were determined:

 

   

To maximize our clients’ profitability through an enhanced offerings and cross-selling, improving the length of the customer’s relationship with Banco Galicia.

 

   

To provide the best experience by anticipating and responding to customer relevant events through digital and self-management channels.

 

40


Table of Contents
   

To optimize the digital relationship cycle by facilitating and encouraging the use of digital products as well as generating a digital journey design for these companies.

Clients in the companies tribe are divided by the type of services that they are given in the following clusters as described below:

 

   

Companies

 

   

Agrobusiness

 

   

Corporate banking

 

   

Finance banking

 

  1.

Companies Cluster: Clients in this category are those clients whose annual total sales are between Ps.600 million and Ps.4.5 billion. This category of the companies tribe includes companies across all industries except for companies engaged in agricultural activity, which receives specific attention from the agrobusiness category due to its particular characteristics. According to companies within this category, there was a marked change in their needs during 2020. In response to the to these needs within the context of a global pandemic and with the objective of offering the best and most comprehensive customer service, the customer service model for companies in this category was based on business banking centers that were led by specialized executives, that were strategically distributed throughout the country and that were organized or grouped in five different regions. The customer service offered in-person at these business banking centers was complemented with additional customer service offered online through Banco Galicia’s digital channels, with the goal of making clients’ transactions easy and agile.

 

  2.

Agrobusiness Cluster: This category within the companies tribe is the only one that is determined by the activity of the clients it serves. Given the characteristics of every company, for companies that focus on agriculture and, in particular, the production of agricultural goods, it is crucial to offer a service model that will respond to their needs and complexity in a personalized way. Banco Galicia’s clients’ satisfaction is one of the strategic focuses on which this segment works hard and stands out, allowing it to maintain its leading position in the sector in Argentina. After the success of the Galicia Rural Conecta service model which was launched in 2018 for agricultural clients with accounts in the Greater Buenos Aires and City of Buenos Aires (“AMBA”) region, during 2020 this service was offered by Banco Galicia in three new areas: the cities of Rosario, Mar del Plata, and Córdoba. The inter-annual growth in loan volume for loans granted by Banco Galicia to companies in this category surpassed 80% by October 2020, and Banco Galicia became the leading provider of financing to companies in this category in Argentina. In terms of volume in treasury securities, there was an increase of more than 50% in 2020 as compared to 2019.

 

  3.

Corporate Cluster: Banca Corporativa features a service model that is based on developing commercial, strategic and close, long-term relationships. This category is comprised of 300 economic groups with annual sales that start at Ps.4,500 million or that -given the complexity of their businesses or their multinational profile- might require very specific attention in terms of financial advice and structuring. After considering the particularities of the businesses within this category, the economic sectors in which they operate and the markets that companies in this category access (or hope to access), the Bank has designed solutions that are adapted to the particular demands of these companies with swift response times. Such solutions are also leveraged using digital transactional banking.

 

  4.

Financial Cluster: Financial cluster includes (i) institutional financial clients and (ii) public sector, which are described below.

 

  (i)

Financial institutions: At an international level, Banco Galicia’s clients in the financial banking cluster within the companies tribe are comprised of correspondent banks, international credit agencies, official credit banks, and export credit insurance companies; whereas at a domestic level, Banco Galicia includes banks, financial companies, exchange bureaus, and other entities that carry out related financial activities. During 2020, given the particular context, virtual

 

41


Table of Contents
  meetings were held with the most active foreign correspondent banks in the foreign trade business, and it was through these virtual meetings that the Bank offered the different products and services offered to its clients. Despite the unfavorable macroeconomic situation in Argentina, and even though the supply of credit lines did not increase during 2020, said supply represented a stable source for offering foreign trade financing strategies to clients as well as for responding to requests regarding confirmation of letters of credit and stand-by letters. As the central axis of Banco Galicia’s strategy in terms of offering sustainable financing, the Bank continued to strengthen its long-term relationships with multilateral organizations and official credit banks, such as International Finance Corporation (IFC), Inter-American Development Bank Invest (IDB), Proparco, Entrepreneurial Development Bank (FMO), Banco de Desarrollo de Brasil (BNDES), Corporación Andina de Fomento, Kreditanstalt fur Wiederaufbau (KFW DEG), OPEC Fund for International Development (OFID) and Overseas Private Investment Corporation (OPIC), among others, with the purpose of expanding the range of credit lines they had to offer with medium and long term financing for investment projects which are mainly in the agro-industrial sector and in the areas of energy efficiency and renewable energies. At a local level, the analysis and detection of business opportunities with financial institutions continued, with an emphasis on improving the experience and consolidating the leadership in an environment of reciprocity and long-term and stable relationships.

 

  (ii)

Public Sector: The public sector category of the financial cluster within companies tribe is comprised of more than 300 companies. 2020 was a challenging year for companies within this category. After general elections, a new Government took office with resulting in changes of governmental contacts, requiring these companies to form new relationships and bonds with new governmental personnel. Banco Galicia believes in the public-private partnership model as a way of developing business, something that should allow everyone to work on several agendas for political-economic dialogue and generate long-term relationships. Regarding customer positioning -which is measured through the Net Promoter Score (“NPS”) methodology- Banco Galicia achieved a high percentage (48%) for 20202 (its second year of measurement). Last but not least, and within the framework of the COVID-19 pandemic, Banco Galicia implemented a program to help municipalities throughout the country, providing supplies and equipment that helped face and fight the pandemic, thus reinforcing their commitment as relevant community actors.

b) Trading & Global Markets

One of the main responsibilities of the Office of Trading & Global Markets is the administration and operation of the positions in foreign currency, financial derivatives, liquidity position and securities, public or private, for its own portfolio or intermediation, in the primary or secondary market, with counterparties or clients.

With the latest information available in 2020 regarding the secondary market for fixed income products, Banco Galicia was ranked the fifth place in the total ranking in MAE in the last twelve months, with a 5.62% market share, being the second bank on the list and the first one with national capital.

In relation to the primary market for fixed income, and according to the latest information available from MAE, Banco Galicia continues to be ranked in the first place for the eighth consecutive year in the consolidated ranking (Trusts, Corporations and Subsovereigns) of amounts awarded with a market share of 13.9%. Likewise, the provision of comprehensive advice to its clients has allowed Banco Galicia to stand out especially in the placement of corporate securities, also occupying the first place in the ranking but with a market share of 19.1%.

In the foreign exchange market, Banco Galicia got second place in the MAE Ranking, after having operated US$6,836 million of the US$63,438 during 2020. The volume traded was reduced by 75% in line with the market decline due to the new regulatory context.

Regarding the bilateral market of futures, Banco Galicia got second place in the MAE Ranking, operating a total volume of US$648 million. Regarding the guaranteed MAE futures market, Banco Galicia got third place, trading US$1,939 million with a 14% share, whereas in the ROFEX Ranking it ended in fifth place, falling one place in relation to 2020.

 

42


Table of Contents

ii) Consumption

Through the commercial platform of Ecosistema NaranjaX, Grupo Financiero Galicia offers financing and digital services to low- and medium-income customer segments in Argentina. In addition, through Banco Galicia, Grupo Financiero Galicia also offers credit cards to customers in Argentina.

Naranja continued consolidating its leading position in the regional credit cards market in 2020.

In December 2020, Naranja issued 2.9 million account statements, 5% less than in 2019. Authorized cards totaled 8.6 million, including Naranja Clásica, Naranja Visa, Naranja MasterCard and Naranja American Express. In addition, purchase transactions at stores decreased 12% as compared to 2019.

Naranja, Ecosistema NaranjaX’ main company, will continue to rely on its strategic pillar of “Organizational Culture and Customer Experience” to grow its customer base and business during 2021.

In parallel with Banco Galicia seeking to optimize its operational flexibility as described above, during 2020 Ecosistema NaranjaX sought to operate in a more flexible manner by creating both multidisciplinary and independent intelligence teams, similarly organized into tribes, centers of excellence and squads. These teams operate based on the tenets of collaboration and flexibility and focus on creating and testing the MVPs (products and services in an initial stage of development). Technological improvements were also incorporated into a new app offered by Naranja and a redesign of Naranja Online (“NOL”).

In terms of consumption, one of the highlights in 2019, was the launching of Naranja X, the virtual wallet from Naranja, which focused on technology and digital channels. For more information see “Sales and Marketing”-“Service Channels”-“Digital Channels”-“Naranja X”.

During 2020, Naranja launched Tarjeta Virtual Naranja, available in Naranja App and Naranja Online (“NOL”), to better assist clients in the context of the pandemic. This card allows customers to make purchases online in a more secure way.

iii) Insurance

Galicia Seguros provides life, property and casualty insurance to customers. With respect to property and casualty insurance products, Galicia Seguros primarily underwrites home and ATM theft insurance. With respect to life insurance, group life and personal accident insurance are its most significant source of revenues. Galicia Retiro offers annuity products and Galicia Broker is an insurance broker.

Galicia Seguros, Galicia Retiro and Galicia Broker are subsidiaries that operate exclusively in Argentina and their total premiums and surcharges earned was equal to Ps.7.789 million in 2020.

iv) Other Business

Galicia Administradora de Fondos

Since 1960, Galicia Administradora de Fondos has been dedicated to the administration of the FIMA Common Investment Funds that are distributed through the different commercial channels of Banco Galicia. It has a wide range of investment funds designed for each investor profile, which allows all types of investors to easily access the capital market through the various Fima funds.

For more information please see “Sales and Marketing” – “Fima Funds”, below.

B.2 Competition

Due to our financial holding structure, competition is experienced at the level of our operating subsidiaries. We face strong competition in most of the areas in which our subsidiaries are active. For a breakdown of our total revenues, for each of the past two fiscal years, for the activities discussed below (i.e., banking, credit cards and insurance), see Item 5. “Operating and Financial Review and Prospects”-A. “Operating Results”.

 

43


Table of Contents

i) Banking

Banco Galicia faces significant competition in all of its principal areas of operation from foreign banks operating in Argentina (mainly large retail banks which are subsidiaries or branches of banks with global operations), Argentine national and provincial government-owned banks, private-sector domestic banks and cooperative banks, as well as non-bank financial institutions.

Regarding private-sector customers, Banco Galicia’s main competitors are large foreign banks and certain domestically owned private-sector banks. Banco Galicia also faces competition from government-owned banks.

Banco Galicia’s estimated market share of private-sector deposits in the Argentine financial system was 10.07% as of December 31, 2020, as compared to 9.92% as of December 31, 2019 and 11.09% as of December 31, 2018.

With respect to loans extended to the private sector, Banco Galicia’s Argentine market share was 13.03% as of December 31, 2020, as compared to 11.50% and 10.51% as of December 31, 2019 and December 31, 2018, respectively, according to the information published by the BCRA.

According to the information published by the BCRA, as of November 30, 2020, Banco Galicia was the largest private-sector bank as measured by its loan portfolio and second as measured by its net worth and deposits.

Banco Galicia believes that it has a strong competitive position in retail banking, both with respect to individuals and SMEs. Specifically, Banco Galicia believes it is one of the primary providers of financial services to individuals, the primary private-sector institution serving SMEs, and has traditionally maintained a leading position in the agriculture and livestock sector.

ii) Argentine Banking System

As of November 30, 2020, the Argentine financial system consisted of 79 financial institutions, of which 64 were banks and 15 were financial non-bank institutions (i.e., finance companies). Of the 64 banks, 13 were Argentine national and provincial government-owned or related banks. Of the 51 private-sector banks, 35 were private-sector domestically owned banks and 16 were foreign-owned banks (i.e., local branches or subsidiaries of foreign banks).

As of November 30, 2020, the top 10 banks, in terms of total deposits (excluding Argentine national and provincial government-owned banks), were: Banco Santander Río, Banco Galicia, Banco Macro, Banco BBVA Argentina, HSBC, Credicoop ICBC and Banco Patagonia. Banco Galicia, Banco Macro and Credicoop are domestically owned banks and the others are foreign-owned banks. According to information published by the BCRA as of November 30, 2020, private-sector banks accounted for 65.8% of total deposits and 62.1% of total net loans in the Argentine financial system. As of the same date, financial institutions (other than banks) accounted for approximately 0.4% of deposits and 2.9% of net loans in the Argentine financial system.

As of November 30, 2020, the largest Argentine national and provincial government-owned or related banks, in terms of total deposits, were Banco Nación, Banco de la Provincia de Buenos Aires and Banco Ciudad de Buenos Aires. Under the provisions of the Financial Institutions’ Law, public-sector banks have comparable rights and obligations to private banks, except that public-sector banks are usually chosen as depositaries for public-sector revenues and promote regional development and certain public-sector banks have preferential tax treatment. The bylaws of some public-sector banks provide that the governments that own them (both national and provincial governments) must guarantee their commitments. According to information published by the BCRA, as of November 30, 2020, government-owned banks and banks in which the national, provincial and municipal governments had an ownership interest accounted for 33.7% of deposits and 35% of loans in the Argentine financial system.

 

44


Table of Contents

Consolidation has been a dominant theme in the Argentine banking sector since the 1990s, with the total number of financial institutions declining from 214 in 1991 to 78 as of November, 2020, with the ten largest banks holding 75.8% of the system’s deposits from the private sector and 75.6% of the system’s loans to the private sector as of November 30, 2020.

Foreign banks continue to have a significant presence in Argentina, despite the fact that the number of these financial institutions decreased from 39 at the end of 2001 to 16 as of November 2020, and the fact that their share of total deposits has decreased since the 2001-2002 financial crisis while the share of domestic private-sector banks has increased.

The Argentine banking sector focuses on transactional business and lacks a robust supply of medium and long-term lending. Local financial system deposits and loans are equivalent to 27.8% and 12% of the GDP respectively, well below those same ratios for other countries in the region.

iii) Credit Cards

In the consumer loan market, Naranja competes with Argentine banks and other financial institutions that target similar economic segments within the credit cards market. The main players in this segment include Banco Supervielle, Banco Columbia, Banco Comafi, Banco Credicoop, Banco Macro, Banco MasVentas, Banco Municipal de Rosario, Banco Nación (Nativa card), Banco de Córdoba (Cordobesa card), Cabal card, Tarjeta Shopping card, Cencosud, CMR Falabella and CFA (Efectivo Si). Historically, certain international banks with a presence in Argentina have attempted to target consumers in these economic segments and have been, to date and for the most part, unsuccessful.

In order to compete effectively at a national and regional level, Naranja targets low- to middle-income clients by offering personalized services in each region, focusing their commercial efforts mainly on such segments. While other Argentine credit card issuers and consumer loan providers focus on earning interest on outstanding personal loans and credit card balances, Naranja also focus on and has access to additional sources of revenues including merchant fees and commissions, which allows it to offer competitive pricing and financing terms. Furthermore, unlike other credit card issuers in Argentina, approximately 13.4% of Naranja’s clients pay their credit card bill through their branch network. The broad geographical reach of their distribution network, which is the second largest in Argentina, has allowed Naranja to establish a local presence in all the provinces of Argentina.

Naranja believes that their diversified and consistent funding sources, significant network of branches, robust information technology infrastructure, relationships with 310,000 merchants and the brand recognition they enjoy provide them with a competitive edge to consolidate and expand their market share in their target market segment, making it difficult for new players to effectively compete in this market segment on a national scale.

iv) Insurance

Sudamericana’s subsidiaries face significant competition since, as of December 31, 2020, the Argentine insurance industry was comprised of approximately 181 insurance companies, 15 of which were dedicated exclusively to annuities. Subsidiaries of foreign insurance companies and the world’s largest insurance companies with global operations are among these companies.

During 2020, the insurance industry continued to grow. Production amounted to Ps.840,557 million, 35% higher than the level recorded for the prior year. Out of the total insurance production in 2020, 84% related to property insurance, 15% related to life and personal insurance, and 1% related to retirement insurance.

Within the 84% corresponding to property insurance, the automotive insurance segment continues to be the most significant segment, representing 37%, followed by the workers’ compensation segment, representing 23.5%. Within the life insurance segment, the group life insurance segment was the most significant, representing 51%, followed by individual life insurance, representing 28%, and personal accident insurance, representing 14%.

 

45


Table of Contents

As of December 31, 2020, based on internal studies undertaken by Galicia Seguros, it is estimated that Galicia Seguros ranked fourth in terms of net premiums for personal accident insurance underwritten and first in terms of net premiums for home and theft insurance underwritten.

B.3. Sales and Marketing

i) Service Channels

Grupo Galicia’s subsidiaries interact with their customers through a variety of marketing channels, which include digital tools and physical branches, tailored to meet specific customer needs.

The strategy of the customer service model of Grupo Financiero Galicia is aimed at allowing its customers to access Grupo Financiero Galicia’s companies services (e.g. Banco Galicia, Ecosistema NaranjaX and Galicia Seguros, among others) through all the service channels provided, which allows customers to operate in different assisted channels, both digital and self-managed, and automatic banking, too.

During 2020, Grupo Financiero Galicia continued promoting the use of digital platforms and apps and worked on the development of the infrastructure for new online channels in order to replace in-person cashier services for ATM services. Additionally, it increased the limits on money withdrawals on ATMs. With this, online orders placed by the different business sectors can be safely covered and the clients’ demand can be easily satisfied.

In addition, during 2020, Banco Galicia sought to maintain a close relationship with its clients, and with that goal in mind it implemented the following digital and self-managed channels:

 

   

Chat conversations through its virtual assistant Gala on its online banking and office banking settings.

 

   

Providing contact information for the officers assigned to clients on the office banking platform in order to improve communication.

 

   

Online access to account statements, credit accounts, cards and purchases; providing reports on tax investments; and offering self-management instructions and tools for investments.

 

   

Providing email messages with notifications and other relevant information.

 

   

Foreign Trade follow-up consultations for clients on the office banking settings.

 

46


Table of Contents

The chart below sets forth Grupo Financiero Galicia’s sales network as of December 31,2020.

 

     As of December 31, 2020  

Branches (number)

  

Banco Galicia

     326  

Naranja

     180  

Electronic banking terminals (number)

  

ATMs

     1,013  

Self-Service Terminals

     1,095  

toque

     22,041  

Digital banking transactions (thousands per month)

  

Galicia Mobile App

     52,737,180  

Online Banking

     48,038,820  

Office Banking

     18,612,657  

Clients (thousands)

  

Banco Galicia

     3,062,196  

Naranja

     2,877,565  

Naranja X

     154,316  

Galicia Seguros

     2,040,906  

Galicia Adminitradora de Fondos

     90,764  

 

a) Digital and Self-Management Channels

In order to take care of our clients and to provide them with ongoing service and assistance, Grupo Financiero Galicia is working to respond to the new COVID-19 reality by using updated digital channels and promoting self-management.

During 2020, the particular context that the world was facing led to a sudden increase in the amount of times people accessed their information through virtual channels. The actions taken by our subsidiaries to respond to this are described below.

By promoting self-management, Banco Galicia carried out the following actions in order to increase digital access for its clients:

 

   

Extending the time window for when customers can invest in the “Fima Common Investment Funds” in order to provide 24/7 access for investing.

 

   

Enabling the possibility of swapping sovereign debt securities using online banking so long as 98% of the holders of the debt to be swapped consent.

 

   

Updating product offerings for undertaken transfers of funds to third parties and AFIP Payments (meaning, payments to the Argentine Customs and Tax Authority, “Administración Federal de Ingresos Públicos”) in order to make conducting these transactions online more efficient and flexible.

 

   

Allowing the digital registration, connection and disassociation of the overdraft agreements.

 

   

Digitalizing statements and reports, which eliminated the process of printing, shipping and even reduced the use of paper.

 

   

Enabling the deposit of paychecks in custody through the Bank’s self-service terminals (referred to as ITAS) and allowing for the recipient of a paycheck in custody to deposit the paycheck before its maturity date and to further request the redemption of the same without the need of an in-person cashier service.

Likewise, Naranja continued working on the digitalization of its platforms and updated its features, adding new technologies and processes while also further refining existing channels in order to improve the overall customer experience. The developments implemented focused on three main objectives:

 

   

Developing digital platforms with the best customer experience in the market.

 

47


Table of Contents
   

Enlarging the portfolio of fully digital clients by offering products and allowing consultations in all of its platforms.

 

   

Enabling Naranja’s businesses to function through technological innovation.

Galicia Seguros accelerated the implementation of new communication channels to facilitate the customer experience. Also, a chat room was added on the corporate website and the call center received a new tool called COLLAB, which allows Galicia Seguros to manage all customer service channels (telephone, WhatsApp, Chat, E-mail and Facebook Messenger) at the same time. All these assets were added to the traditional sales and service channels. Galicia Seguros is making progress in the automation of processes and using robotization tools that allow it to capture improvements in recurring procedures within the sales and after-sales processes. In order to achieve this, they have worked jointly and collaboratively with their business partners: Banco Galicia and Naranja. Accordingly, they developed new functionalities for the contracting process and after-sales management within the digital platforms of Online Banking, Naranja Online and their respective applications. One of them is the possibility of consulting and downloading the acquired policy, the contract for new coverage, the details regarding the assistance services, and the monitoring and follow-up of claims and complaints.

As of the date hereof, these are some of the Grupo Financiero Galicia’s (or its subsidiaries) digital and self-management channels:

 

  1.

Galicia App: this is the mobile online banking app for Banco Galicia. In 2020, this app experienced exponential growth in features offered and their use by clients. Among other functions, the ability to make an appointment at a branch office in advance online, withdraw funds from an ATM with no card, and access ATMs with a fingerprint were incorporated. Likewise, the main screen of the app was redesigned for an enhanced experience, and the option of sending or requesting money to someone registered on the mobile phone’s contact list was added. In order to guarantee the security of the users and their operations, Banco Galicia added the option of biometric fingerprint access, updated the process of connection to Token Galicia (Token Galicia is a numeric code that allows Banco Galicia’s customers to do banking transactions) to a 100% online process, and implemented on Online Banking an intelligence system for the recovery of credentials.

 

  2.

Online Banking: Banco Galicia added the option to self-manage credit card payments as well as an option to pre-settle debt refinancing. The Bank worked to update services and streamline operations for its “Personas” (or individual) clients. Galicia Seguros also added more products and services to Banco Galicia’s online banking offerings, such as pet insurance and a chat room in the section called “Tenencia de Seguros” (Insurance Holdings) in order to help clients at the same time that the inquiries arise.

 

  3.

Office Banking: this is a web-based online platform that Banco Galicia offers to clients in its “companies tribe”. Banco Galicia has encouraged self-management, and companies are now able to carry out a credit assessment of themselves with just one click. During 2020, 95% of loans for companies and 75% of cash advances were carried out digitally from Office Banking.

 

  4.

Gala: this is the name of Banco Galicia’s virtual assistant. It is featured in five different channels and it functions 24x7. Gala was designed to answer customer and non-customer inquiries, providing information on more than 200 topics related to products, services, password management and Quiero! Points, among other things. It also allows you to know the status of the shipment of products, and Banco Galicia is currently working on the pilot stage of checking balances and movements of accounts and cards through the WhatsApp channel. This virtual assistant is prepared to transfer clients to a bank official at the digital call center whenever it fails to understand what the person is trying to ask. The Bank continues to work on the evolution of its virtual assistant to provide solutions that will allow this self-management area to grow. During 2020, it increased its monthly average conversations by 350% as compared to 2019.

 

48


Table of Contents
  5.

Web Naranja: Naranja improved the website’s user help center search function, achieving a 96% success rate for users finding the answers they were seeking in comparison to that of 55% prior to this change.

 

  6.

Naranja Online (NOL): this is Naranja’s web platform. During 2020, Naranja incorporated all of its products and services into Naranja Online, favoring users’ online operations; and it also allowed for non-digital clients to access digital products by providing payment links for the payment of statements that previously would have been made in person. In order to guarantee the security of the users, identity authentication tools were developed for access via text and email messages and also push notifications for sale and communication for users browsing Naranja online. Additionally, clients can now buy top-ups for their mobile phone lines from NOL without the need to pay in cash and instead by having the amount added to their monthly credit card billing statement.

 

  7.

Tienda Naranja: the Tienda Naranja platform was relaunched, and its launching included an expansion in the range of products offered, the inclusion of an app as a new sales channel, an algorithm that analyzes the clients behavior and suggests products accordingly, and the provision of estimates of shipping times, improvement in delivery times, etc. As a result, and due to the increase in online consumption nationwide, there was a year-on-year growth in sales of 300% and 260% in visits as compared to 2019.

 

  8.

Naranja en tu Celular (Naranja on your phone): this is a service of notifications by text messages (SMS) which informs clients about the latest movements in their accounts and allows them to check their balance and buy top-ups for a cell phone line and pay for them as part of their next monthly invoice. In 2020, Naranja also incorporated the possibility of recharging public transportation cards via SMS and added new warning messages regarding cancellations and refunds.

 

  9.

WhatsApp: Naranja X (previously mentioned) developed an automated service bot via WhatsApp in order to also be available app. This automated service bot was well-received by customers. By encouraging online payments, online downloads of products and online credit card purchases, the company contributed to the understanding of products and services as being a part of a single ecosystem. Galicia Seguros launched its corporate WhatsApp channel to streamline all procedures, and this channel became the clients’ first option when contacting the company.

 

  10.

Social Networks: due to the context of the COVID-19 pandemic, users turned to social networks in a massive way. Faced with this new scenario with no open branch offices and no phone assistance, social networks played a significant role when it came to providing information to and communicating with our clients. In this sense, Banco Galicia created permanent and real-time content in order to be closer to its clients than ever. Naranja worked on a content strategy that focused on providing users with useful information for self-management, taking into account the most frequent inquiries received through the help center. This led to great growth in the number of clients joining the Bank’s Facebook account, going from 16,000 cases of monthly pre-pandemic consultations, to a peak of 72,000 cases in April 2020 and more than 60,000 in May of 2020. The number of officers assisting clients was twice as large, and the opening hours were extended in order to ensure a 24-hour response, and that included Sundays and national holidays. Likewise, the Bank activated social listening in order to truly understand how clients were feeling about these changes and what the most frequent questions were, and it used that as input for the design of the content, including the empathic tone in the conversations. On its Facebook Fan page, Galicia Seguros offers content aimed at enhancing its relationship with its clients and also content about its products, coverage and benefits. In addition, the Bank also manages claims and after-sales services from this network.

b) Assisted Channels

Officers and executives at Grupo Financiero Galicia offer clients assisted support. Banco Galicia and Naranja feature a large network of branch offices throughout the country, help centers for clients, and remote customer service.

 

49


Table of Contents

In order to take care of both clients and employees, Banco Galicia paid particular attention to safety features for the reopening of its branch offices, established a system of appointments, and implemented various security protocols.

Also, Banco Galicia transferred simple paperwork to Galicia POINT: a phone channel through which representatives who work remotely can answer inquiries.

Additionally, during 2020, Banco Galicia developed a new channel for its clients: supplementary financial services agents, also known as non-banking correspondents. Through this new channel, clients can carry out transaction operations, such as the payment of statement balances, receipt of ANSES subsidies (subsidies granted by the Argentine Government Department that administers the funds of the country’s state-run pension system Administración Nacional de la Seguridad Social-), and make cash withdrawals, in stores or collecting companies, such as Pago Fácil (“easy pay”). In this way, Banco Galicia expanded its geographic coverage and further grew its network of face-to-face service channels, resulting in an improved customer experience.

Plus, by moving a variety of transactions to non-banking correspondents, Banco Galicia was able to provide more efficient and better service at its various branches and through its online product offerings. By December 2020, an average of 150,000 monthly operations were performed at Banco Galicia’s non-banking correspondents, totalling Ps.1,200 million. Services were offered by non-banking correspondents at almost 300 points throughout the country in 2020. In addition, these non-banking correspondent, points were authorized and able to disburse ANSES social assistance benefits to Banco Galicia’s clients; such as, for example, the IFE plan -which stands for emergency family income and which was implemented as a way of social assistance during the COVID-19 pandemic.

During 2020, Naranja went ahead with the general deployment of its strategy called Sucursales del Futuro (Branches of the Future), a project that is focused on providing a better experience to clients, moving from spaces for transactions to places for relationships, advice and training. To implement the new model, branch offices in the provinces of Mendoza, San Juan, Córdoba, San Luis, Santa Fe, Buenos Aires, Chubut, Santiago del Estero and Río Negro had to undergo some restoration, remodeling and relocation works. In 2020, the new service model reached 30 different branch offices, which were added to the nine already existing before December 31, 2019, making this service tool available to 28% of all clients throughout the country. For the fiscal year of 2021, the deployment is expected to reach another 31 branch offices, reaching 76% of the clients.

Also, Naranja’s telephone channel became a 24x7 assistance channel.

c) Automatic Banking

Automatic banking comprises self-service terminals (TAS) and ATMs, all of them located at Banco Galicia and Naranja branch offices and other spots in the country.

During 2020, Banco Galicia worked on the following initiatives, in order to offer clients more comfort while operating transactions:

 

   

New withdrawal order functionalities in the self-service terminals and ATMs, with the aim of allowing clients to send money even to third parties that do not have a savings account or a Galicia debit card and a Banelco PIN (Personal Identification Number. This 4-digit number allows customers to operate through ATMs with a Galicia Debit Card).

 

   

Increase in withdrawal limits.

 

   

Deposit of paychecks in custody and sale of paychecks.

 

   

The ability to use paychecks under custody to make pending payments.

 

   

Withdrawal order for companies through Office Banking for an amount of up to Ps.100,000.

 

50


Table of Contents

During 2020, Naranja increased the number of digital service spots in 23 branch offices, installing 41 TAS and setting up 9 24-hour service areas. Not only was interrelation with clients made easier, but also Naranja began to offer safer and more agile channels and technology support tools.

ii) Products and Services

With a strategic vision to become a financial platform, Grupo Galicia provides products and services tailored for each customer, individual or company, that are designed to satisfy their unique needs. Through products and services tribes, Grupo Galicia creates and manages these products and services, including financing, E-checks, insurance, credit cards, investments, foreign trade operations, among others.

a) Financing

The application and registration processes in 2020 were 100% digital and adapted to the COVID-19 context, with the goal of allowing everyone to proceed with no difficulties or obstacles whatsoever. The average end-to-end interaction time during 2020 was 72 hours.

Regarding the evolution of loans, interest rates remained relatively stable during the first semester of 2020, and that led to an average of approximately Ps.2,000 million per month of new loans extended to clients. As of April 2020, there was a drop in demand, and then this began to change during the second half of the year as a result of the slow but steady reactivation of certain activities.

Among Banco Galicia’s financing products and services, the following stand out for 2020:

 

  1.

Financing without guarantees: clients in the companies tribe had access to over 25,000 loans for over Ps.80,000 million.

 

  2.

Financing with guarantees: more than 100 pledge agreements were generated with the country’s main agricultural, construction and transportation brands, and 1,000 companies were financed for Ps.8,000 million through the Galicia Convenios digital platform. Banco Galicia also used SGR (mutual guarantee associations)-guaranteed loans to finance MiPyMEs (as defined below) from various industrial and other business sectors. In 2020, Ps.3,700 million were granted, financing more than 1,000 clients.

 

  3.

FOGAR Assistance: Banco Galicia was the largest underwriter within the FOGAR Assistance Line with a total amount of Ps.3,700 million. The Argentine guarantee fund (FoGar) is a public trust which helps Micro, Small and Medium companies (MiPyMEs) to obtain credit. The Government provides partial or total guarantees to companies which are used to help them receive loans through this fund.

 

  4.

Discount of documents: 12,500 customers discounted checks.

 

  5.

Préstamos Express (Express Loans): through Online Banking, Banco Galicia offers loans with a total repayment schedule that goes from 2 to 45 days. Préstamos Express is a product exclusively designed for clients who have not hired the payroll services of Banco Galicia and which helps them better manage their finances. During 2020, the Bank reached an average of Ps.2,000 million of loans granted per month. Through the digital channels of Naranja, clients have access to pre-qualified personal loans, both in fixed installments and in Argentine pesos. In 2020, the Bank offered a maximum of Ps.100,000 and 24 installments.

 

  6.

Agro Lines: Financiamiento Galicia Rural, which evolved from Tarjeta Galicia Rural, was launched in 2020, and it featured an integrated platform that included the main brands in the financing of working capital sectors related to both agricultural and livestock businesses.

 

  7.

Mortgage Loans: the placement of mortgage loans in general and of mortgage loans adjusted by UVA, had already been affected during 2019 as a result of the Argentine national economic context

 

51


Table of Contents
  prevailing at that time. In 2020, due to the increase in the price of UVA and the adverse effect that the pandemic had on the economy, the product was not offered by the Bank. In addition to the risk of affecting the fee / income ratio of our clients, the product continued to be subject to strong regulations by the Government. During the last months of 2019 and in the first months of 2020, with the purpose of unfreezing the mortgage loan value adjustments, the Government implemented a model whereby the value of UVA will be progressively incremented and updated until it reaches its fair market value. In March 2020, a national decree established a new freezing of the UVA value adjustment and consequently a freezing in the value adjustment of the mortgage loan, together with the suspension of foreclosure executions and the impossibility of reporting arrears due to non-payment, among other measures that were established within the framework of public emergency. As of January 31st,2021, the Government is carrying out a new model to increment the value of UVA again which foresees the unfreezing of UVA adjustment in 17 installments, the last one to be paid in June 2022.

 

  8.

Impact financing: Banco Galicia promotes a triple impact business model through which it enhances its role in sustainable development, which begins with the design and implementation of products that contemplate the social and environmental aspects of the projects that are financed, thus focusing on financial inclusion, climate change, diversity, social investment, and impact investment. The following chart highlights certain products offered by this area and the impact in 2020.

 

PRODUCT

  

DESCRIPTION

  

IMPACT

+B Line    Special financing for triple impact companies, with a special focus on B Companies.    Ps.38.8 million
placed to 12 financed projects
Certified Agriculture Line - AAPRESID    For SME producers with a certification in Certified Sustainable Agriculture.    Ps.12.7 million
placed to 4 clients
Line for Essential Supplies for Containment of COVID-19    Financing line for the working capital of SMEs that produce and provide essential sanitation and health supplies.   

Ps.1,236 million placed

705 credits granted

Green Bond    With the aim to collect US$100 million in order to expand its loan program for environmental efficiency projects.   

US$58 million
in financed projects

18 liquidated projects

b) E-Checks

Banco Galicia developed an electronic check, an instrument which allows companies to make collections and payments online and which has now become a key tool. In 2020, Banco Galicia launched a new product called “Payment to Suppliers with Electronic Checks” (Pago a Proveedores con Cheques Electrónicos), which has enabled the migration of all operations to digital options that can be self-managed by the client. It also launched the “Discount Simulation (Simulación de descuento) feature. This helps the client see the actual offer before depositing the check in custody.

A total of 1,387,514 electronic checks were issued during 2020.

c) Insurance

Galicia Seguros has a wide range of products that, in turn, provide a large number of different insurance coverages, fully covering the different needs of customers, based on their occupation, age or income level.

Insurance is sold to customers of Banco Galicia as well as of Naranja, so that Galicia Seguros scope of business includes the entire country and every economic segment. Galicia Seguros offers specific coverage through its broker, so that each customer feels protected and has support in everything it needs.

 

52


Table of Contents

In 2020, Galicia Seguros updated its coverage by launching a new product for pets and a technical insurance with multi-risk coverage for companies, and it also added new telemedicine services and nutritional and psychological assistance to its home and life insurance product offerings.

As part of the group of newly launched products, together with an insurtech company, WeCover, a 100% digital on-demand bicycle insurance was offered starting in June 2020. This insurance may be easily activated and deactivated in accordance with the client’s needs and desires at a given moment.

A new product for pets was also presented: a complete insurance policy for dogs and cats which does not only cover accidents, illnesses, loss or death of the animal, but it also provides day-to-day services and assistance. Some of these services are: veterinary consultations, transfers needed due to an accident or a health issue, vaccinations, oral hygiene and daycare service, so that families can go on vacation knowing that their dog or cat is safe and being taken care of. This product can be acquired by Banco Galicia clients through Online Banking.

Likewise, other services were incorporated into the home and life insurance offerings for a limited time and were particularly designed to accompany clients during the mandatory isolation period. This is how clients were able to make use of the telemedicine service and nutritional and psychological assistance. In this case, the possibility of contracting services through Naranja Online or through the Naranja and Banco Galicia applications was also incorporated.

Finally, for clients in the companies tribe, Galicia Seguros launched Seguro Técnico (Technical Insurance), a multi-risk coverage that covers machinery and electronic equipment.

In 2019, Galicia Seguros launched “Fondo Futuro”, a new 100% online retirement insurance product. Fondo Futuro is the first retirement insurance with 100% digital procurement in Argentina. It is a low-risk medium or long term savings and individual pension system. It works as a retirement supplement, to carry out an individual’s desired retirement plan. The individual insured may partially or totally withdraw the funds, as well as increase, decrease or suspend the contributions made, without generating any debt with Galicia Seguros. The launching of Fondo Futuro made Galicia Seguros the first Argentine entity to be able to issue a 100% online policy with this type of insurance.

In 2020, the online retirement insurance product “Fondo Futuro” had an increase of 124% in the number of policies in force reaching a total of 824 insured clients, where 85% of them represents contributions in Ps. and the remainder corresponds to contributions in US$. By 2020, the total billing of Fondo Futuro was Ps.18.1 million with a monthly average of Ps.1.5 million.

d) Credit Cards

The companies of Grupo Financiero Galicia respond to the needs of their customers with an outstanding offer of services and benefits of credit and debit cards.

Banco Galicia responds to the needs of its clients with an outstanding offer of services and benefits provided through its Galicia Credit and Debit Cards. Banco Galicia offers Visa, Mastercard and American Express cards, and they are offered to clients of all tribes. Some of the products offered are the International, Gold, Platinum, Black/Signature cards, which feature different consumer financing options and exclusive promotions for all their clients.

As of December 31, 2020, Banco Galicia has a stock of active cards of more than 5 million, while Naranja surpasses 8.5 million cards.

In alliance with Garmin (a watch manufacturer and company), Banco Galicia has launched contactless payments that can easily be made through a Garmin watch for Galicia Mastercard cards. The Bank also implemented tokenization in order to improve the safety of the transactions through ecommerce, subscriptions and face-to-face purchases. Over 300,000 token-based transactions were made in 2020.

 

53


Table of Contents

For its part, in 2020 Naranja launched the Naranja Virtual Card, which is available at Naranja and through the Naranja Online App and was designed to assist clients in the context of the current pandemic. This card allows clients to make purchases online in a more secure way. It has a CVV (Verification Code) that is generated every time the client needs to use it. The Naranja Virtual Card does not replace the actual plastic credit card, as it has a different OCR (Optical Character Recognition.) This card is available to be requested by more than 2.5 million clients, including account owners and their additional cardholders. Total purchases using this product since the product was launched in 2020 is, to date, higher than Ps.450 million, with an average purchase of Ps.8,000.

Additionally, and as of the second quarter of 2020, clients can also use Ajnaran (Naranja spelled backwards), a credit card that is printed at the very moment the account owner wishes to make a purchase (rather than having to wait for a new credit card to be delivered to the client’s house) and which has a validity of three years. In 2020, and thanks to special home delivery services, delivery times for physical credit cards were also improved, achieving a significant reduction in the SLA (Service Level Agreement) for card delivery: 25% of clients now receive their cards in less than 48 hours, and 60% in 10 business days. In 2020, more than 58,000 Ajnaran cards were delivered throughout the country.

e) Investments

Banco Galicia has a wide range of investment products that meet the needs and the profile of every client. Before making an investment, all clients are surveyed in order to see their aversion to risk and to find the products that best suit their objectives. This survey is renewed every year.

Additionally, the client receives personal advice coming from the branch network and through the Investment and Private Banking Center for clients in said cluster.

In 2020, Banco Galicia continued to deepen its digital transformation by improving the value proposition of investment products, offering new functionalities and technological solutions in the different channels and also by strengthening its main system of investment and custody of products.

f) Global Custody

With regards to the Global Custody service in 2020, Banco Galicia has continued to increase the positioning of the product, mainly by focusing on the Insurance Companies and Corporate companies.

When compared to 2019, this product has experienced a 45% growth in assets under custody (“AUC”), a 25% growth of Insurance Companies (measured in the number of clients), and 9% growth for the corporate cluster.

g) Fima Funds

Galicia Administradora de Fondos has a wide range of investment funds designed for each investor profile, which allows all types of investors to easily access the capital market through the various Fima funds. The market share of common investment funds was 9.97% as of December 31, 2020, increasing 37 basis points (“bp”) as compared to December 31, 2019. The following is a list of the Fima funds offered:

 

  1.

Fima Premium: this is a fund that provides immediate-online liquidity with a yield close to a fixed-term deposit. It invests mainly in remunerated sight accounts and fixed-term certificates. For very short-term investments in pesos

 

  2.

Fima Ahorro Pesos: it seeks to obtain yield from a portfolio of short-term bonds denominated in Argentine pesos. Its portfolio mainly includes treasury bills denominated in Argentine pesos, fixed terms, bonds and remunerated (i.e. interest generating) accounts, among others. Suitable for conservative short-term investments, for example, those with an investment horizon of approximately 30-60 days.

 

54


Table of Contents
  3.

Fima Ahorro Plus: is an investment portfolio includes short/medium term bonds denominated in Argentine pesos with low volatility and high liquidity. This is an alternative for those investors looking for a balance of risk and return. Its investment portfolio includes treasury bills in pesos, negotiable liabilities of first-line companies, provincial Government debt securities, fixed terms, bonds and remunerated (interest generating) accounts, among others. The investor profile in this case is conservative/moderate and the recommended horizon is 90 to 120 days.

 

  4.

Fima income in Argentine pesos: the aim of the fund is to maximize the yield of a portfolio of assets in pesos at a fixed and variable rate over a medium term. Its portfolio composition includes sovereign bonds, treasury bills denominated in Argentine pesos, negotiable liabilities and financial trusts, among others. Recommended for moderate investments that may last between 1 and 2 years.

 

  5.

Fima renta plus: it invests mainly in a portfolio of medium/long-term bonds denominated in Argentine pesos. It includes negotiable securities and public and private fixed income instruments in pesos, mainly sovereign bonds, negotiable liabilities, and provincial bonds and bills, among others. Suitable for moderate/risky investments of over 2 years

 

  6.

Open Fima SMEs: the aim of the fund is to obtain returns from a portfolio comprised of instruments of fixed income or variable income that are issued by SMEs or companies with low market capitalization, with a long-term investment horizon.

 

  7.

Fima Capital plus: its aim is to maximize the yield of a portfolio composed of dollar linked bonds and synthetic assets that replicate the evolution of the exchange rate, with liquidity in 48 hours.

 

  8.

Fima international fixed income: this alternative seeks to obtain profitability from a portfolio of medium-term dollar bonds, mainly coming from Latin American markets and up to 25% in American treasury bonds. The design of the investment portfolio does not include local bonds, something that will reduce the volatility of the fund.

 

  9.

Fima mix I: fund in pesos composed of local assets that seek to monitor the evolution of the “official dollar,” combined with a lower participation in variable income of shares that are listed on the New York Stock Exchange, through CEDEARs. Local fixed income assets provide the fund with certain stability whereas the equity portion adds greater volatility in search of higher returns.

 

  10.

Fima shares: the aim of the fund is long-term capital appreciation, achieved by investing in Argentine companies that are members of the S&P Merval panel. The investment policy that was developed with respect to the benchmark index (S&P Merval) is all about accompanying the actual growth of the economy through the selection of stocks with good performance in their indicators. Long-term shares of Argentine companies.

 

  11.

Fima PB shares: fund composed of shares that belong to the “S&P Merval” panel. This index considers the evolution of national and international companies that are listed on the local market. Suitable for investors seeking to follow the benchmark by investing in a portfolio managed by specialists in this market.

 

  12.

Fima shares Latin America: it is a variable income fund in dollars. The investment portfolio is mainly made up of Latin American stocks. This fund’s benchmark is the S&P Latin America 40, which integrates shares from the main economic sectors of Brazil, Chile, Mexico, Colombia and Peru, among others.

In 2020, Galicia Administradora de Fondos got the first place in the FCI Money market category with its Fima Premium fund, same place in the T + 1 category with its Fima Ahorro Pesos and Fima Ahorro Plus funds, and also got the first place in the dollar linked category with its Fima fund Capital Plus.

 

55


Table of Contents

Banco Galicia and La Nación co-created the podcast called “Los números también hablan” (Numbers Speak, Too) in which they talk about all the benefits and advantages of the Fima Funds. They also created a series of videos on YouTube and educational digital talks to stay close to their clients.

h) Inviu

It is through Inviu that Grupo Financiero Galicia has developed a digital investment platform that allows users, both investors and financial advisors, to manage their portfolios in an efficient, simple and user-friendly way. This platform was launched on the market in October 2020.

i) Galicia Securities

Galicia Securities offers financial and stock market services to individuals, companies and financial institutions. It is an agent of BYMA, MAE, MAV and performs CIDA services. This new company is already occupying leading positions in the Fixed Income market, given the fact that it ranked second in the BYMA ranking with 3.6% market share in the last quarter of 2020.

j) Foreign Trade

Through the office banking electronic platform, customers can make payments and manage their collections abroad. Likewise, the Galicia Comex department offers product and service options that are tailored to export and import operations, in addition to keeping customers continuously informed of the developments in this area. Banco Galicia continues to accompany its clients in their international businesses through a personalized electronic platform and differentiated funding lines.

In 2020, the volume of foreign trade transactions undertaken by Banco Galicia was equal to US$16,153 million, representing 12.0% of the Argentine foreign trade market share. Of such amount, US$3,043 million was attributable to exports and imports of goods, representing 12.8% of the market share for such transaction. In terms of volume, in 2019, based on the above statistics, the Bank ranked third in Argentine for volume of foreign trade transactions. Through office banking, the Bank’s customers have access to special lines of financing: leasing of imported products, financing of imports and exports, guarantees (“avales”) and Stand By.

Galicia Seguros has surety policies for every need: Temporary importation or exportation, differences in law, value or lack of documentation, land transit and replacement of precautionary measures. It also offers surety insurance coverage when this is required to guarantee liabilities before the AFIP. - Tax and Customs Administration . Through its Comex Tribe, Banco Galicia works to guarantee quality in end-to-end foreign trade operations and safety in the application of current regulations. In order to do this, the Bank implements a Call & Ops service model in which the service circle contacts clients directly and answers their questions, provides advice and resolves any difficulties during the preparation of the corresponding documentation.

k) Capital Market & Investment Banking

Banco Galicia consolidated its position in the Capital Market and Investment Banking by structuring various financial products that are tailored for corporate, SME and agricultural companies. In this regard, the Bank has organized more than 50 transactions in the capital market, with a wide variety of products that included, among others, debt securities, short-term securities, letters and financial trusts.

The issuance of public securities by the City of Buenos Aires for $21,001 million and the ones made by the energy sector for $41,239 million are two of the most important operations that were placed in pesos. In addition to that, the appetite in the market for dollar linked bonds re-emerged during 2020. In that sense, in 2020, the Bank participated in 37 issuances for more than US$1,222 million, mainly from the energy industry and companies linked to the agricultural sector chain. Among the operations placed in Dollars, it is also worth highlighting the issuances for more than US$137 million made by the energy sector and the participation as local Underwriters in the exchanges abroad for both AA 2000 and CGC for US$502 million.

 

56


Table of Contents

From Investment Banking, and as a consequence of the difficulties faced by many companies as a result of the COVID-19 health crisis and the adverse macroeconomic context, the Bank focused on accompanying its clients by restructuring their liabilities with financing methods according to their needs and in the most sustainable way possible, thus completing more than 10 operations for more than $2,800 million.

l) Benefits

EMINENT benefits

In order to provide a commensurate experience for EMINENT clients, we develop targeted proposals that are in line with the pillars of the EMINENT proposal. This is a value proposition focused on art, sports, fashion, gastronomy, women and family. Besides, this proposal adds a series of experiences related to personal well-being, through the concept of Wellness Life.

Quiero! program

Banco Galicia continues to offer more discounts and benefits, with a catalog of more than 1,500 options in different categories such as: savings, post-purchase, physical products, vouchers, and travel and tourism. The site of Quiero! shows clients relevant offers according to their profile and consumption patterns. This leads to a better experience regarding the redemption of points and makes the program simpler and more assertive. During 2020, 330,000 clients used at least one of the benefits.

Benefits in Plan Z

Naranja has assisted its clients with benefits in Plan Zeta (offering 3, 6, 9 and 12 payment installments), discounts, and special plans and deferred payment offers for the purchase of essential items such as those made in supermarkets, pharmacies, door-to-door services, and gas stations. As restrictions became more flexible, the Bank added other categories to the value proposition and encouraged online consumption through discounts and special payment plans. Benefits were activated for special dates such as Friendship Day, Father’s Day, Children’s Day, Mother’s Day and end-of-year parties in specific categories such as clothing, sports, construction and electro. This year, following the growth of online commerce, Naranja became an official sponsor of Cyber Monday for the first time, introducing itself as a means of payment. This participation had a positive impact on consumption, the negotiation of promotions aimed at online sales, and the positioning of the brand. Naranja communicated over 40 promotions every month, using the strategies of 360° communication approach and considering all types of media, especially the Internet. The Smartes (benefits given on Tuesdays) benefit helped clients obtain a 20% discount and then another discount for another 5% through the seniority promotion at Plan Z. At the end of the fiscal year, 30% of Naranja’s turnover was driven by more than monthly 2,500 promotions that were distributed in 9,500 different points throughout the country.

Quiero! in Naranja

The registration for the Naranja customer loyalty program was launched in May 2020. Some of the most outstanding events included the chance to access Quiero! through the NOL (Naranja Online) and App Naranja channels, the redemption points for discounts on certain items and businesses when using Naranja, the registration of 70% of the most important businesses in the country for the redemption points deal with Naranja, and login/registration functionality at quiero.com.ar through Naranja credentials. At the end of the fiscal year, there were 50,000 Naranja clients and 180,000 clients shared with Banco Galicia.

Naranja X

Since the launch of its prepaid card, Naranja X has been offering specific promotions for new customers and only on particular dates such as HotSale and CyberMonday. In addition, it has fixed discounts for all its customers in the payment of services and purchase of products.

 

57


Table of Contents

m) MODO

MODO is the new digital payment solution, launched jointly by over thirty public and private banks in the country. This tool allows banked users to make transfers and payments in stores easily and from their cell phones. This virtual wallet allows the user to have an all-in-one app to check balances and transfer and receive money from other users from their bank accounts in other banks.

From the Galicia app, you can access MODO and use the QR code to make payments to affiliated stores. Another feature is the possibility of transferring money to people registered as a contact on your cell phone, without the need to request a Unique Banking Key (Clave Bancaria Uniforme, “CBU”) or an Alias. This alliance is a great step for our clients because they will no longer need their physical wallet and they will have the chance to migrate to digital channels to make their daily transactions as secure, agile, and effective as always.

n) Naranja X

At the end of 2019 Grupo Financiero Galicia launched Naranja X, Naranja’s Fintech arm that is currently part of the Ecosistema NaranjaX.

Naranja X developed an app with an account in Argentine pesos and a prepaid Naranja X Visa card, free of charge, with contactless technology and a vertical design which is new in this country. With this card, it is possible to make purchases and payments at any store or digital platform in the world, add your automatic debits, or withdraw cash through ATMs. Additionally, the app offers the possibility of transferring money immediately between virtual and bank accounts; buying top-ups for your cell phone lines; loading the public transportation card in every Argentine province; paying over 5,000 services; and paying the Naranja account’s statement.

B.4 Selected Statistical Information

You should read this information in conjunction with the other information provided in this annual report, including our audited consolidated financial statements and Item 5. “Operating and Financial Review and Prospects”. We prepared this information from our financial records in conformity with IFRS.

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

The average balances of interest-earning assets and interest-bearing liabilities, including the related interest that is receivable and payable, are calculated on a monthly basis for Banco Galicia and Tarjetas Regionales on a consolidated basis. The average balances of interest-earning assets and interest-bearing liabilities are calculated on a quarterly basis for Grupo Financiero Galicia and its other non-banking subsidiaries.

 

58


Table of Contents

The following table shows our consolidated average balances, accrued interest and average yield for interest-earning assets and interest-bearing liabilities for the fiscal year ended December 31, 2020, December 31, 2019 and December 31, 2018.

 

     For the Fiscal Year Ended
December 31, 2020
     For the Fiscal Year Ended
December 31, 2019
     For the Fiscal Year Ended
December 31, 2018
 
     Average
Balance
     Accrued
Interest
     Average
Yield /
Rate
     Average
Balance
     Accrued
Interest
     Average
Yield /
Rate
     Average
Balance
     Accrued
Interest
     Average
Yield /
Rate
 
     (in millions of Pesos, except otherwise noted)  

Interest-Earning Assets

                          

Debt Securities at fair value through profit or loss

                          

Government Securities

     155,630        62,430        40.11        166,505        84,883        50.98        93,353        28,708        30.75  

Others Debt Securities

     1,385        1,015        73.29        1,838        888        48.31        3,541        799        22.56  

Total Debt Securities at fair value through profit or loss

     157,015        63,445        40.41        168,343        85,771        50.95        96,894        29,507        30.45  

Repurchase Transactions

     35,871        8,968        25.00        18,170        9,713        53.46        16,479        1,553        9.42  

Loans and Other Financing

                          

Loans

     491,386        148,539        30.23        587,663        159,351        27.12        631,995        156,764        24.80  

Financial Leases

     2,324        352        15.15        3,857        761        19.73        5,059        1,227        24.25  

Other Loans and Other Financing

     2,265        313        13.82        3,317        670        20.20        1,244        589        47.35  

Total Loans and Other Financing

     495,975        149,204        30.08        594,837        160,782        27.03        638,298        158,580        24.84  

Other Interest-Earning Assets

     44,279        13,455        30.39        54,603        13,517        24.76        43,578        7,087        16.26  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest-Earning Assets

     733,140        235,072        32.06        835,953        269,783        32.27        795,249        196,727        24.74  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest-Bearing Liabilities

                          

Deposits

                          

Savings Accounts

     252,515        14,559        5.77        264,364        11,214        4.24        279,693        6,932        2.48  

Time Deposits

     243,255        64,910        26.68        234,214        91,922        39.25        228,217        60,042        26.31  

Total Interest-Bearing Deposits

     495,770        79,469        16.03        498,578        103,136        20.69        507,910        66,974        13.19  

Financing Received from the Argentine Central Bank and Other Financial Institutions

     19,815        2,505        12.64        38,319        5,054        13.19        42,944        5,498        12.80  

Debt Securities and Subordinated Debt Securities

     43,921        7,653        17.42        88,146        19,866        22.54        70,300        17,856        25.40  

Other Interest-Bearing Liabilities

     1,916        293        15.29        13,315        952        7.15        3,393        406        11.97  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest-Bearing Liabilities

     561,422        89,920        16.02        638,358        129,008        20.21        624,547        90,734        14.53  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Spread and Net Yield

                          

Interest Rate Spread

           16.05              12.06              10.21  

Cost of Funds Supporting Interest-Earning Assets

           12.27              15.43              11.41  

Net Yield on Interest-Earning Assets

           19.80              16.84              13.33  

 

(*)

Rates include the CER/UVA adjustment.

ii) Changes in Net Interest Income-Volume and Rate Analysis

The following table allocates, changes in our consolidated interest income and interest expenses between changes in the average volume of interest-earning assets and interest-bearing liabilities and changes in their respective average yield/rate for (i) the fiscal year ended December 31, 2020 compared with the fiscal year ended December 31, 2019 and (ii) the fiscal year ended December 31, 2019, compared with the fiscal year ended December 31, 2018. Differences related to both rate and volume are allocated proportionally to the rate variance and the volume variance, respectively.

 

59


Table of Contents
     Fiscal Year Ended December 31, 2020 /
Fiscal Year Ended December 31, 2019
Increase  (Decrease) due to changes in
    Fiscal Year Ended December 31, 2019 /
Fiscal Year Ended December 31, 2018
Increase  (Decrease) due to changes in
 
     Volume     Rate     Net Change     Volume     Rate     Net Change  
     (in millions of Pesos)  

Interest Earning Assets

            

Debt Securities at fair value through profit or loss

            

Government Securities

     (5,267     (17,186     (22,453     30,540       25,635       56,175  

Others

     (116     243       127       (65     154       89  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Debt Securities at fair value through profit or loss

     (5,383     (16,943     (22,326     30,475       25,789       56,264  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Repurchase Transactions

     (1,642     897       (745     175       7,985       8,160  

Loans and Other Financing

            

Loans

     (36,117     25,305       (10,812     (7,877     10,464       2,587  

Financial Leases

     (258     (151     (409     (261     (205     (466

Other Loans and Other Financing

     (179     (178     (357     123       (42     81  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans and Other Financing

     (36,554     24,976       (11,578     (8,015     10,217       2,202  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Interest-Earning Assets

     305       (367     (62     2,099       4,331       6,430  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest-Earning Assets

     (43,274     8,563       (34,711     24,734       48,322       73,056  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest Bearing Liabilities

            

Deposits

            

Savings Account

     (477     3,822       3,345       (357     4,639       4,282  

Time Deposits

     3,704       (30,716     (27,012     1,617       30,263       31,880  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest-Bearing Deposits

     3,227       (26,894     (23,667     1,260       34,902       36,162  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Received from the Argentine Central Bank and Other Financial Institutions

     (2,347     (202     (2,549     (617     173       (444

Debt Securities and Subordinated Debt Securities

     (8,410     (3,803     (12,213     3,614       (1,604     2,010  

Other Interest-Bearing Liabilities

     1,995       (2,654     (659     633       (87     546  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest-Earning Assets

     (5,535     (33,553     (39,088     4,890       33,384       38,274  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The decrease of Ps.34,711 million in interest income for the fiscal year ended December 31, 2020, as compared to the previous year, is primarily attributable to a Ps.43,274 million decrease in the volume of interest-earning assets, partially offset by an increase of Ps.8,563 million in interest income due to an increase in interest rates.

In particular, Ps.22,326 million of the decrease in interest income was due to a decrease in interest income from debt securities measured at fair value through profit or loss. This decrease primarily resulted from a decrease in interest rates earned from Government securities due to a 1,087 basis point (“bps”) decrease in the average interest rate for debts securities, from 50.98% in 2019 to 40.11% in 2020. The average volume of Government securities held by us amounted to Ps.155,630 million for fiscal year 2020, as compared to Ps.166,505 million for the previous fiscal year.

The Ps.11,578 million decrease in interest from loans and other financing was due to a decrease in volume equal to Ps.36,554 million, mainly as a consequence of a decrease in the average volume of loans granted to the private sector. This decrease was partially offset by an increase in interest rates (accounting for Ps.24,976 million), mainly as a result of an increase in the average rate earned by us on loans and other financing provided.

In terms of interest expenses, the Ps.39,088 million decrease for the fiscal year ended December 31, 2020, as compared to the fiscal year ended December 31, 2019, is primarily a result of an increase in the interest rate payable on time deposits of Ps.27,012 million (which increased from 39.25% in 2019 to 26.68% in 2020).

 

60


Table of Contents

iii) Debt and Equity Securities

The following table shows our holdings of debt and equity securities at the balance sheet dates stated below. Our holdings of Government securities represent mainly holdings of Banco Galicia.

 

     As of December 31,  
     2020      2019  
     (in millions of Pesos)  

Debt Securities at FV through profit or loss

     155,420        89,431  
  

 

 

    

 

 

 

Argentine Government Securities

     24,283        9,122  

Government Bonds

     6,487        472  

Provincial Bonds

     740        —    

City of Buenos Aires Bonds

     91        164  

Treasury Bills

     16,965        8,486  

Argentine Central Bank´s Bill

     128,325        79,153  

Leliq (liquidity Bills)

     128,325        79,153  

Corporate Securities

     2,812        1,156  

Debt Securities

     2,742        1,028  

Debt Securities of Financial Trust

     70        128  
  

 

 

    

 

 

 

Other Debt Securities

     23,070        25,894  
  

 

 

    

 

 

 

Measured at FV through OCI

     4,185        21,669  

Argentine Government Securities

     4,011        21,669  

Government Bonds

     3,934        21,573  

Treasury Bills

     77        —    

City of Buenos Aires Bonds

     —          96  

Argentine Central Bank´s Bill

     174        —    

Leliq (liquidity Bills)

     174        —    

Measured at Amortized Cost

     18,885        4,225  

Argentine Government Securities

     17,887        (37

Government Bonds

     17,931        2  

Treasury Bills

     —          —    

Allowance

     (44      (39

Corporate Securities

     994        1,083  

Debt Securities

     940        582  

Debt Securities of Financial Trusts

     36        692  

Others

     18        19  

Allowance

     —          (210

International Government Securities

     4        3,179  

Treasury Bills

     4        3,179  
  

 

 

    

 

 

 

Investments in Equity Instruments

     5,712        6,201  
  

 

 

    

 

 

 

Domestic

     5,655        6,143  

International

     57        58  
  

 

 

    

 

 

 

Total Debt and Equity Securities

     184,202        121,526  
  

 

 

    

 

 

 

As of December 31, 2020, the increase in our holdings of debt and equity securities was mainly a result of an increase in the volume of Government bonds issued by the BCRA that we held. Our government securities issued by the BCRA increased Ps.49,172 million from Ps.79,153 million as of December 31, 2019 to Ps.128,325 million as of December 31, 2020.

The amount of Argentine government securities recorded at fair value as of December 31, 2020 in an amount of Ps.24,283 million corresponded to securities issued by the National Treasury Bills (for Ps.16,965 million), the Government (for Ps.6,487 million), provincial governments (for Ps.740 million) and the City of Buenos Aires (for Ps.91 million).

As of December 31, 2020, our holding of government securities denominated in Dollars was composed of Government bonds recorded at their fair value (for Ps.4,183 million), Government bonds recorded at their amortized cost (for Ps.1 million) and U.S. Treasury Bonds recorded at their amortized cost (for Ps.4 million).

As of December 31, 2019, the amount of Argentine government securities, recorded at fair value amounted to Ps.9,122 million and corresponded to our holdings of debt securities mainly issued by the National Treasury Bills (for Ps.8,486 million), Government bonds (for Ps.472 million) and the City of Buenos Aires (for Ps.164 million).

As of December 31, 2019, the holding of public securities denominated in Dollars was composed mainly of Government bonds recorded at fair value (for Ps.7,090 million), of National Treasury (for Ps.13 million), of Government bonds recorded at their amortized cost (for Ps.2 million) and U.S. Treasury Bonds recorded at their amortized cost (for Ps.4 million) .

 

61


Table of Contents

All local Government securities, except for the Leliq, which are issued by the BCRA, were issued by the Government, provincial governments or the City of Buenos Aires.

Remaining Maturity and Weighted-Average Yield

The following table analyzes the remaining maturity and weighted-average yield of our holdings of debt securities recorded at amortized cost as of December 31, 2020. Our debt securities portfolio yields do not contain any tax equivalency adjustments.

 

     Fiscal Year Ended December 31, 2020  
            Maturing within 1
year
    Maturing after 1
year but within 5
years
    Maturing after 5
years but within
10 years
    Maturing after
10 years
 
     Total Book
Value
     Book
Value
     Yield
(1)
    Book
Value
     Yield     Book
Value
     Yield
(1)
    Book
Value
     Yield
(1)
 
     (in millions of Pesos, except percentages)  

Other Debt Securities

                       

Measured at Amortized Cost

                       

Argentine Government Securities

     17,931        —          —       17,912        28.40     1        16.30     18        10.50

Corporate Securities

     976        715        47.30     261        49.80     —          —       —          —  

Debt Securities

     940        707        47.40     233        50.30     —          —       —          —  

Debt Securities of Financial Trust

     36        8        40.00     28        45.00     —          —       —          —  
  

 

 

    

 

 

      

 

 

      

 

 

      

 

 

    

Total Other Debt Securities Measured at Amortized Cost

     18,907        715          18,173          1          18     
  

 

 

    

 

 

      

 

 

      

 

 

      

 

 

    

 

(1)

Effective yield based on December 31, 2020 quoted market values.

iv) Loan and Other Financing Portfolio

Our total loans and other financing reflect Banco Galicia’s and Tarjetas Regionales’ loan and other financing portfolios including past due principal amounts. Personal loans and credit-card loans are typically loans to individuals granted by Banco Galicia or Naranja. Most of the Naranja’s loans are included under “credit card loans”. Also, certain amounts related to advances, promissory notes, mortgage loans and pledge loans are extended to individuals. However, advances and promissory notes mostly represent loans to companies. The following table analyzes our consolidated loan and other financing activities portfolio.

 

62


Table of Contents
     As of December 31,  
     2020      2019  
     (in millions of Pesos)  

Principal and Interest

     
  

 

 

    

 

 

 

Non-Financial Public Sector

     —          9  
  

 

 

    

 

 

 

Argentine Central Bank

     13        30  
  

 

 

    

 

 

 

Financial Institutions

     14,701        14,697  
  

 

 

    

 

 

 

Non-Financial Private Sector and Residents Abroad (1)

     

Loans

     537,207        492,932  

Advances

     29,219        21,636  

Overdrafts

     143,769        102,215  

Mortgage Loans

     16,486        20,493  

Pledge Loans

     11,587        4,368  

Personal Loans

     36,504        37,637  

Credit Card Loans

     241,793        203,476  

Placements in Banks Abroad

     1,662        10,721  

Pre-financing and financing of exports

     29,487        73,430  

Other Loans

     5,283        (40

Accrued Interest, Adjustment and Quotation Differences Receivable

     23,650        20,755  

Documented Interest

     (2,233      (1,759

Financial Leases

     1,855        3,030  

Other Financing

     9,892        12,630  
  

 

 

    

 

 

 

Non-financial Private Sector and Residents Abroad

     548,954        508,592  
  

 

 

    

 

 

 

Total Gross Loans and Other Financing

     563,668        523,328  
  

 

 

    

 

 

 

Allowance

     

Loans Allowance

     (36,707      (34,891

Financial Leases Allowance

     (35      (60

Other Financing Allowance

     (492      (233

Less: Allowances

     (37,234      (35,184
  

 

 

    

 

 

 

Total

     526,434        488,144  
  

 

 

    

 

 

 

 

(1)

Categories of loans include:

 

   

Advances: short-term obligations drawn on by customers through overdrafts.

 

   

Overdrafts: endorsed promissory notes, notes and other promises to pay signed by one borrower or group of borrowers and factored loans.

 

   

Mortgage Loans: loans granted to purchase or improve real estate and collateralized by such real estate and commercial loans secured by a real estate mortgage.

 

   

Pledge Loans: loans secured by collateral (such as cars or machinery) other than real estate, where such collateral is an integral part of the loan documents.

 

   

Personal Loans: loans to individuals.

 

   

Credit-Card Loans: loans granted through credit cards to credit card holders.

 

   

Placements in Banks Abroad: short-term loans to banks abroad.

 

   

Pre-financing and financing of exports: loans for exports.

 

   

Other Loans: loans not included in other categories.

 

   

Documented Interest: discount on notes and bills.

As of December 31, 2020, Grupo Financiero Galicia’s loan and other financing portfolio before allowances for loan and other financing losses amounted to Ps.563,668 million, an 8% increase as compared to the year ended December 31, 2019.

In line with the Government’s measures in order to address the impact of COVID-19, the BCRA issued some regulations related to financing, including loans with reduced rates and for production lines (for further information please see “Argentine Banking Regulations” – “Financing Loans for Economic Development”, below). Out of total loans, there are Ps.11.739 million that corresponded to financing lines for productive investment of small and medium companies. As of December 31, 2020, there are Ps.19,689 million that corresponded to loans with reduced rate (between 0% and 24%).

 

63


Table of Contents

Maturity Composition of the Loan Portfolio

The following table sets forth an analysis by type of loan and time remaining to maturity of our loan portfolio as of December 31, 2020.

 

     As of December 31, 2020  
     In 1 year or less     After 1 year
through 5 years
     After 5 years
through 15 years
     After 15 years      Total at
December 31,
2020
 
     (in millions of Pesos)  

Variable Rates

             

Non-Financial Private Sector and Residents Abroad

     22,215       15,979        282        —          38,476  

Loans

     22,215       15,979        282        —          38,476  

Advances

     1,100       —          —          —          1,100  

Overdrafts

     15,808       11,468        136        —          27,412  

Mortgage Loans

     2,896       3,435        146        —          6,477  

Pledge Loans

     77       166        —          —          243  

Personal Loans

     2,290       910        —          —          3,200  

Pre-financing and financing of exports

     44       —          —          —          44  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total Variable Rate

     22,215       15,979        282        —          38,476  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Fixed Rates

             

Financial Institutions

     13,488       627              14,115  

Non-Financial Private Sector and Residents Abroad

     420,502       45,289        481        14        466,286  

Loans

     420,502       45,289        481        14        466,286  

Advances

     28,116       3        —          —          28,119  

Overdrafts

     108,486       7,864        7        —          116,357  

Mortgage Loans

     1,112       1,468        37        11        2,628  

Pledge Loans

     8,394       2,947        —          3        11,344  

Personal Loans

     14,121       15,099        437        —          29,657  

Credit Card Loans

     239,738       2,055        —          —          241,793  

Placements in Banks Abroad

     1,662       —          —          —          1,662  

Pre-financing and financing of exports

     13,590       15,853        —          —          29,443  

Other Loans

     5,283       —          —          —          5,283  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total Fixed Rate

     433,990       45,916        481        14        480,401  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Adjustable Rate

             

Financial Institutions

     586       —          —          —          586  

Non-Financial Private Sector and Residents Abroad

     4,362       6,309        357        —          11,028  

Loans

     4,362       6,309        357        —          11,028  

Mortgage Loans

     1,615       5,409        357        —          7,381  

Personal Loans

     2,747       900        —          —          3,647  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total Adjustable Rate

     4,948       6,309        357        —          11,614  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total Loan

     461,153       68,204        1,120        14        530,491  

Accrued Interest, Adjustment and Quotation Differences Receivable

     23,650       —          —          —          23,650  

Documented Interest

     (2,233     —          —          —          (2,233

Allowance

     (36,707     —          —          —          (36,707
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

     445,863       68,204        1,120        14        515,201  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Interest and the UVA/CER adjustment were assigned to the first month.

v) Credit Review Process

Credit risk is the potential for financial loss resulting from the failure of a borrower to honor its financial contractual obligations. Our credit risk arises mainly from Banco Galicia’s and Naranja’s lending activities, and from the fact that, in the normal course of business, these subsidiaries are parties to certain transactions with off-balance sheet treatment and associated risk, mainly commitments to extend credit and guarantees granted. See also Item 5. “Operating and Financial Review and Prospects”—A. “Operating Results”— “Off-Balance Sheet Arrangements”.

 

64


Table of Contents

Our credit approval and credit risk analysis is a centralized process based on balancing a variety of factors. In undertaking credit approval and credit risk analyses, the Bank’s risk management, credit and origination divisions, both with respect to retail and wholesale businesses, efficiently work together to management asset quality, proactively management problem loans, aggressive charge-offs for uncollectible loans, and adequate loan loss provisioning. These processes also include the update of financial models to measure portfolio risk at operational and customer levels, facilitating the detection of defaulting, or potentially defaulting, loans and losses associated therewith, which allows for the proactive management of the same in order to prevent portfolio deterioration, enabling appropriate protection of our assets.

Banco Galicia

The Risk Division is responsible for the overall risk management of the Bank in accordance with international best practices and handles solvency, financial, operational, credit, technological, reputational and strategic risks. The Risk Division is independent from the business areas of the Bank and its subsidiaries and it reports directly to the Bank’s General Division. The Risk Division works with the functional support of the Compliance and Money Laundering Prevention Division, a division that also reports to the Board of Directors, and whose purpose is to prevent the execution of financial operations with funds derived from illegal activities, and the use of the Bank as a vehicle for laundering money and funding terrorist activities. In addition, the Risk Division monitors compliance with the laws, regulations and internal policies in order to prevent financial and/or criminal penalties and to minimize any reputational impact. It is an independent role that coordinates and assists in identifying, providing advice on, monitoring, reporting and warning management regarding compliance risks.

Moreover, in order to have timely information and a flexible structure in place to efficiently respond and adjust to macro and microeconomic variables, the Risk Division is responsible for credit extension and recovery functions for companies and individuals.

The mission of the Risk Division is comprised of the following activities:

 

   

actively and comprehensively managing and monitoring the risks taken by Banco Galicia and its subsidiaries, ensuring compliance with internal policies and regulations in force;

 

   

keeping the Board of Directors informed of the risks faced by the Bank, proposing how to deal with such risks;

 

   

helping to strengthen a risk management culture;

 

   

establishing the risks, the Bank is willing to take and designing policies and procedures to monitor, control and mitigate the same;

 

   

escalating deviations from internal policies to the Bank’s General Division; and

 

   

managing the evaluation process of available financing capabilities and required capital resources to maintain an appropriate risk profile.

The Risk Division’s responsibilities include:

 

   

ensuring action and contingency plans are in place to address any deviations from acceptable thresholds for risks posing a threat to business continuity;

 

   

recommending the most suitable methodologies for the Bank to measure identified risks;

 

   

guaranteeing that the launching of any new product includes a previous assessment of potential risks involved;

 

65


Table of Contents
   

providing technical support and assisting the Management Division regarding risk management;

 

   

developing and proposing the strategies for credit and credit-granting policies; and

 

   

managing and monitoring the credit origination processes, follow-up and control thereof, and the recovery of past-due loans.

Banco Galicia complies with all regulatory requirements set forth by Law No.25,246, as amended, Resolution No.30/2017, as amended, issued by the Financial Information Unit (the “UIF”) and BCRA’s Communication “A” 6399, as supplemented and/or amended.

The Bank has policies, procedures and control structures in place related to the features of the various products offered, which help monitor transactions in order to identify unusual or suspicious transactions and report them to the UIF. The Compliance and Money Laundering Prevention Division is responsible for managing this risk, through the implementation of control and prevention procedures as well as the communication thereof to the rest of the organization through the drafting of the corresponding handbooks and the training of all employees.

Banco Galicia has appointed a Director responsible for the management of this risk, and has created a Committee in charge of planning, coordinating and enforcing the compliance with the policies set by the Board of Directors. The basic principle on which the regulations regarding prevention and control of money laundering are based is in line with the “know your customer” policy in force worldwide. Such risks are regularly reviewed through internal and external audits.

The following subdivisions depend on support from the Risk Division: Wholesale Credit, Retail Credit and Credit Recovery. They are responsible for developing and proposing strategies for credit and credit-granting policies, as well as managing and monitoring credit origination processes, follow-up and control thereof, and the recovery of past-due loans. The goal of these divisions is to ensure the quality of the loan portfolio, minimize costs while maximizing efficiency, and recovery optimization, thus minimizing loan losses and optimizing efficiency in the credit extension process.

The Retail Credit Division is responsible for ensuring that the fraud screening and prevention process is effective, thereby assuring the quality of the retail portfolio. This Division designs and manages complex credit decision-taking models and tools, directs the alignment efforts to implement retail business strategies, and works together with the business team to suggest business opportunities.

The Wholesale Credit Division is responsible for the corporate rating process, thus assuring the quality of the wholesale portfolio. This Division directs alignment efforts to implement business strategies based on the customer service model, working together with the business team to suggest business opportunities. This Division deals specifically with complex businesses such as banks, public companies, capital markets transactions and investment projects.

Before approving a loan, Banco Galicia performs an assessment of the potential borrower and his/her financial condition. Approvals of loans exceeding certain amounts are analyzed based on the credit line and the customer.

Banco Galicia performs its risk assessment based on the following factors:

 

Qualitative Analysis    Assessment of the corporate borrower’s creditworthiness performed by the officer in charge of the account based on personal knowledge.
Economic and Financial Risk    Quantitative analysis of the borrower’s balance sheet amounts.
Economic Risk of the Sector    Measurement of the general risk of the financial sector where the borrower operates (based on statistical information, internal and external).
Environmental Risk    Environmental impact analysis (required for all investment projects of significant amounts).

 

66


Table of Contents

Loans are generally approved pursuant to pre-set authorization levels, except loans exceeding certain amounts, which are approved by the Credit Committee.

The Recovery Management Division is responsible for administering and managing both the Bank’s performing and under-performing credit portfolio, seeking to minimize the deterioration thereof and establishing recovery of such credit portfolios. Management models and specific strategies are applied to each type of portfolio, segments and tranches in arrears, from early defaults to out-of-court and judicial proceedings.

Naranja

Credit Risk

Credit risk for Naranja arises from a variety of factors, including credit risk related to failures to pay by entities that Naranja lends money to and failures to pay outstanding credit card balances by individual clients that hold credit cards with Naranja.

With respect to investments, Naranja evaluates its credit risk or exposure pursuant to an investment and credit evaluation policy. In accordance with this policy, the Company (i) has certain internal credit risk rating requirements that any company in which it invests must meet, (ii) requires certain debt to equity ratios be maintained by any company to which it lends money and (iii) has upper limits on the amount that it will invest in any given company.

The Company actively monitors the creditworthiness of its clients to minimize its overall exposure to their credit risk. The Company uses the following tools to evaluate and manage the creditworthiness of its clients:

 

   

statistical models that determine the amount of credit that

 

   

Naranja is comfortable extending to a client based on the client’s specific financial situation;

 

   

guidelines for providing credit cards and loans based on the client’s specific financial situation (i.e., verification of the applicant’s identity, monthly income, number of family members, geographic location and occupation);

 

   

case-by-case evaluation of appropriate credit limits for each applicant; and

 

   

ongoing monitoring of each client’s credit position and payment history.

Procedure for Credit Card Application

The credit risk associated with a credit card applicant is evaluated by reviewing the information with respect to each applicant set forth above. The Risk Committee establishes the guidelines and requirements for credit card applicants. Such guidelines are based on statistical models and objective criteria in order for internal credit analysts to efficiently approve or reject each credit card application.

In addition to reviewing each applicant’s credit record, the Company also verifies the credit score and payment history of each applicant. Once the information has been verified and, to the extent the customer meets all applicable requirements, the credit card is issued and delivered at the applicant’s address, or the applicant may arrange to pick it up at any of the Company’s branches.

 

67


Table of Contents

Determination of Credit Limits

Customer’s credit limits are determined on the basis of an assessment of each customer’s specific financial situation. Based on such assessment, customers are assigned one of five risk levels: A, B, C, D or E, with A being the lowest risk segment and E being the highest risk segment. In making such assignment, certain factors are considered, including, but not limited to, monthly income, number of family members, geographic location and occupation. The customer is then assigned a credit limit based on his or her risk level, which is shared among all credit cards associated with such customer, whether as a primary or additional cardholder. The credit limit assigned to each customer includes: (i) the monthly balance limit; (ii) the long-term purchase limit (the maximum amount for a customer to purchase in six or more installments using the credit card); (iii) the total credit limit (the maximum amount that may be owed to the Company); (iv) the maximum balance limit for cash advances, which is determined based on risk segmentation, monthly income, and internal indebtedness as well as in the financial system, not being able to exceed the LCPL (long-term purchase limit plan).

Below is a detail of the percentage limits and nominal caps assigned to each risk segment.

 

     Monthly Balance Limit      Long-term Purchase Limit      Total Credit Limit  
Risk Segment    Income%      Floor in
Ps.
     Top      Income
%
     Floor in
Ps.
     Top      Income
%
     Floor in
Ps.
     Top  

A (Lowest)

     100        14,000        75,000        160        5,000        180,000        200        5,000        210,000  

B

     90        11,000        55,000        150        4,500        12,000        180        4,500        150,000  

C

     80        9,000        44,000        140        4,000        75,000        170        4,000        95,000  

D

     70        7,000        31,000        120        3,500        50,000        150        3,500        60,000  

E (Highest)

     60        6,000        15,000        100        3,000        35,000        120        3,000        40,000  

Naranja reviews such credit limits on a daily basis and a credit limit may be automatically increased for eligible cardholders meeting certain requirements, including payment history. In addition, Naranja reviews cardholders’ applications for increases in the monthly limit and may, in its sole discretion, increase such limits based on the individual customer’s payment history and total income level.

Credit cards are extended to clients active in a wide range of business sectors. As such, the Company maintains a diversified portfolio of risk exposure based on economic fluctuations.

vi) Financial Instruments Classification and Loss Provisions

General

The “Expected Credit Loss” (“ECL”) model applies to financial assets which are valued at both amortized cost and fair value through other comprehensive income (“OCI”). The standard establishes three categories to classify financial instruments, primarily taking into account the credit risk evolution over time. Stage 1 includes financial assets with normal or no significant risk associated; Stage 2 includes financial assets for which a significant increase in credit risk has been identified but they are not yet deemed to be credit-impaired and Stage 3 comprises financial assets which are impaired and/or subject to serious risk of impairment. To calculate the provisions for credit impairment risk, IFRS 9 differentiates among these three stages by applying the following concepts:

 

   

12- Month Expected Credit Losses: Possible events of default within the 12 months following the date of the presentation of financial statements. Assets included in Stage 1 have their ECL measured at 12-month ECL.

 

   

Lifetime Expected Credit Losses: ECL during the active period of the financial asset, which results of calculating the probability of impairment of an asset throughout its duration, up until its maturity. Instruments in Stage 2 or 3 have their ECL measured based on lifetime ECL.

 

68


Table of Contents

The measurement of ECL in accordance with IFRS 9 should consider forward looking information. To estimate ECL, Grupo Galicia has applied the following definitions and parameters, in accordance with IFRS 9.

Financial Instruments Classification

Grupo Galicia classifies its financial instruments into the following groups: (i) retail loans, (ii) retail-like loans, (iii) wholesale loans and (iv) Naranja.

Each subsidiary of Grupo Galicia classifies financial instruments subject to impairment under IFRS 9 in stages, as follows:

 

   

Stage 1: With respect to retail portfolios, Stage 1 includes every financial instrument up to 31 days past due. With respect to wholesale portfolios, Stage 1 includes every client whose BCRA situation indicates a normal status (rating A) (i.e. low risk of bankruptcy).

 

   

Stage 2: This stage includes financial assets for which a significant increase in credit risk has been identified. This stage considers two groups:

 

   

For retail and retail like Portfolios between 31 and 90 days past due. For wholesale it considers credit ratings for which the risk of default has increased significantly.

 

   

Probability of Default or Score with impairment risk.

 

   

Stage 3: For all portfolios, Stage 3 includes every client whose BCRA situation indicates a serious risk of bankruptcy (ratings C, D, E). With respect to retail portfolios, Stage 3 also includes financial instruments that are 90 or more days past due.

See the Argentina Central Bank Classification, on —“Argentine Banking Regulation”— “Loan Classification System”.

Definition of Default

A financial instrument is considered to be in default whenever payment is more than 90 days past due, or if Grupo Galicia believes that the amount due will not be repaid in full. The credit analysis for wholesale loans is not the same as for retail loans and Grupo Galicia’s definition of default with respect to wholesale portfolios is based on a credit analysis of the individual borrower. The definition of default is applied consistently to produce models for the Probability of Default, Exposure at Default and Loss Given Default in Grupo Galicia’s expected loss calculations:

 

   

Probability of Default (“PD”): This is the likelihood of a borrower defaulting on its financial obligation, either over the next 12 months or during the remaining term of the obligation.

 

   

Exposure at Default: This is based on the amounts Grupo Galicia expects to be owed at the time of default, either over the next 12 months or over the remaining term. For example, for a revolving commitment, Grupo Galicia includes the current draw down balance plus any further amount that it is expected to be drawn up to the current contractual limit by the time of default, should it occur.

 

   

Loss Given Default: This represents Grupo Galicia’s expectation of the total loss it will incur in respect of an obligation in default and varies according to the counterparty, seniority of the claim and availability of collateral or other credit support. Loss Given Default is expressed as a percentage loss per Peso of exposure at the time of default and is calculated over the term of the relevant obligation or on a 12-month basis.

A financial instrument is no longer considered to be in default when it does not meet any of the above-mentioned default criteria.

 

69


Table of Contents

Methodology for Expected Credit Loss Estimation

ECL impairment allowances recognized in the financial statements reflect the effect of a variety of possible economic outcomes (as described below) and calculated on a probability-weighted basis. ECL measurement involves the application of judgment and estimates. It is necessary to formulate multiple forward-looking economic forecasts and incorporate them into the ECL estimates. Grupo Galicia uses a standard framework to form economic scenarios to reflect assumptions about future economic conditions, supplemented with the use of management judgment, which may result in using alternative or additional economic scenarios and/or management adjustments.

IFRS 9 establishes the following standards regarding ECL:

 

   

An unbiased weighted probability index, determined by the evaluation of different outcomes.

 

   

Time value of money.

 

   

Reasonable and sustainable information available at no additional cost or effort that provides evidence to support forecasts, as well as present conditions and past events.

Grupo Galicia developed a forward-looking methodology to evaluate the impact of different future macroeconomic scenarios on the credit risk of the financial assets. Grupo Galicia prepared three outcomes with varying probabilities in accordance with IFRS: (i) a median scenario with a 70% probability of occurrence, (ii) a downside scenario with a 15% probability of occurrence and (iii) an upside scenario with a 15% probability of occurrence

In order to account for time value of money, Grupo Galicia assumes expected losses will take place proportionally over time. The ECL is determined by determining the Probability of Default, Exposure at Default and the Loss Given Default for each future month for each collective segment. These three components are multiplied and adjusted, as applicable, to take into account any forward-looking information, thus calculating ECL for each month on a forward-looking basis, which is then discounted back to the reporting date and summed. The discount rate used in the ECL calculation is the original effective interest rate (or an estimate thereof).

Post-model adjustments

Since March 2020, the BCRA implemented a series of measures to reduce the economic consequences of COVID-19 pandemic, among which are the deferral of payments and suspension of the collection of punitive interest in case of default in payments of loan installments, being the credit cards loans excluded from this benefit.

Thus, considering the adverse economic context that the country is going through, borrower credit uncertainty and measures issued by the BCRA, the management recognized an additional credit loss allowance to that obtained through the statistical model of ECL on the deferred loan portfolio amounts, which shows the potential impairment due to the macroeconomic context, once the implemented measures are lifted for the BCRA.

The management measured the additional impact on the allowance from the estimation of the expected credit loss of loan portfolios which have deferred payments, based on new PD estimated depending on actual past due date (without deferrals) and the projected performance of the affected products, modifying the staging classification through a “Lifetime Adjustment”.

 

70


Table of Contents

vii) Credit Risk Exposure of Financial Instruments

The following table sets forth the credit risk exposure of financial instruments for which an ECL allowance is recognized.

 

     Retail Portfolio  
     December 31, 2020  
     ECL Staging        
     Stage 1      Stage 2      Stage 3        
     12-month
ECL
     Lifetime
ECL
     Lifetime
ECL
    Total  

Days past due

          

0

     115,541        47,518        —         163,059  

1-30

     1,378        1,165        1,509       4,052  

31-60

     —          998        49       1,047  

61-90

     —          561        95       656  

Default

     —          —          5,557       5,557  
  

 

 

    

 

 

    

 

 

   

 

 

 

Gross Carrying amount

     116,919        50,242        7,210       174,371  

Loss allowance

     (4,954      (12,628      (5,894     (23,476
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Carrying amount

     111,965        37,614        1,316       150,895  
  

 

 

    

 

 

    

 

 

   

 

 

 

Credit Quality

          

Default as a Percentage of Total Financial Instruments Portfolio

             3.19

Allowance for Financial Instruments as a Percentage of Default

             422.46

Net Charge-Offs as a Percentage of Financial Instruments Portfolio

             11.98

 

     Retail like Portfolio  
     December 31, 2020  
     ECL Staging        
     Stage 1      Stage 2      Stage 3        
     12-month
ECL
     Lifetime
ECL
     Lifetime
ECL
    Total  

Days past due

          

0

     104,800        12,160        962       117,922  

1-30

     969        542        218       1,729  

31-60

     —          210        6       216  

61-90

     —          45        16       61  

Default

     —          —          1,187       1,187  
  

 

 

    

 

 

    

 

 

   

 

 

 

Gross Carrying amount

     105,769        12,957        2,389       121,115  

Loss allowance

     (559      (2,131      (1,832     (4,522
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Carrying amount

     105,210        10,826        557       116,593  
  

 

 

    

 

 

    

 

 

   

 

 

 

Credit Quality

          

Default as a Percentage of Total Financial Instruments Portfolio

             0.98

Allowance for Financial Instruments as a Percentage of Default

             380.96

Net Charge-Offs as a Percentage of Financial Instruments Portfolio

             4.03

 

71


Table of Contents
     Wholesale Portfolio  
     December 31, 2020  
     ECL Staging        
     Stage 1      Stage 2      Stage 3        
     12-month
ECL
     Lifetime
ECL
     Lifetime
ECL
    Total  

Days past due

          

A

     263,742        12,557        —         276,299  

B1

     —          1,002        —         1,002  

Default

     —          —          796       796  
  

 

 

    

 

 

    

 

 

   

 

 

 

Gross Carrying amount

     263,742        13,559        796       278,097  

Loss allowance

     (1,960      (623      (607     (3,190
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Carrying amount

     261,782        12,936        189       274,907  
  

 

 

    

 

 

    

 

 

   

 

 

 

Credit Quality

          

Default as a Percentage of Total Financial Instruments Portfolio

             0.29

Allowance for Financial Instruments as a Percentage of Default

             400.75

Net Charge-Offs as a Percentage of Financial Instruments Portfolio

             1.50

 

     Naranja  
     December 31, 2020  
     ECL Staging        
     Stage 1      Stage 2      Stage 3        
     12-month
ECL
     Lifetime
ECL
     Lifetime
ECL
    Total  

Days past due

          

0

     85,989        1,004        263       87,256  

1-30

     3,232        226        56       3,514  

31-60

     —          853        48       901  

61-90

     —          373        30       403  

Default

     —          —          1,975       1,975  
  

 

 

    

 

 

    

 

 

   

 

 

 

Gross Carrying amount

     89,221        2,456        2,372       94,049  

Loss allowance

     (3,708      (589      (1,848     (6,145
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Carrying amount

     85,513        1,867        524       87,904  
  

 

 

    

 

 

    

 

 

   

 

 

 

Credit Quality

          

Default as a Percentage of Total Financial Instruments Portfolio

             2.10

Allowance for Financial Instruments as a Percentage of Default

             311.14

Net Charge-Offs as a Percentage of Financial Instruments Portfolio

             5.02

 

72


Table of Contents
     Retail Portfolio  
     December 31, 2019  
     ECL Staging         
     Stage 1      Stage 2      Stage 3         
     12-month      Lifetime      Lifetime      Total  

Days past due

           

0

     106,961        39,205        1,242        147,408  

1-30

     2,127        2,070        252        4,449  

31-60

     —          1,718        222        1,940  

61-90

     —          719        375        1,094  

Default

     —          —          5,829        5,829  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross Carrying amount

     109,088        43,712        7,920        160,720  

Loss allowance

     (5,514      (2,555      (6,230      (14,299
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Carrying amount

     103,574        41,157        1,690        146,421  
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit Quality

           

Default as a Percentage of Total Financial Instruments Portfolio

              3.63

Allowance for Financial Instruments as a Percentage of Default

              245.31

Net Charge-Offs as a Percentage of Financial Instruments Portfolio

              6.06

 

     Retail like Portfolio  
     December 31, 2019  
     ECL Staging        
     Stage 1      Stage 2      Stage 3        
     12-month      Lifetime      Lifetime     Total  

Days past due

          

0

     44,985        5,851        677       51,513  

1-30

     1,779        725        225       2,729  

31-60

     —          218        87       305  

61-90

     —          234        202       436  

Default

     —          —          3,318       3,318  
  

 

 

    

 

 

    

 

 

   

 

 

 

Gross Carrying amount

     46,764        7,028        4,509       58,301  

Loss allowance

     (480      (199      (3,424     (4,103
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Carrying amount

     46,284        6,829        1,085       54,198  
  

 

 

    

 

 

    

 

 

   

 

 

 

Credit Quality

          

Default as a Percentage of Total Financial Instruments Portfolio

             5.69

Allowance for Financial Instruments as a Percentage of Default

             123.66

Net Charge-Offs as a Percentage of Financial Instruments Portfolio

             8.14

 

73


Table of Contents
     Wholesale Portfolio  
     December 31, 2019  
     ECL Staging        
     Stage 1      Stage 2      Stage 3        
     12-month      Lifetime      Lifetime     Total  

Days past due

          

A

     280,598        7,743        —         288,341  

B1

     —          514        —         514  

Default

     —          —          6,639       6,639  
  

 

 

    

 

 

    

 

 

   

 

 

 

Gross Carrying amount

     280,598        8,257        6,639       295,494  

Loss allowance

     (679      (302      (6,116     (7,097
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Carrying amount

     279,919        7,955        523       288,397  
  

 

 

    

 

 

    

 

 

   

 

 

 

Credit Quality

          

Default as a Percentage of Total Financial Instruments Portfolio

             2.25

Allowance for Financial Instruments as a Percentage of Default

             106.90

Net Charge-Offs as a Percentage of Financial Instruments Portfolio

             2.64

 

     Naranja  
     December 31, 2019  
     ECL Staging        
     Stage 1      Stage 2      Stage 3        
     12-month      Lifetime      Lifetime     Total  

Days past due

          

0

     60,763        724        356       61,843  

1-30

     3,314        217        122       3,653  

31-60

     —          1,656        104       1,760  

61-90

     —          856        63       919  

Default

     —          —          7,597       7,597  
  

 

 

    

 

 

    

 

 

   

 

 

 

Gross Carrying amount

     64,077        3,453        8,242       75,772  

Loss allowance

     (2,755      (958      (6,379     (10,092
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Carrying amount

     61,322        2,495        1,863       65,680  
  

 

 

    

 

 

    

 

 

   

 

 

 

Credit Quality

          

Default as a Percentage of Total Financial Instruments Portfolio

             10.03

Allowance for Financial Instruments as a Percentage of Default

             132.84

Net Charge-Offs as a Percentage of Financial Instruments Portfolio

             10.49

Under BCRA rules, we are required to cease the accrual of interest or to establish provisions equal to 100% of the interest earned on all loans pertaining to the non-accrual loan portfolio, meaning, all loans to borrowers in Stage 3.

The table below shows the interest income that would have been recorded on non-accrual loans on which the accrual of interest was discontinued and the recoveries of interest on loans classified as non-accrual on which the accrual of interest had been discontinued:

 

     December 31,  
     2020      2019      2018  
     (in millions of Pesos)  

Interest Income that Would Have Been Recorded on Non-Accrual Loans on which the Accrual of Interest was Discontinued

     2,235        4,036        1,248  

Recoveries of Interest on Loans Classified as Non-Accrual on which the Accrual of Interest had been Discontinued (1)

     112        202        63  

 

(1)

Recorded under “Other operating income”.

 

74


Table of Contents

viii) Loss Experience

The following tables present the changes in the loss allowance between December 31, 2019 and December 31, 2020 and the changes in the loss allowance between December 31, 2018 and December 31, 2019.

 

     Stage 1     Stage 2     Stage 3               
     12-month     Lifetime     Lifetime     Purchased
credit-
impaired
     Total  

Loss Allowance as of December 31, 2019

     9,428       4,014       22,149       —          35,591  

Inflation effect

     (4,039     (3,267     (7,276     —          (14,582

Movements with P&L Impact

     —         —         —         —          —    

Transfer from Stage 1 to Stage 2

     (667     667       —         —          —    

Transfer from Stage 1 to Stage 3

     (267     —         267       —          —    

Transfer from Stage 2 to Stage 1

     422       (577     155       —          —    

Transfer from Stage 2 to Stage 3

     174       (536     362       —          —    

Transfer from Stage 3 to Stage 1

     290       —         (290     —          —    

Transfer from Stage 3 to Stage 2

     —         447       (447     —          —    

New Financial Assets Originated or Purchased

     4,487       1,097       3,099       —          8,683  

Changes in PDs/LGDs/EADs

     1,467       1,557       1,273       —          4,297  

Changes to model assumptions and methodologies

     1,340       11,186       3,686       —          16,212  

Foreign exchange and other movements

     1,985       2,357       1,146       —          5,488  

Other movements with no P&L impact

     —         —         —         —          —    

Write-offs and other movements

     (3,439     (974     (13,943     —          (18,356
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loss allowance as of December 31, 2020

     11,181       15,971       10,181       —          37,333