|Closing Price ($)||Shares Out (MM)||Market Cap ($MM)|
|Item 1. Identity of Directors, Senior Management and Advisers|
|Item 2. Offer Statistics and Expected Timetable|
|Item 3. Key Information|
|Item 4. Information on The Company|
|Item 4A. Unresolved Staff Comments|
|Item 5. Operating and Financial Review and Prospects|
|Item 6. Directors, Senior Management and Employees|
|Item 7. Major Shareholders and Related Party Transactions|
|Item 8. Financial Information|
|Item 9. The Offer and Listing|
|Item 10. Additional Information|
|Item 11. Quantitative and Qualitative Disclosures About Market Risk|
|Item 12. Description of Securities Other Than Equity Securities|
|Item 13. Defaults, Dividend Arrearages and Delinquencies|
|Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds|
|Item 15. Controls and Procedures|
|Item 16A. Audit Committee Financial Expert|
|Item 16B. Code of Ethics|
|Item 16C. Principal Accountant Fees and Services|
|Item 16D. Exemptions From Listing Requirements for Audit Committees|
|Item 16E. Purchases of Equity Securities By One Issuer and Affiliated Persons|
|Item 16F. Change in Registrant's Certifying Accountant|
|Item 16G. Corporate Governance|
|Item 17. Financial Statements|
|Item 18. Financial Statements|
|Item 19. Exhibits|
|Balance Sheet||Income Statement||Cash Flow|
|Comparables ($MM TTM)|
|Ticker||M Cap||Assets||Liab||Rev||G Profit||Net Inc||EBITDA||EV||G Margin||EV/EBITDA||ROA|
As filed with the Securities and Exchange Commission on May 10, 2019
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|☐||REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934|
|☒||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended December 31, 2018
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
|☐||SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
Commission file number: 001-12568
BBVA BANCO FRANCÉS S.A.
(Exact name of Registrant as specified in its charter)
BBVA FRENCH BANK
(Translation of Registrant’s name into English)
Republic of Argentina
(Jurisdiction of incorporation or organization)
Av. Córdoba 111, C1054AAA
Ciudad Autónoma de Buenos Aires, Argentina
(Address of principal executive offices)
Eduardo González Correas – 011-54-11-4348-0000 (ext. 14483) – email@example.com – Av. Córdoba 111 31° (C1054AAA)
Ciudad Autónoma de Buenos Aires, Republic of Argentina
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
|American Depositary Shares, each representing the right to receive three ordinary shares, par value Ps.1.00 per share||New York Stock Exchange|
|Ordinary shares, par value Ps.1.00 per share||New York Stock Exchange*|
* The ordinary shares are not listed for trading, but are listed only in connection with the registration of the American Depositary Shares, pursuant to requirements of the New York Stock Exchange.
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
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:
|Ordinary Shares, par value Ps.1.00 per share||612,659,638|
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒Yes ☐ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: ☒Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically 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 which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☐
|International Financial Reporting Standards as issued by the International Accounting Standards Board ☒|| |
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
|PRESENTATION OF FINANCIAL INFORMATION||1|
|CERTAIN TERMS AND CONVENTIONS||2|
|ITEM 1.||IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS||3|
|ITEM 2.||OFFER STATISTICS AND EXPECTED TIMETABLE||3|
|ITEM 3.||KEY INFORMATION||3|
|ITEM 4.||INFORMATION ON THE COMPANY||24|
|ITEM 4A.||UNRESOLVED STAFF COMMENTS||98|
|ITEM 5.||OPERATING AND FINANCIAL REVIEW AND PROSPECTS||98|
|ITEM 6.||DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES||128|
|ITEM 7.||MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS||142|
|ITEM 8.||FINANCIAL INFORMATION||145|
|ITEM 9.||THE OFFER AND LISTING||146|
|ITEM 10.||ADDITIONAL INFORMATION||149|
|ITEM 11.||QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK||161|
|ITEM 12.||DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES||170|
|ITEM 13.||DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES||172|
|ITEM 14.||MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS||172|
|ITEM 15.||CONTROLS AND PROCEDURES||172|
|ITEM 16A.||AUDIT COMMITTEE FINANCIAL EXPERT||178|
|ITEM 16B.||CODE OF ETHICS||178|
|ITEM 16C.||PRINCIPAL ACCOUNTANT FEES AND SERVICES||179|
|ITEM 16D.||EXEMPTIONS FROM LISTING REQUIREMENTS FOR AUDIT COMMITTEES||179|
|ITEM 16E.||PURCHASES OF EQUITY SECURITIES BY ONE ISSUER AND AFFILIATED PERSONS||179|
|ITEM 16F.||CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT||179|
|ITEM 16G.||CORPORATE GOVERNANCE||179|
|ITEM 17.||FINANCIAL STATEMENTS||183|
|ITEM 18.||FINANCIAL STATEMENTS||183|
This Form 20-F contains words, such as “believe”, “expect”, “estimate”, “intend”, “plan”, “may” and “anticipate” and similar expressions that identify forward-looking statements, which reflect our views about future events and financial performance. Actual results could differ materially as a result of factors beyond our control, including but not limited to:
|§||changes in general economic, business or political or other conditions in the Republic of Argentina (“Argentina” or “the Republic”) or changes in general economic or business conditions in Latin America;|
|§||changes in exchange rates or capital markets in general that may affect policies towards or lending to Argentina or Argentine companies;|
|§||increased costs and decreased income related to macroeconomic variables such as exchange rates and the Consumer Price Index in Argentina (“CPI”);|
|§||unanticipated increases in financing and other costs or the inability to obtain additional debt, equity or wholesale financing on attractive terms or at all; and|
|§||the factors discussed under “Item 3. Key Information—D. Risk Factors”.|
Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. BBVA Banco Francés S.A. (“BBVA Francés” or the “Bank”) undertakes no obligation to update or revise these forward-looking statements or to publicly release the results of any revisions to these forward-looking statements. The accompanying information in this annual report, including, without limitation, the information under “Item 4. Information on the Company”, “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk” identifies important factors that could cause material differences between any forward-looking statements and actual results.
The Bank’s audited consolidated financial statements as of and for the years ended December 31, 2018 and 2017 (the “Consolidated Financial Statements”) are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS-IASB”). These are the first financial statements prepared by the Bank under IFRS-IASB, and therefore the opening statement of financial position was prepared as of January 1, 2017, the date of our transition to IFRS, as required by IFRS 1—“First Time Adoption of International Financial Reporting Standards”. The comparative figures at and for the year ended December 31, 2017 reflect adjustments and reclassifications made as a result of our adoption of IFRS-IASB. Previously, our consolidated financial statements were prepared in accordance with the accounting rules (“BCRA-GAAP”) established by Argentine Central Bank (the “Central Bank” or “BCRA”), which differ in some respects from IFRS-IASB.
All 2018 and 2017 data included in this report have been prepared in accordance with IFRS-IASB for the sole purpose of filing this annual report on Form 20-F with the Securities and Exchange Commission (“SEC”).
The statutory consolidated annual financial statements for the fiscal year ended December 31, 2018 that the Bank prepared to comply with the requirements of the Central Bank are the Bank’s first annual financial statements prepared pursuant to the reporting framework established by the Central Bank requiring supervised entities to submit financial statements prepared pursuant to IFRS-IASB, with temporary exceptions from the application of (i) the impairment model in Section 5.5 Impairment of IFRS 9 Financial Instruments and (ii) IAS 29 Financial Reporting in Hyperinflationary Economies, both of which are applicable under the Central Bank’s rules for the fiscal years beginning on or after January 1, 2020, and in accordance with the standards prescribed by Memorandum No. 6/2017 Financial Reporting Framework Established by the BCRA issued on May 29, 2017 regarding the treatment to be applied to uncertain tax positions. We refer in this annual report on Form 20-F to IFRS-IASB as adjusted by the regulations of the BCRA as “IFRS-BCRA”. Beginning with the fiscal year commencing January 1, 2020, we expect to prepare our financial statements for purposes of both our annual reports on Form 20-F and the Central Bank under IFRS-IASB.
For 2018, the Consolidated Financial Statements include entities in which the Bank holds control, directly or indirectly. See “Item 4. Information on the Company – C. Organizational Structure” for an organizational chart depicting BBVA Francés and its subsidiaries.
In this annual report, references to “$”, “US$”, “U.S. dollars” and “dollars” are to United States dollars and references to “Ps.” or “pesos” are to Argentine pesos. Percentages and certain dollar and peso amounts have been rounded for ease of presentation. Unless otherwise stated, all market share and other industry information has been derived from information published by the Central Bank.
Unless otherwise indicated, financial information contained in this annual report reflects the consolidation of the following subsidiaries at the year end and for the fiscal years indicated below.
|Volkswagen Financial Services Compañía Financiera S.A.||X|
|Consolidar AFJP S.A. (undergoing liquidation proceedings)||X||X|
|BBVA Francés Valores S.A.||X||X|
|BBVA Francés Asset Management S.A. Sociedad Gerente de Fondos Comunes de Inversión||X||X|
On September 25, 2018, BBVA Francés lost control of Volkswagen Financial Services Compañía Financiera S.A. (“VWFS”) due to the termination of the two-year commitment by the Bank to provide financing to VWFS if it were unable to diversify its sources of funding. According to IAS 28 Investments in Associates and Joint Ventures, VWFS qualifies as a joint venture and, as such, it has been deconsolidated effective since the date of loss of control.
Since the Bank has adopted IFRS-IASB with respect to its consolidated financial statements as of and for the year ended December 31, 2018, we have applied the accommodation granted by General Instruction G to Form 20-F (First-Time Application of International Financial Reporting Standards), and as a result financial information prior to 2017 has generally been omitted from this annual report on Form 20-F. Please see our annual report on Form 20-F for the year ended December 31, 2017 for BCRA-GAAP and certain other financial information of the Bank prior to 2017.
IAS 29 Financial Reporting in Hyperinflationary Economies requires that an entity whose functional currency is the currency of a hyperinflationary economy must state its assets, liabilities, income and expenses in terms of the measuring unit current at the end of the reporting period (December 31, 2018). The Bank has applied IAS 29 as follows:
|-||Restated the Consolidated Statement of Financial Position as of January 1, 2017, which is the earliest financial information presented.|
|-||Restated the Consolidated Statement of Financial Position as of December 31, 2017.|
|-||Restated the Consolidated Statement of Profit or Loss, the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Changes in Shareholders’ Equity and Consolidated Statements of Cash Flow for the year ended December 31, 2017, including the calculation and separate disclosure of the gain or loss on the net monetary position.|
|-||Adjusted the Consolidated Statement of Financial Position as of December 31, 2018.|
|-||Adjusted the Consolidated Statement of Profit or Loss, the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Changes in Shareholders’ Equity and Consolidated Statements of Cash Flow for the year ended December 31, 2018, including the calculation and separate disclosure of the gain or loss on the net monetary position.|
For further information regarding the methodology and criteria applied as well as the impact of the application of IAS 29 in the Bank´s accounting, see Note 3.2 to the Consolidated Financial Statements.
See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates” for information regarding the evolution of rates of exchange since 2012.
All figures and percentages of variations in this annual report on Form 20-F, unless otherwise stated, are presented in real terms based on the measuring unit current at December 31, 2018.
The terms below are used as follows throughout this report:
|§||“BBVA Francés”, the “Bank” or the “Company” and terms such as “we”, “us” and “our” mean BBVA Banco Francés S.A. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.|
|§||“BBVA” or the “BBVA Group” means Banco Bilbao Vizcaya Argentaria, S.A. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.|
|§||“Consolidated Financial Statements” means our audited consolidated financial statements as of and for the years ended December 31, 2018 and 2017 and consolidated statement of financial position as of January 1, 2017, prepared in accordance with IFRS-IASB and included in this Form 20-F.|
- PART I -
|A.||Selected Financial Data|
The historical financial information set forth below as of and for the years ended December 31, 2018 and 2017 has been selected from, and should be read together with, the Consolidated Financial Statements included herein.
For information concerning the preparation and presentation of the Consolidated Financial Statements, see “Presentation of Financial Information”. See also “D. Risk Factors—Risks Relating to Argentina”, and “D. Risk Factors—Risks Relating to the Argentine Financial System and to BBVA Francés” below.
|For the year ended December 31,|
|(in thousands of pesos) (1)|
|CONSOLIDATED STATEMENT OF PROFIT OR LOSS|
|Amounts in accordance with IFRS-IASB|
|Interest and other income||56,472,561||35,714,188|
|NET INTEREST INCOME||31,734,333||23,754,863|
|Fee and commission income||12,574,698||10,772,307|
|Fee and commission expense||(5,501,505)||(4,882,374)|
|Gains (losses) on financial assets and liabilities designated at fair value through profit or loss, net||115,843||4,361,298|
|Gains (losses) on derecognition of financial assets not measured at fair value through profit or loss||(136,740)||11,983|
|Exchange differences, net||6,489,026||3,377,178|
|Other operating income||2,106,977||1,943,178|
|Other operating expenses||(7,984,040)||(7,346,168)|
|NET INTEREST INCOME AND OTHER OPERATING INCOME||39,398,592||31,992,265|
|Depreciation and amortization||(1,922,260)||(1,429,362)|
|Impairment of financial assets||(3,834,036)||(2,527,822)|
|Loss on net monetary position||(11,654,234)||(6,159,779)|
|NET OPERATING INCOME||2,449,144||2,243,690|
|Share of profit of equity accounted investees||317,523||338,313|
|PROFIT BEFORE TAX||2,766,667||2,582,003|
|Income tax expense||(4,336,370)||(722,492)|
|(LOSS) PROFIT FOR THE YEAR||(1,569,703)||1,859,511|
|Attributable to owners of the Bank||(1,489,732)||1,903,820|
|Attributable to non-controlling interest||(79,971)||(44,309)|
|(Loss) Profit for the year attributable to owners of the Bank per ordinary share (2)(3)||(2.43)||3.34|
|(Loss) Profit for the year attributable to owners of the Bank per ADS (2)(3)(5)||(7.29)||10.02|
|Declared dividends per ordinary share (2)(3)(4)||3.92877||2.29327|
|Declared dividends per ADS (2)(3)(4)(5)||11.78631||6.87981|
|Net operating income per ordinary share (2)(3)||4.00||3.94|
|Net operating income per ADS (2)(3)(5)||12.00||11.82|
|Average ordinary shares outstanding (000s) (3)||612,660||569,910|
|For the Fiscal Year Ended December 31,|
|(in thousands of pesos) (1)|
|CONSOLIDATED STATEMENT OF FINANCIAL POSITION|
|Amounts in accordance with IFRS|
|Cash, cash balances at central bank and other demand deposits||99,105,461||56,453,684|
|Financial assets at fair value through profit or loss||8,627,543||9,494,547|
|Financial assets at amortized cost||203,541,121||201,776,086|
|Financial assets at fair value through Other Comprehensive Income (“OCI”)||24,563,962||25,220,479|
|Financial liabilities at fair value through profit or loss||2,069,529||339,253|
|Financial liabilities at amortized cost||293,240,299||249,393,674|
|Inflation adjustment to share capital||8,580,581||8,580,581|
|Other comprehensive income||30,378||58,125|
|Equity attributable to owners of the Bank||45,512,029||49,061,871|
|Profitability and Performance|
|Return on average total assets (6)||(0.44)%||0.63%|
|Return on average total equity (7)||(3.15)%||4.37%|
|Total equity as a percentage of total assets||12.60%||15.53%|
|Total liabilities as a multiple of total equity||6.94x||5.44x|
|Allowances for loan losses as a percentage of Financial assets at amortized cost||2.01%||1.37%|
|Non-performing loans as a percentage of gross loans (8)||1.80%||0.65%|
|Allowances for loan losses as a percentage of non-performing loans (8)||120.94%||207.19%|
|(1)||Except net income per ordinary share and net income per ADS data and financial ratios.|
|(2)||Based on the average number of ordinary shares outstanding during the year.|
|(3)||The average number of ordinary shares outstanding during a year was computed as the average number of shares outstanding during the twelve months taking into account the outstanding amounts as of the end of each month.|
|(4)||For the year ended December 31, 2018, the dividends in cash declared at the ordinary and extraordinary shareholders’ meeting on April 24, 2019 were Ps.2,407 million. For the fiscal year ended December 31, 2017, the dividends in cash declared at the ordinary and extraordinary shareholders’ meeting on April 10, 2018 were Ps.970 million. Dividends per ordinary share for each year are calculated taking into account dividends declared in such year and the number of outstanding shares at the end of such year.|
|(5)||Each ADR represents three ordinary shares.|
|(6)||Profit or loss for the year attributable to owners of the Bank as a percentage of average total assets, computed as the average of fiscal-year-beginning and fiscal-year-ending balances.|
|(7)||Profit or loss for the year attributable to owners of the Bank as a percentage of average stockholders’ equity, computed as the average of fiscal-year-beginning and fiscal-year-ending balances.|
|(8)||Non-performing loans include all loans to borrowers classified as Stage 3 in accordance with IFRS 9.|
The table below shows the dividends paid on each ordinary share and the equivalent of those dividends expressed in terms of dividends per American Depositary Share, each representing three ordinary shares (the "ADSs"), in each case adjusted for all stock dividends during the relevant periods. The Central Bank requires that we maintain 20% of our net income in legal reserves.
|December 31, 2018 (2)||3.92877||0.08723||11.78631||0.26170|
|December 31, 2017 (3)||2.13325||0.10433||6.39975||0.31298|
|December 31, 2016 (4)||2.86925||0.18909||8.60775||0.56726|
|(1)||For the fiscal year ended December 31, 2018, the dividends in cash declared at the ordinary and extraordinary shareholders’ meeting on April 24, 2019 were Ps.2,407 million. For the fiscal year ended December 31, 2017, the dividends in cash declared at the ordinary and extraordinary shareholders’ meeting on April 10, 2018 were Ps.970 million. For the fiscal year ended December 31, 2016, the dividends in cash declared at the ordinary and extraordinary shareholders’ meeting on March 30, 2017 were Ps.911 million. During the fiscal years ended December 31, 2018 and 2017 the number of outstanding shares were 612,659,638. During the fiscal year ended December 31, 2016 the number of outstanding shares were 536,877,850. Dividends per ordinary share for each year are calculated taking into account dividends declared in such year and the number of outstanding shares at the end of such year.|
|(2)||Based upon the reference exchange rate quoted by the Central Bank at May 8, 2019.|
|(3)||Based upon the reference exchange rate quoted by the Central Bank at April 26, 2018.|
|(4)||Based upon the reference exchange rate quoted by the Central Bank at April 12, 2017.|
The following tables show the annual high, low, average and period-end exchange rate for US$1.00 for the periods indicated. The exchange rate is calculated by the Central Bank based on the information provided by financial institutions on the exchange rate for trading of U.S. dollars for settled transactions in Argentine pesos and U.S. dollars. Such information must be representative of the prevailing market conditions. After gathering this information, the Central Bank calculates the daily exchange rate using the formula set out in Annex I of Communication “A” 3500.
The Federal Reserve Bank of New York does not report a noon buying rate for pesos.
|2019 (through May 8, 2019)||45.6333||37.0350||40.2641||45.0383|
|May 2019 (through May 8, 2019)||45.0383||44.4233||44.8003||45.0383|
|(2)||The average of monthly average rates during the period.|
The exchange rate on May 8, 2019 was Ps.45.0383 = US$1.00.
Fluctuations in the exchange rate between pesos and dollars affect the dollar equivalent of the peso price of the ordinary shares on the Buenos Aires Stock Exchange (Bolsa de Comercio de Buenos Aires, (“BCBA”), which is now known as the Bolsa y Mercados Argentinos S.A. (“BYMA”)) and as a result, would most likely affect the market price of the ADSs. Fluctuations in exchange rates also affect dividend income measured in dollars. The Bank of New York Mellon, as depositary for the ADSs, is required, subject to the terms of the deposit agreement, to convert pesos to dollars at the prevailing exchange rate at the time of making any dividend payments or other distributions. The following table shows the rate of devaluation of the peso compared with the dollar at year end, the rate of exchange (number of pesos per dollar prevailing in the Argentine foreign exchange market at year end) and the rate of inflation for wholesale price for the fiscal years ended December 31, 2018, 2017 and 2016.
Since the repeal of the Convertibility Law in January 2002, the peso has devalued 4,403.8% compared with the dollar.
|Devaluation Rate (2)||101.38%||18.45%||21.88%|
|Exchange Rate (3)||37.8083||18.7742||15.8502|
|(1)||The inflation rate presented is for the Consumer Price Index published by the Argentine National Statistics and Censuses Institute (“INDEC”) and is calculated over the prior twelve months.|
|(2)||For the twelve-month period then ending according to the Argentine Central Bank.|
|(3)||Pesos per dollar according to the Argentine Central Bank.|
|B.||Capitalization and indebtedness|
|C.||Reasons for the offer and use of proceeds|
Risks Relating to Argentina
We are an Argentine corporation (sociedad anónima), and the vast majority of our operations, properties and customers are located in Argentina. Accordingly, the quality of our assets, our financial condition and our results of operations are significantly affected by macroeconomic and political conditions prevailing in Argentina.
Economic and political instability in Argentina may adversely and materially affect our business, results of operations and financial condition.
The Argentine economy has experienced significant volatility in recent decades, characterized by periods of low or negative growth, high levels of inflation and currency devaluation. As a consequence, our business and operations have been, and could in the future be, affected from time to time to varying degrees by economic and political developments and other material events affecting the Argentine economy, such as inflation, price controls, foreign exchange controls, fluctuations in foreign currency exchange rates and interest rates, governmental policies regarding spending and investment, national, provincial or municipal tax increases and other initiatives increasing government involvement in business activities, and civil unrest and local security concerns.
In 2001 and 2002, the Argentine economy suffered a severe economic and political crisis. Among other consequences, the Argentine Crisis resulted in Argentina defaulting on its foreign debt obligations and introducing emergency measures and numerous changes in economic policies that affected utilities, financial institutions and many other sectors of the economy. Argentina also suffered a significant real devaluation of the peso, which in turn caused numerous Argentine private sector debtors with foreign currency exposure to default on their outstanding debt. Restrictions on deposit withdrawals from the banking system were implemented, as dollar denominated loans and deposits were “pesified” (reclassified as peso denominated) and maturities reprogrammed. In 2002, inflation increased to 40% while GDP fell by almost 11%. Although following that crisis, Argentina substantially increased its real gross domestic product (“GDP”), growing 8.9% in 2005, 8.0% in 2006, 9.0% in 2007 and 4.1% in 2008, in 2009 it was affected by an extended drought, which reduced agricultural production, and the effects of the global economic crisis which led to a contraction of the economy of 5.9% during that year. Real GDP growth was strong in 2010 and 2011, increasing to 10.1% and 6.0%, respectively, but economic performance was erratic in subsequent years and after another recession in 2014, GDP contracted by 2.5%, leading to a GDP level below that of 2011 in constant prices. The economy grew again by 2.7% in 2015, primarily driven by an increase in public expenditures and investment.
The economic and financial environment in Argentina was significantly influenced by the presidential elections held on November 22, 2015, which resulted in Mr. Mauricio Macri being elected President of Argentina. Mr. Macri’s administration (the “Macri Administration”) took office on December 10, 2015 and launched a wide array of measures intended to correct longstanding fiscal and monetary policies that had resulted in recurrent public sector deficits, high inflation, pervasive foreign exchange controls and limited foreign investment. In 2016, the elimination of foreign exchange restrictions and rebalancing of utility rates led to an increase in inflation to 41% year-on-year according to the City of Buenos Aires index at year end and a considerable decline in consumption. As a result, GDP fell by 1.8% in 2016. Once the main imbalances were eliminated, the economy picked up again in 2017, with GDP growing 2.9% and inflation slowing to 24.8% year-on-year, though higher than the goal defined by the Central Bank. The Macri Administration’s Cambiemos political party triumphed in the midterm elections of 2017, obtaining the necessary support to implement certain gradual tax and pension reforms, as well as a fiscal agreement with the provinces aimed at normalizing the finances of the provincial administrations.
The gradualist approach implemented by the Macri administration in order to reduce the substantial fiscal and current account deficits and correct the legacy of macroeconomic imbalances came to an abrupt end in the second quarter of 2018 due to a combination of internal shocks (primarily a severe drought), a deterioration of global financial environment (including an increase in U.S. interest rates and the U.S.-China trade war) and policy errors (including a change to BCRA inflation targets and a tax on financial revenues), that led to significant capital outflows from Argentina and the closing of global credit markets for Argentine issuers. From April 30 to July 31, 2018, the Argentine peso (Central Bank reference foreign exchange rate) depreciated 32.1% despite frequent interventions in the foreign exchange market. Even after a strong tightening of monetary policy and International Monetary Fund (“IMF”) support in the form of a high level access stand-by arrangement of US$50 billion signed in mid-June 2018, tensions in the foreign exchange market resurfaced in August, and the peso lost 38.8% of its value during the month in a strong sell off of local assets. Between April and September 2018 there was a loss of international reserves of almost US$14 billion due to sales of U.S. dollars by the Central Bank in the foreign exchange market.
Finally, in early October 2018 a new program was implemented which included a frontloading to 2019 of the IMF disbursements projected to take place in 2020-2021 under a revised agreement which required further fiscal tightening in 2019, including reaching a primary deficit target of 0% of GDP, strengthening Central Bank reserves with further support from official creditors and the continuation of orthodox monetary and fiscal policies. The program with the IMF helps ensure that 2019 financial needs can be met with limited roll-over, while the success of the program should create conditions for market access in 2020, although risks to debt sustainability remain.
The new monetary and exchange rate scheme, which aims to control foreign exchange volatility by absorbing all surplus liquidity in pesos, targets holding the nominal monetary base constant until June 2019 and sets up broad bands within which the foreign exchange can float, was successful in stabilizing the currency in October. The peso appreciated 5% between September 30, 2018 and February 28, 2019 (Ps.39.00/US$ to Ps.40.89/US$) and Leliq Central Bank Bills interest rates have fallen by more than 2,900 basis points from the peak.
Inflation accelerated during the first quarter of 2019, increasing 54.7% during the 12 months ended March 31, 2019 compared to inflation of 47.6% during the 12 months ended December 31, 2018. Prices were negatively affected by the devaluation of the peso during 2018 and adjustments to public utility rates, despite the restrictive monetary policy of the Central Bank during such period. The EMAE index (a monthly estimator of economic activity) signaled that economic activity continued to decline in the beginning of 2019 but to a lesse extent than at the end of 2018. Based on the performance of such index, a slow recovery is expected in 2019.
Although the revised IMF program has had a positive effect by stabilizing financial variables and reducing inflation, risks to the ongoing correction of imbalances remain both on the domestic and external fronts. Sustainable economic growth and improved employment in the medium term will depend upon the manner in which the remaining structural imbalances are addressed and may develop adversely if these policy issues are not addressed adequately or successfully.
The Argentine economy has experienced significant volatility, characterized by periods of low or negative growth, high levels of inflation and currency devaluation. Inflation, any decline in GDP and/or other future economic, social and political developments in Argentina, over which we have no control, have in the past, and may in the future, adversely affect our business, results of operations and financial condition.
The Macri Administration has implemented significant changes in economic policy, but the ability to successfully implement structural reforms may be limited by the decrease in its approval ratings and its lack of support in Congress. The continuation of current economic policies may depend on the result of the 2019 presidential elections.
The Macri Administration assumed office on December 10, 2015 and immediately implemented several significant economic and policy reforms such as lifting foreign exchange restrictions, restoring the credibility of the Argentine National Statistics and Censuses Institute (the “INDEC”), reducing foreign trade controls and settling claims from hold-outs of the 2005 debt swaps which allowed Argentina to emerge from default and again access international credit markets.
A tax reform approved by Congress in late 2017 provided for a gradual reduction in payroll taxes, corporate income tax benefits for investment projects and other taxes such as provincial gross sales taxes and a tax on banking transactions. Export duties on most products were eliminated in 2016, and the tax rates on exports of soybean products were lowered considerably. However, a new tax on all exports of goods and services was introduced on October 5, 2018 in order to achieve the zero primary deficit target in 2019, in spite of its negative impact on the competitiveness of Argentine exports. Although this measure implies a set-back in terms of Macri Administration campaign promises of reducing tax pressures and improving productivity, nonetheless the administration managed to deal with the currency crisis of 2018 while avoiding capital controls and restrictions in the financial system, and reinforcing the commitment to a pro-business environment. This is particularly relevant in the case of Argentina where currency crises have in the past led to restrictions on the withdrawal of deposits or access to foreign currency.
The ability of the Macri Administration to implement legislative measures will require obtaining support from opposition parties, which have opposed Macri Administration initiatives in the past. After the 2017 congressional elections, Cambiemos, Mr. Macri’s political party, increased its representation in both chambers of Congress but still lacks an absolute majority in either. As such, it will need to continue negotiating with opposition parties in order to pass laws in Congress. In October 2019, presidential and congressional elections will be held. As such, making and passing structural reform legislation is expected to be difficult during the election cycle, although the 2019 budget bill required to implement the fiscal adjustment has already been approved by Congress. If the Macri Administration’s agenda cannot be successfully implemented, including as a result of a lack of political support from opposition parties in Congress, the result may weaken confidence in the Argentine economy and adversely affect its financial condition, which could in turn have a material adverse effect on our business, results of operations and financial condition.
Additionally, the approval ratings of the Macri administration began to fall in December 2017 with the reform to the pension adjustment plan and the relaxation of monetary policy which lead to the weakening of the peso. The strong deterioration in economic conditions in 2018 led to further falls in approval ratings and lowered the possibility of a Macri re-election in 2019. If a populist candidate were to be elected in October 2019, it is likely that part of the economic policies and the reforms implemented by the Macri administration could be reversed and less market friendly policies could be put in place with an adverse effect on Argentina’s economy and financial condition, which could in turn have a material adverse effect on our business, results of operations and financial condition.
High inflation rates could negatively affect the Argentine economy in general, including access to the long-term financing market.
Historically, inflation has materially undermined the Argentine economy and the government’s ability to create conditions that permit growth. In recent years, Argentina has experienced high inflation rates which rose from 26.9% year-on-year in 2015 to 45.5% year-on-year in 2018 according to the City of Buenos Aires index.
High inflation rates have led to the loss of competiveness of Argentine exports in international markets and to a decline in private consumption, causing a negative effect on economic activity and employment. Moreover, high inflation rates have in the past and could in the future undermine confidence in the Argentine financial sector, in particular with respect to the peso deposit base, reducing the demand for pesos and leading to a portfolio dollarization, which would in turn cause a decrease in the deposit base. This would negatively affect the business volume of banks, including BBVA Francés.
From 2007 to mid-2016, the CPI data for the Greater Buenos Aires area (the “CPI-GBA”) and for other Argentine regions/provinces published by the INDEC was not consistent with the CPI data published by private institutions. These inconsistencies created uncertainty regarding the Republic's actual inflation rate and made it difficult to anchor inflation expectations.
In 2017, the INDEC began publishing a national CPI index for the purpose of calculating CER adjustments going forward. This new national CPI extended the methodology of the previous CPI-GBA, which had covered only the City of Buenos Aires and Greater Buenos Aires, utilizing December 2016 as its base of 100. In early 2016, the government’s adjustments to electricity and gas tariffs, as well as the increase in the price of gasoline impacted prices, created additional inflationary pressure which resulted in an acceleration of inflation in 2016. Further increases in energy tariffs and other regulated prices led to an inflation rate of 24.8% year-on-year in 2017, missing the Central Bank inflation targets of 12-17% by a wide margin. These targets were changed at the end of 2017 to 15% for 2018, 10% for 2019 and 5% as a long-run target to be reached by 2020, one year later than previously targeted. However, once again, these targets were widely missed in 2018 mainly due to the 50.3% depreciation of the peso which was partly passed through to domestic prices in spite of extremely tight monetary policies. Inflation, which had risen to 2.5% per month in the first half of 2018 due to increases in regulated prices, reached a maximum of 6.5% month-on-month in September 2018 and fell gradually in subsequent months to reach 47.6% year-on-year in December 2018.
Inflation remains a significant challenge for Argentina given its persistent nature in recent years. The revised agreement with the IMF targets a 2.4% of GDP reduction in the primary deficit in 2019 and the complete elimination of Central Bank financing to the Argentine Treasury by the end of 2018.
Failure to comply with the fiscal targets agreed with the IMF could negatively affect the Argentine economy and its access to international financial markets.
Starting in 2005, public expenditures began to increase faster than public revenues and the primary fiscal balance of the national public non-financial sector went from a surplus of 3.2% of GDP in 2004 to a deficit of 3.8% of GDP in 2015. In 2016, the primary deficit was Ps.343.5 billion, which represented an increase of 52.9% compared with the previous year, because the reduction of export duties and the income tax reform negatively impacted revenue growth while the reduction in subsidies to the energy and transport sectors was slower than expected. In 2017, fiscal tightening proceeded at a stronger pace and the Macri Administration met the primary fiscal deficit target of 4.2% of GDP by lowering the deficit to 3.8% of GDP.
However, due to the loss of credibility and access to capital markets, in the midst of the 2018 currency crisis, the Macri Administration was forced to target a faster reduction in the primary fiscal deficit. The national Treasury outperformed the revised primary deficit target of 2.6% of GDP in 2018 by posting a deficit of 2.4% of GDP. The target for 2019 is a more ambitious zero primary deficit. Most of the fiscal adjustments are intended to come from an increase in export duties and the elimination of subsidies to the energy and transport sectors, a reduction in capital spending and efficiency gains in primary spending. However, there can be no assurance that such measures will be successful or sufficient to reduce the fiscal deficit in the medium term. The government is strongly committed to meeting the spending cuts, but a slower than expected economic recovery and weaker tax collections could prevent the Treasury from reducing the deficit to the required amount, jeopardizing access to IMF disbursements during 2019.
Any deterioration of the government’s fiscal position, however, would negatively affect its ability to access the debt markets in the future and could in turn result in more limited access to such markets by Argentine companies, including BBVA Francés.
In 2016 the government started issuing debt in the local Argentine market again after a number of years without any such issuance. Argentine private banks, such as BBVA Francés, often purchase such issuances. The Macri Administration has announced that in 2020 when the IMF program matures it will once again seek to issue net debt in the local Argentine market, and this could lead to increased exposure of private banks, such as BBVA Francés, to the public sector.
It is uncertain whether the Macri Administration will succeed in implementing its strategy to reduce the fiscal deficit and public expenditures in the future, particularly in light of the fact that any measures subject to congressional approval will require support from the opposition. Failure to implement these policies, or if they prove ineffective, could result in higher deficits, negatively impact consumers’ purchasing power and lead to overall higher prices. A weaker fiscal position could have a material adverse effect on the government’s ability to obtain long-term financing and adversely affect economic conditions in Argentina, which could adversely affect our business, results of operations and financial condition.
The Argentine economy is vulnerable to external events that could be caused by significant economic difficulties of Argentina’s major regional trading partners, particularly Brazil, or by more general “contagion” effects, including those precipitated by the economic policy of the current government of the United States and the United Kingdom’s impending departure from the European Union. Such external events and “contagion” effects could have a material adverse effect on Argentina’s economic growth and its ability to service its public debt, and, as a result, on our business.
Weak, flat or negative economic growth of any of Argentina’s major trading partners, such as Brazil, could adversely affect Argentina’s balance of payments and, consequently, Argentina’s economic growth.
In 2015 and 2016, the economy of Brazil, Argentina’s largest export market and the principal source of imports, experienced heightened negative pressure due to the uncertainties stemming from its political crisis, including the removal of Ms. Dilma Rousseff as President from office. Although the Brazilian economy began to recover in 2017 as GDP grew 1%, inflation fell to 2.9% year-on-year and the Brazilian Real appreciated 1.5% year-on-year in December 2017. In 2018, the Brazilian Real depreciated 17.2% in the context of uncertainty regarding presidential elections but inflation only rose to 3.7% and GDP increased by 1.1% .Any deterioration of economic conditions in Brazil may reduce demand for Argentine exports and increase demand in Argentina for Brazilian imports. Political instability has decreased after the 2018 elections when Jair Bolsonaro was elected president, but fiscal and social security reforms required to ensure debt sustainability could face opposition in the Brazilian congress and lead to uncertainty regarding fiscal solvency in Brazil. Any deterioration of economic conditions in Brazil may reduce demand for Argentine exports and increase demand in Argentina for Brazilian imports. It is possible that Brazilian political instability could have a further negative impact on the Argentine economy.
The Argentine economy may also be affected by “contagion” effects. International investors’ reactions to events occurring in one developing country sometimes appear to follow a “contagion” pattern, in which an entire region or investment class is disfavored by international investors. In the past, the Argentine economy has been adversely affected by such contagion effects on a number of occasions, including the 1994 Mexican financial crisis, the 1997 Asian financial crisis, the 1998 Russian financial crisis, the 1999 devaluation of the Brazilian Real, the 2001 collapse of Turkey’s fixed exchange rate regime, the global financial crisis that began in 2008 and the strong depreciation of the Turkish Lira in 2018.
The Argentine economy may also be affected by conditions in developed economies, such as the United States, that are significant trading partners of Argentina or have influence over world economic cycles. A more protectionist trade policy from the new government of the United States could affect world trade with negative repercussions for Argentina. If interest rates increase abruptly in developed economies, including the United States and Europe, or if global financial conditions become tighter due to higher risk aversion due to trade and geopolitical tensions, as occurred in 2018, Argentina and its developing economy trading partners, such as Brazil, could find it more difficult and expensive to borrow capital and refinance existing debt, which could adversely affect economic growth in those countries. The scheduled withdrawal of the United Kingdom from the European Union (often referred to as “Brexit”) and uncertainty regarding such process may adversely affect business activity and economic and market conditions in the United Kingdom, the Eurozone and globally, and could contribute to instability in global financial and foreign exchange markets. In addition, Brexit could lead to additional political, legal and economic instability in the European Union.
Any of these factors could adversely affect economic conditions in Argentina which would in turn adversely affect our business, results of operations and financial conditions.
A decline in international prices for Argentina’s principal commodity exports could have a material adverse effect on Argentina’s economy and public finances, and, as a result, on our business.
Historically, the commodities market has been characterized by high volatility. Despite the volatility of prices of most of Argentina’s commodities exports, commodities have significantly contributed to the government’s revenues during the 2000s due to the imposition of export duties on agricultural products in 2002. Although most duties were eliminated and the export tax on soy was reduced from 35% to 30% by the Macri Administration in 2016, and was further reduced in 2018 by 0.5% per month, the Argentine economy is still relatively dependent on the price of its main agricultural exports, primarily soy. This dependence, in turn, renders the Argentine economy vulnerable to commodity prices fluctuations. International soybean prices decreased slightly during 2017 and further in 2018 due to growing trade tensions between the United States and China. Declines in commodity prices may adversely affect the Argentine economy, and the government’s fiscal revenues, which could in turn adversely affect our business, results of operations and financial condition.
Exchange controls and restrictions on capital inflows and outflows could have a material adverse effect on Argentine public sector activity, and, as a result, our business.
In 2001 and 2002, following a run on the financial sector triggered by the public's lack of confidence in the continuity of the convertibility regime that resulted in massive capital outflows, the government introduced exchange controls and restrictions on the transfer of foreign currency in an attempt to prevent capital flight and a further depreciation of the peso. These exchange controls substantially limited the ability of issuers of debt securities, among others, to accumulate or maintain foreign currency in Argentina or make payments abroad.
Although several of such exchange controls and transfer restrictions were subsequently suspended or terminated, in June 2005 the government issued a decree that established new controls on capital flows, which resulted in a decrease in the availability of international credit for Argentine companies.
In addition, from 2011 until the Macri Administration took office in December 2015, the government increased controls on the sale of foreign currency and the acquisition of foreign assets by local residents, limiting the possibility of transferring funds abroad. Together with regulations established in 2012 that subjected certain foreign exchange transactions to prior approval by Argentine tax authorities or the Central Bank, these measures significantly curtailed access to the foreign exchange market. In response, an unofficial U.S. dollar trading market developed in which the peso-U.S. dollar exchange rate differed substantially from the official peso-U.S. dollar exchange rate.
The Macri Administration has substantially eliminated all foreign exchange restrictions that developed under the previous administration. See “—Fluctuations in the value of the peso could adversely affect the Argentine economy and the Republic’s ability to service its debt obligations.” below. Notwithstanding the measures adopted by the Macri Administration in 2015-2016 and the fact that during the 2018 significant decline in the value of the peso the government avoided instrumenting any kind of restrictions on purchases of hard currency or capital controls, if in the future the Central Bank and/or the government re-introduces exchange controls and impose restrictions on transfers abroad, such measures may negatively affect Argentina’s international competitiveness, discourage foreign investments and increase foreign capital outflows, which could have an adverse effect on economic activity in Argentina.
Any of these factors could have a material adverse effect on our business, results of operations and financial condition.
The Macri Administration has begun to implement significant measures to solve the current energy sector crisis, but the eventual outcome of such measures is unknown.
Economic policies since the Argentine Crisis have had an adverse effect on Argentina’s energy sector. The failure to reverse the freeze on electricity and natural gas tariffs imposed during the Argentine Crisis created a disincentive for investments in the energy sector. Instead, the government sought to encourage investment by subsidizing energy consumption. The policy proved ineffective and operated to further discourage investment in the energy sector and caused production of oil and gas and electricity generation, transmission and distribution to stagnate while consumption continued to rise. To address energy shortages starting in 2011, the government attempted to increase imports of energy, with adverse implications for the trade balance and the international reserves.
In response to the growing energy crisis, the Macri Administration declared a state of emergency with respect to the national electricity system, which was in effect until December 31, 2017. The state of emergency allowed the government to take actions designed to stabilize the supply of electricity to the country, such as instructing the Ministerio de Energía y Minería de la Nación (Ministry of Energy and Mining) to design and implement, with the cooperation of all federal public entities, a coordinated program to guarantee the quality and security of the electricity system. In addition, the Macri Administration announced the elimination of certain energy subsidies and significant adjustments to electricity rates to reflect generation costs.
Additionally, the Macri Administration announced the elimination of a portion of subsidies to natural gas and adjustment to natural gas rates. As a result, average electricity and gas prices increased gradually and energy subsidies fell from Ps.209.2 billion in 2016 to Ps.125.6 billion (a decline of 39.9% year-on-year) during 2017 according to the Ministry of Economy. However, certain of the government’s initiatives relating to the energy and gas sectors were challenged in the Argentine courts and resulted in judicial injunctions or rulings against the government’s policies, which were later lifted as the legal objections were overcome. In 2018, energy rates for residential consumers were raised again, and the sharp devaluation of the Argentine peso led to an increase in energy costs in pesos and a 41.6% year-on-year increase in energy subsidies to Ps.177.9 billion
The Macri Administration has taken steps and announced measures to address the energy sector crisis while taking into consideration the implications of these price increases for the poorest segments of society by approving subsidized tariffs for qualifying users. Failing to address the negative effects on energy generation, transportation and distribution in Argentina with respect to both the residential and industrial supply, resulting in part from the pricing policies of the prior administrations, could weaken confidence in and adversely affect the Argentine economy and the Republic’s ability to service its debt.
Any failure by the Macri Administration to solve the current energy crisis could have a material adverse effect on Argentine economy, which could in turn have a material adverse effect on our business, results of operations and financial condition.
Any failure to adequately address actual and perceived risks of institutional deterioration and corruption may adversely affect Argentina’s economy and financial condition.
The lack of a solid institutional framework and corruption have been identified as, and continue to be, a significant problem for Argentina. In Transparency International’s 2018 Corruption Perceptions Index survey of 180 countries, Argentina ranked #85. In the World Bank’s Doing Business 2019 report, Argentina ranked #119 out of 190 countries, down from #117 in 2018.
Recognizing that the failure to address these issues could increase the risk of political instability, distort decision-making processes and adversely affect Argentina’s international reputation and ability to attract foreign investment, the Macri Administration has announced several measures aimed at strengthening Argentina’s institutions and reducing corruption. These measures include reducing criminal sentences in exchange for cooperation with the government in corruption investigations, increasing access to public information, seizing assets from corrupt officials, increasing the powers of the Anticorruption Office (Oficina Anticorrupción) and the passing of a new public ethics law, among others. The government’s ability to implement these initiatives is uncertain as it requires the involvement of the judicial branch, which is independent, as well as legislative support from opposition parties. In 2018, an in-depth investigation into a corruption scandal linked to a public works graft scheme implemented by the prior administration was investigated and led to the arrest of several prominent individuals. Public perception of the independence of the judicial system has been strengthened by these actions, but no assurances can be given that the implementation of these measures will be successful.
Any failure by the Macri Administration to adequately address actual and perceived risks of institutional deterioration and corruption may adversely affect Argentina’s economy and financial condition, which could in turn have a material adverse effect on our business, results of operations and financial condition.
Fluctuations in the value of the peso could adversely affect the Argentine economy and the Republic’s ability to service its debt obligations.
Fluctuations in the value of the peso may adversely affect the Argentine economy. A devaluation of the peso may adversely affect the government’s revenues (measured in U.S. dollars), fuel inflation and significantly reduce real wages. After several years of moderate variations in the nominal exchange rate, the peso lost 35.3% of its value in 2014 and 33.7% in 2015. Persistent high inflation during this period, with formal and “de facto” exchange controls, resulted in an increasingly overvalued real official exchange rate. Compounded by the effects of foreign exchange controls and restrictions on foreign trade, these highly distorted relative prices resulted in a loss of competitiveness of Argentine production, impeded investment and resulted in economic stagnation during this period.
After the foreign exchange controls were lifted at the end of 2015, the peso depreciated by 38.5% in 2016 considering the average foreign exchange rate in December of 2016 compared with the average foreign exchange rate in December of 2015. In 2017, the depreciation of the peso fell to 11.8%, well below inflation, raising doubts about potential appreciation of the peso in real terms once again. In this scenario, the vulnerability of the Argentine economy to a tightening of international financial conditions was reflected in a current account deficit of 4.9% of GDP in 2017 and a low level of international reserves compared to other countries in the region. When ten-year U.S. treasury rates began to rise and the U.S. dollar strengthened, these vulnerabilities resulted in a negative differentiation of Argentina compared with other emerging countries, which led to a prolonged run on the currency despite frequent interventions by the Central Bank and a sizeable loan from the IMF signed in June 2018. Finally, after another sell-off of Argentine assets in August 2018 and a strong depreciation, in early October 2018 a revised program with the IMF which further tightened fiscal and monetary policy managed to stabilize the foreign exchange market and the peso appreciated by 7.5% in the last quarter of 2018. Considering the full year, the peso depreciated by 50.3% in nominal terms in 2018. Together with the decline in economic activity, the real depreciation of the peso resulted in a strong reduction in imports and a correction of the external deficit in the fourth quarter of 2018.
According to the revised IMF agreement, the Argentine peso floats freely within an accepted band of exchange rates, but the Central Bank may intervene to a limited extent in the foreign exchange market selling reserves if the exchange rate rises above a certain level, defined initially at Ps.44/US$ (and subsequently adjusted by inflation) which is the upper threshold of the accepted band in which the peso floats freely without intervention of the Central Bank. Conversely the Central Bank can purchase reserves if the foreign exchange rate falls below the lower threshold of the non-intervention band.
In early 2019, the peso crossed the lower threshold, prompting purchases by the Central Bank and a strong decline in interest rates pursuant to the monetary program. As inflation has remained high, a stronger nominal appreciation of the peso could lead to renewed doubts regarding the appreciation of the peso against the U.S. dollar in real terms. This presents risks for the Argentine economy, including the possibility of a reduction in exports as a consequence of the loss of external competitiveness and deterioration of the current account deficit. Any such appreciation could also have a negative effect on economic growth and employment, reduce tax revenues in real terms and also raise fears regarding the impact of a sudden stop in capital flows.
In addition, political uncertainty or changes in liquidity in international markets could lead to additional volatility and depreciation of the peso or a reduction of the Central Bank’s reserves as a result of currency intervention and could adversely affect inflation expectations and the Argentine economy and the Republic’s ability to service its debt obligations.
Any of these factors could have a material adverse effect on our business, results of operations and financial condition.
There can be no assurances that the Republic will be able to obtain financing on satisfactory terms in the future, which could have a material adverse effect on the Republic’s ability to make payments on its outstanding public debt.
The Republic’s future tax revenue and fiscal results may be insufficient to meet its debt service obligations and the Republic may have to rely in part on additional financing from domestic and international capital markets in order to meet future debt service obligations. However, the Republic may not be able to access international or domestic capital markets at acceptable prices or at all, and, if that is the case, the Republic’s ability to service its outstanding public debt could be adversely affected, which could in turn adversely affect Argentina’s economy and financial condition and thereby have a material adverse effect on our business, results of operations and financial condition.
Risks Relating to the Argentine Financial System and to BBVA Francés
The short-term structure of the deposit base of the Argentine financial system, including the deposit base of the Bank, could lead to a reduction in liquidity levels and limit the long-term expansion of financial intermediation.
In recent years, growth of the Argentine financial sector has been heavily dependent on deposit levels because of the relatively small size of the Argentine capital markets and the lack of access to foreign capital markets. After the Macri Administration took office, access to foreign capital markets was again possible, supporting credit growth in addition to the deposit base, but during 2018 international and local markets were closed for most of the year for Argentine companies due to growing risk aversion toward emerging markets generally, and to Argentina in particular, after the foreign exchange crisis that began in May. There can be no assurance regarding when access to foreign credit markets may resume and, if resumed, access may be disrupted again in the future.
From 2016, the implementation of the tax amnesty regime and restored investor confidence resulted in a significant growth of U.S. dollar deposits. That process came to a halt in the first half of 2018 during the currency crisis due to fears that these deposits might be immobilized by the government and financial institutions indeed suffered a slight withdrawal of these kind of deposits in September 2018. Dollar-denominated deposits have begun to grow again after the new IMF program was implemented in early October 2018, but 2019 is an election year in Argentina, and U.S. deposits may again be subject to volatility. Although banks, including BBVA Francés, generally maintain high levels of liquidity in U.S. dollars, among them Central Bank reserve requirements that represent almost a quarter of total U.S. deposits, if we experience significant withdrawals by depositors it could have a material adverse effect on our business, results of operations and financial condition.
The local currency deposit base is mostly short-term and transactional. Deposits represent a small fraction of GDP when compared with other emerging countries. During the first part of the year, foreign exchange volatility reduced the pace of growth of peso deposits, reflecting negative growth in real terms.
The liquidity in local currency of the Argentine financial sector is currently relatively high, in part due to the level of minimum cash requirements applicable to Argentine financial institutions, which the Central Bank raised several times during 2018, and in part due to a slowing demand for loans after interest rates were raised sharply in 2018. For BBVA Francés, these liquid assets account for 55.3% of our total deposits as of December 31, 2018.
Notwithstanding the above, because most deposits are short-term deposits, a substantial part of loans must also have short-term maturities to match the terms of the deposits. The proportion of long-term credit lines, such as mortgages, is small, although at December 31, 2018 it was higher than one year prior due to the success of UVA (inflation adjusted) loans. At the beginning of 2018 there was also an incipient local and international debt market to issue long term bonds, including fixed rate, floating rate and UVA. Origination of both long-term loans and liabilities was severely affected during the second half of the year as a consequence of the peso devaluation, the increase in interest rates and generally worsened economic conditions.
We have a continuous demand for liquidity to fund our business activities. Our profitability or solvency could be adversely affected if access to liquidity and funding is constrained or made more expensive for a prolonged period of time. Furthermore, withdrawals of deposits or other sources of liquidity may make it more difficult or costly for us to fund our business on favorable terms. Although we believe that deposit liquidity levels are currently reasonable, no assurance can be given that those levels will not be reduced due to future negative economic conditions or otherwise. If depositors lose confidence as a result of negative economic conditions or otherwise and withdraw significant funds from financial institutions, there will be a substantial negative impact on the manner in which financial institutions, including us, conduct their business and on their and our ability to operate as financial intermediaries. If we are unable to access adequate sources of medium and long-term funding or if we are required to pay high costs in order to obtain the same and/or if we cannot generate profits and/or maintain our current volume and/or scale of our business, whether due to a decline in deposits or otherwise, our liquidity position and ability to honor our debts as they come due may be adversely affected, which could have a material adverse effect on our business, results of operations and financial condition.
Significant growth of peso cash (banknotes) positions in the Bank could have an adverse impact on our results of operations.
The Central Bank has made it a key policy to try to minimize the use of physical bills (banknotes) in the economy as a way to reduce informal activity and improve efficiency. This policy involves numerous sectors of the Argentine economy, including banks, and is likely to require significant time to realize significant changes. Since 2012, the Argentine Central Bank’s charter states that peso cash balances in physical bills (banknotes) cannot be used by financial institutions to comply with statutory reserve requirements. As a result, the Bank has sought to minimize its peso cash balances in physical bills (banknotes), as they yield no income. Since the second half of 2016, the Central Bank began refusing to receive physical bills from financial institutions in order to further decrease their use in the Argentine economy. As a consequence, BBVA Francés’ balance of physical bills increased above normal levels, mainly through the first half of 2017, as a result of our business strategy of collecting a substantial amount of physical bills from large retail corporations as a way to promote business within the retail sector. Collecting bills generates a surplus of bills that the Bank used to deposit in its current account in the Central Bank and then allocated to profitable assets. This policy affected adversely our net income through these periods. Although the Bank took measures to offset this impact, such as raising the fees we charge for the collection service or reducing the net amount of bills we receive from customers every month, and banknotes balances declined to more reasonable levels from the third quarter of 2017 and stayed at those levels for most part of 2018, no assurance can be given that our peso cash balances in physical bills (banknotes) will not arise again in the future. A significant growth of peso cash balances in physical bills (banknotes) positions in the Bank could have an adverse impact on our business, results of operations and financial condition.
Reduced spreads between interest rates received on loans and those paid on deposits could adversely affect our profitability.
The spread between the interest rates on loans and deposits could be affected as a result of increased competition in the banking sector and the government’s tightening or loosening of monetary policy in response to inflation concerns. During recent years, as a consequence of higher inflation, interest rates have significantly increased in Argentina.
After the Macri Administration took office, expectations were of a decline in both inflation and interest rates and therefore banking spreads. However, in 2018 devaluation of the peso and higher inflation led the Central Bank to substantially raise interest rates, ending the margin contraction trend. If the process of declining inflation expectations and rates resume, renewed pressure on banking spreads would be expected. Moreover, a change in the composition of the source of funding, which is currently heavily weighted by non-interest-bearing deposits, could also put downward pressure on margins. A change in the composition of the source of funding could result from lower interest rates, higher demand of credit and therefore a need to increase the amount of time deposits or other types of bearing interest liabilities. Further reduction in spreads could have a material adverse effect on our business, results of operation and financial conditions.
Our business is particularly vulnerable to volatility in interest rates.
Our results of operations are substantially dependent upon the level of our net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Interest rates are highly sensitive to many factors beyond our control, including fiscal and monetary policies of governments and central banks, regulation of the financial sector in the market in which we operate, domestic and international economic and political conditions and other factors.
In the current Argentine scenario where the government is attempting to stabilize high inflation rates, there is a risk of volatility in the interest rates. This scenario could adversely affect our financial margin as a result of differential movements in interest rates for deposits, loans or other bank assets and liabilities. In addition, a high proportion of loans referenced to variable interest rates makes debt service on such loans more vulnerable to changes in interest rates. In addition, high interest rates could reduce the demand for credit and our ability to generate credit for our clients, as well as contribute to an increase in the credit default rate. As a result of these and the above factors, significant changes or volatility in interest rates could have a material adverse effect on our business, results of operations and financial condition.
Mismatch between UVA loans and UVA deposits could adversely affect our profitability.
During 2017, new UVA (inflation-adjusted) mortgages started to grow significantly. At the same time, the Bank launched UVA deposits, but such deposits grew at a slower pace, leading to a mismatch in this activity. During 2018, as a consequence of the peso devaluation, higher inflation and interest rates, growth in both UVA loans and liabilities slowed. If this mismatch continues or increases in the future it could have a material adverse effect on our business, results of operations and financial condition.
Our estimates and established reserves for credit risk and potential credit losses may prove to be inaccurate and/or insufficient, which may materially and adversely affect our results of operations and financial condition.
A number of our products expose us to credit risk, including consumer loans, commercial loans and other receivables. Changes in the income levels of our borrowers, increases in the inflation rate or an increase in interest rates could have a negative effect on the quality of our loan portfolio, causing us to increase provisions for loan losses and resulting in reduced profits or in losses. We estimate and establish reserves for credit risk and potential credit losses. This process involves subjective and complex judgments, including projections of economic conditions and assumptions on the ability of our borrowers to repay their loans. We may not be able to timely detect these risks before they occur, which may increase our exposure to credit risk. Overall, if we are unable to effectively control the level of non-performing or poor credit quality loans in the future, or if our loan loss reserves are insufficient to cover future loan losses, this could have a material adverse effect on our business, results of operations and financial condition.
Increased competition in the banking industry may adversely affect the Bank’s operations.
The markets in which we operate are highly competitive and this trend will likely continue with new business models likely to be developed in coming years whose impact is unforeseeable. The markets in which we operate are highly competitive and this trend will likely continue. In particular, we expect that competition with respect to small- and medium-sized businesses is likely to increase. As a result, even if the demand for financial products and services from these markets continues to grow, competition may adversely affect our results of operations by decreasing the net margins we are able to generate. In addition, the trend towards consolidation in the Argentine banking industry has created larger and stronger banks with which we must now compete.
We also face competition from non-bank competitors, such as payment platforms, e-commerce businesses, department stores (for some credit products), automotive finance corporations, leasing companies, factoring companies, investment funds, pension funds, insurance companies, and public debt. In recent years, the financial services sector has experienced a significant transformation, closely linked to the development of the internet and mobile technologies. Part of that transformation involves the entrance of new players, such as non-bank digital providers that compete (and cooperate) between them and with banks in most of the areas of financial services as well as large digital players such as Google, Facebook or Apple, who have also started to offer financial services (mainly, payments and credit) ancillary to their core business. However, as of the date of this annual report, there is an uneven playing field between banks and such non-bank players. For example, banking groups are subject to prudential regulations that have implications for most of their businesses, including those in which they compete with non-bank players that are only subject to activity-specific regulations or benefit from regulatory uncertainty. Existing loopholes in the regulatory framework are another source of uneven playing fields between banks and non-bank players. Some new services or business models are not yet covered under existing regulations. In these cases, asymmetries between players arise since regulated providers often face obstacles to engage in unregulated activities.
Our future success may depend, in part, on our ability to use technology to provide products and services that provide convenience to customers. Despite the technological capabilities that we have been developing and our commitment to digitalization, as a result of the uneven playing field referred to above or for other reasons, we may not be able to effectively implement new technology-driven products and services or be successful in marketing or delivering these products and services to our customers, which would adversely affect our business, financial condition and results of operations.
In addition, companies offering new applications and financial-related services based on artificial intelligence are becoming more competitive. The often lower cost and higher processing speed of these new applications and services can be especially attractive to technologically-adept purchasers. As technology continues to evolve, more tasks currently performed by people may be replaced by automation, machine learning and other advances outside of our control. If we are not able to successfully keep pace with these technological advances, our business may be adversely affected.
We are a subsidiary of BBVA Group, and activities across BBVA Group could adversely affect us.
We are a part of a highly diversified international financial group which offers a wide variety of financial and related products and services including retail banking, asset management, private banking and wholesale banking. The BBVA Group strives to foster a culture in which its employees act with integrity and feel comfortable reporting instances of misconduct. The BBVA Group employees are essential to this culture, and acts of misconduct by any employee, and particularly by senior management, could erode trust and confidence and damage the BBVA Group and the Bank’s reputation among existing and potential clients and other stakeholders. Negative public opinion could result from actual or alleged conduct by the BBVA Group entities in any number of activities or circumstances, including operations, employment-related offenses such as sexual harassment and discrimination, regulatory compliance, the use and protection of data and systems, and the satisfaction of client expectations, and from actions taken by regulators or others in response to such conduct.
For example, BBVA is currently conducting an investigation regarding allegations of improper activity related to its relationship with Grupo Cenyt which may have violated its ethical standards and applicable governance or regulatory obligations. Governmental authorities are also investigating this matter. This matter or any similar matters arising across the BBVA Group could damage our reputation and adversely affect the confidence of our clients, rating agencies, regulators, bondholders and other parties and could have a material adverse effect on our business, results of operations and financial condition.
Our credit ratings depend on Argentine sovereign credit ratings, and such dependence limits our access to international financial markets.
Our credit ratings are based on Argentina’s sovereign rating, which has fluctuated considerably since the Argentine Crisis. As a result, our ratings have also fluctuated in this period, although they have tended to be higher than the sovereign rating. These fluctuations impact our costs of funding, our collateral obligations and our ability to access international markets. Argentina is no longer in default following the final agreement reached with certain of the holders of bonds issued by the Republic (holdouts), and as a result between 2016 and 2017 Argentina’s sovereign ratings were upgraded, but in 2018 that trend was reversed, and the country was either downgraded or had its outlook put under review with negative outlook. A further decrease in Argentina’s sovereign rating could limit our access to financing or make such financing more expensive for us, even if available, which could have a material adverse effect on our business, results of operations and financial condition.
The financial industry is increasingly dependent on information technology systems, which may fail, may not be adequate for the tasks at hand or may no longer be available.
Banks and their activities are increasingly dependent on highly sophisticated information technology (“IT”) systems. IT systems are vulnerable to a number of problems, such as software or hardware malfunctions, computer viruses, hacking and physical damage to vital IT centers. IT systems need regular upgrading and banks, including us, may not be able to implement necessary upgrades on a timely basis or upgrades may fail to function as planned.
Furthermore, we are under continuous threat of loss due to cyber-attacks, especially as we continue to expand customer capabilities to utilize internet and other remote channels to transact business. Two of the most significant cyber-attack risks that we face are e-fraud and breach of sensitive customer data. Loss from e-fraud occurs when cybercriminals breach and extract funds directly from customers’ or our accounts. A breach of sensitive customer data, such as account numbers, could present significant reputational impact and significant legal and/or regulatory costs to us.
Over the past few years, there have been a series of distributed denial of service attacks on financial services companies. Distributed denial of service attacks are designed to saturate the targeted online network with excessive amounts of network traffic, resulting in slow response times, or in some cases, causing the site to be temporarily unavailable. Generally, these attacks have not been conducted to steal financial data, but meant to interrupt or suspend a company’s internet service. While these events may not result in a breach of client data and account information, the attacks can adversely affect the performance of a company’s website and in some instances have prevented customers from accessing a company’s website. Distributed denial of service attacks, hacking and identity theft risks could cause serious reputational harm. Cyber threats are rapidly evolving and we may not be able to anticipate or prevent all such attacks. Our risk and exposure to these matters remains heightened because of the evolving nature and complexity of these threats from cybercriminals and hackers, our plans to continue to provide internet banking and mobile banking channels, and our plans to develop additional remote connectivity solutions to serve our customers. We may incur increasing costs in an effort to minimize these risks and could be held liable for any security breach or loss.
Additionally, fraud risk may increase as we offer more products online or through mobile channels.
In addition to costs that may be incurred as a result of any failure of our IT systems, we could face fines from bank regulators if we fail to comply with applicable banking or reporting regulations as a result of any such IT failure or otherwise. Any of the above risks could have a material adverse effect on our business, results of operations and financial condition.
We face security risks, including denial of service attacks, hacking, social engineering attacks targeting its colleagues and customers, malware intrusion or data corruption attempts, and identity theft that could result in the disclosure of confidential information, adversely affect our business or reputation, and create significant legal and financial exposure.
Our computer systems and network infrastructure and those of third parties, on which we are highly dependent, are subject to security risks and could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Our business relies on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in its computer and data management systems and networks, and in the computer and data management systems and networks of third parties. In addition, to access our network, products and services, our customers and other third parties may use personal mobile devices or computing devices that are outside of our network environment and are subject to their own cybersecurity risks.
We, our customers, regulators and other third parties, including other financial services institutions and companies engaged in data processing, have been subject to, and are likely to continue to be the target of, cyber-attacks. These cyber-attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information, ransomware, improper access by employees or vendors, attacks on personal email of employees, ransom demands to not expose security vulnerabilities in our systems or the systems of third parties or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of us, our employees, our customers or of third parties, damage our systems or otherwise materially disrupt our or our customers’ or other third parties’ network access or business operations. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to ensure the integrity of our systems and implement controls, processes, policies and other protective measures, we may not be able to anticipate all security breaches, nor may we be able to implement guaranteed preventive measures against such security breaches and the measures we implement may not be sufficient. Cyber threats are rapidly evolving and we may not be able to anticipate or prevent all such attacks and could be held liable for any security breach or loss.
Cybersecurity risks for banking organizations have significantly increased in recent years in part because of the proliferation of new technologies, and the use of the internet and telecommunications technologies to conduct financial transactions. For example, cybersecurity risks may increase in the future as we continue to increase our mobile-payment and other internet-based product offerings and expand our internal usage of web-based products and applications. In addition, cybersecurity risks have significantly increased in recent years in part due to the increased sophistication and activities of organized crime affiliates, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists and other external parties, including those involved in corporate espionage. Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks and “spear phishing” attacks are becoming more sophisticated and are extremely difficult to prevent. In such an attack, an attacker will attempt to fraudulently induce colleagues, customers or other users of our systems to disclose sensitive information in order to gain access to its data or that of our clients. Persistent attackers may succeed in penetrating defenses given enough resources, time, and motive. The techniques used by cyber criminals change frequently, may not be recognized until launched and may not be recognized until well after a breach has occurred. The risk of a security breach caused by a cyber-attack at a vendor or by unauthorized vendor access has also increased in recent years. Additionally, the existence of cyber-attacks or security breaches at third-party vendors with access to our data may not be disclosed to it in a timely manner.
We also face indirect technology, cybersecurity and operational risks relating to the customers, clients and other third parties with whom we does business or upon whom we rely to facilitate or enable our business activities, including, for example, financial counterparties, regulators and providers of critical infrastructure such as internet access and electrical power. As a result of increasing consolidation, interdependence and complexity of financial entities and technology systems, a technology failure, cyber-attack or other information or security breach that significantly degrades, deletes or compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including us. This consolidation, interconnectivity and complexity increases the risk of operational failure, on both individual and industry-wide bases, as disparate systems need to be integrated, often on an accelerated basis. Any third-party technology failure, cyber-attack or other information or security breach, termination or constraint could, among other things, adversely affect our ability to effect transactions, service our clients, manage our exposure to risk or expand our business.
Cyber-attacks or other information or security breaches, whether directed at us or at third parties, may result in a material loss or have material consequences. Furthermore, the public perception that a cyber-attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with customers and third parties with whom we do business. Hacking of personal information and identity theft risks, in particular, could cause serious reputational harm. A successful penetration or circumvention of system security could cause us serious negative consequences, including loss of customers and business opportunities, significant business disruption to our operations and business, misappropriation or destruction of our confidential information and/or that of our customers, or damage to our or our customers’ and/or third parties’ computers or systems, and could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and could adversely impact our results of operations, liquidity and financial condition.
An increase in fraud or transaction errors may adversely affect our reputation, results of operations and financial condition.
Due to the large number of transactions that occur in a financial institution such as the Bank, errors can occur and worsen before being detected and corrected. In addition, some of our transactions are not fully automated, which may increase the risk of human error, or manipulation, and it may be difficult to detect losses quickly. If we are unable to effectively and timely detect and remedy fraudulent and erroneous transactions, it could damage our reputation, entail serious costs and affect our transactions, as well as have a material adverse effect on our business, results of operations and financial condition.
Because we are a financial institution, any insolvency proceeding against us would be subject to the powers of, and intervention by, the Central Bank, which may limit remedies otherwise available and extend the duration of the proceedings.
Under Argentine law, the liquidation and commencement of bankruptcy proceedings against financial institutions, until their banking license has been revoked by the Central Bank, may only be commenced by the Central Bank. If BBVA Francés were unable to pay its debts as they come due, the Central Bank could intervene and revoke our banking license, and file a bankruptcy petition before a commercial court. If the Central Bank intervenes, the reorganization proceeding could take longer and it is likely that the shareholders’ remedies would be restricted. During any such process, the Central Bank would have to consider its interests as a regulator and could well prioritize the claims of other creditors and third parties against us. As a result of any such intervention, shareholders may realize substantially less on the claims than they would in a bankruptcy proceeding of a non-financial institution in Argentina or a financial institution or non-financial institution in the United States or any other country.
Lawsuits brought against us outside Argentina, the enforcement of foreign judgments and complaints based on foreign legal concepts may be unsuccessful.
We are a commercial bank organized under the laws of Argentina. Most of our shareholders, directors, members of the supervisory committee and officers and certain experts named herein reside outside the United States (principally in Argentina). Substantially all of our assets are located outside the United States. If any shareholder were to bring a lawsuit against our directors, officers or experts in the United States, it may be difficult for them to effect service of legal process within the United States upon these persons or to enforce in Argentina a judgment against them obtained in the courts of the United States based upon the civil liability provisions of the United States federal securities laws, due to specific requirements of Argentine law regarding procedural law issues and principles of public policy.
Class actions against financial institutions for an indeterminate amount may adversely affect the profitability of the financial sector and of the Bank.
The Argentine national constitution and the Argentine Consumer Protection Law No. 24,240, as supplemented or amended (the “Consumer Protection Law”), contain certain provisions regarding class actions. However, their guidance with respect to procedural rules for instituting and trying class action cases is limited. Nonetheless, Argentine courts have admitted class actions in certain cases, including various lawsuits against financial institutions related to “collective interests” such as alleged overcharging on products, interest rates and advice in the sale of public securities. In recent years, some of these lawsuits have been settled by the parties out of court. These settlements have typically involved an undertaking by the financial institution to adjust its fees and charges. If class action plaintiffs were to prevail in these or other matters against financial institutions generally, or against us specifically, this could have an adverse effect on the financial industry generally and on our business, results of operations and financial condition in particular.
In the future, court and administrative decisions may increase the degree of protection afforded to our debtors and other customers, or be favorable to the claims brought by consumer groups or associations. This could affect the ability of financial institutions, including us, to freely determine charges, fees or expenses for their services and products, thereby affecting our business and results of operations.
BBVA, our controlling shareholder, has the ability to direct our business and its interests could conflict with yours.
As of December 31, 2018, our parent company, BBVA, directly or beneficially owned 66.55% of our capital stock. As a result, BBVA controls virtually all decisions with respect to our company made by shareholders. It may, for example, without the concurrence of the remaining shareholders, elect a majority of our directors, effect or prevent a merger, sale of assets or other business acquisition or disposition, cause us to issue additional equity securities and determine the timing and amounts of dividends, if any, always subject to the applicable legal framework. Its interests may conflict with your interests as a holder of our shares or ADSs, and it may take actions that might be desirable to BBVA but not to our other shareholders.
Our ability to grow our business depends on our ability to manage our relationships with partners and grow our deposit base.
We seek to grow our business by, among other means, increasing our client base. Our strategic partnerships are important components of our client acquisition strategy. We have various strategic partnerships, including those with LATAM Airlines, sponsorship of the soccer club Talleres de Córdoba and credit card programs with River Plate and Boca Junior, as well as insurance companies, such as La Caja, as well as the agreements with the automobile companies Peugeot, Renault and Volkswagen, which we depend on to expand our client reach cost-effectively, further expand our points of presence and enhance our value proposition. Any deterioration in our relationships with our strategic partners could adversely affect our strategy and materially and adversely affect our business, results of operations and financial condition.
In addition, the successful growth of our business depends on our ability to grow our deposit base. Political, economic or legal developments in Argentina or other factors could lead customers to withdraw funds from the Argentine financial system, adversely affecting us. If there are improvements in the Argentine economy, including lower inflation and increased bancarization and lending activity in the Argentine banking sector, we expect this would contribute to the growth of our business and profitability. However, we can provide no assurance regarding the future performance of the Argentine economy or how any improvements will affect us. If the Argentine economy fails to improve, it could have a material adverse effect on our business, results of operations and financial condition.
We may enter into one or more acquisitions which could adversely affect the value of the Bank.
We regularly explore consolidation opportunities in the ordinary course of business and believe there are significant opportunities to expand our footprint in the Argentine banking sector. In the event that we choose to make an acquisition in the future, any such transaction would involve a number of risks and uncertainties, including:
|§||the possibility that we pay more than the value we will derive from any such transaction;|
|§||the possibility that Argentine economic and political conditions will not develop in the manner we expect;|
|§||the possibility that the Argentine financial services market will not develop in the manner we expect;|
|§||a reduction in our cash available for operations and other uses;|
|§||the potential incurrence of indebtedness to finance any such transaction;|
|§||delays in achieving or our failure to achieve successfully achieve the anticipated benefits of any acquisition;|
|§||difficulties in integrating any business acquired, including difficulties in harmonizing the companies’ operating practices, technology platforms, internal controls and other policies, procedures and processes;|
|§||diversion of management time and resources in coordinating a larger or more geographically dispersed organization;|
|§||the quality of the assets of the acquired business may be lower than we anticipate; and|
|§||the assumption of certain liabilities, whether known or unknown.|
Any of the foregoing or other risks and uncertainties related to any acquisition could have a material adverse effect on our business, results of operations and financial condition or the value of the Bank.
We may suffer adverse consequences related to our calculation of income tax for the years ended December 31, 2016 and 2017.
As discussed in our Form 6-K furnished to the SEC on June 30, 2017, on May 12, 2017, we filed a request for declaratory judgment with the Contentious Administrative Federal Court No. 12, Secretariat No. 23, seeking that such court declare unconstitutional certain provisions of Argentine law that prevented us from applying an inflation adjustment mechanism. On May 12, 2017, we filed our income tax return for 2016 giving effect to an adjustment for inflation, and in 2018 we filed our income tax return for 2017 also giving effect to an adjustment for inflation. As of the date of this annual report on Form 20-F, our request for declaratory judgment remains pending before the Contentious Administrative Federal Court No. 12, Secretariat No. 23. We are currently preparing our income tax return for 2018 and our Board of Directors will decide in the coming days whether to give effect to an adjustment for inflation in such income tax return.
At the request of the Central Bank, the Bank recognized an income tax provision of Ps.1,185.8 million in nominal terms for the year ended December 31, 2016 in our statutory consolidated annual financial statements presented to the Central Bank. Subsequently, based on our consideration of the technical merits of the tax deduction, which was confirmed by the Bank’s legal and tax advisors, such provision was eliminated in the preparation of our Consolidated Financial Statements under IFRS-IASB included herein, positively affecting our results of operations for the year ended December 31, 2017. The Bank followed the same methodology in respect of the year ended December 31, 2017, recording a provision of Ps.1,021.5 million in nominal terms in respect of such year in our statutory consolidated annual financial statements, which in turn was eliminated in the preparation of our Consolidated Financial Statements under IFRS-IASB included herein, positively affecting our results of operations for the year ended December 31, 2018.
We cannot predict the outcome of this legal action or whether we will be required to amend our income tax returns for 2016, 2017 or any subsequent year (as applicable) in the future or make any provisions with respect thereto in our financial statements prepared under IFRS-IASB. If we are required to amend our income tax returns for 2016, 2017 or any subsequent year (as applicable), we may be required to pay interest and charges to the Argentine tax authorities, and could be subject to other consequences. We cannot predict the outcome of our request for declaratory judgment pending before the Contentious Administrative Federal Court No. 12, Secretariat No. 23, or whether it would have a material adverse effect on our business, results of operations or financial condition, or the trading prices of our ordinary shares and ADSs.
The Argentine economy qualifies as a hyperinflationary economy under IAS 29. Given that the peso is our functional currency, we apply IAS 29 for periods ending after July 1, 2018, and our Consolidated Financial Statements and other financial information are presented in terms of the measuring unit current at December 31, 2018.
IAS 29 requires that financial statements of any entity whose functional currency is the currency of a hyperinflationary economy, whether based on the historical cost method or on the current cost method, be adjusted in terms of the measuring unit current at the end of the reporting period. IAS 29 does not establish a set inflation rate beyond which an economy is deemed to be experiencing hyperinflation. However, hyperinflation is commonly understood to occur when changes in price levels are close to or exceed 100% on a cumulative basis over the prior three years, when presented together with certain other qualitative macroeconomic factors.
During the six-month period ended June 30, 2018, the decreasing trend of inflation in Argentina noted in recent prior periods reversed, with variations in different indexes being higher than in previous months. The total cumulative inflation in Argentina in the 36 months prior to June 30, 2018, as measured by both consumer and wholesale price indexes published by INDEC, exceeded 100%. Qualitative macroeconomic factors, including the depreciation of the peso in recent months, also support the conclusion that Argentina is now a hyperinflationary economy for accounting purposes. Accordingly, IAS 29 is applicable to any information as from July 1, 2018 included in any of our filings with the SEC under the Securities Act of 1933, as amended, or the Exchange Act of 1934, as amended (the “Exchange Act”). Argentine accounting standards authorities have reached a consensus that the “general price index” for IAS 29 purposes is determined considering the wholesale price index (WPI) up to December 2016 and the consumer price index (CPI) onwards. These indexes have been determined or referred to the National Institute of Statistics and Census (INDEC). Therefore, our Consolidated Financial Statements included in this annual report are adjusted by applying the relevant indexes and presented in terms of the measuring unit current at December 31, 2018.
In December 2018, the Congress approved Law No. 27,468, which included the possibility of adjusting for inflation. Likewise, Law No. 27,468 delegated to the Central Bank, in the case of financial entities, the entry into force of the new regulations. We have not applied IAS 29 Financial Reporting in Hyperinflationary Economies to our statutory consolidated annual financial statements presented to the Central Bank. In addition, the financial statements provided to the Central Bank are prepared in accordance with IFRS BCRA, which differs in significant respects from IFRS-IASB. See “Presentation of Financial Information”. As such, the Consolidated Financial Statements included in this annual report are not comparable with our financial statements furnished to the Central Bank. The application of IAS 29 Financial Reporting in Hyperinflationary Economies to our financial statements presented to the Central Bank is required for fiscal years beginning on or after January 1, 2020 as set forth by the BCRA through Communication “A” 6651 issued on February 22, 2019.
We are subject to numerous restrictions on our ability to pay dividends.
We are subject to legal and other restrictions on our ability to pay dividends. In Argentina, financial institutions may distribute dividends provided that (i) they are not covered by the terms of sections 34 “Regularization and recovery” and 35 bis “Institution restructuring to safeguard lending and bank deposits” of the Law on Financial Institutions (Law No. 21,526); (ii) they are not receiving financial assistance from the BCRA; (iii) they are not in arrears or non-compliance with the information regime established by the BCRA; and (iv) they meet minimum capital requirements and cash requirements. See “Item 8. Financial Information—A. Financial Statements and other Financial Information—Dividends”. Amounts available for distribution as dividends are determined pursuant to Argentine law and IFRS-BCRA. As a result, dividends may be paid when we have no income as determined under IFRS-IASB and, conversely, dividends may not be payable even if we have income as determined under IFRS-IASB. Moreover, BBVA as our majority shareholder has the power to approve or fail to approve any proposed dividends.
Legal, Regulatory and Compliance Risks
We identified material weaknesses in our internal control over financial reporting as part of management’s assessment. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of disclosure controls and procedures, investor confidence in the Bank and the market price of our ordinary shares and ADSs may be adversely affected.
We maintain disclosure controls and procedures designed to ensure that we timely report information as specified in applicable Argentine and U.S. rules. Within such disclosure controls and procedures, we maintain a system of internal control over financial reporting. However, these controls may not achieve, and in some cases have not achieved, their intended objectives.
Our management has issued a report on its assessment of the effectiveness of our internal control over financial reporting as of December 31, 2018 and concluded that we did not maintain effective internal control over financial reporting as a result of material weaknesses. These material weaknesses related to the preparation of the Consolidated Financial Statements in accordance with IFRS-IASB. Previously, our management also concluded as of December 31, 2017 that we did not maintain effective internal control over financial reporting as a result of certain material weaknesses. See “Item 15. Controls and Procedures”.
Although we have developed a remediation plan, we can provide no assurance that such plan will be successful or that we will be able to maintain effective internal control over financial reporting in the future, that misstatements due to error or fraud or otherwise will not occur, that all control issues have been detected or that we will be able to prepare our financial information on a timely basis. If our disclosure controls and procedures, including internal control over financial reporting, are not effective, it could have a material adverse effect on our business, results of operations and financial condition, could have an adverse effect on the price of our ordinary shares and ADSs and could subject us to regulatory scrutiny.
We operate in a highly regulated environment, and our operations are subject to regulations adopted, and measures taken, by several regulatory agencies.
Financial institutions in Argentina are subject to significant regulation relating to functions that historically have been determined by the Central Bank and other regulatory authorities (for capital requirements see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Requirements”). The Central Bank may penalize us, in case of any breach of applicable regulations. Similarly, the Argentine National Securities Commission (“CNV”), which authorizes securities offerings and regulates the public securities markets in Argentina, has the authority to impose sanctions on us and our Board of Directors for breaches of corporate governance. The Financial Information Unit (Unidad de Información Financiera, or “UIF”) regulates matters relating to anti-money laundering and has the ability to monitor compliance with any such regulations by financial institutions and, eventually, impose sanctions. Any such regulatory agencies could initiate proceedings and impose sanctions against us, our shareholders or our directors.
The Central Bank has also imposed restrictions on the positive foreign currency net global position of financial institutions, which have been modified several times, to prevent the Central Bank’s foreign currency reserves from further decreasing. As of the date of this annual report, the positive foreign currency net global position may not exceed 5% of the lesser of the financial institution’s total capital computed for the relevant preceding month or the financial institution’s own liquid assets.
In addition, pursuant to Communication “A” 6129, sanctions imposed by the Central Bank, the UIF, the CNV and/or the Superintendencia de Entidades Financieras y Cambiarias (the Superintendence of Financial Institutions and Exchanges, referred to as the “Superintendence”) and/or their authorities, may result in the revocation of the licenses to operate as financial institutions. Such revocation may occur when, in the opinion of the board of directors of the Central Bank, there was a material change in the conditions deemed necessary to maintain such license, including those relating to the suitability, experience, moral character or integrity of (i) the members of a financial institution’s board of directors (directors, counselors or equivalent authorities), (ii) its shareholders, (iii) the members of its supervisory committee or (iv) others, such as its managers.
The absence of a stable regulatory framework or the imposition of measures that may affect the profitability of financial institutions in Argentina and limit the capacity to hedge against currency fluctuations could result in significant limits to financial institutions’ decision-making ability. In turn, this could cause uncertainty and negatively affect our future financial activities and result of operations. In addition, existing or future legislation and regulation could require material expenditures or otherwise have a material adverse effect on our business, results of operations and financial conditions.
In addition to regulations specific to our industry, we are subject to a wide range of federal, provincial and municipal regulations and supervision generally applicable to businesses operating in Argentina, including laws and regulations pertaining to labor, social security, public health, consumer protection, the environment, competition and price controls.
These or any other future governmental measures or regulations could have a material adverse effect on our business, results of operations and financial condition.
The instability of the regulatory framework, in particular the regulatory framework affecting financial institutions, could have a material adverse effect on financial institutions such as BBVA Francés.
During Cristina Kirchner’s second term as President (from 2011 to 2015) a series of new regulations were issued affecting financial institutions, mainly regulating the foreign exchange market and imposing new capital requirements for financial institutions. In this regard, Communications “A” 5272 and 5273 of the Central Bank, dated January 27, 2012, increased the capital requirements for financial institutions operating in Argentina. These Communications required certain minimum capital levels in order to support operational risks and the distribution of dividends, and an additional capital buffer equivalent to 75% of the total capital requirements. For more information regarding capital requirements for Argentine banks please see “Item 4. Information on the Company—F. The Argentine Banking System and its Regulatory Framework”.
Moreover, a new law was approved by the Congress introducing amendments to the Central Bank’s charter. The principal issues addressed by this bill were the use of Central Bank’s reserves for the cancellation of public debt together with the implementation of polices by the Central Bank in order to interfere in the determination of interest rates and terms of loans to financial institutions.
The Central Bank issued Communications “A” 5319 and “A” 5380, dated July 5, 2012 and December 21, 2012, respectively, and Communication “A” 5516, dated December 27, 2013, making it mandatory for banks to provide credit lines for productive purposes. This requirement has been renewed every six months since then. The purpose of these measures implemented by the former government was to foster investment and growth. Finally, on November 3, 2017 the Central Bank determined that mandatory credit lines for productive financing and financial inclusion will continue to be required until December 2018. The quota for 2018 was a percentage of monthly non-financial private deposits in pesos as of November 30, 2017, according to the following schedule: January 2018: 16.5%, decreasing by 1.5 percentage points monthly until reaching 0% in December 2018. This is a significant development for banks given that the portion of deposits that financial institutions must loan at low interest rates was significantly reduced, allowing banks to allocate such funds in a more profitable way.
On November 29, 2012, the Argentine Congress passed the new “Securities Law”, which modified the public offer regime set forth by Law No. 17,811, as amended. One of the most significant amendments introduced by the Securities Law referred to the powers of the CNV. The adoption of Section 20 of the Securities Law raised concern in the market, especially among listed companies, since it entitles the CNV to (i) appoint supervisors with veto power over the resolutions adopted by the board of directors of listed companies and (ii) disqualify the board of directors of listed companies for a period of 180 days when, as determined by the CNV, the interests of the minority shareholders and/or security holders are adversely affected.
On October 1, 2013, the Central Bank issued Communication “A” 5460, granting broad protections to consumers of financial services, including, among other aspects, the regulation of fees and commissions charged by financial institutions for their services. As a result, fees and charges must represent a real, direct and demonstrable cost and should have technical and economic justification. Communication “A” 5514 introduced an exception to the application of Communication "A" 5460 for certain credit agreements that have pledges as collateral and are entered into before September 30, 2019.
On December 23, 2014, the Central Bank amended Communication “A” 5460 through Communication “A” 5685. As a result of this amendment, any increase in commissions for new products or services for retail customers must have the prior authorization of the Central Bank.
While the Macri Administration has repealed part of the regulatory framework enacted by the Kirchner Administration, such as (i) the restrictions on the foreign exchange market, (ii) the regulations concerning minimum and maximum interest rates on certain loans and deposits, (iii) the requirements governing the flow of capital into Argentina, (iv) the percentage of foreign currency positions of financial institutions, (v) the monthly contributions that banks must set aside each month to fund the deposit guarantee fund, (vi) additional capital requirements for the dividend distribution, and (vii) the requirement of prior authorizations to increase commissions, it is still unclear whether the new regulatory framework will be stable and the impact that the new regulatory framework may have on our business. The absence of a stable regulatory framework or the introduction of new regulations that affect the banking business could limit the ability of financial institutions, including BBVA Francés, to make long-term decisions, such as asset-allocation decisions, and could cause uncertainty with respect to our future business, results of operations and financial condition. We cannot assure that laws and regulations currently governing the financial sector will not continue to change in the future or that any changes will not have a material adverse effect on our business, results of operations and financial condition.
Exposure to multiple provincial and municipal legislation and regulations could adversely affect our business and results of operations.
Argentina has a federal system of government with 23 provinces and one autonomous city (Buenos Aires), each of which, under the Argentine national constitution, has full power to enact legislation concerning taxes and other matters. Likewise, within each province, municipal governments have broad powers to regulate such matters. Due to the fact that our branches are located in multiple provinces, we are also subject to multiple provincial and municipal legislation and regulations. Future developments in provincial and municipal legislation concerning taxes, provincial regulations or other matters could have a material adverse effect on our business, results of operations and financial condition.
The Consumer Protection Law and the Credit Card Law may limit some of the rights afforded to us and our subsidiaries.
The Consumer Protection Law establishes a number of rules and principles for the protection of consumers. Although the Consumer Protection Law does not contain specific provisions for its enforcement in relation to financial activities, it does contain general provisions that might be used as grounds to uphold such enforcement, as it has been previously interpreted in various legal precedents. Moreover, the new Argentine Civil and Commercial Code has captured the principles of the Consumer Protection Law and established their application to banking agreements.
The application of both the Consumer Protection Law and the Credit Card Law No. 25,065 (the “Credit Card Law”) by administrative authorities and courts at the federal, provincial and municipal levels has increased. Moreover, administrative and judicial authorities have issued various rules and regulations aimed at strengthening consumer protection. In this context, the Central Bank issued Communication “A” 5460, as supplemented and amended, granting broad protection to financial services customers, limiting fees and charges that financial institutions may validly collect from their clients. In addition, the Argentine Supreme Court of Justice issued the Acordada 32/2014, creating the Public Registry of Collective Proceedings for the purpose of registering collective proceedings (such as class actions) filed with national and federal courts. In the event that we are found to be liable for violations of any of the provisions of the Consumer Protection Law or the Credit Card Law, the potential penalties could limit some of our rights, such as reducing our ability to collect payments due from services and financing provided by us, or otherwise adversely affect our business, results of operations and financial condition.
On September 18, 2014, a new pre-judicial service of dispute resolution was created by Law No. 26,993, in order for consumers and providers to resolve any dispute within the course of 30 days, including fines for companies that do not attend the hearings.
Furthermore, the rules that govern the credit card business provide for variable caps on the interest rates that financial institutions may charge clients and the fees that they may charge merchants. Moreover, general legal provisions exist pursuant to which courts could decrease the interest rates and fees agreed upon by the parties on the grounds that they are excessively high. A change in applicable law or the existence of court decisions that lower the cap on interest rates and fees that clients and merchants may be charged would reduce our revenues and therefore negatively affect our results of operations.
The application of this regulation or any new regulation that may limit some of the rights afforded to us could have a material adverse effect on our business, results of operations and financial condition.
We are exposed to risks in relation to compliance with anti-corruption laws and regulations and economic sanctions programs.
Our operations are subject to various anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977, and economic sanction programs, including those administered by the United Nations and the United States, including the U.S. Treasury Department’s Office of Foreign Assets Control. The anti-corruption laws generally prohibit providing anything of value to government officials for the purposes of obtaining or retaining business or securing any improper business advantage. As part of our business, we may directly or indirectly, through third parties, deal with entities the employees of which are considered government officials. In addition, economic sanctions programs restrict our business dealings with certain sanctioned countries, individuals and entities.
Although we have adopted internal policies, procedures, systems and other mitigating measures designed to ensure compliance with applicable anti-corruption laws and sanctions regulations, there can be no assurance that such policies, procedures, systems and other mitigating measures will be sufficient or that our employees, directors, officers, partners, agents and service providers will not take actions in violation of our policies and procedures (or otherwise in violation of the relevant anti-corruption laws and sanctions regulations) for which we or they may be ultimately held responsible. Violations of anti-corruption laws and sanctions regulations could lead to financial penalties being imposed on us, limits being placed on our activities, our authorizations and licenses being revoked, damage to our reputation and other consequences that could have a material adverse effect on our business, results of operations and financial condition. Further, we engage in investigations relating to alleged or suspected violations of anti-corruption laws and sanctions regulations from time to time and any such investigations or any related proceedings could be time-consuming and costly.
Our anti-money laundering and anti-terrorism policies may be circumvented or otherwise not be sufficient to prevent all money laundering or terrorism financing.
We are subject to rules and regulations regarding money laundering and the financing of terrorism. Monitoring compliance with anti-money laundering and anti-terrorism financing rules can put a significant financial burden on banks and other financial institutions and pose significant technical problems. Moreover, after the enactment of Law No. 27,401 on Corporate Criminal
Liability, the Bank has begun to draw up an Integrity Program consisting of a set of actions, mechanisms and internal procedures to promote integrity, supervision and control, aimed at preventing, detecting and correcting irregularities and illegal acts included in Law No. 27,401. In this context, the Bank has an internal official whose function is the development, coordination and supervision of the Integrity Program. Although we believe that our current anti-money laundering program (which includes, among other elements, policies, procedures, technical infrastructure, independent reviews and training activities) is, and the Integrity Program will be, sufficient to comply with applicable rules and regulations, we cannot guarantee that our anti-money laundering and anti-terrorism financing programs and procedures will not be circumvented or otherwise not be sufficient to prevent all money laundering or terrorism financing. For example, we were recently notified by the UIF of the initiation of a summary proceeding against us and the members of our Board of Directors and our compliance officer relating to alleged violations of anti-money laundering regulations. We expect to defend the interests of such parties in such proceedings, but cannot predict the outcome thereof. Any violations of applicable anti-money laundering, anti-terrorism or other laws and regulations may have severe consequences, including sanctions, fines and notably reputational consequences, which could have a material adverse effect on our business, results of operations and financial condition.
Argentine corporate disclosure, governance and accounting standards may require us to provide different information than would be required under U.S. standards. This difference could influence foreign investors’ decisions to invest in Argentine securities and could therefore limit our access to international markets.
The securities laws of Argentina that govern publicly-listed companies such as us impose disclosure requirements that are more limited than those in the United States. The Argentine securities markets are not as highly regulated and supervised as the U.S. securities markets. There are also important differences between accounting and financial reporting standards applicable to financial institutions in Argentina and those in the United States. As a result, financial statements and reported earnings of Argentine financial institutions generally differ from those reported based on U.S. accounting and reporting standards.
The statutory consolidated annual financial statements for the fiscal year ended December 31, 2018 that the Bank prepared to comply with the requirements of the Central Bank are the Bank’s first annual financial statements prepared pursuant to the reporting framework established by the Central Bank requiring supervised entities to submit financial statements prepared pursuant to IFRS-IASB, with temporary exceptions from the application of (i) the impairment model in Section 5.5 Impairment of IFRS 9 Financial Instruments and (ii) IAS 29 Financial Reporting in Hyperinflationary Economies, both of which are applicable under the Central Bank’s rules for the fiscal years beginning on or after January 1, 2020, and in accordance with the standards prescribed by Memorandum No. 6/2017 Financial Reporting Framework Established by the BCRA issued on May 29, 2017 regarding the treatment to be applied to uncertain tax positions. The Consolidated Financial Statements included in this annual report on Form 20-F have been prepared in accordance with IFRS-IASB. Although we expect to prepare our financial statements for purposes of both our annual reports on Form 20-F and the Central Bank under IFRS-IASB beginning with the fiscal year commencing January 1, 2020, we do not intend to report in accordance with IFRS-IASB on an interim basis during 2019. As such, our interim financial information for 2019 will not be comparable with the Consolidated Financial Statements and other information contained in this annual report on Form 20-F.
Accordingly, the information available about us will not be the same as the information available about a U.S. company. The differences in the disclosure requirements between IFRS BCRA, IFRS-IASB and U.S. GAAP could limit foreign investors’ ability to evaluate our business, results of operations and financial condition, and influence foreign investors’ decisions whether to invest in Argentine securities, thereby limiting our access to international financial markets.
The special rules that govern the priority of different stakeholders of financial institutions in Argentina, which give priority to depositors with respect to most other creditors, may negatively affect other stakeholders in case of judicial liquidation or bankruptcy of the Bank.
Argentine Law No. 24,485, in force since April 18, 1995 and as amended by Law No. 25,089, provides that in case of judicial liquidation or bankruptcy of a financial institution such as BBVA Francés, all depositors, irrespective of the type, amount or currency of their deposits, will have general and absolute preferential rights with respect to all other creditors, except for certain labor credits and credits secured with a pledge or mortgage, to be paid with 100% of the funds deriving from the liquidation of our assets. In addition, depositors of any kind of deposits have special preferential rights over the remaining creditors of us, except for certain labor credits, to be paid with (i) any of our funds which may be held by the Central Bank as total reserves, (ii) any remaining funds of ours in existence as of the date on which our license is revoked, or (iii) any funds derived from the compulsory transfer of certain of our assets according to instructions of the Central Bank, in the following order of priority: (a) deposits made by legal entities up to Ps.5,000 per entity, or its equivalent in foreign currency, (b) deposits for terms exceeding 90 days and (c) all other deposits on a pro rata basis.
In case of a judicial liquidation or bankruptcy of a financial institution such as BBVA Francés, shareholders may not be able to partially or completely recover their investment due to the priority imposed by law.
There is uncertainty regarding the possible effects that pension and tax reform could have in the Argentine economy.
On December 19, 2017, the Argentine Congress enacted the pension reform law that reformulates the Integrated Pension System in Argentina (SIPA), proposing an adjustment of the valuations of pensions and social benefits according to inflation and economic growth. The purpose of this law, together with the tax reform law, the labor reform bill and the capital markets law, is to increase the competitiveness of the Argentine economy by reducing both the fiscal deficit and poverty in a sustainable way.
Through Decree No. 110/2018 of February 8, 2018, the Argentine government regulated the articles of Law No. 27,426 on Pension Reform approved by the Argentine Congress at the end of 2017, and Law No. 27,260 that created the so-called “Historical Reparation Program”, which is a national program for retirees and pensioners by which the national government offers a proposal for readjustment of retirement benefits and, if applicable, the recognition of retroactive sums owed to certain retirees who have received inadequate payments. This Decree specified the scope of the new retirement regime, which will be applicable to retirees who have been granted readjustments through the Historical Reparation Program, and those who obtained a definitive sentence before March 1, 2018. It also leaves without effect the terms of article 252 of the Labor Contract Law (LCT) that had begun to elapse before the entry into force of Law No. 27,426 of December 29, 2017. Therefore, Decree No. 110/2018 allows the employer to require a worker who reaches 70 years of age to begin legal processes for retirement.
On December 28, 2017, the Argentine Congress enacted the tax reform law. The main taxes that are modified are those related to social security contributions, taxes on corporate and personal profits, bank credits and debits, gross income, stamp tax, value added tax, elimination of internal customs (subject to agreement with the provinces), environmental taxes (CO2) on fuels, transfer taxes on real estate and modifications to the customs code. The reform is to be implemented within one and five years (depending on each modification), which is expected to provide predictability to the changes and support the fiscal sustainability of the reform. These tax reforms are designed to promote investment, competitiveness and quality employment, by reducing tax evasion, to comply with the proposed fiscal goals and to move towards sustained development of the Argentine economy.
We cannot assure you that these reforms adopted by the Argentine Congress will achieve their stated goals. If these reforms are unsuccessful, they could have an adverse effect on the Argentine economy and, consequently, on our business, results of operations and financial condition.
There is uncertainty regarding financial sector reforms.
On January 10, 2018, the Argentine Executive Branch issued Decree No. 27/2018 (the “DNU”) whereby a series of new measures were implemented in order to facilitate public and private action by deregulating various markets and activities and simplifying standards. Much of the DNU is aimed at the financial sector, including Chapters II (on companies), III (on the trust fund for the development of entrepreneur capital MiPyMES), IX (which regulates the Argentine guarantee fund), X (on reciprocal guarantee companies), XVI (on the sustainability guarantee fund), XIX (on insurance), XX (on the actions of the financial information unit) and XXII (on access to credit and financial inclusion). The DNU aims in general to reduce government bureaucracy, simplify processes, improve the operation of the financial system and generate competition. We can provide no assurance that the DNU will achieve is intended results. Any failure of the DNU to achieve its goals could have a material adverse effect on our business, results of operations and financial condition.
ITEM 4. INFORMATION ON THE COMPANY
Recent Political and Economic Developments in Argentina
Argentina experienced economic growth of 2.9% in 2017 and an environment of global optimism. 2018 started with a greater level of uncertainty and expectations of increases in the main benchmark interest rate of the United States.
In December 2017, the financial authorities in Argentina decided to increase inflation targets. Because such targets appeared to be unattainable, the Central Bank decreased the monetary policy rate, which had previously been subject to incremental adjustments. This led to a loss of confidence in the Central Bank’s monetary policy and an increase in inflation expectations.
A period of volatility began by mid-April 2018, initially in the foreign exchange market, triggered by both external and internal factors. In particular, the increase in the main benchmark interest rate of the United States and trading tensions between the United States and its main trading partners had consequences on emerging markets, in particular on the economies that showed greater vulnerability such as Argentina and Turkey.
In addition to such external factors, a significant and unexpected drought caused heavy damage to the main agricultural area of Argentina with an adverse impact on the harvest and, consequently, on domestic economic growth and the supply of foreign currency from the external sector. On the financial side, a number of policy imbalances and inconsistencies became evident and caused alarm in the markets, eventually triggering an abrupt capital flight and a stop in foreign funding by mid-May thus causing the exchange rate (Central Bank benchmark) to rise from 20.69 Ps./US$ at April 30, 2018 to 28.86 Ps./US at June 30, 2018.
The Central Bank was unable to control the run on the foreign exchange market in spite of having used reserves to stabilize it. In this scenario, the government decided to seek credit support from the IMF in order to achieve an orderly adjustment process for the economy. The arrangement was closed in June 2018 and provided for a three-year US$50 billion stand-by loan agreement subject to the fulfilment of certain stricter fiscal goals and reserve objectives, but also to more relaxed inflation targets and without any request for wide structural reforms. Emphasis was placed on the need to reinforce the independence of the Central Bank, with reforms including the immediate prohibition against financing the treasury and strengthening of the Central Bank balance sheet by reducing the stock of Central Bank Bills (Letras del Banco Central, Lebac). A floor was prescribed for social spending that could be increased by up to 0.2% of GDP if a need arises to provide assistance to the most vulnerable.
As a result of the considerable amount of the IMF loan and rapid disbursement of the first tranche, the foreign exchange market started to stabilize early in July 2018, following the change in the President of the Central Bank. However, such stability did not last long. The run on the currency increased the uncertainty about the future of the economy and had an adverse impact on the image of the government and consumers’ confidence declined. By the end of August 2018 a new round of capital flight and peso depreciation took place (the exchange rate rose from Ps./US$ 27.34 on July 31, 2018 to Ps./US$ 40.9 on September 28, 2018. Following a new fiscal adjustment which accelerated to 2019 the zero primary fiscal deficit target, a revised agreement was signed with the IMF which increased the funding from US$50 billion to US$57.6 billion and also frontloaded the disbursements to cover all financial needs of 2018 and 2019 so that the government would not have to resort to credit markets to place debt until 2020. The new fiscal goal required a step back in relation to certain reforms enacted in 2017 to ease the tax pressure, such as a decrease in export tax withholdings and the tax on personal assets.
Following a new change of management in the Central Bank, the inflation target system was abandoned and superseded by a new monetary-foreign exchange scheme effective in October 2018 based on a strict control over the monetary base and which is designed to remain steady on a non-seasonal basis until June 2019 with minimum growth until December of such year. At the same time, a “non-intervention” band was established for the foreign exchange market by which the exchange rate floats and the Central Bank may only engage in intervention outside such ranges and on a restricted basis. This scheme appeared to be effective during the fourth quarter of 2018 as the monetary base goals were fulfilled and the exchange rate remained within the stipulated ranges.
During 2018 economic activity measured by GDP fell 2.5% compared to 2017. In the first half of the year the deterioration in economic activity was mainly related to the effects of the drought. However, in the second half of the year the deterioration of domestic financial conditions worsened the economic recession, mainly affecting the levels of consumption and investment. Although the economy could begin to recover in 2019, GDP is still expected to contract by 1.2%.
With respect to the labor market, in 2018 there was an increase in the unemployment rate to around 9.2% compared to 8.4% in 2017.
The domestic CPI increased by 47.6% in 2018, reflecting an acceleration of inflation compared to 24.8% in 2017, as a result of the foreign exchange and financial crisis during the year.
Core inflation reached 47.7% as a result of the effect of devaluation on prices. Transportation prices increased by 66.8%, food and beverages increased by 51.6%, miscellaneous goods and services increased by 53.2%, health costs increased by 50.2% and household furniture and maintenance increased by 50.3%, all of which changes were above average.
The domestic public sector recorded a primary deficit of Ps.338,987 million in 2018, accounting for approximately 2.3% of GDP. As a consequence, the annual fiscal goal of 2.7% was exceeded based on the commitment for the year in the agreement with the IMF. This result reflects a 16.1% decrease compared to the deficit in the previous year.
Primary public spending showed a year-on-year 22.4% increase, while revenues from the public sector increased 30.2%. Repayment of interest on public debt increased by 72.9% as a result of both an increase in indebtedness and the effect of devaluation on liabilities denominated in foreign currency. The overall deficit reached Ps.727,927 million, accounting for a 15.7% increase compared to 2017.
With respect to spending, there was a year-on-year 1.1% increase in capital spending while subsidies to economic sectors rose by 22.5%, to partially offset the effect of devaluation on the price of energy. Total welfare benefits increased by 27.6%, operating expenditures increased by 22.5% and transfers from the federal government to the provinces fell by 4.1%.
Tax revenues rose by 25.6% due to increases in revenues from the value added tax (“VAT”), the tax on banking transactions and taxes on foreign trade.
The trade deficit in 2018 reached US$3,823 million, a reduction compared to the deficit of US$8,472 million in the previous year. This result is a consequence of exports totaling US$61,621 million, 5.1% higher than the previous year, with a 5.4% decline in sales of primary products as a result of the adverse effects of the drought. Exports of agricultural products increased by 1.5%, while industrial exports increased by 9.3% and exports of fuel and energy increased by 69.2%, with fuel and energy accounting for 6.8% of total exports.
On the other hand, imports reached US$65,441 million in 2018, a 2.2% decrease compared to 2017. All categories of imports experienced decreases as a result the contraction of the economy and the impact of devaluation of the peso, except for intermediate goods which increased by 14.6% and fuels and lubricants which increased by 14.1%. The greatest decline was in capital goods which decreased by 17.9%.
The current account deficit of the balance of payments amounted to US$28,003 million in 2018, 11.4% lower than the previous year. Despite devaluation, the external sector did not experience a rapid adjustment, in addition to increasing the accrual of interest on debt held by non-residents.
In the foreign exchange market, the Peso depreciated by 50.3% in the year, and the exchange rate reached 37.81 Ps./US$ as of December 31, 2018. The market was characterized by great volatility during the year and such volatility was one of the main factors of instability and was especially strong in May/June and August/September.
International reserves reached US$65,806 million as of the end of the year, a US$10,751 million increase compared to the balance as of December 2017, mainly due to three disbursements received under the stand-by agreement with the IMF in an aggregate amount of US$28 billion and the accounting as international reserves of a supplementary currency swap agreement with China in the amount of ¥ (yuan) 60 billion (US$9 billion) confirmed in December 2018. Sales of reserves held by the Central Bank on the foreign exchange market reached US$15,968 million and were effected in March and September 2018.
At the beginning of the year the monetary aggregates were driven by the growth in the previous year but were also affected by the financial crisis and policy changes at the Central Bank. The monetary base in terms of balances increased by 40.7% in 2018, mainly as a result of an increase in the current account of banks at the Central Bank which grew by 156.3% due to increase in mandatory reserve requirements (encajes), while cash held by the public rose by 5.4% in the year. The M2 monetary aggregate (which includes money in circulation plus sight deposits), measured in balances, grew by 22.7% in the same period.
In 2018, the Central Bank managed to eliminate the stock of Lebacs (Letras del Banco Central, an instruments of short term debt issued by the Central Bank), which had reached a peak of Ps.1,290,667 million in March, out of which 72% was held by private sector investors. Monthly auctions had become one of the events of great uncertainty and volatility due to the large number of monthly maturities. The strategy consisted in partial rollovers, increasing the system liquidity requirements to neutralize the ensuing monetary expansion and at the same time offering instruments denominated in pesos issued by the treasury to channel the demand for short-term debt instruments in pesos. The stock was discharged in full on December 19, 2018. This discharge and the elimination of monetary funding to the Treasury are the main pillars on which the new monetary and foreign exchange scheme are based.
As a consequence of the crisis, the instability of the financial market and the agreement with the IMF, the Central Bank abandoned the inflation target scheme and replaced it with a strategy consisting of control over the monetary base as a nominal anchor of the economy.
The monetary base goal was implemented in the fourth quarter of 2018 through daily auctions of Liquidity bills (Leliq), an instrument which is only held by banks, the benchmark interest rate of which is determined endogenously at the auctions according to demand by banks and the amount offered by the Central Bank for purposes of achieving the intended monetary base target.
With respect to the foreign exchange market, a non-intervention band was established, the ranges of which are adjusted as determined by the Central Bank. The lower and upper band were initially set at 34 and 44 Ps./US$ and during the last quarter of the year they were adjusted on a daily basis by a 3% monthly rate. If the exchange rate falls outside such range, the Central Bank would have the option to engage in intervention with certain restrictions, such as a daily intervention level. During the fourth quarter of 2018 the exchange rate remained within the ranges.
All comparisons of the financial system contained in this annual report on Form 20-F are presented in nominal terms.
The rise in interest rates had an impact on the operation of the financial system throughout the year. As to deposits, both this factor and the cancellation of the stock of Lebacs resulted in a 50.4% growth of total deposits denominated in pesos, while peso-denominated deposits held exclusively by the private sector increased by 41.4%. The increase in term deposits (65% for traditional term deposits denominated in pesos and 865.3% for those indexed by the benchmark stabilization coefficient/purchasing power unit (CER/UVA)) is notable. Performance of sight deposits was weaker in the private sector, with peso-denominated checking accounts increasing by 23.5% and peso-denominated savings accounts increasing by 23.2%. Dollar-denominated deposits held by the private sector grew by 9.7% during the period.
As regards loans, the lending growth, in particular consumer loans and loans to companies, was contingent upon the interest rates and the BCRA’s restrictive monetary policy. The stock of peso-denominated loans granted to the non-financial private sector grew by 17.2% in the year. Placements were led by mortgage-backed loans which rose by 62.3%, which remained strong during the first 4 months of the year. Dollar-denominated loans grew by 3.7% in dollar terms.
The Badlar interest rate (interest on deposits in excess of Ps.1 million) of private banks, stated in monthly averages, was 23% at the start of the year and rose during the second half of the year up to 51.3% in November, and it averaged 48.6% in December 2018. The rise in the Badlar rate, and those of other lending and borrowing rates rose in tandem with the rise in the BCRA policy rate (until October the average monetary policy rate and thereafter the Leliq rate) which was 27.25% in January 2018 but reached almost 72% in October ending at 59.25% on December 31, 2018. The high interest rates contributed to maintaining attractive deposits in pesos in light of the foreign exchange market instability and the increasing country risk.
|A.||History and development of the company|
BBVA Francés, an Argentine corporation (a sociedad anónima or “S.A.”), was duly incorporated under the name Banco Francés del Río de la Plata S.A. on October 14, 1886. The Bank has registered its office in Avenida Córdoba 111 31st floor, C1054AAA, Ciudad Autónoma de Buenos Aires, Argentina; telephone number 54-11-4346-4000. The Bank’s agent in the United States for U.S. federal securities law purposes is CT Corporation System, currently with offices at 28 Liberty Street, New York, New York 10005.
BBVA Francés’ original by-laws were approved on November 20, 1886 by a decree recorded in the Public Registry of Commerce of the City of Buenos Aires, and the last amendment was recorded on October 25, 2017. Pursuant to its current corporate by-laws, the Bank will terminate its activities on December 31, 2080, unless this term is extended by the shareholders. The ordinary and extraordinary shareholders’ meeting held on April 24, 2019 modified BBVA Francés’ by-laws to change the Bank’s legal name to BBVA Argentina S.A. and make certain modifications regarding public offerings in conformity with Articles 62 bis and 63 of Law 26,831. Such amendments are pending registration with the Public Registry of Commerce (“IGJ”).
The Bank is supervised by the Central Bank of Argentina, an entity that establishes valuation and accounting criteria, the rules on liquidity and capital requirements as well as the reporting systems of Argentine financial institutions. It is also subject to inspections by the Central Bank, based on which it is assigned a “rating”. See “Item 4. Information on the Company—F. The Argentine Banking System and its Regulatory Framework”.
Since 1886, the Bank has been recognized as a leading provider of financial services to large corporations. In the early 1980s, it broadened its customer base to include small and medium-sized companies ("SMEs") as well as individual customers. In response to demands from the corporate market and following the structural changes brought about by the stabilization process in Argentina, since 1991, the Bank added to its traditional commercial banking products a full range of services, such as investment banking, capital market transactions and international banking.
In the 1980s and 1990s, in order to achieve a wider market penetration, it expanded its distribution network by opening branches throughout Argentina.
In December 1996, when BBVA became the principal shareholder, the Bank reaffirmed its universal banking strategy with the goal of increasing its focus on medium- and low-income individuals and small and medium-sized companies in the middle market.
To this end, in August 1997, 71.75% of Banco de Crédito Argentino, a retail bank focused on the middle market and consumer banking sectors, was acquired. To effect the merger, BBVA Francés issued 14,174,432 ordinary shares to the existing shareholders of Banco de Crédito through a capital increase. On March 5, 1998 the Public Registry of Commerce registered the merger as well as the change in the name of the company from Banco Francés del Río de la Plata S.A. to Banco Francés S.A.
At the ordinary and extraordinary shareholders’ meeting held on April 27, 2000, a resolution was passed to change our name to BBVA Banco Francés S.A. On October 4, 2000, the Public Registry of Commerce registered our change from Banco Francés S.A. to BBVA Banco Francés S.A., and the amendment to our by-laws were made to reflect the name change.
In the early 2000s the Argentine Crisis and the ensuing economic and political instability led to a deep contraction in the intermediation volumes. In response, the Bank changed its short-term commercial strategy towards the transactional business, adjusted its operating structure and implemented a strict cost control plan. Actions were also focused on recovering asset quality levels, which had been strongly affected by the Argentine Crisis. By mid-2003, the economy began to recover and we returned to offering the full range of financial services, including credit facilities, albeit restricted to short-term financing. Commencing in 2004, BBVA Francés gradually strengthened its credit activity in the midst of economic solvency, and consolidated its transactional business. During recent years, the Bank has focused mainly in the most profitable segments, retail and small and medium-sized companies, while maintaining the leadership in the large corporations business.
On February 9, 2012, the respective boards of directors of BBVA Francés and Inversora Otar S.A. (a company whose sole purpose was to develop the activities of an investment company, and whose majority shareholder was BBV America SL) approved the merger between the two companies, and on March 26, 2012 the shareholders’ meetings of both companies approved the transaction. After being approved by the Central Bank and the CNV, the merger was registered in the Public Registry of Commerce on March 27, 2014, under number 5,302.
On March 26, 2014, BBVA Francés cancelled 50,410,182 ordinary shares and issued simultaneously 50,410,182 ordinary shares of BBVA Francés, to be delivered in exchange to the former owners of Inversora Otar (BBV América S.L., Corporación General Financiera S.A. and Sucesión Romero) pursuant to the exchange ratio duly approved. As a result of this transaction as of December 31, 2014, the shareholders of Inversora Otar S.A. have the following ownership of BBVA Francés: BBV América S.L. 29.81%, Corporación General Financiera S.A. 0.47% and Sucesión Romero 0.0041%.
Because of this simultaneous increase and cancellation of the shares, the total amount of the corporate capital of the Bank remained unchanged. On April 1, 2012, as a result of the merger between BBVA Francés and Inversora Otar S.A., BBVA Francés acquired all the shares of BBVA Francés Valores S.A. previously held by Inversora Otar S.A., becoming its sole shareholder. On June 29, 2012, BBVA Francés S.A. sold a 3.0047% interest in BBVA Francés Valores S.A. to BBV America SL for Ps.441,194.
BBVA Francés considers the high income segment as strategic and for that reason in November 2013 the Bank launched the premium segment with an exclusive event at the Greek embassy in Argentina. This segment is composed of the 15,000 clients with the highest income, who have access to a new and different service experience: “Premium” executives, parking at branches with VIP spaces, free of charge subscriptions to magazines and newspapers, birthday presents and many other premium experiences at theatres, concerts and movies, with pre-sales on tickets and priority in invitations and exclusive brochures, among others.
In September 2014, BBVA Francés created the new Digital and Transformation Banking Division, following the guidelines of the BBVA Group. The new division was created in order to develop more convenient and relevant products for customers and to pursue more dynamic business, employing increasingly innovative communication channels. Furthermore, BBVA Francés implemented some organizational changes, redefining roles and simplifying the organizational chart, in order to adapt the Bank’s internal structure to its business needs. In September 2016, with the goal of promoting and consolidating the transformation process and advancing in the fulfillment of strategic objectives, the Digital and Transformation Banking Division became part of the Business Development Department. Under this new scheme, the Business Development Department has adopted a project-based structure to take full advantage of the opportunities presented in that context.
On May 20, 2015, BBVA Francés entered into a share purchase agreement with the Volkswagen Group for the acquisition of 51% of the issued and outstanding capital stock and voting rights of the Volkswagen Credit Compañía Financiera S.A., representing 23,970,000 registered, non-endorsable shares of common stock, par value Ps.1. On August 25, 2016, the Central Bank issued Resolution No. 332, authorizing the acquisition of 51% of the share capital of Volkswagen Credit Compañia Financiera S.A. by BBVA Francés. Moreover, on September 26, 2016, the shareholders of Volkswagen Credit Compañía Financiera S.A. amended its bylaws in order to include the new shareholders structure and approved the amendment of the company’s name to Volkswagen Financial Services Compañía Financiera S.A. The name change was registered with the IGJ on November 14, 2016, under No. 22302, Book 82 of Corporations. On January 18, 2018, Volkswagen Financial Services Holding Argentina S.A. and BBVA Banco Francés S.A., as shareholders, held an ordinary and extraordinary general meeting at which they decided to increase the share capital by Ps.400 million, going from Ps.497 million to Ps.897 million. The amount corresponding to the capital increase was subscribed in its entirety on the day of the shareholders’ meeting, in proportion to the shareholding of each shareholder. As a result, the 51% shareholding of BBVA Francés in the company is represented by 204 million common shares, nominative, non-endorsable, with a par value of Ps.1.00 each and entitled to one vote per share. On September 25, 2018, BBVA Francés lost control over the company due to the termination of the two-year commitment by the Bank to provide financing to the company if it were to fail to diversify its sources of funding. According to IAS 28, VWFS qualifies as a joint venture and, as such, it has been deconsolidated effective since the date of loss of control.
On June 30, 2015, the Board of Directors of BBVA Francés decided to carry out some changes in the Senior Management. The Board accepted the resignation of Mr. Juan Eugenio Rogero González as Risk Director and appointed Mr. Gerardo Fiandrino for this position. Throughout 2017, new changes were implemented in the Senior Management. Mr. Ernesto Gallardo was appointed as Director of the Financial and Planning Area, succeeding Mr. Ignacio Sanz y Arcelus; Mr. Eduardo González Correas was appointed as Director of Legal Services, succeeding Mr. Adrián Bressani; and Mrs. Mónica Etcheverry was appointed as Director of Normative Compliance, succeeding Mr. Walter Vallini. On October 13, 2017 the Nomination and Remunerations Committee decided to incorporate Mr. Eduardo González Correas and Mrs. Mónica Etcheverry into the Management Committee.
On June 13, 2017, the shareholders of BBVA Francés held an ordinary and extraordinary general meeting in which they approved the increase of share capital by public subscription for the sum of up to Ps.145 million of par value, through the issuance of up to 145,000,000 ordinary, book-entry shares with the right to one vote and par value one Ps.1.00 per share, delegating to the Board of Directors the powers to implement this share capital increase and determine the conditions of the offering.
On July 18, 2017, the Board of Directors approved the offering of 66,000,000 ordinary shares with a subscription price of US$5.28 per share and US$15.85 per American Depositary Share (ADS), utilizing the reference exchange rate published by the BCRA on that date (Ps.17.0267) for the purposes of determining the price in pesos. On July 24, 2017 the offering was closed.
In accordance with the terms of the underwriting agreement for the offering, on July 26, 2017, the underwriters exercised the option to acquire 9,781,788 additional new shares (equivalent to 3,260,596 ADS) at the same offering price. On July 31, 2017 the offering of the additional shares closed. The proceeds from the offering were used to continue with the Bank’s growth strategy in the Argentine financial system.
On March 8, 2019, the respective boards of BBVA Francés and BBVA Francés Valores S.A. approved the merger of the two companies, and on April 24, 2019, the respective shareholders’ meetings approved the transaction. Currently, the transaction is pending authorization by the CNV.
Within the framework of the Divestment Commitment assumed by Prisma Medios de Pago S.A. (“Prisma”) and its shareholders against the National Commission for the Defense of Competition, the Bank, together with the other shareholders of Prisma, accepted an offer by AI Zenith (Netherlands) B.V. (an affiliate of Advent International Corporation) to acquire 51% of the common shares of Prisma. The Bank’s pro rata share of such offer amounted to 2,344,064 common shares, representing 5.6721% of the share capital of Prisma and 51% of the Bank’s stake in Prisma.
For each shareholder, including the Bank, the divestment commitment involves the pro rata sale of at least 51% of their shares in Prisma before January 23, 2019 and the remaining 49% of their shares within 36 months after the end of such initial sale.
The sale was completed on February 1, 2019. Following this transaction, the Bank owns 2,252,139 shares of Prisma, representing 5.4496% of its share capital. This transition does not affect the normal development of the Bank’s business.
On March 26, 2019 Mr. Jorge Bledel presented, and the Board of Directors accepted, his resignation as member of the Board. The shareholders’ meeting held on April 24, 2019 elected Mrs. Isabel Goiri to succeed Mr. Jorge Bledel, and she became the new chairwoman of the Board. This appointment is subject to BCRA approval.
On July 10, 2013, BBVA Francés and Consultatio S.A. signed a sale and purchase agreement, under which the Bank acquired 23 of the 33 floors of the building under construction by Consultatio S.A., which became the “BBVA Tower”. This was the largest corporate headquarters real estate development project in the Republic and was part of the plan designed in 2010 by BBVA Francés to unify its core areas, which were divided among 10 buildings in the City of Buenos Aires.
The BBVA Tower is the image of leadership, innovation and excellence, and a clear evidence of the commitment of BBVA Francés to its employees as well as to the Republic. It meets the highest sustainability standards and was awarded a LEED Gold Certification (Leadership in Energy & Environmental Design), recognizing that the building is environmentally sustainable and a healthy space to work in.
With more technology and new services which improve workplace quality in line with open space corporate layout, the tower provides spaces that allow working in areas without limits or offices dividing the employees. It promotes more fluid and transparent communication, team work and the exchange of knowledge and experiences.
In the last quarter of 2016 personnel began moving to the new headquarters, a process that was completed in April 2017.
On October 30, 2018, BBVA Francés recorded the deed to its headquarters offices.
As a result of the completion of the process, the Bank has decided to offer for sale certain buildings where its central offices were located. At the Board meeting of June 26, 2018, it was decided to accept a purchase offer for the properties located at Reconquista 40, Presidente Perón 362, Maipú 356 functional unit 16, Bolívar 501 and Mexico 628 functional unit 1, all within the Autonomous City of Buenos Aires. On July 05, 2018, the sale of these properties was finalized.
BBVA Francés is a leading Argentine banking institution present in the local financial system since 1886. We are a subsidiary of the BBVA Group, our principal shareholder since 1996. We are the third largest bank in Argentina not controlled by a government entity in terms of total deposits, with a 6.4% market share of total banking system deposits and the third largest private Argentine bank in terms of total loans, with 7.8% of total banking system loans excluding the Bank’s joint ventures, and 8.6% of total banking system loans including the Bank’s joint ventures, based on information published by the Central Bank as of December 31, 2018. As presented in this annual report on Form 20-F, market share data is based on data published by the Central Bank which has not been adjusted for inflation. As such, certain of the information presented in this annual report as adjusted for inflation may not be directly comparable to information published by the Central Bank.
Most of the Bank’s operations, property and customers are located in Argentina. The Bank has traditionally accepted deposits and granted loans in pesos and in certain other currencies, primarily U.S. dollars. Foreign currency deposits can be lent only to companies that generate flows in the same currency.
The Bank was one of the first companies listed on the Buenos Aires Stock Exchange (now the BYMA), quoting since 1888 (ticker: FRAN). Its shares in the form of American Depositary Shares have been listed on the New York Stock Exchange since 1993 (ticker: BFR) and on the Madrid-based LATIBEX (Mercado de Valores Latinoamericanos) since December 1999 (ticker: XBFR).
As of December 31, 2018, we had total consolidated assets of Ps.361.5 billion, a total loan portfolio of Ps.181.6 billion, total deposits of Ps.259.5 billion and total shareholders’ equity of Ps.45.5 billion, on a consolidated basis. Our consolidated net loss for the year ended December 31, 2018 was Ps.1.5 billion and our consolidated net income for the year ended December 31, 2017 was Ps.1.9 billion.
Through our universal banking platform, we provide a broad range of financial and non-financial services to both individuals and companies throughout Argentina, going across all segments of the population, including retail and commercial banking, insurance, asset management, securities brokerage, and investment banking products and services. We believe the wide range of financial solutions we offer our customers, complemented by our unique strategic alliances and strategic partners, as well as our capacity to leverage the BBVA Group’s global expertise, relationships and technological platform, provide us with a significant competitive edge compared to other Argentine companies in the financial sector. Such competitive advantages place us in a privileged position to capture opportunities arising from favorable macroeconomic policies and reforms implemented in 2015-2016, and to capitalize on the consolidation potential of the fragmented banking sector.
We manage the following entity-wide business lines:
|·||Retail banking, through which we offer financial services to individuals across all income segments. Our main retail banking products include checking and savings accounts, time deposits, credit cards, personal and auto loans, mortgages, insurance and investment products. Despite our historically strong presence within the middle-income and affluent segments of the population, our products and distribution channels are designed to attract clients across all client segments. As of December 31, 2018, we had approximately 2.5 million active retail banking clients, compared with 2.3 million active retail banking clients as of December 31, 2017. Our retail banking strategy is focused on growing our client base, expanding our product offering and services, particularly in underdeveloped products such as mortgages and in products where we see potential to increase our market share such as personal loans, and leveraging our technological platform to enhance our clients’ banking experience. As of December 31, 2018, we had total loans of Ps.76.9 billion and total deposits of Ps.180.6 billion within our retail banking business line, which decreased 4.4% and increased 12.0%, respectively, when compared to December 31, 2017.|
|·||Small and medium-sized companies through which we offer financial services primarily to local private-sector companies. Our main middle market products include financing products, factoring, checking accounts, time deposits, transactional and payroll services, insurance and investment products. As of December 31, 2018, we had approximately 46 thousand middle market clients. We believe that small and medium-sized companies are a key element for economic growth in Argentina, and we are focused on expanding the number of clients we serve and on being a strategic ally to our middle market clients, supporting them with tailored products and transactional solutions, as well as with differentiated customer support through our 252 branches. As of December 31, 2018, we had total loans of Ps.52.4 billion and total deposits of Ps.49.2 billion within our small and medium-sized companies business line, which decreased 17.5% and increased 5.8%, respectively, when compared to December 31, 2017.|
|·||Corporate and investment banking (C&IB), through which we offer financial services to some of the largest Argentine corporations and multinational companies operating in Argentina. In addition to the products we offer to our middle market company clients, we provide our corporate and investment banking clients with global transaction services, global markets solutions such as risk management and securities brokerage, long term financing products including project finance and syndicated loans, and corporate finance services including mergers and acquisitions and capital markets advisory services. As of December 31, 2018, we had approximately 1,100 corporate banking clients, which included substantially all of the largest corporates and multinational companies in Argentina. Within our corporate and investment banking business line, we are focused on leveraging the deep expertise of our industry-focused relationship executives, supported by the BBVA Group’s global network, to continue to provide bespoke global financial solutions to our corporate client base. We are focused on being a trusted partner for our corporate clients as they seek to finance investment opportunities, particularly within certain sectors of the economy where investment has lagged such as telecommunications, energy and infrastructure. As of December 31, 2018, we had total loans of Ps.52.2 billion and total deposits of Ps.29.7 billion within our corporate and investment banking business line, which increased 15.7% and 52.3% respectively, when compared to December 31, 2017.|
We offer our products and services through a wide multiple-channel distribution network with presence in all the Argentine provinces and in the City of Buenos Aires, servicing 2.5 million active clients as of December 31, 2018. This network includes 252 branches, which provide services to the retail segment and to small and medium-sized companies and institutions. Corporate Banking is divided by industry sector into Consumer Goods, Heavy Industries and Energy, each of which provides personalized services to large companies. Complementing the distribution network, at December 31, 2018 there were 14 in-company branches, one point of sale outlet (a contact point that offers only automated services and commercial assistance, but does not have a license granted by the BCRA to operate as a branch) and two points of express support, 834 ATMs and 844 self-service terminals (“SSTs”).
Additionally, we provide an electronic banking service, a modern, secure and functional internet banking platform and a mobile banking app. The Bank had a total number of 6,107 employees as of December 31, 2018.
The distribution network is complemented by business alliances, including those with LATAM Airlines, sponsorship of the soccer club Talleres de Córdoba and credit card programs with River Plate and Boca Junior, as well as insurance companies, such as La Caja, as well as the agreements with the automobile companies Peugeot, Renault and Volkswagen, that have allowed us to expand our client reach cost-effectively and further expand our points of presence while enhancing our value proposition.
BBVA Francés has invested in its physical and digital distribution network, making it possible to offer a differential, flexible, convenient banking experience to its customers. In addition, we consider that with our existing distribution structure, we have the necessary reach and scale to facilitate our expected growth while improving our operating efficiency, number of customers and products.
We believe we have a privileged position to take advantage of the market opportunities that appear in a scenario of economic growth and declining inflation and in a financial system expected to grow and further consolidate.
BBVA Francés has identified transformation and growth as the drivers of its strategy.
BBVA Francés focuses on transformation based on the conviction that client experience will be the decisive differentiating factor in the success of the institution in the coming years. Moreover, the financial intermediation activity is aligned with the technological revolution reshaping most industries, forcing the Bank to reconsider and redesign the model to service, attract and interact with customers in general.
The following describes the Bank’s primary transformative initiatives in 2018:
The Bank’s digital transformation began in 2015 with an expanded digital presence in Google and Facebook. In 2017 and 2018 the Bank’s digital strategy became more sophisticated by adding leading digital applications and focusing on excellence in user experience and digital sales solutions, thus supplementing the Bank’s traditional channels to become more productive and increase the number of clients.
During 2018, 46.4% of the Bank’s products were sold through digital platforms, while 59.4% of retail clients were already engaging in digital transactions compared to 41.1% and 54.7% in 2017, respectively. The Bank believes this transformation makes it distinct from its competitors as to quality of service, leading to its consistently high NPS (Net Promoter Score), for which the Bank always aims to rank first among Argentine banks. In turn, BBVA Francés seeks to take advantage of data and technology to design offerings of products and services that meet clients’ needs.
The Bank’s digital transformation strategy is primarily focused on increasing client self-service through digital tools, growing in an open market and improving points of physical contact with clients. BBVA Francés has been focused on developing an omni-channel service model, in which physical branches are just one way among many of connecting with clients. While the Bank has an extensive countrywide branch network present in all provinces, the role of branches is changing and is expected to continue to change. More and more value-added transactions are expected to be served personally, while other types of transactions will be increasingly undertaken through digital channels.
In sum, the Bank’s digital transformation process is an essential element of its strategy, from both business and growth perspectives, which enables it to connect and serve clients in a manner consistent with their expectations, as reflected in the Bank’s consistently high NPS. It also contributes to the Bank’s efficiency, paving the way for a better use of resources and delivering a competitive advantage.
Cultural Transformation - Agile
In 2018 the Bank undertook a cultural transformation under the name and concept of “agile”, with a focus on always putting the customer first and finding solutions to their needs. Under this new model the Bank implemented a new organizational structure, providing greater resources to teams and new working methodologies including reorganization of roles and tasks, open communication and synergies fostered by open plan workspaces, and the latest technology available.
In 2018 BBVA Francés reaffirmed its goal to increase its market share and is now one of the leading banks in the Argentine financial system. The Bank has implemented an ambitious growth plan which includes expanding the customer base, both for individuals and companies, as well as the size of the balance sheet. This growth plan, which was implemented by BBVA Francés in 2017, continued during 2018 in terms of expansion of the client base of both individuals and companies, with an increase of over 162 thousand active clients during 2018, reaching an aggregate of 2.5 million retail clients as of December 31, 2018. With respect to small and medium-sized companies, BBVA Francés reorganized the management model for this client segment, providing service to small and medium-sized companies throughout the entire network of branches, thus enabling greater penetration of and closeness to smaller companies, achieving a client base of approximately 48 thousand companies as of December 31, 2018.
BBVA Francés closed its fiscal year ended December 31, 2018 as one of the leading financial institutions in the Argentine financial system, increasing its customer portfolio and gaining market share in its credit portfolio.
The total loan portfolio of BBVA Francés amounted to Ps.181.6 billion as of December 31, 2018, which reflected a 3.9% decrease year-on-year, while private loans amounted to Ps.171.9 billion, decreasing 5.7% year-on-year. As a result, the Bank had a private loans consolidated market share of 8.7% as of December 31, 2018 (based on BCRA market information as of such date).
The Banks’s growth plan has focused on products and segments that the Bank considers vital for economic development of both customers and Argentina as a whole in the coming years. Loans decreased by 3.9% from December 31, 2017 to December 31, 2018 and increased by 42% on a nominal basis, in which context the Bank has expanded its market share from 7.3% as of December 31, 2017 to 7.7% as of December 31, 2018, an increase of 40 b.p. (based on BCRA market information as of such date).
BBVA Francés has been focused on gaining market share for its core products. In the retail business there was an increase in personal loans, which had a market share of 5.29% as of December 31, 2018, an increase of 65 b.p. compared to its market share as of December 31, 2017 (based on BCRA market information as of such date). It also increased its share in the credit card business, both in financing and consumption, which increased by 97 b.p and 96 b.p., respectively, from December 31, 2017 to December 31, 2018. In addition, the market share for commercial loans increased by 63 b.p. over the same period (based on BCRA market information as of such date).
With respect to liabilities as of December 31, 2018 total deposits amounted to Ps.259.5 billion, increasing 14.2% over the prior twelve months, over which period our sight account deposits (checking and savings accounts) grew 11.2%, whereas time deposits rose 26.6%. As of December 31, 2018, saving and checking accounts amounted to Ps.169.7 billion. The Bank’s market share for private sector deposits rose 25 b.p reaching 8.0% as of December 31, 2018 (based on BCRA market information as of such date).
The Bank considers funding from deposits as a vital component in its financing given the lack of depth of the Argentine capital markets and difficulties of Argentine companies in accessing international capital markets, especially in the retail and middle market segments. In this line, UVA deposits were launched in 2017 and have been significant for the Bank at both the retail and wholesale levels.
On November 8, 2018, BBVA Francés issued Series 25 of its UVA bonds for Ps.784.3 million (nominal value). The bonds mature 24 months after issuance and carry a 9.5% fixed interest rate which is payable quarterly.
Below is an overview of each of our principal business lines and their evolution during 2018.
The Bank has a very strong presence in the retail banking segment where it offers a comprehensive set of financial services across all income segments and provides services to employees (payroll), professionals and merchants.
We offer our products and services through our extensive multi-channel distribution network that includes 252 branches, 834 ATMs, 844 self-service terminals, a telephone banking service, a modern, secure and functional internet banking platform with over one million active users representing over 59% of our total clients (including Premium World (Affluent), Premium (Mass Affluent) and Classic (Mass)), a mobile banking app with more than 563,000 users and a total of 6,107 employees, each as of December 31, 2018. Our distribution network is complemented by strategic partnerships that have allowed us to expand our client reach cost-effectively.
Our business alliances, which include for example LATAM Airlines, the Talleres de Cordoba soccer team and credit card programs with River Plate and Boca Junior, as well as Peugeot, Renault and Volkswagen, and insurance companies such as La Caja, allow us to not only offer an attractive and differentiated value proposition to our 2.5 million active customers but also expand our customer base.
We have made our digital strategy a priority. In this respect, maintaining a cutting-edge digital banking platform has been a key element of our strategy as clients increasingly value the flexibility and convenience of digital channels. As of December 31, 2018, more than half of our total clients were active users of our website and/or our mobile banking app. We have established an ambitious internal goal of all of our clients experiencing our digital channels and of originating a significant portion of our sales online. In addition to being convenient for our clients, digital channels yield other benefits for us such as improving our operating efficiency, reducing capacity utilization and resources used at our branches and other physical channels and generating business intelligence with respect to our clients’ behaviors and needs that facilitates innovation.
We are also committed to providing a differentiated and high quality service and user experience for our clients at our branches and throughout our entire distribution network. We believe that customer service is highly valued by users of financial services in Argentina and that providing high quality service is an important way of distinguishing ourselves from our competitors. In this respect, we constantly improve our branches and digital applications to further enhance our customers’ experience. In addition, we monitor regularly our performance through client surveys and other feedback mechanisms to ensure that we consistently provide a high quality experience. We will continue to be focused on deploying technology innovations and adapting our processes to reduce customer wait times at branches and improve the productivity of our workforce.
With the objective of providing the best possible value proposition to all our customers, we have segmented our retail business in the following groups:
|·||Premium World (Affluent). This group includes our wealthiest customers and as of December 31, 2018 accounted for approximately 94,108 clients, a 40% increase from the previous year.|
|·||Premium (Mass Affluent). As of December 31, 2018 this group accounted for approximately 173,219 clients, a 12% increase from the previous year.|
|·||Classic (Mass). As of December 31, 2018 this group accounted for approximately 1,530,085 clients, a 5% increase from the previous year.|
|·||Financial Inclusion (Express). As of December 31, 2018 this group accounted for approximately 670,278 clients, a 6% increase from the previous year. This group is defined by the limited interactions they currently have with us; however they also represent an attractive cross-selling opportunity. They usually have a single savings account and sometimes one credit card.|
We strive to be our clients’ principal bank, and to that end we have teams that actively work across each of these customer groups to obtain our customers’ payroll deposits. As of December 31, 2018 we had 583,474 customers with their payroll direct deposited with the Bank.
As of December 31, 2018, our non-performing loan (“NPL”) ratio (defined as loans with more than 90 days past due divided by total loans) for retail lending was 2.14%, compared to 1.44% as of December 31, 2017.
In terms of assets, as of December 31, 2018, the loan portfolio amounted to Ps.76.9 billion, decreasing 4.5% in the year, whereas deposits amounted to Ps.180.6 billion, an increase of 12.0%.
In 2018, Retail Banking focused on the following products:
BBVA Francés continued offering a wide range of products through all selling channels, engaging in tactical pricing actions during the year, attaining good spread management and placement, and enabling it to increase its market share. As of December 31, 2018, BBVA Francés accounted for 5.29% of the total market, an increase of 65 b.p. compared to December 31, 2017.
In turn, the Bank maintained its product communication campaign in advertising media and continued to expand in terms of web and mobile placement, ending the year with of digital sales amounting to 48% of total sales for the year.
During the year, alliances were reinforced through the real estate channel and a stronger relationship was developed with different real estate developers and search portals. Other 2018 highlights in mortgage loans included the improvement of the website portal for digital simulation and optimization of operating processes. Such developments, in the context of the macroeconomic climate in 2018, contributed to an increase in transactions that enabled the Bank to perform strongly relative to its competitors in the market. As of December 31, 2018, BBVA Francés accounted for 3.4% of the total market, an increase of 17 b.p. compared to December 31, 2017.
BBVA Francés was one of the leaders during 2018 in the placement of car loans, through its respective joint ventures with Peugeot-Citroën, Renault-Nissan and Volkswagen-Audi-Ducatti. Following historic record sales in the first half of the year, the automobile market was affected by the foreign exchange crisis, the rise in interest rates and a fall in purchasing power, which negatively affected the automobile financing business. BBVA Francés and its joint venture partners had a market share of 40% for new secured financing transactions in respect of new vehicles in 2018.
During 2018, the Bank attracted more than 60,000 new clients with its products, and car loans were one of the main channels for attracting new customers to the Bank. In addition, wholesale financing transactions were performed with car dealers in coordination with automobile manufacturers, in a vertical integration fashion, and cross-selling with car dealers of the brands associated with the Bank’s joint ventures was significant.
In the motorcycle business, BBVA Francés doubled its share of loans for high-end motorcycles from 20% in 2017 to 40% in 2018 of performed transactions, with new customers for motorcycle loans accounting for 20% of the volume of new customers to the Bank in 2018. Commercial agreements were reinforced during 2018 with respect to the brands KTM, BMW, Royal Enfield and Husqvarna. In addition, a new agreement was reached with Harley Davison during 2018. In the car business, new agreements were reached with Suzuki and Subaru.
In line with the digital development strategy, new website tools were enabled for online scoring of loans for both cars and motorcycles offered by the Bank’s main business partners, which gave rise to client referrals already pre-qualified in the dealer platform.
BBVA Francés continues to expand options for the redemption of loyalty points to include a wide variety of products and experiences. Sponsorships continued to be implemented during 2018 by means of alliances with the music producers Move Concerts and Popart. Moreover, a new agreement was executed with the theater producer RGB, which adds the traditional winter holiday events “Disney on Ice” and “Cabaret”. FrancésGo, which is important to the Bank’s communication with its credit card customers, reached 690 thousand net downloads in 2018 and had an NPS equal to 61%. In 2018 the Bank added new features such as fingerprint access on iOS devices and notifications regarding rebates and payments due.
Promotional actions were carried out for redemption of miles accrued in exchange for air tickets and catalog products. In 2018 there is a new chance to redeem points in exchange for hotel accommodation and to earn miles on reservations. In addition, actions were carried out for the purchase of miles at a 50% discount for BBVA Francés customers. Premium and Premium World customers are eligible for special earning benefits, access to VIP lounges and cabin upgrades.
As part of its merchant program, the LATAM Pass program continued to be offered to retail stores that provided evidence of sales vouchers with BBVA Francés. In addition, an immediate web-based voucher payment option was implemented, adding benefits to the value offer to retail stores.
These actions allowed the Bank to increase credit card consumptions in terms of amounts processed 47.2% in 2018 compared to the previous year, which reflects an increase in the credit cards consumption market share of 96 b.p., closing the year at 13.5%. During 2018, 60% of credit card accounts activated recorded activities, reflecting an 8.6 percentage point decline over 2018.
For BBVA Francés, this is the core product in the funding strategy. The goal is to grow retail balances, which tend to be more stable and at a lower cost compared to time deposits from our corporate and investment banking business line, by expanding the customer base with investment on the Classic (Mass) segment, and offering better options and convenience for the high income segment.
During 2018, performance of time deposits was strong. Total time deposits denominated in pesos had a market share of 6.26% as of December 31, 2018, an increase of 31 b.p. compared with December 31, 2017. Retail time deposits, which are time deposits of less than Ps.1 million, had a market share of 7.1% as of December 31, 2018, an increase of 12 b.p compared with December 31, 2017, and wholesale time deposits, which are time deposits of more than Ps.1 million, had a market share of 5.6% as of December 31, 2018, an increase of 97 b.p. compared with December 31, 2017. Wholesale time deposits saw a significant increase in the number of customers in 2018 as a result of the Bank’s multi-segment integral management, especially as a result of the incorporation of private banking in addition to Premium client management. In the Classic segment, the Bank focused on the incorporation of new clients, growing by 30 thousand clients in the retail segment during 2018.
For 2019, the focus is expected to continue to be on attracting new clients both in the Classic and high-income segments, by implementing a multi-channel strategy of including executives at branches, private banking, dedicated representatives and web and mobile channels. In December 2018, a raffle was held for all customers who are holders of the savings account package “El Libretón”, which includes a savings account in U.S. dollars. Prizes were drawn in the total amount of Ps.150 thousand.
Small and Medium-sized Companies
BBVA Francés maintains a leadership presence among corporations, agricultural producers and other institutions and continues working to maintain a strategic alliance with this sector in Argentina with a loan portfolio of Ps.52.4 billion as of December 31, 2018, a decrease of 17.5%. Total deposits amounted to Ps.49.2 billion as of December 31, 2018, an increase of 5.8% compared with December 31, 2017. We have approximately 46 thousand clients in this business area. Our commercial lending portfolio NPL ratio, including our corporate lending portfolio, was 1.83% as of December 31, 2018 as compared with 0.20% as of December 31, 2017. This significant increase was mainly due to the effect of the adverse economic climate on our customers.
Among our principal lending products are cash advances, overdraft protection, financial loans and foreign trade. In addition, we offer services such as leasing and differentiated corporate and agriculture credit cards, among others. We also offer checking accounts and time deposits as well as investment management services through our investment funds, transaction services, cash management solutions, collection services and payment services.
The Bank’s operating model for middle market was strengthened in 2018, through which the Bank increased its geographic capillarity, providing improved servicing to clients. In turn, automatic self-service tools and channels were developed, and they generated more than 30% of transactions through the Bank’s digital channels, which has resulted in a leading position in the market among private banks for providing advances on post-dated checks. Despite market changes, an aggressive growth strategy was sustained by adjusting prices of short- and long-term loans, thus generating good penetration among larger enterprise clients and expanding the base of smaller clients. During 2018, over 40,000 new payroll accounts were contributed to the Bank for payment of wages, with 49,136 active clients, increasing by over 7,000 net clients since the launching of the New Enterprise Model.
In order to expand the service model, in 2018 new officers were recruited with varying business profiles to assist different types of clients in various markets. As of December 31, 2018, the segment had 167 specially qualified officers assigned to provide ongoing assistance in the development of clients through the Bank’s network of branches. In addition, in 2018 the Bank worked to improve service quality by continuing its onboarding training program for business agents and candidates, conducting a training program targeted at branch managers, delegating credit-related powers to managers to improve response times and an incentive plan focused on goal achievement, and launching ten new digital products mainly intended for the self-service segment.
In 2018, small and medium-sized companies banking focused on the following products:
BBVA Francés performed well in the foreign trade market in 2018, despite a 21% decrease in the volume of imports and exports in 2018 compared with 2017. The Bank reached a market share of 15.99% in import payments as of December 31, 2018, based on the import ranking published by BCRA, thus having maintained its leading position for six consecutive quarters, while it ranked second as of December 31, 2018 in the ranking published by the BCRA for export charges, with a market share of 13.63%. In 2018, the foreign trade market contracted by 1.29%. The portfolio in U.S. dollars was US$1.4 billion as of December 31, 2018, compared to US$1.3 billion as of December 31, 2017. In 2018, the Bank recorded US$3,293 billion in new loans, compared to US$2,350 billion in 2017. In 2018 the Bank registered 246 new commercial customers, for a total of 6,814 commercial customers as of December 31, 2018. In December 2018, 64.59% of foreign trade transactions were carried out through the Bank’s Comex platform, compared with 52.5% in December 2017.
In order to continue growing in terms of the number of clients, digitalizing and strengthening the business in 2019, the Bank is working on the following lines of action: export/import financing at Comex online; transfers from individuals abroad through a web-based self-service; re-engineering of rates with business rules per concept and client intelligence; minimization of approval times for a new rating or exchange rating; implementing GPI Swift, where clients will have a tracking number for their transactions; completing product digitalization (opening of letters of credit for imports, letters of credit for exports and collections); works have begun in line with global in cash management; increased presence in the provinces; client training workshops in Comex business digital products; and campaigns/ commercial actions with follow-up on performance.
In 2018 the Bank’s agricultural business segment experienced a 65% increase in the size of its asset portfolio to Ps.19.9 billion at December 31, 2018 from Ps.12.0 billion at December 31, 2018. In addition, the Bank added more than 200 new agricultural business customers and recorded a significant increase in transaction volume. In 2018 in the agricultural business area, the Bank experienced strong volumes with suppliers of machinery and other production inputs. In addition, the Visa Agro card has also experienced strong participation among the Bank’s customers, including more than 80 agreements with major providers participating in the card program. The Bank also experienced strong performance in the livestock sector as well as in regional services. There was significant increase in the Bank’s market share of agricultural business, and the Bank ranked third in 2018, from fourth in 2017.
The Bank continued to implement its digital transformation plan during 2018. See “—Strategy—Transformation—Digital Transformation” above.
Corporate & Investment Banking (CIB)
Through our corporate and investment banking business we offer banking services to approximately 1100 multinational companies and local private-sector and state-owned enterprises. In terms of assets, as of December 31, 2018, the loan portfolio for CIB amounted to Ps.52.2 billion, an increase of 15.7%, whereas deposits for CIB amounted to Ps.29.7 billion, an increase of 52.3%.
In our corporate business line, we leverage the BBVA Group’s global presence and interconnected structure covering the corporate business line across the globe. Our corporate and investment banking products include checking, savings, time deposits and bilateral loan products that allow for structured finance for our global clients. In addition, as part of our investment banking services, we offer advisory services on mergers and acquisitions and initial public offerings and corporate- and project financing. In Argentina we cover local clients, including large and medium-sized companies, and large international clients. Our clients also include institutional and governmental clients including pension funds, insurance companies and banks.
Through our treasury unit we also offer trading services, and we are also engaged in capital markets, money markets and foreign exchange markets, brokerage services in connection with fixed-income securities, derivatives, leasing and trust services.
BBVA Francés continued to enjoy a leading position in the Argentine wholesale segment with notable performance both in the credit business and transaction-based banking services. CIB was focused in 2018 on achievement of strategic goals, including, among others, leadership in both Corporate Banking and Investment Banking, optimization of capital allocation and increasing cross-selling margins. The Bank is working to attain these goals through increased business consolidation, process efficiencies and the establishment of long-term relationships with customers.
The following describes the four main business areas within CIB.
This area provides credit solutions across the entire value chain, including advice, structuring and financing, with a wide range of products. This area is divided into Project Finance and Global Lending.
Global Transaction Banking
This area provides front-office services to companies to allow them to manage working capital by means of financing instruments denominated both in pesos and dollars. It also provides products for cash management and transaction products through multiple channels: transaction platform, electronic banking (BBVA Francés Net Cash), personal attention, direct channels, SWIFT and mobile banking. Global Transaction Banking is divided into Working Capital, Cash Management, Client Resources, and Trade Finance and Correspondent Banks. Global Transaction Banking has been focused on becoming a well-established leader in financing to clients both in pesos and dollars.
This area is responsible for providing services related to origination, structuring, distribution and risk management of market products. Global Markets is divided into Foreign Exchange, Fixed Income and Credit (Debt Capital Markets).
In Equity Capital Markets, Corporate Finance is in charge of meeting clients’ needs related to the securities markets, with focus on developing customized solutions for companies to enhance their value. Services include initial public offerings (IPOs), capital increases with or without rights, accelerated placements, convertible notes, flexible dividends, treasury shares and public offerings for withdrawal of outstanding shares from public offering (PTOs).
Corporate Finance also provides advice on acquisitions, divestments and mergers, both for registered and privately owned companies, to help them attain their strategic goals. In addition, it works on matching private equity (financial or strategic partners), valuation reports and fairness opinions, advice on acquisitions and privatizations.
The following table sets forth the relative proportions of loans and advances (net of allowance for loan losses) and deposits attributable to our principal business lines during the last two years.
|Financial assets at amortized cost - Loans and advances|
|December 31, 2018||December 31, 2017|
|(in thousands of pesos, except percentages)|
|Small and medium-sized companies||52,444,965||28.88||%||63,454,009||33.57||%|
|Financial liabilities at amortized cost - Deposits|
|December 31, 2018||December 31, 2017|
|(in thousands of pesos, except percentages)|
|Small and medium-sized companies||49,240,049||18.97||%||46,547,108||20.48||%|
The evolution of our service models is inspired by the values of BBVA: Client comes first, We think big and We are one team. For such reason, great efforts are in progress to provide better customer service, to provide the best solutions and to innovate in the way the Bank conducts business. In response to such efforts, clients have embraced the use of new technologies and formats in performing their transactions, thus allowing the Bank to continue promoting projects aimed at differentiation and meeting clients’ demands.
The Bank’s comprehensive service concept was expanded in the branch network during 2018 for all customer segments through specialized agents. Additionally, specialized middle market servicing was extended to every branch during the year.
BBVA Francés works with a multiple-channel strategy focused on the user’s experience fostering the best practices for each contact channel and innovating with the technological advances available for each area. On the one hand, it has a brick-and-mortar structure which includes branches, a call center and a network of ATMs and SSTs. On the other, it has digital channels, such as web and mobile. Both are complemented by partners and strategic alliances which make it possible to present the value proposition to a higher number of parties.
In retail banking, the focus in 2018 was on expanding digital banking and optimizing management tools in the following client segments:
|·||Premium World (Affluent) / Premium (Mass Affluent): This group includes high-income retail customers serviced by dedicated executives in branches which have a premium space to provide the highest customer service quality by executives who follow a specific protocol for customer service and management. During the year, a direct management model was well established. Such model is addressed to clients who engage in a high level of digital transactions, thus enabling them to be served without the need to visit branches, by account managers responsible for such service. This model is expected to be expanded next year to reflect clients’ evolution in the digital era. The connection, growth and retention in this client segment is a priority to the Bank.|
|·||Classic (Mass): For retail customers with an identified business activity, the Bank has developed a management model based on business officers who can understand both their personal and business needs in order to offer them unified, simple assistance. During the year, it was tested in some regions and may be expanded based on clients’ feedback.|
|·||Financial Inclusion (Express): Retail customers who do not fall into any of the previous segments are managed by commercial officers from the branches and, increasingly, through automatic or telephone channels.|
The middle market banking model was altered to create regional business centers with officers that assist their middle market and small- and medium-sized companies portfolios with the following objectives:
|·||Unifying small- and medium-sized companies and middle market banking: This implied a comprehensive view of the business regardless of the company size. For this purpose, follow-up and support to these segments were unified from central areas.|
|·||Approaching customers and dynamism in management: In order to improve customer service, the structures were adapted and regional business centers were created. Every branch can now assist customers in their needs.|
|·||Measurement: It was expanded to follow the activity of companies and individuals for information processes in each branch.|
|·||Digitalization: Significant innovations were generated for automatic management of customers.|
In parallel with traditional channels, several optimizations are being undertaken to streamline the rest of the tasks with a productivity aim.
|·||Mass Sales Force: The sales team has been focused in 2018 on improving channel performance through productivity plans, incentive models, enhanced processes and revising the value offer. Advantage was taken of the dynamism of this team to link individuals engaged in business or small and medium-sized companies to products, for example, merchant acquisition.|
|·||Call Center: It is a cross-selling and client attraction channel through specific campaigns. With client analysis models, performance of this channel continues to improve. In addition, the retention service division was strengthened through improvements in the value proposition and service processes.|
|·||Partners and Business Alliances: These are boosters of the Bank’s strategy of attraction of and connection with clients, enabling the Bank to reach eligible prospective clients for each product. Follow-up on each of these initiatives is essential to tailor offers to clients’ needs and satisfaction.|
The Bank is focused on customer service by improving servicing, and one of its goals is customers’ self- management through the development of multiple channels. In this line, over the past year, more than 131,000 transactions were migrated away from branches, which implied the transfer of significant operating resources to other commercial roles. In turn, waiting times in branches were lowered, leading to first place in the Net Promoter Score for customers’ experience in branches. The Net Promoter Score is a management tool that can be used to gauge the loyalty of the customer.
In 2018, the Bank made progress in connection with the following main lines of action as described below:
|·||ATM/SST Replacement and Expansion Plan: 44 works and 217 new pieces of equipment.|
|·||ATS Plus, enabling input of up to 160 bills per transaction: 81 SSTs at 74 branches.|
|·||Deposits in dollars was enabled at SSTs of 31 branches.|
|·||SST Availability Plan: record 93.6%.|
|·||SSTs were enabled to receive payments and deposits on Saturdays, Sundays and holidays from 7 a.m. to 10 p.m. through a pilot program at Branch 68 Concordia. Expansion is expected to take place in 2019.|
|·||Full Time Lobby: lobby always open. Implemented at 129 branches.|
|·||ATM and SST balancing and maintenance using cameras as a double check system: implemented at 90 branches.|
|·||Francés Express: 100 pieces of equipment were replaced.|
|·||Double-profile Cashiers (Cashier and Operating Agent/Cashier and Business Agent): 98% of cashiers.|
|·||Harmonized Service Model: Customer routing system at 84% of the network (213 branches).|
|·||New feature for generation of online appointments, through the app for Premium and Premium World clients (90 branches).|
|·||Francés Line: comprehensive plan for migration to automated management channels (IVR / FNET). 24% reduction of calls to operators, now served automatically.|
With the aim of boosting digital banking, the Bank has been focused on three core ideas: attracting new customers, excellence in users’ experience and digital sales solutions.
In the second half of 2018, BBVA Francés reached the first level in the Net Promoter Score for web channel within its peer group. With respect to internet banking, this indicator reached 80%, which represents an improvement compared to 70% obtained in 2017.
BBVA Francés continues to aim to provide the greatest availability of web-based and mobile browsing in the market, supported by technology that provides the most suitable solutions. All these changes boosted the number of digital clients, who engage in transactions on the web and through mobile channels, with 59.4% of active clients using digital tools in 2018.
With respect to digital sales in 2018, the growth strategy was focused on the incorporation of new digital marketing tools, incorporating new solutions and optimizing those tools put in place in previous years.
In retail banking, in 2018 the Bank provided migration to BBVA Group-wide interfaces for credit card applications from non-clients and a mortgage-backed loan simulator. Improvements were made in the public web experience both for payroll accounts and account bundled packages. Additionally, the ability for clients to apply for UVA-indexed personal loans was added to Francés Net. These efforts translated into a significant increase in the number of credit cards sold through digital channels, an increase in the share of digital personal loans (including UVA-indexed) over total loans of the Bank and a large number of requests for mortgage-backed loans.
In 2018, the Bank focused its digital marketing efforts on attracting new clients through new tools and developing deeper relations with partners.
In relation to the Bank’s various products, results and improvements developed in 2018 are described below:
|·||Personal Loans: These accounted for a 48% share over total loans as of December 31, 2018 in the individual banking segment, from 33% as of December 31, 2017.|
|·||Credit Cards: The issuance of primary cards was 37% of total card issuances in 2018, the same as in 2017, and the issuance of additional cards accounted for 38% of total card issuances.|
|·||Mortgage-backed loans: These accounted for an 18% share over total transactions during 2018 in terms of loans amounts settled at the Bank.|
|·||Investments: Represented a 53% share of digital sales over total time deposits as of December 31, 2018, and represented 94% of the total subscription for mutual investment funds during 2018.|
|·||Savings Accounts: Benefitted from cross-selling, reaching a 46% share of total savings accounts in the Bank as of December 31, 2018, compared with 44% as of December 31, 2017.|
|·||Insurance: The share in digital sales was 22% over total sales during 2018, compared with 20% in 2017.|
Throughout 2018 the Bank added new features to the FrancésGo application, and the user experience was enhanced, which resulted in over 940 thousand subscribers to the program, representing a 25% increase, through experiences such as Cirque de Soleil, Disney on Ice, Sugar, Abel Pintos, and Boca vs. River.
The Bank added new features in the section My Cards (Mis Tarjetas), including the option to withdraw cash without a card from any ATM, login with fingerprint in iOS devices, LATAM Pass loyalty program subscription and other, with over 35 thousand users a month since its launch in November 2017.
Late last year, the Bank launched a specialized version of FrancésGo for retail stores, providing access to the benefits offered by BBVA Francés. During the year over 1,000 retail stores registered digitally.
In 2018 the Bank’s corporate banking strategy of offering digital solutions was well-established, enabling improvement and retaining positioning within such segment.
Digital Products launched in 2018 included the following:
|·||Francés Net Cash digital agreements;|
|·||mobile check discounting;|
|·||Francés Net Cash custody account registration;|
|·||immediate payment of vouchers for people engaged in business at Francés Net; and|
|·||check discounting for people engaged in business at Francés Net.|
The following were highlights from corporate banking from 2018:
|·||39% of check discounting transactions were performed through a digital channel;|
|·||15% of total agreements of corporate banking were digital and over 700 clients were using the digital product;|
|·||new report was introduced on reconciliation of vouchers and separate detail of taxes for clients using immediate payment of vouchers; and|
|·||improvement in mobile deposits enabled multiple deposits from the Francés Net Cash app.|
Quality and Client Experience
In line with BBVA’s mission “To make the opportunities of this new era accessible to everyone”, and in a manner consistent with the strategic priority of “Delivering the best experience to the client”, in 2018 the function and scope of quality and client experience was expanded and improved, with a focus on the clients’ needs.
Supported by a strong feedback infrastructure and the NPS index as a metric of excellence, the Bank developed a plan to gain insight into customers’ experience at each point of contact with BBVA Francés and each purchased product or service. Based on such information about the main needs of customers at each interaction with the Bank, along with a strategy in place that is intended to execute projects and processes with a greater impact, the Bank has been focused on experience enhancement. Focused on sharing client information throughout the entire organization, in 2018 the Bank undertook a detailed analysis, seeking to solve problems found in a fast, dynamic and innovating way based on quality metrics and indicators, with a focus on the user.
Understanding peoples’ needs to design products and services that meet their expectations is one of the fundamental pillars to achieve differentiation. Innovation in solutions is seen by the Bank as the way to a real transformation now and in the future. For such reason, the Quality and Client Experience Plan for 2019 consists of establishing a governance model that enables implementation of concrete actions for improvement in priority fields identified in interactions with the clients, and exploring new opportunities to get to know the customers beyond the NPS surveys while engaging the entire organization.
Our information technology, or IT, area is responsible for our systems operation and availability as well as data security and integrity. Our main data center and our disaster recovery and back-up center are located in Buenos Aires, Argentina. Our modern technology platform is interconnected with the platform of the BBVA Group, which enables us to provide seamless coverage to our customers.
We have made significant investments in technology, and we plan to continue doing so to enable us to retain and enhance our competitive position in various markets and to improve the security and quality of our services.
Our operational platform efficiently combines our modern business-oriented IT systems with our multichannel distribution strategy, resulting in innovative ways to serve our clients. We have well-developed CRM tools that allow us to monitor our clients’ behavior and provide them with targeted product offerings through diverse channels. As a result, we are able to effectively leverage alternative distribution channels, such as ATMs, internet banking and our contact centers, which are complementary to our traditional proprietary branch network, which enables us to provide better service to our clients and to increase our sales ratios.
We have implemented multiple controls to respond to the new threat of cybersecurity, based on a comprehensive, multi-faceted security framework that include people, technology, processes and procedures.
In Argentina, ownership of trademarks can be acquired only through a validly approved registration with the National Institute of Industrial Property (Instituto Nacional de la Propiedad Industrial, or INPI), the agency responsible for registering trademarks and patents in Argentina. After registration, the owner has exclusive use of the trademark in Argentina for five years. Trademarks registrations can be renewed indefinitely for additional five-year periods, if the registrant proves that it has used such trademark within the last five years.
We have several trademarks, most of which are brand names of our products or services. All our material trademarks are registered or have been submitted to INPI for registration by the BBVA Group or us.
Banco Bilbao Vizcaya Argentaria, S.A. (BBVA)
As of December 31, 2018, BBVA owned 66.55% of our capital stock.
BBVA is a global financial group, organized in six geographical business segments: (i) Banking Activity in Spain, (ii) Non-Core Real Estate, (iii) Mexico, (iv) South America, (v) the United States, (vi) Turkey and (vii) Rest of Eurasia. In addition to these geographical business areas, BBVA has a separate "Corporate Center" segment. This segment handles certain general management functions. Some of the benefits we receive from the BBVA Group are:
|§||sharing of technology;|
|§||development of new banking products that have been customized for the Argentine market;|
|§||leveraging BBVA’s global client relationships to serve those clients operating in Argentina; and|
|§||BBVA’s participation in BBVA Francés as a shareholder is both long term and strategic.|
Subsidiaries and investees of BBVA Francés
The following chart reflects our subsidiaries as of December 31, 2018:
|(1)||Undergoing liquidation proceedings.|
The following information is related to our subsidiaries, joint ventures and associates as of December 31, 2018:
|Subsidiary or investee company||Country of |
BBVA Francés Ownership and Voting Power
|BBVA Francés Asset Management S.A.(3)||Argentina||95.00%||Investment fund manager||449.2|
|BBVA Francés Valores S.A.||Argentina||97.00%||Stock exchange brokerage||169.4|
|Consolidar AFJP S.A. (undergoing liquidation proceedings)||Argentina||53.89%||Pension fund manager||52.8|
|(1)||Total stockholders’ equity as of December 31, 2018.|
|(2)||Statutory stockholders’ equity, adjusted for purposes of consolidation so as to apply an accounting criterion uniform with that of BBVA Francés, if applicable.|
|(3)||The Bank has an effective 95.00% ownership interest in the capital stock of the company and has an indirect 4.8498% ownership interest through BBVA Francés Valores S.A.|
Below is a description of our subsidiaries:
|-||BBVA Francés Asset Management S.A. Sociedad Gerente de Fondos Comunes de Inversión.|
During 2018, the investment funds industry in Argentina continued to grow. As per preliminary information prepared by the Argentine Investment Funds Association (CAFCI), the industry ended the fiscal year with assets under management amounting to Ps.599,645.2 million, an increase of Ps.55,595.5 million, or 10.2% compared to at December 31, 2017.
Such increase was led by the term-deposit fund segment, which at December 31, 2018 totaled Ps.151,840.3 million, an increase of Ps.89,800.1 million, or 144.7%.
The money market segment ended the fiscal year with total assets under management amounting to Ps.447,804.8 million, decreasing by Ps.34,204.6 million during the year, or 7.1%. The largest declines were in fixed-income funds, which decreased by Ps.43,865.4 million, or 11.7%.
As of December 31, 2018, the assets under management by BBVA Francés Asset Management amounted to Ps.34,566.6 million, a decrease of Ps.895.3 million, or 2.5% compared to the previous year. Pursuant to the interim asset ranking prepared by CAFCI, BBVA Francés Asset Management had a total market share for investment funds of 5.7% as of December 31, 2018, thus ranking fourth.
In the category of fixed-term funds, at December 31, 2018 the company managed assets in the amount of Ps.15,899.2 million, an increase of Ps.10,922.3 million, or 219.5% compared to the assets held as of December 31, 2017.
In the market funds segment, the company showed a decrease in 2018 of Ps.11,817.6 million, or 38.8%. At December 31, 2018, managed funds amounted to Ps.18,667.3 million. In this latter category, there was a considerable decrease in fixed-income funds, which fell by Ps.11,343.8 million, or 39.5%, in the year, and amounted to Ps.17,342.6 million at December 31, 2018.
As of December 2018, the company had registered 21 investment funds under management with the CNV.
As of the date hereof, the funds managed by the company are as follows:
|-||FBA Renta Pesos, FBA Ahorro Pesos, FBA Bonos Argentina, FBA Renta Fija Plus, FBA Horizonte, FBA Horizonte Plus, FBA Bonos Globales, FBA Renta Mixta, FBA Retorno Total I, FBA Calificado, FBA Acciones Argentinas and FBA Acciones Latinoamericanas are currently operating normally, with subscriptions and redemptions in pesos.|
|-||FBA Renta Fija Dólar, FBA Renta Fija Dólar Plus, FBA Bonos Latam and FBA Retorno Total II are also operating normally, and they admit subscription and redemption in US dollars.|
|-||FBA Renta Pesos Plus is registered with the CNV in the process of changing its name, changing from subsection b to subsection a, and changing its investment policy.|
|-||FBA Brasil I, FBA Renta Pública I, FBA Renta Pública II and FBA Renta Fija Local were approved by the CNV and started doing business by means of a contribution made by the company. For the time being, they are not operational, as the company is waiting for the right timing for their commercial launch.|
As in previous years, the company plans to pay particular attention to the development of international economic and financial conditions, performance of the currency market and performance of the price of crude oil and other commodities.
With respect to the local context, the volume of business, inflation and foreign exchange rates, as well as indebtedness and public spending, will be closely monitored in 2019. Likewise, special attention will be paid to compliance with commitments undertaken with the IMF.
In the local context, investment funds are expected to represent an efficient alternative option for various types of investors in 2019. Accordingly, the company will aim to continue developing products that are tailored to customers’ demands, seeking an expanded offer and improvements for investors’ risk management.
As of December 31, 2018, FBA Commodities had no equity volume. The rest of the Bank´s investment funds at such date had the following assets:
|FBA Renta Pesos||15,883,270|
|FBA Ahorro Pesos||6,302,409|
|FBA Bonos Argentina||4,011,931|
|FBA Renta Fija Dólar||3,747,771|
|FBA Renta Fija Dólar Plus||1,582,891|
|FBA Acciones Argentinas||371,680|
|FBA Acciones Latinoamericanas||363,493|
|FBA Renta Fija Plus (ex FBA Commodities)||219,981|
|FBA Horizonte Plus||94,620|
|FBA Renta Mixta||83,995|
|FBA Retorno Total II||65,690|
|FBA Retorno Total I||57,549|
|FBA Bonos Latam||36,718|
|FBA Bonos Globales||34,199|
|FBA Renta Pesos Plus||15,974|
|FBA Renta Publica I||1,060|
|FBA Renta Fija Local||1,060|
|FBA Brasil I||1,059|
|FBA Renta Publica II||377|
|-||BBVA Francés Valores S.A.|
During 2018, the local securities market was mainly affected by high price volatility and the foreign exchange crisis. The fall in the market measured in dollars was the steepest in the last ten years. The exchange rate on December 31, 2017 was 18.77 Ps./US$ while on December 31, 2018 it was 37.8 Ps./US$, which accounts for a 50.3% depreciation. In turn, inflation was 47.6%. As such, inflation and the exchange rate presented significant challenges to the stabilization of the economy.
Measured in pesos, the Merval Index rose by 0.8% and the M.Ar (Merval Argentina) Index fell by 7.2% during 2018. Measured in dollars, they fell by 50.2% and 54.2%, respectively. These were the largest declines since 2002 and occurred in the context of the Merval and the M.Ar indexes recording historic highs in January.
Market capitalization of domestic companies fell by 12% in pesos and 56.8% in dollars during 2018. Within the SP Merval Index, the securities of TGS U2 (Transportadora de Gas del Sur) and YPFD (YPF SA) rose 32.03% and 19.06%, respectively, in pesos. However, measured in dollars, all domestic securities lost market value during the year. Within the same index, the worst performing securities were CVH (Cablevisión Holding SA) and SUPV (Grupo Supervielle SA), which fell 49.37% and 43.68%, respectively, in pesos. In dollar terms, the same securities also were the worst performers, falling 74.96% and 72.15%, respectively.
In addition, during 2018 trading concentration increased as the ten securities with the highest trading volume accounted for 67.3% of the total, compared to 54.4% in 2017.
In this context, the bond market also showed a poor performance, with the bond index published by the Argentine Institute of Capital Markets (IAMC as per its Spanish acronym) showing a 57% increase measured in pesos, while falling by 21.6% in dollars. Both the equity market and the bond market performance reflected a significant lack of confidence in financial expectations and uncertainty of investors regarding development of the economy and monetary variables. However, it is worth noting that in the last quarter, as a result of its agreement for financing and assistance from the IMF, the government launched a new aggressive plan for monetary and fiscal stabilization that is beginning to accomplish the targeted results. For example, late in 2018 the economy started to become stabilized in terms of foreign exchange and monetary policy.
On March 8, 2019, the Board of Directors of BBVA Francés Valores S.A. decided to submit to consideration at the shareholders’ meeting a proposal for the merger of BBVA Francés Valores S.A. into its parent company BBVA Banco Francés S.A., with a view to optimizing operating costs by combining resources and processes. The Board of Directors of BBVA Francés Valores approved the consolidated statement of financial position for merger purposes, and authorized submission of the merger prospectus to the CNV to apply for authorization of the merger. Provided that all relevant final approvals are obtained, the merger is expected to be consummated on October 1, 2019.
Following Law No. 26,831 and General Resolution No. 622/13 issued by the CNV coming into force in December 2012 and September 2013, respectively, the business of BBVA Francés Valores S.A. has been carried out on a residual basis with an aim to retaining its operating capacity, while also searching for new trading and business opportunities, subject to the performance of the capital markets.
Accordingly, the company’s loss for the year was Ps.43 million, mainly generated by a revaluation of its own treasury investments, net of the expenses and taxes required to keep the company fully capable of doing business.
|-||Consolidar A.F.J.P. S.A. (undergoing liquidation proceedings)|
Law No. 26,425 was enacted on December 4, 2008. It abolished the capitalization system that was part of the Integrated Pension and Retirement System (Sistema Integrado de Jubilaciones y Pensiones) which was merged into and substituted by a single public distribution system called SIPA (Sistema Integrado Previsional Argentino, i.e. Argentine Integrated Pension System). As a consequence, Consolidar A.F.J.P. S.A. no longer managed the resources in the individual capitalization accounts of its members, who were beneficiaries of the Argentine Integrated Pension System. These funds were transferred to the Sustainability Guarantee Fund of the Argentine Pension System in the same form as they were invested, and the Argentine Social Security Administration (ANSES) became the only and single holder of its assets and rights.
On October 29, 2009 the ANSES issued Resolution No. 290/2009 granting pension and retirement fund managers the possibility of reconverting their corporate purpose to manage funds consisting of voluntary contributions and deposits of the members in their respective capitalization accounts. Interested companies had 30 business days to express their interest.
In view of all of the above, on December 28, 2009, and bearing in mind that it was impossible for Consolidar A.F.J.P. S.A. to maintain the corporate purpose for which it had been organized, the company held a unanimous special shareholders’ meeting. The resolution of this meeting was to dissolve and subsequently wind-up the company as of December 31, 2009. It was understood that this was the best alternative to preserve in the best possible way the creditors’ and shareholders’ interests. At the same time, and in accordance with the terms of the Argentine Corporations Law, the shareholders’ meeting resolved to appoint accountants Messrs. Gabriel Orden and Rubén Lamandia, to liquidate Consolidar A.F.J.P. S.A. These accountants are the legal representatives of the Company as of December 31, 2009 and are working in order to wind it up. As of this date, they are taking all necessary steps to carry out the liquidation of Consolidar A.F.J.P. S.A.
On January 28 2010, the dissolution of Consolidar A.F.J.P. S.A. (undergoing liquidation proceedings) was registered with the IGJ, as were the names of the appointed liquidators.
The general and special shareholders’ meeting of Consolidar A.F.J.P S.A. (undergoing liquidation proceedings) approved on October 19 2009 a voluntary reduction of the corporate capital by Ps.75 million, which was approved by the Office of Corporations on January 11, 2010. Subsequently, on January 19, 2010, all capital contributions were transferred to the shareholders, in accordance with the above-mentioned reduction.
BBVA Francés, as shareholder, requested that Consolidar A.F.J.P. S.A. (undergoing liquidation proceedings) submit a request for negotiations with the Argentine Ministry of Economy and Public Finance (Ministerio de Economía y Finanzas Públicas de la Nación) and the Argentine Social Security Administration (ANSES). This was done in accordance with the terms of Law No. 26,425 in order to find solutions to the consequences of implementation of the Law. This request was filed by Consolidar A.F.J.P. S.A. (undergoing liquidation proceedings) on June 11, 2010.
In turn, on December 7, 2010, Consolidar A.F.J.P. S.A. (undergoing liquidation proceedings) filed a complaint for damages against the Federal government and the Ministry of Labor, Employment and Social Security at the Contentious-Administrative Federal Court number 4, Secretariat number 7, under case number 40,437/2010. The claim was confirmed by BBVA Francés as controlling shareholder of the company. On July 15, 2011 Consolidar A.F.J.P. S.A. (undergoing liquidation proceedings) and BBVA Francés filed an additional motion to determine the amount of damages. On March 9, 2012, the Court ordered the service of process to the National State.
In this connection, on May 13, 2013, the judge in charge ordered the commencement of the trial stage. The Company is collecting and submitting all witness, documentary and expert evidence and on May 28, 2013 the statements of its witnesses were submitted as evidence at court. There have been no further updates on the case since then.
At December 2018, the case is in a stage of producing accounting evidence.
|Joint ventures||Country of |
BBVA Francés Ownership and Voting Power
|Volkswagen Financial Services S.A.||Argentina||51.00%||Financial institution||1,241.9|
|PSA Finance Argentina Cía. Financiera S.A.||Argentina||50.00%||Financial institution||869.0|
|Rombo Compañía Financiera S.A.||Argentina||40.00%||Financial institution||1,286.9|
|(1)||Total stockholders’ equity as of December 31, 2018.|
|(2)||Statutory stockholders’ equity, adjusted for purposes of consolidation so as to apply an accounting criterion uniform with that of BBVA Francés, if applicable.|
Below is a description of our joint ventures:
|-||Volkswagen Financial Services Compañía Financiera S.A. (VWFS)|
The main business of VWFS focuses on granting secured loans for the acquisition of new and used vehicles of makes belonging to the Volkswagen group, and on offering wholesale financing to the dealer network.
The focus of the company in 2018, which was characterized by financial instability and general declines in automotive sales, was maintaining a competitive offer to clients and ensuring liquidity and availability of products at all times. During the year UVA-indexed secured loans were granted, and capital lease lines, financed maintenance and retail loans for the Ducati brand were also launched. In addition, response times were improved for approvals of applications for financing loans from clients and settlement of secured loans. This was reflected in positive feedback in the customer and dealer satisfaction survey.
In January 2018, the company received a capital contribution from its shareholders equal to Ps.400 million in support of expected portfolio growth. In turn, funding sources from other banks were increased in a total amount of Ps.1,380 million. In December 2018, VWFS successfully issued its first series of notes in an amount of Ps.737 million.
During 2018, the Volkswagen Group achieved a 14.6% automobile market share in Argentina, thus regaining its ranking as the leader in sales. In a highly competitive environment, in 2018 Volkswagen obtained a 67% loyalty rate in the network of dealers, compared with 70% in 2017. VWFS maintained its 13.4% penetration consistent again in 2018, in an environment where average penetration of the financial affiliates of automobile manufacturers has generally declined.
During 2018, the main objective was to offer competitive financing products and services to the clients. The company settled an aggregate number of 16,317 secured loans, a 21.7% decrease compared to the previous year, derived from a decline in sales of the brand.
VWFS had net loss of Ps.220 million for 2018, compared with a net gain of Ps.99 million in 2017.
To finance the portfolio of secured loans, the company plans to continue diversifying its funding sources with its main business partner, other commercial banks and through the issuance of notes.
|-||PSA Finance Argentina Compañía Financiera S.A.|
PSA Finance’s equity is divided into equal share interests held by BBVA Francés and Banque PSA Finance, an affiliate of the PSA Peugeot Citroën group, based in France.
PSA Finance’s main business is focused on providing secured loans for the purchase and leasing of new Peugeot, Citroën and DS vehicles. In addition, it offers financing for the purchase of used cars for customers proposed by the official Peugeot and Citroën dealer network, as well as other financial products and services related to the purchase, maintenance and insurance of vehicles.
The automotive industry closed 2018 with a total of 773 thousand registrations, a 10.2% decrease compared to 2017. The first five months of 2018 showed a record volume of activity, while a significant volume decrease was recorded in the second half of the year as a result of the impact of the macroeconomic conditions and the increase in interest rates.
PSA Finance in 2018 had a 19.53% penetration over registrations of the brands (measured on the basis of financing of new cars), a 6.5% decrease compared to 2017. The company’s market share declined during 2018 as a result of PSA Finance’s focus on financing of new cars in the context of deceleration of the economy and higher interest rates.
In this context, the total financing volume in 2018 was equal to 19,785 transactions for secured loans for new and used cars and leasing-related units, equivalent to Ps.3,655 million.
With respect to the product offering, in 2018 the company continued working together with Peugeot, Citroën and DS in development of exclusive and distinct financial products for certain vehicles.
Promotional campaigns and rebates were increased in the retail financing segment in an attempt to attract more clients in a highly competitive market that offers a wide range of products intended to meet demand. In 2018, private banks played an important role in the segment of secured financing as a result of UVA-indexed loans, and PSA Finance was required to reinforce its commercial offer in tandem with changes in the market. In 2018, 84.5% of the network of dealers chose financing through PSA Finance.
The company is focused on a policy of optimization and containment of financial costs in a context of market deceleration. Under these conditions, the net loss amounted to Ps.1,408 million in 2018, compared with a net loss of Ps.687 million in 2017.
|-||Rombo Compañía Financiera S.A.|
Rombo Compañía Financiera (RCF) is the main financing company of the network of Renault and Nissan dealers, both for new and used vehicles. During 2018, Renault had a 14.8% market share in the automotive market in 2018 (compared to 13.3% in 2017), ranking third in sales. Nissan’s market share was 2.8% in 2018 (compared to 1.8% in 2017). Within a framework of strong competition, it managed to improve its market share and position, supported by the launch and renovation of models, largely assisted by car loans secured by pledges granted by its financial company.
RCF’s share of sales by Renault decreased to 24.2% in 2018 compared to 36.3% in 2017 for Renault, while its share of Nissan sales was 17.6% in 2018 compared to 26.3% in 2017 mainly due to the high interest rates volatility.
RCF continues to be the leading company in the ranking of loans and loyalty among brand captive companies, closing the year with an average share equal to 90.5% (loans granted by RCF out of total loans for the sale of Renault vehicles) (source: AFIMA). In addition, Renault and Nissan contributed to the lending business by making available significant commercial options (subsidized rates) both for new and used vehicles.
With such support, RCF obtained 31,558 financings for new Renault and Nissan vehicles in 2018 (compared to 42,969 in 2017) and 6,514 used vehicles in 2018 (compared to 11,255 in 2017). Thus, the total financing portfolio was Ps.8,888 million as of December 31, 2018, which accounts for a 30.1% decrease compared to Ps.12,707 million as of December 31, 2017.
The volume of non-performing loans increased from 0.94% as of December 31, 2017 to 1.33% as of December 31, 2018 due to the economic decline.
Regarding financing, in 2018 four series of notes were issued in an aggregate amount of Ps.906.9 million, and the total outstanding balance of notes as of the fiscal year end was Ps.2,876.1 million. The program amount was increased to Ps.6 billion in fiscal year 2018, with a “AA (arg)” rating from Fix SCR S.A. Agente Calificadora de Riesgo and “Aa1.ar” from Moody’s.
RCF had a net loss of Ps.427 million and Ps.75 million for 2018 and 2017, respectively.
|Associates||Country of |
BBVA Francés Ownership and Voting Power
|BBVA Consolidar Seguros S.A. (3)||Argentina||12.22%||Insurance||1,120.1|
|Interbanking S.A. (1)||Argentina||11.11%||Information services for financial markets||889.8|
|(1)||Total stockholders’ equity as of December 31, 2018.|
|(2)||Statutory stockholders’ equity, adjusted for purposes of consolidation so as to apply an accounting criterion uniform with that of BBVA Francés, if applicable.|
Below is a description of our associates:
|-||BBVA Consolidar Seguros S.A.|
BBVA Consolidar Seguros provides fire, mixed family and comprehensive insurance, theft, personal accidents, group life, debt balance, funeral services and other insurance.
In 2018, premiums amounted to Ps.2,382.9 million, representing a 0.1% increase compared to the previous year in nominal terms. Since September 2017, as a result of a change in applicable Argentine law to encourage competition, BBVA Consolidar Seguros no longer receives life insurance premiums for the entirety of new debt issued by BBVA Francés for personal loans, credit cards, secured loans or overdraft protection products.
The increase in 2018 in turnover from voluntary insurance premiums was 19.5% compared with 2017. The company’s business strategy combines a wide range of products with multiple distribution and service channels, all of which are based on segmentation of clients’ and prospects’ needs. Claims paid amounted to Ps.439.0 million, or 18.4% of issued premiums.
Net income amounted to Ps.653.4 million and represents a return on shareholders’ equity as of the year end of 59.1%. As of December 31, 2018 the minimum capital surplus amounted to Ps.644.4 million and the solvency ratio, measured as the quotient between cash and cash equivalents, investments and real property, and the technical commitments and debts with insured parties, equaled 1.59.
On January 22, 2016, the Argentine Superintendence of Insurance (“SSN”) issued Resolution No. 39,647, which refers to shares held in SME investment funds (authorized by the CNV) and establishes a minimum investment of 3% and a maximum investment of 20%.
On March 21, 2016, the Central Bank published Communication “A” 5928, which amends the Financial User Protection Rules in relation to insurance. As regards debtor balance life insurance, it establishes, for financial institutions subject to such communication, the prohibition from charging any type of commission and/or fees related to debtor balance insurance that covers death or total permanent disability. In addition, it determines that financial institutions are required to purchase a debtor balance insurance to cover those contingencies or, alternatively, to provide for “self-insurance”, being a challenge for the insurance company to attract the greatest number of customers/banking and financial institutions to offer them such product.
In November 2017, the SSN issued Resolution No. 41057, which provides for changes in investments in insurance companies.
To comply with such resolution, eligible investments will be those assets issued by the Central Bank, with a date of incorporation to the assets prior to the publication of this regulation (November 16, 2017), and up to maturity, provided that they will be required to observe the following schedule:
|-||As of December 31, 2017, the highest permitted amount in investment funds containing assets issued by the BCRA was required to be 75% of the total value of such investments.|
|-||As of January 31, 2018, the highest permitted amount in investment funds containing assets issued by the BCRA was required to be 50% of the total value of such investments.|
|-||As of February 28, 2018 the highest permitted amount in investment funds containing assets issued by the BCRA was required to be 25% of the total value of such investments.|
|-||As of March 31, 2018 investment funds containing assets issued by the BCRA may not be considered as eligible investments.|
Up to 40% as of Resolution No. 41,057 of the SSN may be invested in public-private participation projects, infrastructure or real estate development projects, notarized real estate meant for rent. In addition to existing provincial securities, municipal securities are added (up to 3%), and those from the City of Buenos Aires (up to 10%). For close-end investment funds, the limit was extended from 18% to 60% of total investments.
For 2019, BBVA Consolidar Seguros plans to continue expanding its main business lines, particularly other risks, personal accident, group life, and mixed family and comprehensive insurance, by means of a product offering that is designed to meet its main clients’ needs.
As a member and shareholder of Interbanking S.A., together with seven other leading Argentine banks, the Bank offers an electronic communications system which enables its customers to optimize their banking transactions. The Bank’s corporate customers can connect to the service from their personal computers at any time and review their accounts at any member bank, send messages, transfer funds, make electronic wage payments, supplier payments and tax payments, and display market data. Through Interbanking, the Bank offers distinct electronic products for each segment of its corporate clientele and processes online transfers, allowing debit and credit transactions to be settled automatically and to be reflected in the relevant accounts in real time. As a result of the Bank’s shareholding in Interbanking S.A., on June 29, 2018 the Bank received Ps.65 million in dividends.
The following are all positions that we hold in non-financial institutions where we own more than 2% of the invested companies’ equity as of December 31, 2018.
% of Shares Owned
|Coelsa S.A.||Argentina||8.91%||Clearing house||56.0|
|Argencontrol S.A.||Argentina||7.77%||Agent mandatory||4.2|
|Sedesa S.A.||Argentina||10.04%||Deposit guarantee fund||93.6|
|Prisma Medios de Pagos S.A. (2)||Argentina||11.12%||Credit card issuer||3,852.0|
|(1)||Total Stockholders’ Equity as of December 31, 2018.|
|(2)||Held for sale as at December 31, 2018 and 2017.|
|D.||Property, plants and equipment|
BBVA Francés is domiciled in Argentina and has its principal executive offices at Av. Córdoba 111, C1054AAA Buenos Aires, Argentina. The principal executive offices, which we own, are approximately 30,517 square meters in area.
At December 31, 2018, our branch network consisted of 252 retail branches, of which 112 were located in properties that we own and 140 were located in properties leased to us. The branches are located throughout all of the 23 Argentine provinces as well as the City of Buenos Aires.
|E.||Selected statistical information|
The following information is included for analytical purposes and should be read in conjunction with the Consolidated Financial Statements as well as “Item 5. Operating and Financial Review and Prospects”. This information has been prepared from our financial records, which are maintained in accordance with IFRS-BCRA. The Consolidated Financial Statements and the selected statistical information below have been adjusted to comply with IFRS-IASB for the sole purpose of filing this annual report on Form 20-F with the SEC.
Average Balance Sheets, Interest Earned on Interest-Earning Assets and Interest Paid on Interest-Bearing Liabilities
The average balances of interest-earning assets and interest-bearing liabilities, including the related interest earned or paid, were calculated on a daily basis for the years ended December 31, 2018 and 2017. Average balances have been separated between those denominated in pesos and in foreign currencies.
This selected statistical information has been prepared in accordance with IAS 29, which requires that in the financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, the assets, liabilities, income and expenses of such entity be stated in terms of the measuring unit current at the end of the reporting period (December 31, 2018).
The real interest rate is the amount of interest earned or paid during the period divided by the related average balance.
Included in interest earned are the net gains on our portfolio of government securities and related differences in market quotations. We manage our trading activities in government securities as an integral part of our business. We do not, as a matter of practice, distinguish between interest income and gain or loss on our government securities portfolio.
The following tables show average balances, interest amounts and average real rates for our interest-earning assets and interest-bearing liabilities for the fiscal years ended December 31, 2018 and 2017.
|Fiscal Year ended December 31,|
|balance (1)||earned/paid||real rate (2)||balance (1)||earned/paid||real rate (2)|
|(in thousands of pesos, except percentages)|
|Government securities (3)|
|Loans and advances (4)|
|To customers/financial institutions|
|To central bank|
|Total interest-earning assets|
|Fiscal Year ended December 31,|
|balance(1)||earned/paid||real rate (2)||balance(1)||earned/paid||real rate (2)|
|(in thousands of pesos, except percentages)|
|Non interest-earning assets|
|Cash, cash balances at central bank and other demand deposits|
|Investments in joint ventures and associates|
|Tangible and intangible assets|
|Allowance for loan losses|
|Total non interest-earning assets|
|Fiscal Year ended December 31,|
|balance (1)||earned/paid||real rate (2)||balance (1)||earned/paid||real rate (2)|
|(in thousands of pesos, except percentages)|
|Banks loans - Central bank|
|Banks loans - Other financial institutions|
|Debt securities issued|
|Total interest-bearing liabilities|
|Fiscal Year ended December 31,|
|balance (1)||earned/paid||real rate (2)||balance (1)||earned/paid||real rate (2)|
|(in thousands of pesos, except percentages)|
|and stockholders´ equity|
|Total non-interest-bearing liabilities|
|and stockholders equity|
|TOTAL LIABILITIES AND|
|(1)||Average balances for 2017 are derived from monthly-end balances. Such average balances have been adjusted for inflation by applying an average coefficient for both 2018 and 2017.|
|(2)||Annualized on a 360-days basis.|
|(3)||Includes trading gains and losses in all fiscal years. Unrealized gains and losses arising from changes in the market value of our trading portfolio of government securities and yield on our investment portfolio of government securities are included.|
|(4)||Loan amounts are stated before deduction of the allowance for loan losses.|
Changes in Interest Income and Interest Expense; Volume and Rate Analysis
The following tables allocate, by currency of denomination, changes in our interest income and interest expense between changes in the average volume of interest-earning assets and interest-bearing liabilities and changes in their respective nominal interest rates for the fiscal year ended December 31, 2018 compared with the fiscal year ended December 31, 2017. Volume and rate variances have been calculated based on movements in average balances over the period and changes in nominal interest rates on average interest-earning assets and average interest-bearing liabilities. The net change attributable to changes in both volume and rate has been allocated to volume. Trading and yield on government trading and investment accounts results are included in the computation of interest income in all fiscal years.
|Year ended December 31, 2018/2017|
Increase (Decrease) Due to Changes in
|Loans and advances|
|To customers/financial institutions|
|To central bank|
|Total interest-earning assets|
|Year ended December 31, 2018/2017|
Increase (Decrease) Due to Changes in
|Banks loans - Central bank|
|Banks loans - Other financial institutions|
|Debt securities issued|
|Total interest-bearing liabilities|
Interest-Earning Assets: Net Interest Margin and Spread
The following table analyzes, by currency of denomination, our levels of average interest-earning assets and net interest income, and illustrates the comparative margins and spreads for each of the fiscal years indicated.
|Fiscal Year ended December 31,|
|(in thousands of pesos, except percentages)|
|Average interest-earning assets|
|Net interest income (1)|
|Net interest margin (2)|
|Weighted average rate||13.56%||11.83%|
|Yield spread, nominal basis (3)|
|Weighted average rate||11.60%||10.03%|
|(1)||Net interest income is defined as interest earned less interest paid. Trading results from our portfolio of government securities are included in interest.|
|(2)||Net interest margin is net interest income stated as a percentage of average interest-earning assets.|
|(3)||Yield spread nominal basis is defined as the difference between the average nominal rate on interest-earning assets and the average nominal rate on interest-bearing liabilities.|
Investment Portfolio: Government and Corporate Securities
We own, manage and trade a portfolio of securities issued by the Argentine and other governments and corporate issuers. The following table sets out our investments in Argentine and other governments and corporate securities as of December 31, 2018 and 2017 by type and currency of denomination.
|(in thousands of pesos)|
|Securities measured at fair value|
|Other debt bonds||55,857||8,072|
|Instruments issued by the BCRA|
|Measured at fair value||20,202,428||23,008,419|
|Total government securities in pesos||28,815,032||26,292,410|
|In foreign currency:|
|Securities measured at fair value|
|Total government securities in foreign currency||3,233,616||7,068,530|
|Total government securities||32,048,648||33,360,939|
|Total corporate securities||541,952||713,908|
|Subtotal government and corporate securities||32,590,600||34,074,847|
|Total government and corporate securities||32,319,026||34,069,183|
The table below presents the issuer of which, as of December 31, 2018, we held securities in excess of 10% of our stockholder equity as of such date:
|(in thousands of pesos)|
Investment Portfolio: remaining maturities of our investment portfolio
The following table analyzes the remaining maturities of our investment portfolio as of December 31, 2018 in accordance with the relevant issuance terms.
|Within 1 year||After 1 year but within 5 years||After 5 years but within 10 years||After 10 years||Total|
|(in thousands of pesos, except percentages)|
|Securities measured at fair value|
|Argentine bonds (*)||1,363,441||7,115,611||45,225||32,470||8,556,747|
|Other debt bonds||55,857||-||-||-||55,857|
|Instruments issued by the BCRA|
|Measured at fair value||20,202,428||-||-||-||20,202,428|
|Total government securities in pesos||21,621,726||7,115,611||45,225||32,470||28,815,032|
|In foreign currency:|
|Securities measured at fair value|
|Total government securities in foreign currency||3,233,616||-||-||-||3,233,616|
|Total government securities||24,855,342||7,115,611||45,225||32,470||32,048,648|
|Weighted average yield (for the securities indicated with *) (1)||18.38%||29.04||%||21.91||%||8.75%|
|(1)||The maturity profile above is based on each bond contractual maturity and its amortization profile. The weighted average yield was calculated using the internal rate of return of each bond published by the Argentine Institute of Capital Markets (“IAMC”) weighted by the expected outstanding principal at each maturity bucket.|
The following table analyzes our loan portfolio by types of loan as of December 31, 2018 and 2017. Loans are stated before deduction of the allowance for loan losses.
|(in thousands of pesos)|
|Loans and advances to government sector||206||322|
|Loans and advances to central bank||383||-|
|Loans and advances to financial institutions|
|Loans and advances to financial institutions||9,669,330||6,772,988|
|Allowance for loan losses||(33,486||)||(49,296||)|
|Loans and advances to customers|
|Discounted instruments (2)||11,310,587||16,484,475|
|Real estate mortgage||10,104,731||6,570,691|
|Loans for the prefinancing and financing of exports||45,088,576||34,176,155|
|Receivables from financial leases||2,377,747||3,390,288|
|Loans to personnel||1,205,501||926,209|
|Other financing (3)||14,051,828||20,614,282|
|Allowance for loan losses||(4,064,066||)||(2,710,432||)|
|Preferred guarantees (4)||10,470,296||15,988,272|
|(1)||Overdrafts include short and long-term loans to companies and overdraft lines of credit.|
|(2)||Discounted instruments are endorsed promissory notes.|
|(3)||Other financing are loans not included in other categories.|
|(4)||Preferred guarantees mainly relate to mortgages and car loans, for which collection of the amounts owed is reasonably assured because the guarantees may be executed through established legal processes.|
For a description of the risk elements associated with our investment portfolio and our risk policies, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”
Loans by Economic Activity
The table below analyzes our loan portfolio according to the borrowers’ main economic activity as of December 31, 2018 and 2017. Where appropriate, personal loans are allocated to the economic activity of the borrower. Loans are stated before deduction of the allowance for loan losses.
|(in thousands of pesos, except percentages)|
|Agricultural and livestock||11,186,199||6.02||%||4,452,891||2.32||%|
|Electricity, oil, water and sanitary services||2,034,506||1.10||%||1,786,537||0.93||%|
|Wholesale and retail trade||18,167,505||9.78||%||17,915,847||9.34||%|
Maturity Composition of the Loan Portfolio
The following table analyzes our loan portfolio as of December 31, 2018 by type of loan and by the time remaining to maturity. Loans are stated before deduction of the allowance for loan losses. We expect most loans to be repaid at maturity in cash or through refinancing at market terms.
|Amount as of December 31,|
within 1 year
|After 1 year|
|After 5 years|
|(in thousands of pesos, except percentages)|
|To government sector||206||206||—||—||—|
|To central bank||383||383||—||—||—|
|To financial institutions||9,669,330||5,202,337||1,929,153||2,537,840||—|
|With privileged guarantees||11,754,953||873,917||1,004,412||2,716,636||7,159,988|
|Percentage of total loan portfolio||100.00%||56.05%||19.67%||20.01%||4.27%|
Interest Rate Sensitivity of Outstanding Loans
The following table analyzes, by currency of denomination, the interest rate sensitivity of our loan portfolio as of December 31, 2018. Loans are stated before deduction of the allowance for loan losses.
|As of December 31, 2018|
|(in thousands of pesos)|
|Pesos — including adjustable loans||121,164,596|
|(1)||For additional information on non-performing loans see “—Non-performing and Restructured Loans” below.|
The following table sets forth a breakdown of our fixed and variable rate loans which have a maturity of one year or more as of December 31, 2018.
|Interest Sensitivity of|
Outstanding Loans Maturing
in More Than One Year
|Fixed rate||Variable rate|
|(in thousands of pesos)|
|To financial institutions||2,537,840||—|
Foreign Country Outstanding Positions
As of December 31, 2018 and 2017 we did not hold "cross-border outstandings" exceeding 1% of our total assets. Cross-border outstandings are defined as loans (including accrued interest), acceptances, interest-bearing deposits with other banks, other interest-bearing investments and any other monetary assets which are denominated in dollars or other non-local currency.
Classification of Loan Portfolio by Stage
The following table presents our loan portfolio classified by stage, before the deduction for the allowance for loan losses as of December 31, 2018 and 2017:
|As of December 31,|
|(in thousands of pesos, except percentages)|
We have concluded that all our refinanced loans comply with the conditions for considering them as troubled debt restructuring (“TDR”). A restructured loan is considered a TDR if the debtor is experiencing financial difficulties and the Bank grants a concession to the debtor that would not otherwise be considered. Concessions granted could include: reduction in interest rate to rates that are considered below market, extension of repayment schedules and maturity dates beyond original contractual terms.
Loans considered TDR for the years ended December 31, 2018 and 2017 were as follows:
|As of December 31,|
|Troubled debt restructuring||2018||2017|
|(in thousands of pesos)|
We classify our loan portfolio in two categories: (i) retail and (ii) wholesale.
The following table presents our retail and wholesale loan portfolio as of December 31, 2018 and 2017 before the deduction of the allowance for loan losses:
|(in thousands of pesos, except percentages) (1)|
|Stage 1 (Retail)||67,711,127||85.11||%||76,479,792||97.67||%|
|Stage 1 (Wholesale)||101,397,582||95.55||%||113,116,243||99.69||%|
|Stage 2 (Retail)||10,207,375||12.83||%||744,200||0.95||%|
|Stage 2 (Wholesale)||2,612,739||2.46||%||105,453||0.09||%|
|Stage 3 (Retail)||1,641,773||2.06||%||1,081,630||1.38||%|
|Stage 3 (Wholesale)||2,111,710||1.99||%||247,668||0.22||%|
|Total retail loans||79,560,275||100.00||%||78,305,622||100.00||%|
|Total wholesale loans||106,122,031||100.00||%||113,469,364||100.00||%|
|(1)||Percentages for each category are of total consumer, commercial or total loans, as the context requires.|
Non-performing and Restructured Loans
The following table analyzes at each of the dates indicated below our gross non-performing loan portfolio, and further breaks down the total into loans with preferred guarantees and those which are unsecured:
|As of December 31,|
|(in thousands of pesos)|
|With preferred guarantees||36,745||121,746|
The table below sets forth non-performing loans by economic activity as of each of the dates indicated:
|% of Loan Portfolio||Loan|
|% of Loan Portfolio|
|(in thousands of pesos, except percentages)|
|Agricultural and livestock||45,284||1.21||%||63,015||4.72||%|
|Electricity, oil, water and sanitary services||269||0.01||%||1,524||0.11||%|
As of December 31, 2018, the majority of our loan portfolio, and non-performing and restructured loan portfolio, consisted of loans to Argentine borrowers. At that date, Ps.329.4 million, or 0.18% of our total loan portfolio, consisted of loans to foreign borrowers.
Gross interest income that would have been recorded on non-performing loans during the fiscal years ended December 31, 2018 and 2017 amounted to Ps.802.9 million and Ps.43.1 million, respectively.
Analysis of the Allowance for Loan Losses
The table below sets forth the activity in the allowance for loan losses for the fiscal years ended December 31, 2018 and 2017. In conformity with Central Bank requirements, we charge-off non-performing loans when we believe that recovery is unlikely and, in any event, no later than seven months after a loan has been classified as “irrecoverable” without preferred guarantees. We continue to try to collect all amounts past due, even if they have been charged-off, if we believe that the likelihood of collecting such amounts justifies the commitment of resources to do so.
|Year ended December 31,|
|(in thousands of pesos, except percentages)|
|Balance at the beginning of the year||2,767,041||1,317,015|
|Adoption IFRS 9||1,036,297||-|
|Provisions for loan losses||3,871,311||2,749,775|
|Balance at the end of year||4,869,442||2,767,041|
|Charge-off / average loans||1.51||%||0.78||%|
|(1)||In accordance with IAS 39|
|(2)||Charge-offs are not concentrated in any particular economic activity. The Ps.2,805.2 million charged-off in the fiscal year ended December 31, 2018, Ps.1,057.0 million or 37.68%, were related to corporate borrowers and Ps.1,748.2 million or 62.32%, were related to individual consumers. The variation between 2018 and 2017 was due to the increases in the doubtful loan portfolio. Of the Ps.1,299.7 million charged-off in the fiscal year ended December 31, 2017, Ps.57.9. million or 4.46%, were related to corporate borrowers and Ps.1,241.8 million or 95.54%, were related to individual consumers. Charge-offs include reversal and applications.|
Allocation of the Allowance for Loan Losses
The following table allocates the allowance for loan losses and sets forth the percentage distribution by each category as of December 31, 2018 and 2017.
|As of December 31,|
|(in thousands of pesos, except percentages)|
|Notes discounted and purchased||123,296||2.53||%||231,187|