Company Quick10K Filing
Quick10K
Grupo Financiero Galicia
20-F 2018-12-31 Annual: 2018-12-31
20-F 2017-12-31 Annual: 2017-12-31
20-F 2016-12-31 Annual: 2016-12-31
20-F 2015-12-31 Annual: 2015-12-31
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BSBR Banco Santander 0
GGAL 2018-12-31
Item 17 [ ] Item 18 [ ]
Part I
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
Part II
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 Accountants' Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant.
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
Note 1. Accounting Policies and Basis for Preparation
Note 46 Provides More Detail of How The Expected Credit Loss Allowance Is Measured.
Note 2. Significant Accounting Policies and Estimates
Note 3. Transition To Ifrs
Note 4. Financial Instruments
Note 5. Fair Values
Note 6. Cash and Cash Equivalents
Note 7. Fair Value Debt Securities At Fair Value Through Profit or Loss
Note 8. Derivative Financial Instruments
Note 9. Repo Transactions
Note 10. Other Financial Assets
Note 11. Net Loans and Other Financing
Note 12. Other Debt Securities
Note 13. Financial Assets Pledged As Collateral
Note 14. Current Income Tax Assets
Note 15. Investments in Equity Instruments
Note 16. Equity Investments in Subsidiaries, Associates and Joint Ventures
Note 17. Leases
Note 18. Property, Plant and Equipment
Note 19. Intangible Assets
Note 20. Deferred Income Tax Assets/Liabilities
Note 21. Assets/Liabilities for Insurance Contracts
Note 22. Other Non-Financial Assets
Note 24. Deposits
Note 25. Liabilities Measured At Fair Value Through Profit or Loss
Note 26. Other Financial Liabilities
Note 27. Loans From The Argentine Central Bank and Other Financial Institutions
Note 28. Debt Securities
Note 29. Subordinated Debt Securities
Note 30. Provisions
Note 31. Other Non-Financial Liabilities
Note 32. Capital Stock
Note 33. Income Statement Breakdown
Note 34. Gold and Foreign Currency Quotation Differences
Note 35. Other Operating Income
Note 36. Underwriting Income From Insurance Business
Note 37. Loan Loss Provision
Note 38. Personnel Expenses
Note 39. Administrative Expenses
Note 40. Depreciation and Impairment of Assets
Note 41. Other Operating Expenses
Note 42. Income Tax/Deferred Tax
Note 43. Dividends
Note 44. Earnings per Share
Note 45. Segment Reporting
Note 46. Capital Management and Risk Policies
Note 47. Contingencies and Commitments
Note 48. Offsetting of Financial Assets and Liabilities
Note 49. Off-Balance Sheet Items
Note 50. Transfer of Financial Assets
Note 51. Non-Controlling Interest
Note 52. Related Party Transactions
Note 53. Acquisition of Debt Securities Under Section 35 Bis of Financial Institutions Law
Note 54. Additional Information Required By The Argentine Central Bank
Note 55. Subsequent Events
EX-4.3 d728957dex43.htm
EX-12.1 d728957dex121.htm
EX-12.2 d728957dex122.htm
EX-13.1 d728957dex131.htm
EX-13.2 d728957dex132.htm

Grupo Financiero Galicia Earnings 2018-12-31

GGAL 20F Annual Report

Balance SheetIncome StatementCash Flow

20-F 1 d728957d20f.htm FORM 20-F Form 20-F

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 2019

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20–F

(Mark One)

[   ]

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

[X]

Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2018 or

[   ]

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

[   ]

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

 

Commission File Number 000-30852

 

GRUPO FINANCIERO GALICIA S.A.

(Exact name of Registrant as specified in its charter)

GALICIA FINANCIAL GROUP

(Translation of Registrant’s name into English)

REPUBLIC OF ARGENTINA

(Jurisdiction of incorporation or organization)

Grupo Financiero Galicia S.A.

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

C1038 AAJ-Buenos Aires, Argentina

(Address of principal executive offices)

Pedro A. Richards, Chief Executive Officer

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

Perón 430, 25° Piso C1038AAJ Buenos Aires ARGENTINA

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

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

American Depositary Shares, each representing ten Class B ordinary Shares

Name of each exchange on which registered

Nasdaq Capital Market

Title of each class

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

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

American Depositary Shares, each representing the

right to receive ten ordinary shares, par value

Ps.1.00 per share New York Stock Exchange

 

GGAL

 

NASDAQ

Ordinary shares, par value Ps.1.00 per share*

 

GGAL

 

NASDAQ

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

 

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

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

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

 

Class A Ordinary Shares, Ps.1.00 par value

 

281,221,650

Class B Ordinary Shares, Ps.1.00 par value

 

1,145,542,947

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X]   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 [X]

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 [X]   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 [X]   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 [X]

 

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  [X]

Other  [ ]

 

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

Item 17 [  ] Item 18 [  ]

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

 

 

 


 

Table of Contents

 

PRESENTATION OF FINANCIAL INFORMATION

 

1

FORWARD LOOKING STATEMENTS

 

2

PART I

 

4

 

 

Item 1.

Identity of Directors, Senior Management and Advisers

 

4

 

 

Item 2.

Offer Statistics and Expected Timetable

 

4

 

 

Item 3.

Key Information

 

4

 

 

 

A. Selected Financial Data

 

4

 

 

 

B. Capitalization and Indebtedness

 

8

 

 

 

C. Reasons for the Offer and Use of Proceeds

 

9

 

 

 

D. Risk Factors

 

9

 

 

Item 4.

Information on the Company

 

24

 

 

 

A. History and Development of the Company

 

24

 

 

 

B. Business Overview

 

31

 

 

 

C. Organizational Structure

 

95

 

 

 

D. Property, Plants and Equipment

 

96

 

 

Item 4A.

Unresolved Staff Comments

 

96

 

 

Item 5.

Operating and Financial Review and Prospects

 

96

 

 

 

A. Operating Results

 

96

 

 

 

B. Liquidity and Capital Resources

 

125

 

 

 

E. Off-Balance Sheet Arrangements

 

131

 

 

 

F. Contractual Obligations

 

131

 

 

 

G. Safe Harbor

 

131

 

 

Item 6

Directors, Senior Management and Employees

 

132

 

 

Item 7.

Major Shareholders and Related Party Transactions

 

147

 

 

 

A. Major Shareholders

 

147

 

 

 

B. Related Party Transactions

 

148

 

 

Item 8.

Financial Information

 

150

 

 

 

A. Consolidated Statements and Other Financial Information

 

150

 

 

 

B. Significant Changes

 

153

 

 

Item 9.

The Offer and Listing

 

153

 

 

Item 10.

Additional Information

 

156

 

 

 

B. Memorandum and Articles of Association

 

156

 

 

 

C. Material Contracts

 

163

 

 

 

D. Exchange Controls

 

163

 

 

 

E. Taxation

 

163

 

 

 

H. Documents on Display

 

171

 

 

Item 11.

Quantitative and Qualitative Disclosures About Market Risk

 

171

 

 

Item 12.

Description of Securities Other Than Equity Securities

 

179

 

 

 

D. American Depositary Shares

 

179

PART II

 

181

 

 

Item 13.

Defaults, Dividend Arrearages and Delinquencies

 

181

 

 

Item 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds

 

181

 

 

Item 15.

Controls and Procedures

 

181

 

 

Item 16A.

Audit Committee Financial Expert

 

182

 

 

Item 16B.

Code of Ethics

 

182

 

 

Item 16C.

Principal Accountants’ Fees and Services

 

182

 

 

Item 16D.

Exemptions from the Listing Standards for Audit Committees

 

183

 

 

Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

183

 

 

Item 16F.

Change in Registrant’s Certifying Accountant

 

183

 

 

Item 16G.

Corporate Governance

 

183

 

 

Item 16H.

Mine Safety Disclosure

 

183

PART III

 

184

 

 

Item 17.

Financial Statements

 

184

 

 

Item 18.

Financial Statements

 

184

 

 

Item 19.

Exhibits

 

185

 

 


 

PRESENTATION OF FINANCIAL INFORMATION

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

 

Grupo Financiero Galicia;

 

Banco de Galicia y Buenos Aires S.A.U. (“Banco Galicia” or the Bank”), our largest subsidiary, consolidated with (i) Tarjetas Regionales S.A. (“Tarjetas Regionales”) and its operating subsidiaries, until December 31, 2017 (effective January 1, 2018, Tarjetas Regionales was transferred to be an operating subsidiary of Grupo Financiero Galicia), (ii) Tarjetas del Mar S.A. (“Tarjetas del Mar”) until March 31, 2017 (effective April 1, 2017 Tarjetas del Mar was sold), (iii) Galicia Valores S.A., (iv) Fideicomiso Financiero Galtrust I until December 31, 2017 and (v) Fideicomiso Saturno Créditos;

 

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

 

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

 

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

 

Net Investment S.A. (“Net Investment”) (liquidated as of December 31, 2017); and

 

Galicia Administradora de Fondos.

These consolidated financial statements have been prepared in accordance and in compliance with the International Financial Reporting Standards (“IFRS”) issued by the International Financial Reporting Standards Board (“IASB”) and the interpretations of the International Financial Reporting Interpretations Committee. IFRS in force as of the date of preparation of these consolidated financial statements for the fiscal years ended December 31, 2018 and 2017 have been applied. Grupo Galicia has applied IFRS for the first time for the fiscal year beginning on January 1, 2018 (the transition date being January 1, 2017). We maintain our financial books and records in Argentine Pesos and prepare our financial statements in conformity with IFRS, as issued by the IASB, effective as of the fiscal year beginning on January 1, 2018. Grupo Galicia has also adjusted its financial statements for the year ended December 31, 2017 in accordance with IFRS to serve as a comparative basis for the financial statements for the year ended December 31, 2018. Grupo Galicia’s consolidated financial statements for the fiscal year ended December 31, 2018 have been prepared in accordance with IFRS 1 “First-time Adoption of International Financial Reporting Standards”.

As of July 1, 2018, Argentina qualified as a hyperinflationary economy for accounting purposes. Grupo Galicia’s financial statements whose functional currency is the Argentine peso, have been prepared in accordance with IAS 29 Financial Reporting in Hyperinflationary Economies as if the Argentine economy had always been hyperinflationary. The results of operations for the year ended December 31, 2018 and 2017 are reflected in terms of current purchasing power using the Consumer Price Index (“CPI”) as of December 31, 2018.

In this annual report, references to “US$” and “Dollars” are to United States Dollars and references to “Ps.” or “Pesos” are to Argentine Pesos. The exchange rate used in translating Pesos into Dollars and used in calculating the convenience translations included in the following tables is the “Reference Exchange Rate” that is published by the Argentine Central Bank and that was Ps.37.8083 and Ps.18.7742 per US$1.00 as of December 31, 2018 and December 31, 2017, respectively. The exchange rate translations contained in this annual report should not be construed as representations that the stated Peso amounts actually represent or have been or could be converted into Dollars at the rates indicated or at any other rate.

1


 

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

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

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

Certain figures included in this annual report have been rounded for purposes of presentation. Percentage figures included in this annual report have not been calculated on the basis of such rounded figures but rather on the basis of such amounts prior to rounding. For this reason, percentage amounts in this annual report may vary from those obtained by performing the same calculations using the figures in the financial statements. Certain numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them due to rounding.

FORWARD LOOKING STATEMENTS

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

 

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

 

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

 

fluctuations in the Argentine rate of inflation, including hyperinflation;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

2


 

 

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

 

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

 

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

 

possible financial difficulties of the Argentine government;

 

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

 

designation of Argentina as a hyperinflationary economy; and

 

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

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

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

 


3


 

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A. Selected Financial Data

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

The selected consolidated financial information as of December 31, 2018, December 31, 2017, and January 1, 2017 and for the fiscal years ended December 31, 2018 and December 31, 2017 has been derived from our audited consolidated financial statements included in this annual report.

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

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


4


 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

 

(in millions of Pesos, except as noted)

 

Consolidated Income Statement In Accordance with IFRS

 

 

 

 

 

 

 

 

Net Income from Interest

 

 

33,364

 

 

 

29,874

 

Net Fee Income

 

 

20,238

 

 

 

22,146

 

Net Income from Financial Instruments

 

 

17,353

 

 

 

8,461

 

Loan and Other Receivables Loss Provisions

 

 

(16,300

)

 

 

(7,294

)

Net Operating Income

 

 

73,094

 

 

 

68,978

 

Loss on Net Monetary Position

 

 

(18,064

)

 

 

(6,823

)

Operating Income

 

 

3,374

 

 

 

14,598

 

Income Tax from Continuing Operations

 

 

(6,913

)

 

 

(7,319

)

(Loss) / Gain for the Year Attributable to GFG

 

 

(3,466

)

 

 

6,794

 

Other Comprehensive Income

 

 

(87

)

 

 

(435

)

Total Comprehensive Loss Attributable to GFG

 

 

(3,553

)

 

 

6,359

 

Ordinary Shares Outstanding for the year

 

 

1,427

 

 

 

1,427

 

Basic Earnings per Share (in Pesos)

 

 

(2.43

)

 

 

4.76

 

Diluted Earnings per Share (in Pesos)

 

 

(2.43

)

 

 

4.76

 

Cash Dividends per Share (in Pesos)

 

 

1.40

 

 

 

1.13

 

Book Value per Share (*) (in Pesos)

 

 

42.13

 

 

 

45.22

 

(*) Total Shreholders´Equity attributable to GFG divided Ordinary Shares Outstanding for the year.

 

 

 

For the Year Ended December 31,

 

 

As of January 1,

 

 

 

2018

 

 

2017

 

 

2017

 

 

 

(in millions of Pesos, except as noted)

 

Consolidated Balance Sheet in Accordance with IFRS

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Due from Banks

 

 

143,309

 

 

 

87,045

 

 

 

121,184

 

Debt Securities at Fair Value Through Profit or Loss

 

 

75,935

 

 

 

42,748

 

 

 

28,818

 

Net Loans and Other Financing

 

 

282,710

 

 

 

284,355

 

 

 

245,703

 

Total Assets

 

 

569,692

 

 

 

489,641

 

 

 

450,614

 

Deposits

 

 

360,097

 

 

 

296,367

 

 

 

277,078

 

Other Liabilities

 

 

147,747

 

 

 

125,796

 

 

 

127,863

 

Shareholders’ Equity attributable to GFG

 

 

60,125

 

 

 

64,525

 

 

 

42,954

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Loans and Other Financing

 

 

39

%

 

 

24

%

 

 

14

%

Total Assets

 

 

45

%

 

 

28

%

 

 

27

%

Deposits

 

 

59

%

 

 

38

%

 

 

34

%

Total Liabilities

 

 

49

%

 

 

31

%

 

 

31

%

5


 

 

 

 

For the Year Ended December 31,

 

 

 

 

2018

 

 

 

2017

 

 

Selected Ratios (*)

 

 

 

 

 

 

 

Profitability and Efficiency

 

 

 

 

 

 

 

Net Yield on Interest Earning Assets (1)

 

 

14.08

 

%

 

 

11.43

 

%

Financial Margin (2)

 

 

15.57

 

%

 

 

12.11

 

%

Return on Assets (3)

 

 

(0.61

)

%

 

 

1.39

 

%

Return on Shareholders’ Equity (4)

 

 

(5.76

)

%

 

 

10.53

 

%

Efficiency ratio (5)

 

 

52.04

 

%

 

 

52.36

 

%

Capital

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity as a Percentage of Total Assets

 

 

10.55

 

%

 

 

13.18

 

%

Total Liabilities as a Multiple of Shareholders’ Equity

 

 

8.45

 

x

 

 

6.54

 

x

Total Capital Ratio

 

 

15.11

 

%

 

 

10.69

 

%

Liquidity

 

 

 

 

 

 

 

 

 

 

Cash and Due from Banks(6) as a Percentage of Total Deposits

 

 

39.80

 

%

 

 

29.37

 

%

Loans and other financing as a Percentage of Total Assets

 

 

49.63

 

%

 

 

58.07

 

%

Credit Quality

 

 

 

 

 

 

 

 

 

 

Non-Accrual Instuments (7) as a Percentage of Total Financial Instruments Portfolio

 

 

3.51

 

%

 

 

2.20

 

%

Allowance for Financial Instruments as a Percentage of Non-accrual Financial Instruments(7)

 

 

137.42

 

%

 

 

129.75

 

%

Net Charge-Offs as a Percentage of Financial Instruments Portfolio

 

 

4.98

 

%

 

 

2.17

 

%

Inflation and Exchange Rate

 

 

 

 

 

 

 

 

 

 

Wholesale Price Index

 

73.50

 

%

 

18.80

 

%

Consumer Price Index

 

47.65

 

%

 

24.80

 

%

Exchange Rate Variation (8)

 

 

101.44

 

%

 

 

18.42

 

%

CER (9)

 

47.16

 

 

 

22.62

 

 

UVA (10)

 

46.86

 

 

 

21.15

 

 

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

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

(2) Financial margin represents net interest income plus net fee income plus net result from financial instruments plus foreign currency quotation differences plus insurance premiums earned plus certain items included in other operating income and expenses, divided by the average balance of interest-earning assets.

(3) Net income attibutable to GFG as a percentage of  total assets.

(4) Net income attibutable to GFG as a percentage of shareholders’ equity.

(5) Personnel expenses plus administrative expenses plus depreciation and devaluations of assets, divided by net interest income plus net fee income plus net result from financial instruments plus foreign currency quotation differences plus insurance premiums earned plus certain items included in other operating income.

(6) Liquid assets of Banco Galicia include cash and receivables, Lebacs (Bills form Argentine Central Back), net call money, short-term loans to other Argentine financial institutions, special guarantee accounts held at the Argentine Central Bank, and repurchase and reverse repurchase transactions in the Argentine financial market.

(7) Non-Accrual Financial Instruments are defined as those Financial Instruments in Stage 3.

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

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

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


6


 

The tables below reflect Grupo Galicia’s financial results for the fiscal years ended December 31, 2016, 2015 and 2014, which were prepared in accordance with Argentine Banking GAAP (“Previous GAAP”). The information based on Previous GAAP included below and elsewhere is this annual report is not comparable to information prepared in accordance with IFRS.

 

 

Fiscal Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

(in millions of Pesos, except as noted)

 

Consolidated Income Statement in Accordance with Argentine Banking GAAP

 

 

 

 

 

 

 

 

 

 

 

 

Financial Income

 

 

36,608

 

 

 

25,844

 

 

 

19,860

 

Financial Expenses

 

 

20,239

 

 

 

13,402

 

 

 

10,321

 

Gross Brokerage Margin (1)

 

 

16,369

 

 

 

12,442

 

 

 

9,539

 

Provision for Losses on Loans and Other Receivables

 

 

3,533

 

 

 

2,214

 

 

 

2,411

 

Income before Taxes

 

 

9,371

 

 

 

7,139

 

 

5,330

 

Income Tax

 

 

(3,353

)

 

 

(2,801

)

 

 

(1,992

)

Net Income

 

 

6,018

 

 

 

4,338

 

 

 

3,338

 

Basic Earnings per Share (in Pesos)

 

4.63

 

 

3.34

 

 

2.57

 

Diluted Earnings per Share (in Pesos)

 

4.63

 

 

3.34

 

 

2.57

 

Cash Dividends per Share (in Pesos)

 

0.18

 

 

0.12

 

 

0.08

 

Book Value per Share (in Pesos)

 

15.66

 

 

11.14

 

 

7.88

 

Amounts in Accordance with U.S. GAAP

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

6,037

 

 

 

4,336

 

 

 

3,504

 

Basic and Diluted Earnings per Share (in Pesos)

 

4.64

 

 

3.33

 

 

2.70

 

Book Value per Share (in Pesos)

 

15.45

 

 

11.06

 

 

7.88

 

Financial Income

 

 

34,549

 

 

 

24,252

 

 

 

18,166

 

Financial Expenses

 

 

19,410

 

 

 

12,826

 

 

 

9,663

 

Gross Brokerage Margin

 

 

15,139

 

 

 

11,426

 

 

 

8,503

 

Provision for Losses on Loans and Other Receivables

 

 

3,192

 

 

 

1,985

 

 

 

1,992

 

Income Tax

 

 

3,195

 

 

 

2,644

 

 

 

1,890

 

Consolidated Balance Sheet in Accordance with Argentine Banking GAAP

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Due from Banks

 

 

61,166

 

 

 

30,835

 

 

 

16,959

 

Government Securities, Net

 

 

13,701

 

 

 

15,525

 

 

10,01

 

Loans, Net

 

 

137,452

 

 

 

98,345

 

 

 

66,608

 

Total Assets

 

 

242,251

 

 

 

161,748

 

 

 

107,314

 

Deposits

 

 

151,688

 

 

 

100,039

 

 

 

64,666

 

Other Funds (2)

 

 

70,210

 

 

 

47,224

 

 

 

32,402

 

Total Shareholders’ Equity

 

 

20,353

 

 

 

14,485

 

 

 

10,246

 

Average Total Assets (3)

 

 

184,395

 

 

 

122,684

 

 

92,51

 

Percentage of Period-end Balance Sheet Items

 

 

 

 

 

 

 

 

 

 

 

 

Denominated in Dollars:

 

 

 

 

 

 

 

 

 

 

 

 

Loans, Net of Allowances

 

12.77

 

 

3.26

 

 

 

4.20

 

Total Assets

 

27.56

 

 

16.88

 

 

 

12.11

 

Deposits

 

33.63

 

 

14.37

 

 

 

7.46

 

Total Liabilities

 

30.82

 

 

18.86

 

 

 

13.61

 

Amounts in Accordance with U.S. GAAP

 

 

 

 

 

 

 

 

 

 

 

 

Trading Securities

 

 

17,196

 

 

 

16,148

 

 

 

10,199

 

Available-for-Sale Securities

 

 

5,423

 

 

 

4,385

 

 

 

4,627

 

Total Assets

 

 

260,403

 

 

 

180,142

 

 

 

120,393

 

Total Liabilities

 

 

240,316

 

 

 

165,759

 

 

 

110,150

 

Shareholders’ Equity

 

 

20,087

 

 

 

14,383

 

 

 

10,243

 

(1)

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

(2)

Primarily includes debt with merchants and liabilities with other banks and international entities.

(3)

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

 

7


 

 

 

Fiscal Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

 

2014

 

Selected Ratios in Accordance with Argentine Banking GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Profitability and Efficiency

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Yield on Interest Earning Assets (1)

 

 

13.26

%

 

 

14.18

%

 

 

 

14.42

%

Financial Margin (2)

 

 

12.10

 

 

13.12

 

 

 

13.56

 

Return on Average Assets (3)

 

3.48

 

 

3.83

 

 

 

3.85

 

Return on Average Shareholders’ Equity (4)

 

35.03

 

 

35.54

 

 

 

39.07

 

Net Income from Services as a Percentage of Operating Income (5)

 

39.63

 

 

38.65

 

 

 

 

37.40

 

Efficiency ratio (6)

 

64.98

 

 

63.64

 

 

 

60.51

 

Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity as a Percentage of Total Assets

 

 

8.40

%

 

 

8.96

%

 

 

 

9.55

%

Total Liabilities as a Multiple of Shareholders’ Equity

 

10.9

x

 

10.17

x

 

 

9.47

x

Total Capital Ratio

 

 

15.04

%

 

 

13.38

%

 

 

 

15.91

%

Liquidity

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Due from Banks(7) as a Percentage of Total Deposits

 

 

47.18

%

 

 

42.93

%

 

 

 

38.60

%

Loans, Net as a Percentage of Total Assets

 

56.74

 

 

 

60.80

 

 

 

62.07

 

Credit Quality

 

 

 

 

 

 

 

 

 

 

 

 

 

Past Due Loans (8) as a Percentage of Total Loans

 

 

2.43

%

 

 

2.46

%

 

 

 

2.61

%

Non-Accrual Loans (9) as a Percentage of Total Loans

 

3.31

 

 

3.11

 

 

 

3.57

 

Allowance for Loan Losses as a Percentage of Non-accrual Loans(9)

 

100.06

 

 

112.41

 

 

 

105.78

 

Net Charge-Offs (10) as a Percentage of Average Loans

 

1.67

 

 

1.26

 

 

 

2.81

 

Ratios in Accordance with U.S. GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity as a Percentage of Total Assets

 

7.71

 

 

7.98

 

 

 

8.51

 

Total Liabilities as a Multiple of Total Shareholders’ Equity

 

11.96

x

 

11.52

x

 

 

10.75

x

Liquidity

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, Net as a Percentage of Total Assets

 

 

52.76

%

 

 

54.55

%

 

 

 

55.29

%

Credit Quality

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

128.53

 

 

135.35

 

 

 

129.78

 

Inflation and Exchange Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale Inflation (11)

 

 

34.59

%

 

 

12.65

%

 

 

 

28.27

%

Consumer Inflation (12)

 

 

41.05

%

 

 

26.90

%

 

 

 

23.91

%

Exchange Rate Variation (13) (%)

 

21.88

 

 

52.07

 

 

 

31.21

 

CER (14)

 

35.79

 

 

15.05

 

 

 

24.34

 

UVA (15)

 

17.26

 

 

-

 

 

 

-

 

(1)

Net interest earned divided by interest-earning assets.

(2)

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

(3)

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

(4)

Net income as a percentage of average shareholders’ equity.

(5)

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

(6)

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

(7)

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

(8)

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

(9)

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

(10)

Direct charge-offs minus amounts recovered.

(11)

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

(12)

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

(13)

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

(14)

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

(15)

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

B. Capitalization and Indebtedness

Not applicable.

8


 

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

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

Risk Factors Relating to Argentina

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

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

During the course of the last few decades, Argentina’s economy has been marked by a high degree of instability and volatility, periods of low or negative economic growth and high, fluctuating levels of inflation and devaluation. Grupo Galicia’s results of operations, the rights of holders of securities issued by Grupo Galicia and the value of such securities could be materially and adversely affected by a number of possible factors, some of which include Argentina’s inability to sustain economic growth, the effects of inflation, Argentina’s ability to obtain financing, a decline in the international prices for Argentina’s main commodity exports, fluctuations in the exchange rates of other countries against which Argentina competes and the vulnerability of the Argentine economy to external shocks.

Since 2012, Argentina has gone through a period of stagflation. Figures of economic activity reflected a slowdown in domestic production, together with an increasing inflation rate at a higher pace than that noted in previous years. After the Peso devaluation with respect to the Dollar that took place in January 2014, the exchange rate between those two currencies remained relatively steady until the end of the former government’s term of office. During that period, low activity growth levels continued coexisting with a high inflation rate.

In December 2015, Mauricio Macri took office as the new president of Argentina. Since becoming president, Mr. Macri has implemented several measures, such as exchange and regulatory measures that reversed policies that had been in place prior to his administration, such as regulations related to exchange controls and other currency regulations. The impact of these measures, such as a devaluation of the Peso with respect to the Dollar of approximately 50%, as well as the impact of any measures that the Macri administration may implement in the future, is unknown and could have a material and adverse impact on the results of Grupo Galicia’s operations.

No assurance can be given that additional events in the future, such as the enactment of new regulations by the Argentine government or authorities, will not occur. As a result of the foregoing, the financial position and results of operations of private sector companies in Argentina, including Grupo Galicia, the rights of the holders of securities issued by such institutions and the value thereof may be negatively and adversely impacted.

9


 

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

A less favorable international context, a decrease in the competitiveness of the Peso as compared to foreign currencies, the low consumer confidence and low confidence from both local and foreign investors and a higher inflation rate, among other factors, may affect the development and growth of the Argentine economy and cause volatility in the local capital markets. Such events may adversely impact Grupo Galicia’s business and financial condition. Pursuant to the National Institute of Statistics and Census (the “INDEC”), the gross domestic product (the “GDP”) in Argentina, in real terms, decreased 2.5% in 2014; increased 2.7% in 2015; decreased 2.1% in 2016; increased 2.7% in 2017; and decreased 2.5% in 2018. Likewise, the INDEC carried out a review of the economic growth data corresponding to the periods from 2005 to 2015. This review exhibited a 20% difference between current measurements and those conducted by the prior administration.

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

 

a high rate of public spending;

 

high inflation rates;

 

regulatory uncertainty for certain economic activities and sectors;

 

decreases in the prices for commodities as the economic recovery has depended on high prices for commodities, which prices are volatile and beyond the control of the government;

 

the effects of a restrictive U.S. monetary policy, which could generate an increase in financial costs for Argentina;

 

fluctuations in the Argentine Central Bank’s monetary reserves; and

 

uncertainty with respect to exchange and capital controls.

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

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

As the date of this annual report, the impact that the reforms adopted by the Macri administration will have on the Argentine economy as a whole, and the financial sector in particular, cannot be predicted. In addition, the Macri administration’s ability to implement all of its proposed policies and corresponding measures cannot be assured. Since assuming office, the Macri administration has announced and implemented several significant economic policy reforms, including reforms related to the INDEC, the foreign exchange market foreign trade, fiscal deficit reduction, the correction of certain monetary imbalances, energy crisis, corporate criminal liability, the social security system, and the tax code. In 2016, Macri’s administration also was able to reach an agreement with the holdout creditors of Argentina’s outstanding debt.

In the congressional elections held on October 22, 2017, Macri’s governing coalition obtained the largest percentage of votes. His coalition, however, does not have a majority of seats in Congress, and therefore, it may be difficult to implement some of the aforementioned measures unless President Macri obtains support from the opposition party. This creates further uncertainty as to whether the Macri administration will be able to pass further reform measures. The political uncertainty surrounding potential economic reform could lead to volatility in the market prices of securities of Argentine companies.

10


 

The fiscal, monetary and currency adjustments undertaken by the Macri administration may result in slower short-term economic growth while seeking to guide the economy toward a sustained path for growth in the medium-term. Immediately after the foreign exchange controls were lifted on December 16, 2015, the dismantling of the multiple exchange regime resulted in the official Peso exchange rate (available only for certain types of transactions) falling in value by 40.1%, and the Peso-Dollar exchange rate fell to Ps.13.76 to US$1.00 on December 17, 2015. The Argentine Central Bank allowed the Peso to float with limited intervention until March 2018.As a result of the exchange rate crisis that began in March 2018 and lasted throughout the rest of 2018, the Peso-Dollar exchange rate became increasingly volatile. The exchange rate crisis lasted throughout most of 2018 and by December 28, 2018, the Peso-Dollar exchange rate had increased to Ps.37.81 to US$1.00. There can be no assurance as to the short- or long-term effects of these policies on the exchange rate or the Argentine economy as a whole.

The impact that these measures, and any future measures taken by a new administration, will have on the Argentine economy as a whole and the financial sector in particular cannot be predicted. Economic liberalization may be disruptive to the economy and may fail to benefit, or may harm, our business. In particular, Grupo Galicia has no control over the implementation of the reforms to the regulatory framework that governs its operations and cannot guarantee that these reforms will be implemented or that they will be implemented in a manner that will benefit its business. The failure of these measures to achieve their intended goals could adversely affect the Argentine economy and Grupo Galicia’s business, financial position and results of operations and the trading price for its ADSs.

If the high levels of inflation continue, the Argentine economy and Grupo Galicia’s financial position and business could be adversely affected.

Since 2007, the Argentine economy has experienced high levels of inflation. According to private estimates, as figures published by the INDEC were not reliable, inflation rates increased from levels of around 10% in 2005 and 2006 to a level above 20% during the following years, and reached a rate of 42.3% in 2014, decreasing to 27.2% in 2015, mainly due to the slowdown in economic activity in Argentina and to the overvaluation of the Peso, and increasing again to around 40% in 2016 and 25% in 2017, primarily as a consequence of the adjustments made by the government to fix certain macroeconomic imbalances, such as the dismantling of the multiple exchange regime and eliminating certain subsidies. In 2018, the devaluation of the Peso led to a rise in inflation. Inflation was 47.6% as of December 31, 2018. In response to this hyperinflation, the Argentine Central Bank abandoned its annual inflation reduction goals for 2019.

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

In addition to the above, the accuracy of INDEC’s calculation of the CPI in Greater Buenos Aires (IPC-GBA), according to which inflation was calculated, has been questioned. In particular, concerns were historically voiced that the actual consumer and wholesale price indices may be significantly higher than those that were indicated by INDEC. In order to address these concerns, the Macri administration has implemented various personnel changes at the INDEC. The new individuals in charge have discontinued use of most previously used indices in order to review the same and, potentially, to establish new, more accurate and reliable indices. There is currently uncertainty regarding what other future measures the INDEC may adopt and the impact that such measures may have on the relationship between Argentina and the IMF and the results of operations of Grupo Galicia.

A high inflation rate also affects Argentina’s competitiveness abroad, as well as real salaries, employment rates, consumption rates and interest rates. A high level of uncertainty with regard to these economic variables, and lack of stability in terms of inflation, could lead to shortened contractual terms and affect the ability to plan and make decisions. This may have a negative impact on economic activity and on the income of consumers and their purchasing power, all of which could materially and adversely affect Grupo Galicia’s financial position, results of operations and business, and the trading price for its ADSs.

11


 

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

Argentina and Argentine companies have had limited access to foreign financing in recent years, primarily as a result of a default in December 2001 by Argentina on its debt to foreign bondholders, multilateral financial institutions and other financial institutions. Argentina settled all of its outstanding debt with the IMF in 2006, carried out a variety of debt swaps with certain bondholders between 2004 and 2010, and reached an agreement with the Paris Club in 2014. After several years of litigation, on March 1, 2016, an agreement was reached between the Argentine government and certain creditors to which the Argentine government was previously in default. This agreement consisted of a payment in cash of approximately US$4.7 billion to the NML, Aurelius, Barcebridge and Davidson Kempner funds, and was approved by the Argentine Congress pursuant to law No.27,249.

On April 18, 2016, in order to make the payment to said funds and to other bondholders in similar conditions, Argentina issued bonds in an amount of US$16.5 billion, with interest rates between 6.25% and 8% and maturities of three, five, 10 and 30 years. The payment of approximately US$9.3 billion to the bondholders was made on April 22, 2016, thus reaching a final solution to the Argentine debt in default.

During the remainder of 2016, 2017 and the first four months of 2018, the Argentine government continued to seek financing from international markets. Following the exchange rate crisis beginning in April 2018, however, Argentina has not been able to access the international capital markets, resulting in the Argentine government requesting a loan from the IMF (Stand-By Agreement for a total of US$57 billion). The Argentine government may only drawdown on such loan to the extent it is honoring its commitment to implement restrictive monetary and fiscal policies, which could have a significant adverse effect on Argentina’s economy and on Argentine companies or Grupo Galicia’s ability to obtain international financing, and could also adversely affect local credit conditions.

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

The reliance on the export of certain commodities, such as soy, has made the country more vulnerable to fluctuations in their prices. A decrease in commodity prices may adversely affect the Argentine government’s fiscal revenues and the Argentine economy as a whole.

A significant increase in the real appreciation of the Peso could affect Argentina’s competitiveness, substantially affecting exports, and this in turn could prompt new recessionary pressures on Argentina’s economy and a new imbalance in the foreign exchange market, which could exacerbate exchange rate volatility. Given the strong reliance on revenues from taxes on exports, a significant appreciation of the real exchange rate could substantially reduce Argentine public sector’s tax revenues in real terms. The occurrence of the foregoing could exacerbate the existing inflationary environment and potentially materially and adversely affect the Argentine economy, as well as Grupo Galicia’s financial condition and operating results and, thus, the trading prices for its ADSs.

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

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

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

12


 

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

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

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

The problems faced by the European Union’s periphery countries, resulting from a combination of factors such as low growth, fiscal woes and financial pressures, are particularly acute. Reestablishing financial and fiscal stability to offset the low or zero growth continues to pose a challenge. As a result, the leading economies of the European Union imposed emergency economic plans in such countries, which plans are still in place. During 2018, the U.S. Federal Reserve increased the Federal Funds rate by 100 basis points and continued to cut its asset purchase and its monetary easing programs. Such changes continued to strengthen the Dollar globally, affecting commodity prices and reducing the inflow of capital to emerging market countries, including Argentina.

Brazil, Argentina’s main trade partner, has experienced a slight increase in GDP in recent years, increasing 1.1% in 2017 and 2018. Although Brazil’s economic outlook may be improving, a further deterioration of activity, a delay in Brazil’s expected economic recovery or a slower pace of economic improvement in Brazil may have a negative impact on Argentine exports and on the overall level of economic and industrial activity in Argentina, particularly with respect to the automotive industry. In addition, the inauguration of Jair Bolsonaro as the new president of Brazil has contributed to geopolitical volatility in this region as a result of his polarizing ideologies.

China, which is the main importer of Argentine raw materials, experienced an economic slowdown in 2018 as compared to recent years. The prices for Argentine commodities, in particular oilseeds, decreased. If these trends continue, it could affect the inflow of foreign currency into Argentina from exports. The slowdown of the Chinese economy and increased volatility of its financial markets could impact financial markets worldwide, which, in turn, could increase the cost and availability of financing both domestically and internationally for Argentine companies.

The international financial environment may also result in a devaluation of regional currencies and exchange rates, including the Peso, which would likely also cause volatility in Argentina.

A new global economic and/or financial crisis or the effects of deterioration in the current international context, could affect the Argentine economy and, consequently, Grupo Galicia’s results of operations, financial condition and the trading price for its ADSs.

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

If the Peso depreciated significantly against the U.S. Dollar, as has recently occurred and which could occur again in the future, it could have an adverse effect on the ability of Argentine companies to make timely payments on their debts denominated in or indexed or otherwise connected to a foreign currency, generate very high inflation rates, reduce real salaries significantly, and have an adverse effect on companies focused on the domestic market, such as public utilities and the financial industry. Such a potential devaluation could also adversely affect the Argentine government’s capacity to honor its foreign debt, with adverse consequences for Grupo Galicia’s and Banco Galicia’s businesses, which could affect Grupo Galicia’s capacity to meet obligations denominated in a foreign currency which, in turn, could have a material adverse effect on the trading prices for Grupo Galicia’s ADSs.

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In 2017, the Dollar to Peso exchange rate increased 18% as compared to 2016. This trend accelerated in 2018, with an increase of 113% from December 2017 to December 2018. Since December 31, 2018, the local currency has depreciated by 14%. Any further depreciation of the Peso may have an adverse impact on the business of Grupo Galicia and on the trading prices for its ADSs.

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

Finally, as a result of the hyperinflation caused by the exchange rate crisis, the costs associated with Grupo Galicia’s subsidiaries servicing their foreign currency-denominated debt will increase, which could increase Grupo Galicia’s costs and therefore have a material adverse effect on Grupo Galicia’s financial condition and results of operations.

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

Since December 2001, different government administrations have established and implemented various restrictions on foreign currency transfers (both in respect of transfer into and out of Argentina). Although the Macri administration eliminated such restrictions, Grupo Galicia cannot assure that such measures will not be implemented again in the future.

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

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

Service of process upon individuals or entities which are not resident in the United States may be difficult to obtain in the United States. Grupo Galicia and its subsidiaries are companies incorporated under the laws of Argentina. Most of their shareholders, directors, members of the Supervisory Syndics’ Committee, officers, and some specialists named herein are domiciled in Argentina and the most significant part of their assets is located in Argentina. Although Grupo Galicia has an agent to receive service of process in any action against it in the United States with respect to its ADSs, none of its executive officers or directors has consented to service of process in the United States or to the jurisdiction of any United States court. As a result, it may be difficult to effect service of process against Grupo Galicia’s executive officers and directors. Additionally, under Argentine law, the enforcement of foreign judgments will only be allowed if the requirements in sections 517 to 519 of the National Code of Civil and Commercial Procedures are met or, if it is one of the powers governed by provincial law, the requirements in the applicable local code of procedure, and provided that the foreign judgment does not infringe on concepts of public policy in Argentine law, as determined by the competent courts of Argentina. As such, an Argentine court may find that the enforcement in Argentina of a foreign judgment (including a U.S. court) that requires payment be made by an Argentine to holders of its foreign currency-denominated securities outside of Argentina is contrary to the public policy if, for instance, there are legal restrictions in place prohibiting Argentine debtors from transferring foreign currency abroad to pay off debts.

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

Historically, the Argentine government has played an active role in the electric power sector through the ownership and management of state-owned companies engaged in the generation, transmission and distribution of electric power. To address the Argentine economic crisis of 2001 and 2002, the Argentine government adopted Law No.25,561 and other regulations, which made a number of material changes to the regulatory framework applicable to the electric power sector and have significantly distorted supply and demand in the sector. These changes included the freezing of distribution margins, the revocation of adjustment and inflation indexation mechanisms for tariffs, a limitation on the ability of electric power distribution companies to pass on to the consumer increases in costs due to regulatory charges and the introduction of a new price-setting mechanism in the wholesale electricity market, all of which had a significant impact on electric power generators and caused substantial price differences within the market.

Since the Macri administration assumed office, the Argentine government has initiated significant reforms in the electric power sector. As part of such reforms, the Argentine government has taken actions designed to guarantee the supply of electric power in Argentina, such as instructing the Ministry of Energy and Mining to develop and implement a coordinated program to guarantee the quality of the electric power system and ration individuals’ and public entities’ consumption of energy by increasing tariffs. In addition, the Argentine government and certain provincial governments have approved significant price adjustments and tariff increases applicable to certain generation and distribution companies, resulting in an increase in cost of energy prices for consumers.

On March 31, 2017, the Ministry of Energy and Mining released a new tariff schedule that increased the price consumers pay for electricity and natural gas by 36% with the goal of reducing government subsidies for energy consumption as part of efforts to reduce the Argentine government’s fiscal deficit. Following a public hearing, the Minister of Energy and Mining released a revised tariff schedule in December 2017, which further increased rates between 34% and 57% (depending on the province) for natural gas and approximately 34% for other electricity. On December 28, 2018, the government further increased gas and electricity tariffs to 40% and 55%, respectively, which will be implemented during the 2019 fiscal year.

As a result, there has been a significant increase in the cost of energy in Argentina, which could have a material adverse effect on consumers’ disposable income, and therefore, Grupo Galicia’s financial condition and results of operations and the trading price of our ADSs.

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

In the past, the Argentine government has passed laws and regulations requiring private sector companies to maintain certain salary levels and provide their employees with additional work-related benefits. Furthermore, employers, both in the public sector and in the private sector, have been experiencing intense pressure from their personnel, or from the labor unions representing such personnel, demanding salary increases and certain benefits for the workers, given the prevailing high inflation rates. Labor pressure can also potentially lead to strikes or work stoppages if demands are not satisfied, which could have a material and adverse effect on Grupo Galicia’s operations.

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

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Risk Factors Relating to the Argentine Financial System

The stability of the Argentine financial system is dependent upon the ability of financial institutions, including Banco Galicia, the main subsidiary of Grupo Galicia, to maintain and increase the confidence of depositors.

The measures implemented by the Argentine government in late 2001 and early 2002, in particular the restrictions imposed on depositors to withdraw money freely from banks and the pesification and restructuring of their deposits, were strongly opposed by depositors due to the losses on their savings and undermined their confidence in the Argentine financial system and in all financial institutions operating in Argentina.

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

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

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

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

As a result of the 2001-2002 financial crisis, the volume of financial intermediation activity dropped dramatically: private sector credit plummeted from 24% of GDP in December 2000 to 7.7% in June 2004 and total deposits as a percentage of GDP fell from 31% to 23.2% during the same period. The depth of the crisis and the effect it had on depositors’ confidence in the financial system created uncertainty regarding its ability to act as an intermediary between savings and credit. Furthermore, the ratio of the total financial system’s private-sector deposits and loans to GDP remains low when compared to international levels and continues to be lower than the periods prior to the crisis, especially in the case of private-sector deposits and loans, which amounted to 20.7% and 10.6% of GDP, respectively, as of December 31, 2018.

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

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

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

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

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

Banco Galicia’s exposure to the public sector as of March 31, 2019 was Ps.124,058 million, representing approximately 22% of its total consolidated assets and 240% of its shareholders’ equity. Of this total, Ps.99,480 million were Argentine Central Bank debt instruments, Ps.24,535 million corresponded to Argentine government securities, while the remaining Ps.43 million corresponded to other receivables resulting from financial brokerage. As a result, Grupo Galicia’s income-generating capacity may be materially impacted, or may be particularly affected by the Argentine public sector’s repayment capacity and the performance of public sector bonds, which, in turn, is dependent on the factors referred to above. Banco Galicia’s ability to honor its financial obligations may be adversely affected by the Argentine government’s repayment capacity or its failure to meet its obligations in respect of Argentine government obligations owed to Banco Galicia.

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

Argentine Law No.24,240 (the “Consumer Protection Law”) sets forth a series of rules and principles designed to protect consumers, which include Banco Galicia’s customers. The Consumer Protection Law was amended by Law No.26,361 on March 12, 2008 (as amended by Laws No.27,250 and 27,265 in 2016) to expand its applicability, rights granted to consumers and the penalties associated with violations thereof. Additionally, Law No.25,065 (as amended by Law No.26,010 and Law No.26,361, the “Credit Card Law”) also sets forth public policy regulations designed to protect credit card holders. On October 1, 2014, a new Civil and Commercial Code was sanctioned, which captured the principles of Consumer Protection Law and established their application to banking agreements.

On September 17, 2014, Law No.26,993 was enacted, which created a “System to Solve Disputes in Consumer Relationships”, introducing new administrative and legal procedures within the framework of the Consumer Protection Law; namely, an administrative and a judicial regime for such matters.

The application of both the Consumer Protection Law and the Credit Card Law by administrative authorities and courts at the federal, provincial and municipal levels has increased. This trend has led to an increase in general consumer protection levels. In the event that Grupo Galicia and its subsidiaries are found to be liable for violations of any of the provisions of the Consumer Protection Law or the Credit Card Law, the potential penalties could limit some of Grupo Galicia and its subsidiaries’ rights, for example, with respect to their ability to collect payments due from services and financing provided by Grupo Galicia or its subsidiaries, and adversely affect their financial results of operations. There can be no assurance that court and administrative rulings based on the newly enacted regulation or measures adopted by the enforcement authorities will not increase the degree of protection given to its debtors and other customers in the future, or that they will not favor the claims brought by consumer groups or associations. This may prevent or hinder the collection of payments resulting from services rendered and financing granted by Grupo Galicia’s subsidiaries, which may have an adverse effect on their results and operations.

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

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

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Final judgments entered against financial institutions under these class actions may affect the profitability of financial institutions in general and of Banco Galicia specifically in relation to class actions filed against Banco Galicia. For further information regarding class actions brought against Banco Galicia, please refer to the Item 8. “Financial Information”─A. “Consolidated Statements and Other Financial Information”—“Legal Proceedings”— “Banco Galicia”.

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

City of Buenos Aires tax authorities, as well as certain provincial tax authorities, have initiated administrative proceedings against financial institutions in order to collect higher gross income taxes from such financial institutions beginning in 2002 and onward.

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

Moreover, amendments to existing regulations may increase Grupo Galicia’s tax rate and a material increase in the tax burden could adversely affect its financial results.

Risk Factors Relating to Us

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

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

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

Notwithstanding the fact that the repayment of such obligations could be afforded by Grupo Galicia through other means, such as bank loans or new issues in the capital market, investors should take notice of the above, prior to deciding on their investment in equity in Grupo Galicia. For further information on dividend distribution restrictions, see Item 5. “Operating and Financial Review and Prospects”─B. “Liquidity and Capital Resources”.

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

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

In addition, although Argentine laws provide for certain requirements that are similar to those prevailing in the U.S. in relation to publicly listed companies (including, for example, those related to price manipulation), in general, applicable Argentine laws are different to those in the U.S. and in certain aspects may provide different or fewer protections or remedies as compared to U.S. laws. Further, Grupo Galicia relies on exemptions from certain Nasdaq rules that are applicable to domestic companies. Accordingly, the corporate information available about Grupo Galicia is not the same as, and may be more limited than, the information available to shareholders of a U.S. company.

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

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

Due to Grupo Galicia’s adoption of IFRS beginning January 1, 2018, Grupo Galicia’s internal controls over financial reporting may not be effective, resulting in increased operational costs to comply with its financial reporting obligations, therefore adversely affective its results of operations and financial reporting process.

Grupo Galicia adopted IFRS effective as of January 1, 2018 and Grupo Galicia’s financial statements for the year ended December 31, 2018 are its first financial statements prepared in accordance with IFRS.  In connection with this transition, Grupo Galicia has faced challenging and complex changes to its accounting and financial reporting procedures. The implementation of Grupo Galicia’s existing internal control mechanisms and corporate governance processes in light of its adoption of IFRS may not be effective. As a result, Grupo Galicia may have to invest significant time and financial resources to restructuring its internal controls and corporate governance processes to comply with its financial reporting obligations, thus resulting in increased operational costs and therefore adversely affecting Grupo Galicia’s results of operations and financial reporting process.

As of July 1, 2018, the Peso qualifies as a currency of a hyperinflationary economy, and Grupo Galicia is required to apply inflationary adjustments to its financial statements, which adjustments could adversely affect its financial statements, results of operations and financial condition.

Pursuant to IAS 29 (Financial Reporting in Hyperinflationary Economies), the financial statements of entities whose functional currency is that of a hyperinflationary economy must be restated in a suitable general price index to control for the effects of changes. IAS 29 does not prescribe when hyperinflation arises,but rather provides for several characteristics indicating hyperinflation in an economy. In addition, the IASB does not identify specific hyperinflationary jurisdictions. In June  2018, the International Practices Task Force of the Centre for Quality, which monitors “highly inflationary countries”, categorized Argentina as a country with a projected three-year cumulative inflation rate greater than 100%. Additionally, some of the other qualitative factors of IAS 29 were present. Argentine companies applying IFRS are required to apply IAS 29 to their financial statements for periods ending on and after July 1, 2018. In addition, certain regulatory authorities, such as the Argentine Securities Commission

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(Comisión Nacional de Valores) (“CNV”), have required that financial statements submitted to the CNV for the periods ended on and after December 31, 2018 to be restated for inflation in accordance with IAS 29.

For purposes of the determination of the indexation for tax purposes, Law No.27,468, enacted on December 4, 2018, substituted the Wholesale Price Index for CPI and modified the standards triggering tax indexation procedures. For the three fiscal years beginning January 1, 2018, such tax indexation will be applicable if the variation of the CPI exceeds 55% in 2018, 30% in 2019 and 15% in 2020. The tax indexation determined during any such year will be allocated as follows: 1/3 in that same year, and the remaining 2/3 in equal parts in the following two years. From January 1, 2021, the tax indexation procedure will be triggered under similar standards as those set forth by IAS 29.

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

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

Grupo Galicia’s subsidiaries estimate and establish reserves for potential credit risk and losses related to changes in the levels of income of debtors/borrowers, increased rates of inflation, increased levels of non-performing loans or an increase in interest rates. This process requires a complex and subjective analysis, including economic projections and assumptions regarding the ability of debtors to repay their loans.

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

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

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

Furthermore, many legal and regulatory regimes require Grupo Galicia’s subsidiaries to report transactions and other information to regulators and other governmental authorities, self-regulatory organizations, exchanges, clearing houses and customers. Grupo Galicia’s subsidiaries are also required to withhold funds and make various tax-related payments, relating to their own tax obligations and those of their customers. Grupo Galicia’s subsidiaries

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may be subject to fines, penalties, restrictions on our business, or other negative consequences if they do not timely, completely, or accurately provide regulatory reports, customer notices or disclosures, or make tax-related withholdings or payments, on behalf of themselves or their customers.

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

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

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

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

The business of many of Grupo Galicia’s subsidiaries depends on the efficient and uninterrupted operation of its data processing systems, its platforms for the exchange of information and its digital networks. Many of Grupo Galicia’s subsidiaries have access to a large amount of confidential information about their respective clients. Therefore, cybersecurity breaches represent a potential risk for Grupo Galicia. Cybersecurity breaches that result in, for example, identity theft, phishing, ransomware, information leaks, APT (Advanced Persistent Threat), DDoS Attacks (Denial of Distributed Service) or the theft of personal and confidential information, could negatively affect the security of information that is stored and transmitted through the information systems and network infrastructure of Grupo Galicia and negatively affect the reputation of Grupo Galicia’s brands, thereby causing existing and potential clients to refrain from conducting business with Grupo Galicia’s subsidiaries. Grupo Galicia cannot provide any assurance that the systems are invulnerable to cybersecurity breaches or that its existing security measures will be successful in protecting against any such breach. In addition, any of the aforementioned events could lead to an increase in compliance costs for Grupo Galicia’s subsidiaries. If any of the above described events were to occur, it could lead to reputational damage to Grupo Galicia’s brands, which could reduce the use and acceptance of its products, greater regulation, and increased compliance costs, therefore adversely affect its business and results of operation and the trading price for its ADSs.

Fluctuations in the value of the Peso could adversely affect Argentine economic growth and Argentina’s international reserves and the financial situation of the Grupo Galicia and its subsidiaries.

The devaluation of the Peso could have a negative impact on the ability of certain Argentine businesses to make timely payments on their foreign currency-denominated debt, could cause inflation, could cause a significant reduction in salaries in real terms, could put at risk the financial stability of companies, such as certain subsidiaries of Grupo Galicia, whose success depends on internal market demand and could also adversely affect the ability of the Argentine government to pay its foreign currency-denominated debt. In 2015, the Peso depreciated approximately 25% as compared to the Dollar, which included a 10% depreciation between January 1, 2015 and November 30, 2015 and a 16% devaluation during the last month of the year, the majority of which was concentrated in the period after December 16, 2015 once the government of Macri assumed control of the exchange rate put in place by the prior government. In 2016, the Peso lost approximately 28% of its value as compared to the Dollar and in 2017, the Peso lost approximately 11% of its value as compared to the Dollar. In 2018, an exchange rate crisis caused the Peso to lose approximately 53% of its value as compared to the Dollar.

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

Further, a significant depreciation of the Peso would, among other things, increase the cost of servicing certain of Grupo Galicia’s subsidiaries’ foreign currency-denominated debt. Either a significant depreciation or appreciation could have a material adverse effect on the Argentine economy and Grupo Galicia’s financial condition and results of operations.

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Shortages in the availability of energy in Argentina could adversely affect the Argentine economy and hence the operation and business of Grupo Galicia and its subsidiaries.

The various economic crisis in the past in Argentina and the fixing of the tariff rates in the electricity sector have provoked a significant lack of infrastructure and business investment for the supply and transportation of natural gas and electricity. At the same time, the demand for the natural gas and electricity in Argentina has increased considerably due to the improving economic conditions in the country and the low cost of such services. To address such increase in demand, Argentina has needed to import natural gas from other countries. The Central Bank’s reserves have been frequently used by the government to pay for such imports. If the government is unable to pay to import natural gas to cover the energy deficit, the Argentine economy may suffer and Argentine businesses may be adversely affected.

Several measures have been adopted by the government in order to lessen the short term impact of the lack of energy for residential and industrial users. If these measures are not sufficient, or if the relevant investments are not timely made, the Argentine economy could be seriously affected, producing a negative impact on local business.

Since 2015, as a first step, tariff increases were implemented and subsidies to industries and to high income consumers were reduced. In February 2016, the government implemented various increases in tariffs and reductions in subsidies for gas and electricity users.

On August 18, 2016, the Supreme Court suspended the gas tariff increases for residential users and ordered public hearings in respect of such increases. The Argentine government, complying with this ruling, conducted public hearings on the matter in September 2016. During such hearings, the Secretary of Energy ratified the government’s plan to maintain such increases and to further increase the same. In October 2016, resolution No.212 – E/2016 established the new gas tariffs with an average increase of 200% for residential consumers and of 277% for most merchants, small and medium companies.

On September 27, 2016, Federal Judge No.3 of the Province of Cordoba suspended for the whole country the increase of gas tariffs for merchants, small and medium companies and ordered the imposition of the tariff regime in place on March 31, 2016 until December 27, 2016. Such resolution was appealed by the Argentine government. On September 6, 2016, the Supreme Court ruled in favor of increasing the electricity tariffs in the Province of Buenos Aires.

As a consequence of the above, the cost of energy has increased significantly in recent years, which increase may have an adverse effect on the Argentine economy and Grupo Galicia’s financial condition and results of operations.

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

During recent years, the Argentine government has substantially increased the levels of its public spending. In 2016, public sector spending increased by 38.2% as compared to the prior year, and the government announced a primary fiscal deficit equal to 4.2% of GDP. In 2017, public sector spending increased by 21.8% as compared to the prior year, and the government announced a primary fiscal deficit equal to 3.8% of GDP. In 2018, public sector spending increased by 22.4% as compared to the prior year, and the government announced a primary fiscal deficit equal to 2.4%, with revenues increasing 30.2% for the year ended December 31, 2018 as compared to the year ended December 31, 2017.

Despite the results of the year ended December 31, 2018, if public spending increases again outpace increases in revenues, the fiscal deficit is likely to increase, causing the Argentine government to seek assistance from the Central Bank and the National Administrator of Pensions.

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

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

The lack of a solid institutional framework and corruption have been identified as serious problems for Argentina, and may continue to be. In the Transparency International’s Corruption Perceptions Index 2018, which measures corruption in 180 countries, Argentina ranked No.85. In the World Bank’s “Doing Business” report in 2018, Argentina Ranked No.119 out of 190 countries. The failure to address these issues could increase the risk of political instability, distort the decision-making process, adversely affect Argentina’s international reputation and its ability and the ability of its companies to attract foreign investment. Although the Macri administration has announced several measures aimed at strengthening Argentina’s institutions and reducing corruption, the Argentine government’s ability to implement these initiatives is uncertain as it would require the involvement of the judiciary branch, which is independent, as well as legislative support from opposition parties and there can be no assurances that the implementation of such measures will be successful. A deterioration in the Argentine economy could have a material and adverse effect on Grupo Galicia’s financial condition and results of operations.

 

Item 4. Information on the Company

A. History and Development of the Company

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

Through the operating subsidiaries of Tarjetas Regionales, in which Grupo Galicia has an 83% ownership interest, we provide proprietary brand credit cards and consumer finance services throughout the “Interior” of Argentina. Argentines refer to the “Interior” as all of Argentina except for Buenos Aires and its surrounding areas (“Greater Buenos Aires”).

Through Sudamericana Holdings and its subsidiaries we provide insurance products in Argentina. We directly or indirectly own other companies providing financial related products as explained herein. We are one of Argentina’s largest financial services groups with consolidated assets of Ps.569,692 million as of December 31, 2018. For more information regarding the corporate reorganization of Tarjetas Regionales and the sale of Compañia Financiera Argentina S.A. (“CFA”), please see “History”.

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

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

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

History

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Grupo Financiero Galicia

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

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

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

On January 12, 2017, Grupo Financiero Galicia, together with its main subsidiary Banco Galicia, accepted an offer made by Mr. Julio A. Fraomeni and Galeno Capital S.A.U. to purchase 100% of CFA. On December 4, 2017, pursuant to Resolution No.414, the Argentine Central Bank authorized such sale, which was completed on February 2, 2018, and Grupo Financiero Galicia received Ps.30,771,146 (which, as adjusted for inflation, was equal to Ps.42,794,389 as of December 31, 2018).

On May 16, 2017, the Board of Directors of Grupo Financiero Galicia accepted an offer to acquire 10,000 book-entry shares with a nominal value of Ps.1 per share, representing 1% of the share capital of Galicia Valores S.A. owned by CFA for Ps.906,524.15 (which, as adjusted for inflation, was equal to Ps.1,511,188 as of December 31, 2018).

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

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

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

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On September 26, 2017, the global primary follow-on offering period ended and 109,999,996 Class B shares were subscribed for a price of US$5 per share. Such shares were issued on September 29, 2017. The Company granted the underwriters the option to purchase additional Class B ordinary shares at the offering price, and on October 2, 2017, the underwriters exercised such option and 16,500,004 additional Class B shares at US$5 per share were issued on October 4, 2017.

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

On December 27, 2017, Grupo Financiero Galicia made a capital contribution to Banco Galicia of Ps.10,000,000,000 (which, as adjusted for inflation, was equal to Ps.14,764,559,007 as of December 31, 2018).

Banco Galicia

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

Banco Galicia was founded in September 1905 by a group of businessmen in Argentina and began operations in November 1905. Two years later, in 1907, Banco Galicia’s stock was listed on the Buenos Aires Stock Exchange (the “BASE”). Banco Galicia’s business and branch network increased significantly by the late 1950s and continued expanding in the following decades, after regulatory changes allowed Banco Galicia to exercise its potential and gain a reputation for innovation, thereby achieving a leading role within the domestic banking industry.

In the late 1950s, Banco Galicia launched the equity mutual fund FIMA Acciones and founded the predecessor of the asset manager Galicia Administradora de Fondos. Beginning in the late 1960s, Banco Galicia began to establish an international network mainly comprised of branches in New York and in the Cayman Islands, a bank in Uruguay and several representative offices.

In order to develop automated banking in Argentina and avoid bank disintermediation (i.e., when consumers access information or goods directly rather than through intermediaries) in the provision of electronic information and fund transfer services, in 1985, Banco Galicia established, together with four other private- sector banks operating in Argentina, Banelco S.A. to operate a nationwide automated teller system, which became the largest in the country. During the same year, Banco Galicia also acquired an interest in VISA Argentina S.A., and is currently one of the largest issuers of such cards in Argentina.

During the 1990s, Banco Galicia implemented a growth and modernization strategy directed at achieving economies of scale and increasing productivity and, therefore, heavily invested in developing new businesses, acquiring new customers, widening its product offering, developing its IT and human resources capabilities, and expanding its distribution capacity. This was comprised of traditional channels (branches) and, especially, alternative channels, including new types of branches (e.g., in-store), ATMs, banking centers, phone banking and internet banking.

As part of its growth strategy, Banco Galicia began expanding into rural areas in the Interior, where there was believed to be a high potential for growth. Historically, the Interior was underserved relative to Buenos Aires and its surroundings with respect to access to financial services, and its population tends to use fewer banking services. Between 1995 and 1999, Banco Galicia acquired equity interests in entities and formed several non-banking companies providing financial services to individuals in the Interior through the issuance of proprietary brand credit cards. See “Regional Credit Card Companies” below. In addition, in 1997, Banco Galicia acquired a regional bank that was merged into it, with branches located mainly in Santa Fe and Córdoba, two of the wealthiest and most populous provinces.

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In order to fund its strategy, during the 1990s, Banco Galicia tapped the international capital markets for both equity and debt. In June 1993, Banco Galicia carried out its initial international public offering in the United States and Europe and, as a result, listed its American Depositary Receipts (“ADRs”) on the Nasdaq Stock Market until 2000, when Banco Galicia’s shares were exchanged for our shares. In 1991, it was the first Argentine bank to issue debt in the European capital markets and, in 1994, it was the first Latin American issuer of a convertible bond. In 1996, Banco Galicia raised equity again through a local and international public offering.

In 1996, Banco Galicia entered the bank insurance business through an agreement with ITT Hartford Life Insurance Co. for the joint development of initiatives in the life insurance business. In the same year, Banco Galicia initiated its internet presence, which evolved into a full e-banking service for both companies and individuals.

At the end of 2000, Banco Galicia was the largest private-sector bank in the Argentine market with a 9.8% deposit market share.

In 2001 and 2002, Argentina experienced a severe political and financial crisis, which had a material adverse effect on the financial system and on financial businesses as a whole, including Banco Galicia, but especially on financial intermediation activity. However, during the crisis, the provision of transactional banking services was maintained. With the normalization of the Argentine economy and the subsequent period of growth, financial activities began to increase, translating into significant growth for the financial system as a whole, including Banco Galicia. The provision of services continued to develop, surpassing their development pre-crisis, and financial intermediation activity resumed progressively.

Beginning in May 2002, Banco Galicia began to implement a series of initiatives to deal with the liquidity shortage caused by the systemic deposit run, the unavailability of funding and other adverse effects of the 2001-2002 financial crisis. Banco Galicia significantly streamlined its operations and reduced its administrative expenses and, immediately after launching such initiatives, restored its liquidity. Also, in late 2002 and early 2003, Banco Galicia closed all of its operating units abroad or began to wind them down. In addition, Banco Galicia: (i) restructured most of its commercial loan portfolio, a process that was substantially completed in 2005, (ii) restructured its foreign debt, a process that began in 2002 and that was completed in May 2004, and resulted in an increase in its capitalization, and (iii) in February 2004, finalized the restructuring of its debt with the Argentine Central Bank incurred as a consequence of the 2001-2002 financial crisis.

Together with the launching of the above-mentioned initiatives, Banco Galicia began to normalize its activities, progressively restoring its customer relations and growing its business with the private sector. In 2007, Banco Galicia finalized the full repayment of its debt with the Argentine Central Bank incurred as a consequence of the 2001-2002 financial crisis. In addition, in August 2007, Banco Galicia repaid in full the notes that it had issued to restructure the debt of its New York Branch and undertook a share offering to increase its capitalization, in order to be able to support the increase in regulatory capital requirements on a bank’s exposure to the public sector and the growth of its business with the private sector.

On February 25, 2014, Grupo Financiero Galicia, which controlled 99.62% of the shares of Banco Galicia, resolved to issue an offer to acquire the 2,123,962 shares of Banco Galicia owned by third parties. On April 24, 2014, said transaction was approved by the CNV and on July 14, 2014, it was incorporated by the Argentine Superintendency of Corporations. Currently, 100% of the outstanding capital stock of Banco Galicia is owned by Grupo Financiero Galicia. See “Grupo Financiero Galicia” above.

In addition, Banco Galicia requested to delist its shares from the BYMA to become a privately held company. Banco Galicia’s quotation was suspended on April 30, 2014. On August 21, 2014, the CNV approved Banco Galicia’s request to delist its shares from the BASE.

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

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

On December 27, 2017, Grupo Financiero Galicia, in its capacity as sole shareholder and holder of 100% of the capital of Banco Galicia, integrated a capital contribution of Ps.10,000 million (which, as adjusted for inflation, was equal to Ps.14,765 million as of December 31, 2018). The Argentine Central Bank, through its Resolution No.35 dated January 11, 2018, approved the capital contribution and its consideration as computable capital.

Regional Credit Card Companies

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

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

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

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

In 1999, Banco Galicia reorganized its participation in this business through Tarjetas Regionales, a holding company wholly owned by Banco Galicia and Galicia Cayman, which owns the shares of Tarjeta Naranja, Comfiar S.A., Tarjetas Cuyanas, and Tarjetas del Mar. In addition, between 1999 and 2000, Tarjetas Regionales acquired Tarjetas del Sur S.A., a credit card company operating in southern Argentina. In March 2001, Tarjetas del Sur S.A. merged into Tarjeta Naranja.

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

 

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

 

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

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

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

These companies have experienced a significant expansion of their customer bases, in absolute terms and with respect to the range of customers served, number of cards issued, distribution networks and size of operations, as well as a technological upgrade and general modernization. By mid -1995, Tarjeta Naranja had approximately 200,000 cards outstanding. As of December 31, 2018, the Regional Credit Card Companies, on a consolidated basis, had approximately 9 million issued cards and were the largest proprietary brand credit card operation in Argentina.

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

The business operations of the Regional Credit Card Companies are exposed to foreign exchange rate fluctuations and interest rate fluctuations; however, they mitigate the foreign exchange rate risk in respect of their business and operation through hedging transactions and try to offset their interest rate exposure with assets that bear interest at similar floating rates. In addition, the Regional Credit Card Companies have an overall liquidity policy requiring them to maintain sufficient liquidity to cover at least three months of future operations and to formulate a cash flow projection for each upcoming year. These internal policies and practices ensure adequate working capital through which the Regional Credit Card Companies protect their operations against short-term cash shortages, allowing them to focus on expanding their business and continuously better serving their clients.

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

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

Sudamericana Holding

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

In addition, during fiscal year 2012 Galicia Seguros, together with three other insurance companies, created Nova Re Compañía Argentina de Reaseguros S.A., the goal of which is to increase the scope of offerings of reinsurance products in Argentina. In September 2017, Galicia Seguros sold its ownership interest in such entity.

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Galicia Administradora de Fondos

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

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

Net Investment (Liquidated)

Net Investment was established in February 2000 as a holding company (87.5% owned by Grupo Financiero Galicia and 12.5% owned by Banco Galicia).

On May 16, 2017, the General Ordinary Shareholders’ Meeting of Net Investment unanimously approved the early dissolution and subsequent liquidation of Net Investment. At such meeting, the shareholders appointed a liquidating committee that took all required actions leading to such entity’s actual liquidation, with the financial statements as of December 31, 2017 corresponding to its final liquidation. The final distribution of capital was made on January 9, 2018.

Galicia Warrants

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

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

Capital Investments and Divestitures

During 2018, our capital expenditures amounted to Ps.3,688 million, allocated as follows:

 

Ps.2,337 million in fixed assets (real estate, machinery and equipment, vehicles, furniture and fittings); and

 

Ps.1,351 million in organizational and development expenses.

During 2017, our capital expenditures amounted to Ps.3,087 million, allocated as follows: