Galicia Financial Group - 20-F annual report

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)

 

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)

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

 

* 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:

 

 

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):

 

 

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:

 

 

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]

 

 

 

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Table of Contents

 

 

 

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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:

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.

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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:

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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.

 

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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.

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

 

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(*) 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.

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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.

 

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B. Capitalization and Indebtedness

Not applicable.

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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.

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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:

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.

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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.

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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.

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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:

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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:

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

These capital expenditures were primarily made in Argentina.

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For a description of our divestitures in 2018 and 2017 related to Tarjetas del Mar, Tarjetas Regionales and the sale of CFA, please see “─History” ─ “Banco Galicia” and “Tarjetas Regionales”.

Investment Planning

We have budgeted capital expenditures for the fiscal year ending December 31, 2019, for the following purposes and amounts:

These capital expenditures will primarily be made in Argentina. Management considers that internal funds will be sufficient to finance capital expenditures for the year ending December 31, 2019.

B. Business Overview

Business

Banking

Banco Galicia, our largest subsidiary, operates in Argentina and substantially all of its customers, operations and assets are located in Argentina. Banco Galicia is a bank that provides, directly or through its subsidiaries, a wide variety of financial products and services to large corporations, SMEs, and individuals.

Banco Galicia is one of Argentina’s largest full-service banks and is a leading provider of financial services in Argentina. According to information published by the Argentine Central Bank, as of December 31, 2018, Banco Galicia ranked first in terms of assets and loan portfolio and second in terms of deposits within private-sector banks in Argentina. As of the same date, Banco Galicia also ranked first among private-sector domestic banks in terms of assets, loans and deposits. Its market share of private sector deposits and of loans to the private sector was 11.08% and 10.51%, respectively, as of December 31, 2018. As of December 31, 2018, Banco Galicia had total assets of Ps.511,338 million, total loans and other financing of Ps.243,232 million, total deposits of Ps.361,446 million, and its shareholders’ equity amounted to Ps.43,969 million.

Banco Galicia provides a full range of financial services through one of the most extensive and diversified distribution platforms amongst private-sector financial institutions in Argentina. This distribution platform, as of December 31, 2018, was comprised of 325 full service banking branches, located throughout the country, 2,029 ATMs and self-service terminals owned by Banco Galicia, phone banking and e-banking facilities. Banco Galicia’s customer base, on an unconsolidated basis, was comprised of approximately 3.0 million customers, who were comprised of mostly individuals but who also included 105,960 companies. Banco Galicia has a strong competitive position in retail banking, both with respect to individuals and SMEs. Specifically, based on internal studies undertaken by Banco Galicia, it is estimated that Banco Galicia is one of the primary providers of financial services to individuals, one of the largest providers of credit cards, one of the primary private-sector institutions serving SMEs, and has traditionally maintained a leading position in the agriculture and livestock sectors. Banco Galicia’s primary clients are classified into three categories, Wholesale Banking, Retail Banking, and Financial Banking.

Wholesale Banking

Banco Galicia’s Wholesale Banking division is organized into the following three segments: (i) Large-Corporations Banking, Investment Banking and Capital Markets; (ii) Middle-Market Banking and (iii) Agricultural Sector.

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Large-Corporations Banking, Investment Banking and Capital Markets

Large-Corporations Banking provides services and financial assistance to companies with annual revenues in excess of Ps.3,000 million or which, due to their profile as a multinational corporation or to the complexity of their businesses, need special treatment in terms of advice and financial structuring.

As of December 2018, this segment serviced more than 950 customers from more than 300 economic groups. As of December 2018, assets had increased 83%, while deposits had increased 56%, as compared to December 2017. As of December 2018, financial margin and income from services increased by more than 45% and net income doubled as compared to December 2017. This growth is based on the sustained support and positioning of this segment with customers in the energy, oil and gas, infrastructure, automotive, agro-industrial, and food and beverage sectors.

In 2018, Banco Galicia consolidated its position in the capital markets and investment banking sector, through the structuring of financing products tailored to the needs of its corporate clients, SMEs and agricultural companies. In 2018, Banco Galicia syndicated more than 69 transactions, 23 syndicated and structured loans and 46 issuances of debt and equity instruments, including notes, short-term securities, bills and financial trusts.

The most important Peso-denominated transactions in 2018 were issuances of (i) government securities by the City of Buenos Aires and the province of Buenos Aires, (ii) securities by automotive companies, such as Fiat, Toyota and Mercedes Benz, (iii) securities by affiliates of Grupo Financiero Galicia, such as Tarjeta Naranja and Banco Galicia and (iv) securities by financial companies.

The most important Dollar-denominated transactions included acting as the local placement agent for the issuance of notes in an aggregate principal amount of US$600 million for MSU Energy S.A.

The Bank also participated in domestic and international syndicated transactions in 2018, primarily in the oil and gas sector, in an aggregate amount of more than Ps.4,460 million and US$400 million.

The Bank was also involved in the procurement of private operators for toll roads in Argentina under the Public-Private Partnership Program, acting as guarantor underwriter for the financing of such projects.

Middle-Market Banking

In 2018, the Middle-Market Banking segment was comprised of 4,500 customers from all over Argentina, with annual revenues ranging from Ps.300 million to Ps.2,000 million. This segment includes all business sectors, except for primary agricultural production. These customers are managed by highly specialized general managers and finance managers who provide tailored customer service and customized financing options for such customers. The managers serving these customers are located in twenty of the Bank’s corporate banking centers throughout Argentina and rely on the use of technology and digital channels, which allows for regular communication and streamlined services.

The balance of the Bank’s lending portfolios increased by 33% for the year ended December 31, 2018 as compared to the year ended December 31, 2017. As of December 31, 2018, the average treasury balance was equal to Ps.35,000 million, an increase of more than 22% compared to the year ended December 31, 2017. Net profits for the year ended December 31, 2018 were equal to Ps.2,000 million, an increase of 298% as compared to the year ended December 31, 2017.

Agricultural Sector

The Agricultural Sector is the Bank’s only segment defined by its customers’ industry. In recent years, agriculture has changed significantly, primarily as a result of new technologies, bioeconomics and integration and changes in product distribution, marketing and domestic and international consumption. Banco Galicia tailors its product and service offerings to serve its customers in this segment. Banco Galicia has focused on developing digital solutions to more closely connect and communicate with customers in this segment.

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In 2018, the Bank launched a new digital platform to help farmers finance the purchase of agricultural machinery and commercial vehicles through leasing and mortgage agreements. Tarjeta Galicia Rural, a credit card designed for the purchase and financing of agricultural supplies, cattle, breeding cattle, machinery and services for the rural sector, continues to hold a leading position in this industrial sector in 2018 with 56% of the market share among private banks.

As part of this segment, the Bank also makes loans to finance working capital, purchases of equipment and capital expenditures (including the financing of clean energy projects), with 92% year-on-year growth. The Bank has also consolidated its position as the private bank with the largest loan portfolio secured by livestock as collateral.

In 2018, the Bank launched the “Galicia Rural Conecta” customer service model. This new channel incorporates more remote features and reaches more customers in this segment with the goal of providing customers with tailored services and digital banking options without sacrificing tailored services and customer knowledge.

Retail Banking

In 2018, Retail Banking continued to focus on implementing its commercial strategy, focusing on offering products tailored to the unique needs of each of the following segments: Business and SMEs, Galicia ÉMINENT, Private Banking and Individuals Segment. The following are the major challenges that the Bank believes this division will face in implementing this strategy for the period from 2017-2020:

Regarding transactions, Banco Galicia offers its customers checking and savings accounts, credit and debit cards, and payroll direct deposit, among other services. Banco Galicia’s customers have access to its services through its branch network as well as through its electronic distribution channels. The Bank’s Retail Banking Division offers various types of loans (i.e., personal loans and mortgages) and time deposits (in Pesos or foreign currencies). See “—Sales and Marketing.”

Business and SMEs

The Business and SMEs segment is focused on providing financing and other financial products and services to businesses not serviced by the wholesale banking division and small- to medium-sized companies. The Bank provides such clients with a variety of services and product offerings, including financial products, payroll services, discount checks and foreign trade transaction support.

This segment encourages the growth of retail stores, professionals and companies by offering flexible products and services according to a customer’s specific activity and stage of development and provides such

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customers with the knowledge and tools to streamline their operations and promote networking among such businesses.

Galicia ÉMINENT

Galicia ÉMINENT is a segment of the Bank that provides services targeted towards its high net worth customers.

In 2018, Galicia ÉMINENT grew 28% as a result of an increase in new customers. The number of customers with high-yield investments continues to increase, and the Bank continues to pursue a strategy aimed at positioning the Bank as an investment bank. With respect to its customer service model, it has continued leading the Net Promoter Score (“NPS”) by 29%, with outstanding performance in the customer service of Galicia Conecta executives with 40,000 users and other channels such as online banking. NPS is a private, online survey conducted by the Bank that gauges overall customer satisfaction and loyalty based on customers’ willingness to recommend a brand to others.

Private Banking

Private Banking offers distinctive and professional financial services to high net worth individuals, through the management of their investments and the provision of financial advisory services by trained officers. Private Banking offers its customers a wide range of domestic financial investment alternatives, such as deposits, FIMA mutual funds, government and corporate securities, shares and trusts where the Bank acts as a dealer.

Individuals Segment

Banco Galicia’s Individuals Segment focuses on lower class, lower-middle class and upper-middle class customers. As of December 31, 2018, approximately 77% of Banco Galicia’s customers belonged to this segment. For this segment, the Bank focuses on communication and customer service models that provide a combination of efficiency and a quality customer experience and the automation of processes to improve operations and service availability, accessibility and effectiveness.

The Bank has employed several initiatives to increase the efficiency of its customer service, such as improving obtaining customers’ email addresses and cell phone numbers to increase digital communication. In addition, the Bank now has one universal contact number (instead of 22) and has improved its automated voice response, reducing the number of calls made to its customer service center by 17% in 2018 as compared to 2017. In addition, the Bank has implemented GALA, an automated assistance program, in Argentina. GALA allows clients to ask general questions about the Bank, products and services, 24/7. In 2018, GALA answered more than 100,000 customer inquiries.

In 2018, the Bank also implemented several initiatives to improve customers’ experiences in physical branches. For example, the Bank created a new position in each branch that is responsible for hosting, providing advice and teaching clients to use self-service channels. For the year ended December 31, 2018, the Bank improved its NPS score by 4% to 26% as compared to the year ended December 31, 2017 and personal banking was ranked second among financial institutions in Argentina.

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Financial Banking

The Financial Banking Division includes the commercial, financial entities, public sector, trading and global markets, and investment products and global custody divisions. Additionally, it is also responsible for the mutual funds business, as the Bank is the main distribution channel for mutual funds.

Commercial Division

The Commercial Division is responsible for consolidating the Bank’s position in the Institutional Customer segment (Insurance Companies and Mutual Funds), and acting as the investment channel for other segments of legal entities (Corporate, Public Sector and Financial Entities).

The Commercial Division seeks to reinforce the cross-sale of financial products and encourage the use of transactional (collections and payments) and financial assets custody products, promoting the integrated development of the entire range of customer products.

In 2018, prices and secondary trading volumes were highly volatile. Until their final amortization, the most important asset in 2018 in terms of volume were the Lebacs issued by the Argentine Central Bank. As a result, there was a sharp increase in the trading of other assets (sovereign and provincial bonds and notes), which increased from a monthly average of approximately Ps.3,000 million in 2017 to Ps.12,000 million in 2018 traded with local customers. The primary market also fell significantly, especially among private issuers.

The volume of deposits increased substantially during 2018, mainly due to the change in the asset composition of the Mutual Funds portfolio. In the Institutional Customer segment, the average volume increased from Ps.10,018 million as of December 31, 2017 to Ps.25,918 million as of December 31, 2018. This increase was mainly due to interest-bearing demand deposits made by the Mutual Funds.

Financial Institutions

The Financial Institutions Division is responsible, at an international level, for managing the Bank’s business relationships with partner banks, international credit agencies, official credit banks and export credit insurance companies, and, at a domestic level, with banks, financial companies, exchange houses, and other entities that carry out related activities.

Similar to prior fiscal years, during 2018 bilateral meetings were held with the most active international partner banks, through which the Bank channeled the different products and services offered to its customers. Despite unfavorable macroeconomic conditions in Argentina, the availability of significant support from international banks, such as the IFC, IDB Invest and CAF, made it possible for the Bank to provides credit lines to customers and meet applications for letters of credit and standby letters of credit confirmation, as well as customers’ financing needs.

As part of the Bank’s sustainable financing strategy, it continued strengthening its relationships and seeking business opportunities with multilateral agencies and official credit banks, such as the IFC, IDB Invest, the Andean Development Corporation, the FMO, Proparco, the National Economic and Social Development Bank, the DEG, the KFW and OFID, among others, with the goal of broadening the availability of mid- and long-term credit lines to finance investment projects in the agro-industrial, energy and renewable energy sectors.

The Bank also continued developing its business relationships with European export credit insurance companies, such as Hermes, COFACE, SACE and Cesce, among others, with the goal of offering medium- and long-term credit lines to its customers for the import of capital goods.

Domestically, the Bank continued analyzing and identifying business opportunities with financial institutions, focusing on the improvement of customers’ experience and improving its NPS score.

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Public Sector

The Public Sector Division seeks to position Banco Galicia as the leading bank used by the public sector by offering financial solutions through transactional, investment and financing products. The Bank’s Public Sector Division continued to grow at a moderate rate in 2018 as result of an increase in the amount of funds managed by the Bank.

Finally, as a result of the foregoing, in 2018 there was a 120% increase in the number of the Bank’s managed public sector loan portfolios as compared to 2017.

Investment Products and Global Custody Division

In 2018, the Investment Products and Global Custody Division relaunched the Bank’s Global Custody product, which is a service provided by the Bank in which it holds funds in custody for clients and also invests such funds on behalf of its clients. The Bank also focused on its institutional customers to strengthen its position in this segment and improve its market share. Income from services related to this division increased 90% in 2018 as compared to 2017 and the number of institutional customers increased 41% in 2018 as compared to 2017.

This division is also responsible for the Bank’s identification, prioritization and management of different technology-related projects. In connection with these digital initiatives, this division undertook two important projects in 2018, which were the (i) replacement of the system of the Investment Product Division and (ii) upgrade of the digital investment platform, in order to significantly improve customers’ experience.

Trading and Global Markets Division

The main responsibilities of the Trading and Global Markets Division include the management and administration of foreign currency positions, derivatives instruments, government and corporate securities for both proprietary trading and for counterparties, institutional corporate and individual customers. This division is also responsible for developing and applying investment strategies based on the risk parameters determined by the Board of Directors. By providing comprehensive financial strategic advice, Banco Galicia was able to maintain a leading position in the Argentine capital markets offering based on debt origination and structuring for local issuers.

Following a favorable first quarter of 2018, there was a marked increase in the removal of assets from Argentina as a result of the exchange rate crises and devaluation of the Peso during the remainder of 2018. Despite high volatility and perceived market risk, investment by non-resident investors (mainly from the United States, England, Brazil and Chile) continued to increase. After the Argentine Central Bank’s implementation of a new monetary policy on October 1, 2018, investment in the Peso renewed in order to take advantage of foreign exchange stability and high interest rates.

In the foreign exchange market, Banco Galicia increased its volume of transactions by 26% in 2018 as compared to 2017 and assumed the first place ranking in the Mercado Abierto Eletrónico (“MAE”) after having traded US$ 32,779 million out of the total US$276,690 traded in the MAE in 2018. In the futures market, Banco Galicia maintained its second place ranking in the MAE, with a total volume of US$4,422 million, increasing from 12.4% in 2017 to 23.6% in 2018, while it ranked fourth again in ROFEX’s ranking (second among financial entities). The foreign trade volume transacted amounted to US$9,124 million, a 48% decrease as compared to 2017. In addition, Dollar trading transactions performed well, increasing from US$5,799 million in 2017 to US$6,521 million in 2018.

Banco Galicia ranked second in the MAE’s total fixed income ranking in 2018, trading US$81,515 million of the total US$691,609 million traded in the MAE, representing 11.8% of the market share. In addition, Banco Galicia held the third position in the fixed income ranking prepared by Bolsas y Mercados Argentina in 2018 with a total of Ps.266,536 million of the Ps.2,884,588 million traded in the Argentine market, representing 9.24% of the market share and making it the lead market in terms of market share.

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With respect to primary issuances, the Bank maintains its first place ranking in the MAE’s consolidated ranking of placement agents (notes, trusts and sub-sovereign securities in the aggregate) with Ps.39,271 million placed during 2018, representing 20.1% of the total issuances placed in the local market, as compared to the Ps.32.864 million placed by the Bank during 2017, representing 16.3% of the total issuances placed in the local market.

Customer Experience

To improve customers’ experience and improve culture, the Bank implemented the projects described below. In 2018, the Bank carried out five major projects aimed at improving customers’ experience:

Consumption

Through Tarjeta Naranja, Grupo Financiero Galicia offers financing to low- and medium-income customer segments.

Tarjeta Naranja continued consolidating its leading position in the regional credit cards market in 2018. According to official data and private market studies, the Bank is the primary issuer of credit cards domestically and is ranked as the leading credit card brand in rural areas of Argentina.

In December 2018, Tarjeta Naranja issued 3.2 million account statements, 6% less than in 2017. Authorized cards totaled 8.8 million, including Naranja Clásica, Naranja Visa, Naranja MasterCard and Naranja American Express. In addition, purchase transactions at stores increased 8% as compared to 2017.

Tarjeta Naranja, Tarjetas Regionales’ main subsidiary, will continue to rely on its strategic pillar of “Organizational Culture and Customer Experience” to grow its customer base and business.

Galicia Seguros

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

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Galicia Seguros, Galicia Retiro and Galicia Broker are subsidiaries that operate exclusively in Argentina and their total insurance underwriting was equal to Ps.3,902 million in 2018.

Galicia Retiro’s business plan for 2019 is to maintain its current business and relaunch voluntary retirement products (for both individuals and groups). Galicia Seguros has been developing alternative sales channels and new points of contact and sales, to increase the Bank’s insurance customer base.

Additionally, its business initiatives for 2019 are as follows:

 

Other Businesses

Galicia Administradora de Fondos

Since 1960, Galicia Administradora de Fondos has been engaged in the management of FIMA mutual funds marketed to Banco Galicia’s clients. In 2018, new distributors were added to reach additional customers. It currently has a wide range of investment funds designed for each investor profile, allowing a variety of investors to easily access the capital markets through the various FIMA funds with as little as Ps.100 or US$100:

The increase in the use of investment funds by individual investors has been facilitated by tools that streamline investment decision-making and investment generally. The Galicia Administradora de Fondos website (fondosfima.com.ar) provides investors with comprehensive information regarding its funds, as well as an online investment simulator and an investor education section.

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Competition

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

Banking

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

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

Banco Galicia’s estimated market share of private-sector deposits in the Argentine financial system was 11.08% as of December 31, 2018, as compared to 10.20% as of December 31, 2017 and 9.86% as of December 31, 2016.

With respect to loans extended to the private sector, Banco Galicia’s Argentine market share was 10.51% as of December 31, 2018, as compared to 9.65% and 9.63% as of December 31, 2017 and December 31, 2016, respectively, according to the information published by the Argentine Central Bank.

According to the information published by the Argentine Central Bank, as of December 31, 2018, Banco Galicia was the largest private-sector bank as measured by its assets and loan portfolio and second as measured by its net worth and deposits.

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

Argentine Banking System

As of December 31, 2018, the Argentine financial system consisted of 78 financial institutions, of which 63 were banks and 15 were financial non-bank institutions (including finance companies, credit unions and savings and loans associations). Of the 63 banks, 13 were Argentine national and provincial government-owned or related banks. Of the 50 private-sector banks, 33 were private-sector domestically owned banks and 17 were foreign-owned banks (i.e., local branches or subsidiaries of foreign banks).

As of December 31, 2018, the top 10 banks, in terms of total deposits (excluding Argentine national and provincial government-owned banks), were: Banco Santander Río, Banco Galicia, BBVA Banco Francés, Banco Macro, HSBC, Credicoop Bank and ICBC. Banco Galicia, Banco Macro and Credicoop are domestically owned banks and the others are foreign-owned banks. According to information published by the Argentine Central Bank as of December 31, 2018, private-sector banks accounted for 55.7% of total deposits and 61.3% of total net loans in the Argentine financial system. As of the same date, financial institutions (other than banks) accounted for approximately 0.3% of deposits and 3.4% of net loans in the Argentine financial system.

As of December 31, 2018, the largest Argentine national and provincial government-owned or related banks, in terms of total deposits, were Banco Nación, Banco de la Provincia de Buenos Aires and Banco Ciudad de Buenos Aires. Under the provisions of the Financial Institutions’ Law, public-sector banks have comparable rights and obligations to private banks, except that public-sector banks are usually chosen as depositaries for public-sector revenues and promote regional development and certain public-sector banks have preferential tax treatment. The

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bylaws of some public-sector banks provide that the governments that own them (both national and provincial governments) must guarantee their commitments. According to information published by the Argentine Central Bank, as of December 31, 2018, government-owned banks and banks in which the national, provincial and municipal governments had an ownership interest accounted for 44.0% of deposits and 35.3% of loans in the Argentine financial system.

Consolidation has been a dominant theme in the Argentine banking sector since the 1990s, with the total number of financial institutions declining from 214 in 1991 to 78 as of December 31, 2018, with the ten largest banks holding 78.7% of the system’s deposits from the private sector and 74.6% of the system’s loans to the private sector as of December 31, 2018.

Foreign banks continue to have a significant presence in Argentina, despite the fact that the number of these financial institutions decreased from 39 at the end of 2001 to 17 as of December 2018, and the fact that their share of total deposits has decreased since the 2001-2002 financial crisis while the share of domestic private-sector banks has increased.

The Argentine banking sector focuses on transactional business, and lacks a robust supply of medium and long-term lending. Local financial system deposits and loans are equivalent to 21.7% and 14.6% of the GDP respectively, well below those same ratios for other countries in the region.

Regional Credit Cards

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

In order to compete effectively at a national and regional level, the Regional Credit Card Companies target low- to middle-income clients by offering personalized services in each region, focusing their commercial efforts mainly on such segments. While other Argentine credit card issuers and consumer loan providers focus on earning interest on outstanding personal loans and credit card balances, the Regional Credit Card Companies also focus on and have access to additional sources of revenues including merchant fees and commissions, which allow them to offer competitive pricing and financing terms. Furthermore, unlike other credit card issuers in Argentina, approximately 50% of the Regional Credit Card Companies’ clients pay their credit card bill through their branch network. The broad geographical reach of their distribution network, which is the second largest in Argentina, has allowed the Regional Credit Card Companies to establish a local presence in all the provinces of Argentina.

The Regional Credit Card Companies believe that their diversified and consistent funding sources, significant network of branches, robust information technology infrastructure, relationships with over 270,000 merchants and the brand recognition they enjoy provide them with a competitive edge to consolidate and expand their market share in their target market segment, making it difficult for new players to effectively compete in this market segment on a national scale.

Insurance

Sudamericana’s subsidiaries face significant competition since, as of December 2018, the Argentine insurance industry was comprised of approximately 176 insurance companies, 13 of which were dedicated exclusively to annuities. Subsidiaries of foreign insurance companies and the world’s largest insurance companies with global operations are among these companies.

During 2018, the insurance industry continued growing. Production amounted to Ps.391.7 billion, 30% higher than the level recorded for the prior year. Out of the total insurance production in 2018, 83% related to property insurance, 15% related to life and personal insurance, and 2% related to retirement insurance.

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Within the 83% corresponding to property insurance, the automotive insurance segment continues to be the most significant segment, representing 44%, followed by the workers’ compensation segment, representing 30%. Within the life insurance segment, the group life insurance segment was the most significant, representing 57%, followed by individual life insurance, representing 22%, and personal accident insurance, representing 15%.

As of December 31, 2018, based on internal studies undertaken by Galicia Seguros, it is estimated that Galicia Seguros ranked third in terms of net premiums for personal accident insurance underwritten and first in terms of net premiums for home and theft insurance underwritten.

Sales and Marketing

Service Channels

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

 

Digital Channels

In 2018, Grupo Galicia continued to improve and provide innovative services through its digital channels in response to customer demands and as a means of providing information to customers and a channel for customer service, including through improved service response time and by offering customers the ability to submit customer service requests 24/7.

In 2018, Banco Galicia’s digital channels were used by more than 1.3 million customers of all ages and demographic backgrounds. As such, Banco Galicia collects usage data and statistics to identify what actions are most frequently used by customers to prioritize such actions on its platforms. In May 2018, Banco Galicia launched Instagram for Galicia ÉMINENT and a Twitter account to provide daily updates and important information for the SMEs segment.

Tarjeta Naranja provides information to customers regarding transactions, purchases made, due dates, payments made, withdrawals, transfer notices, balance queries and mobile transfers. In 2018, Tarjeta Naranja incorporated technological assistance, which provides remote advice on the use of technological devices.

In 2018, Galicia Seguros achieved 100% digital insurance self-management by developing digital policies, which include audiovisual information and explanations regarding insurance coverage and packages. Moreover, customers can easily access their policy information digitally through their email.

Physical Channels

Banco Galicia and Tarjeta Naranja have an extensive network of branches throughout Argentina, providing for in -person contact with customers. In addition, Galicia Seguros uses Banco Galicia’s infrastructure to provide personalized customer service. Banco Galicia’s dedicated customer service officers are qualified to help companies, retailers, investors, payroll employees and the general public and to advise customers and prospective customers on the best credit and financing options to meet their individuals needs.

Customers can handle all of their transactions through ATMs at these branches. Branches are located throughout Argentina based on the number of customers served in each province.

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In 2018, the Bank partnered with Starbucks to open its first branch inside a Starbucks in the Recoleta neighborhood of Buenos Aires. This location offers different services, including internet access, extended hours, co-working spaces and meeting rooms for both customers and non-customers. In addition, the Bank offers personalized service through host officers who provide advice on ATMs, encourage customer adoption of digital channels and resolve queries or claims.

Products and Services

Grupo Galicia, through its subsidiaries, offers its customers in Argentina tailored and unique service, including credit cards, personal, mortgage and corporate loans, and a wide range of insurance and investment products focused on various segments.

Personal Loans

Interest and inflation rates, together with consumption, remained stable for the three months ended March 31, 2018, contributing to a high volumes of loans averaging Ps.1,700 million per month. Following the onset of the exchange rate crisis and devaluation of the Peso in May 2018, loans decreased to Ps.1,000 million per month. As a result, the amount of UVA-denominated loans increased due to their lower interest rates and delayed repayment structure. As the exchange rate crisis continued in 2018, the Bank implemented several loan default prevention measures to maintain a healthy loan portfolio.

In addition, Tarjeta Naranja offers simple, safe and convenient online and digital customer service for its loan customers through Naranja Online and the Naranja APP.

Mortgage Loans

In 2018, the volume of UVA-denominated mortage loans increased as a result of the exchange rate crisis; however, the amount of UVA-denominated loans decreased. In the beginning of 2018, the average loan made by the Bank per month was Ps.750 million. Following the onset of the exchange rate crisis, the average loan made by the Bank per month was Ps.200 million. During 2018, Banco Galicia continued to be a leader among private banks for UVA-denominated mortgage loans. Banco Galicia also began making loans for construction and home expansion and renovations, as well as home purchases in order to provide its customers with broader financing offerings.

Individual and Corporate Insurance

In 2018, Galicia Seguros continued to focus on improving customer experiences. Responding to demands for greater self-service options, Galicia Seguros’ online quotation system now provides customers with the ability to compare the automobile insurance policies provided by a variety of insurance companies. Customers can also purchase their home, mobile phone, personal, bicycle and laptop insurance online by immediately obtaining quotes online and consulting digital customer service. Customers can chose among different service methods according to their personal preferences.

Also, given the importance of small- and medium-sized companies in overall economic development in Argentina, the Bank launched SME Comprehensive Insurance in July 2018 following an analysis of insurance market trends and customer needs. The main objective of this product is to provide comprehensive protection to small- and medium-sized companies by safeguarding business assets and providing customized insurance options at affordable rates. This product is also offered to independent professionals, as well as business owners. Amounts insured and insured businesses increased during 2018 following the launch of this product.

Tarjeta Naranja independently markets and offers the following insurance policies: Home, Guaranteed Consumption, Unemployment, Protected Purchase, Personal Accidents, Protected Woman, Health, Life, ATM Theft, Protected Bag, Automobile, Motorcycle, Motorcycle Assistance, Mobile Phone, Travel, Multi-Assistance, Used Appliances, Mobile Technology and Comprehensive Pet insurance.

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Credit Cards

Banco Galicia

Banco Galicia meets its customers’ needs by offering range of services and benefits, through its Galicia credit and debit cards.The Bank markets Visa, Mastercard and American Express cards, covering all segments. The product range includes International, Gold, Platinum and Black/Signature cards with different spending and financing options and promotions for all customers.

Tarjeta Naranja

As of June 2018, Naranja Clásica merged with Naranja Oro and became NARANJA, the new base product that offers “Plan Zeta”, which is an option for customers to finance their debt payments in three or six monthly installments. In addition, Tarjeta Naranja revised the form of its account statements to offer a more streamlined format. In addition, Tarjeta Naranja offers the following products:

Investments

In 2018, Banco Galicia continued to work on improving its investment value proposal and its customer experience by expanding its product range, simplifying product operations and providing more proactive advice to customers.

Banco Galicia provides a wide range of products according to each customer’s needs and investor profile. Before investing in securities or mutual funds, it conducts a survey of all customers so that they are able to identify their profile to select the investment products that best fit their investment objectives. Banco Galicia offers advice through its Investments Center or in person at its branch offices. Information on each product is also available on the Bank’s website.

Banco Galicia also provides the option of investing in either Peso- or Dollar-denominated time deposits, with periodic interest payments and UVA-adjustments, Banco Galicia also offers lower interest rates to certain of its customers based on their income segment.

In 2018, Banco Galicia began offering a UVA 90-day time deposit product through its Online Banking platform, and held 8.4 % of the market share for time deposits less than Ps.1 million as of December 31, 2018, representing an increase of 65%.

Regarding debt and equity investments, customers can purchase notes and stocks listed on the CNV online. Additionally, the Bank allows for the online tender of Lebac, Letes or Lecap according to the calls made by the Argentine Central Bank or the Ministry of Finance. Most of the Bank’s products, including the purchase of foreign currency, can be done through the Online Banking platform or the Galicia mobile application. With respect to capital markets products, a new investment module that will be offered on the Online Banking platform is being developed and will focus on providing customers with self-service options and an improved customer experience. In September 2018, the Bank launched its “minimum viable product” to facilitate the online purchase and sale of bonds and stocks. This product provides customers with bond and stock quotes, the ability to trade in Pesos or Dollars and a summary of a customer’s total position. Customers also have the option to purchase and sell the bonds and stocks of foreign issuers through the Online Banking platform.

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In 2018, the Bank launched the “Wealth Management Project”, with the goal of positioning the Bank as an investment bank by 2022.

Finally, the Bank simplified foreign exchange trading processes in 2018 by extending the opening and closing hours of branches. In addition, the Bank offered a preferential Dollar exchange rate through online channels to high-income segment (Private Banking, Business and SMEs, Professionals GOLD and Galicia EMINET) customers.

Foreign Trade

For the year ended December 31, 2018, Banco Galicia’s foreign trade volume transactions were equal to US$56.1 million, representing a market share of 12.1% in Argentina. Of this amount, US$11.8 million was attributable to the export and import of goods, with a market share of 12.6% in Argentina. For the year ended December 31, 2018, Banco Galicia ranked second in Argentina in terms of volume for foreign trade transactions.

Through the Bank’s Office Banking e-platform, customers can make payments and manage their collections abroad. As part of the Bank’s digital initiative, the Bank began to offer import letters of credits online.

In addition, the GaliciaComex Community provides product and service options targeted to export and import operations, including providing customers with relevant sector and market news. The GaliciaComex Community also provides tailored financing options, including import leasing, import and export financing, surety and stand by letters of credit.

Galicia Seguros offers surety bonds for a variety of needs, including to back stop temporary import or export receivables.

Financing Granted to Companies

Banco Galicia offers short-, mid- and long-term financing to companies, transactional services, and foreign trade operations. In 2018, the Bank supported more than 25,500 companies covering a wide spectrum of economic activities, such as industrial, agriculture, services and marketing, thereby supporting overall economic growth in Argentina by providing companies with access to liquidity. In 2018, the Bank financed 210 operations for a total of Ps.149 million.

Products and services include the following:

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Agreements and Payroll

Agreements and Payroll are comprised of product offerings to businesses to manage payroll transactions and accounting services for their employees.

In 2018, the Bank increased the number of payroll customers by 2.05% and the number of salaries by 37.1% as compared to 2017. Similar to other sectors, the Bank continued to focus on improving the customer service experience and service efficiency.

The Bank strengthened its partnerships with several businesses, including the Bar Association of the City of Buenos Aires, the Argentine Dental Association and the Argentine Neurosurgery Association. Furthermore, the Bank continued to support the educational community and provide benefits to families in more than 121 schools that use Banco Galicia for their transactions.

Digital Transformation

Banco Galicia and Tarjeta Naranja both started a digital transformation program with the goal of improving organization and competing with rapid changes in the banking industry. These processes are independently managed in accordance with the culture and business of each company. In 2018, Banco Galicia invested approximately Ps.63 million in these programs and worked on the initial phase of implementation for its 2017-2020 strategy of the digital transformation program, which includes six focal points (digital marketing , travel optimization, data and analytics, system infrastructure, agile methodology and organization and culture and talent).

The Center of Excellence was created as a strategic area and consolidated in 2018 as a single and integrated window for improving management, with the goal of defining methodologies, developing capabilities and cultural transformation. In addition, the Bank launched a digital academy to build new digital strategies, and the Galicia Leader (Líder Galicia) model was updated to define new transformation skills.

Promotions and Benefits

Banco Galicia

Banco Galicia’s Quiero! Program continues to increase its rewards catalog with more than 1,500 options in different categories and 362 brands that allow customers to benefit from discounts and redemptions. Under this program, 513,484 customers obtained benefits starting at 140 Quiero! points, thus increasing the accessibility of this program to customers of all spending backgrounds.

In 2018, the new Quiero! Platform was launched with the objective of helping customers discover the most relevant offers by applying algorithms to offer each customer the most relevant rewards based on their profile.

Tarjeta Naranja

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Selected Statistical Information

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

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

The average balances of interest-earning assets and interest-bearing liabilities, including the related interest that is receivable and payable, are calculated on a monthly basis for Banco Galicia and Tarjetas Regionales on a

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consolidated basis. The average balances of interest-earning assets and interest bearing liabilities are calculated on a quarterly basis for Grupo Financiero Galicia and its other non-banking subsidiaries.

Average balances have been separated between those denominated in Pesos and those denominated in Dollars. The average yield/rate is the amount of interest earned or paid during the period divided by the related average balance.

The following table shows our consolidated average balances, accrued interest and average yield for interest-earning assets and interest-bearing liabilities for the fiscal year ended December 31, 2018 and December 31, 2017.

 

 

The table below reflects such information for the fiscal year ended December 31, 2016, which was prepared in accordance with Argentine Banking GAAP.

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Changes in Net Interest Income-Volume and Rate Analysis

The following table allocates, by currency of the underlying asset or liability, changes in our consolidated interest income and interest expenses between changes in the average volume of interest-earning assets and interest-bearing liabilities and changes in their respective average yield/rate for the fiscal year ended December 31, 2018 compared with the fiscal year ended December 31, 2017. Differences related to both rate and volume are allocated proportionally to the rate variance and the volume variance, respectively.

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The increase of Ps.32,601 million in interest income for the fiscal year ended December 31, 2018, as compared to the previous year, is primarily attributable to a Ps.7,563 million increase in the volume of interest-earning assets, together with an increase of Ps.25,038 million in interest income due to an increase in interest rates.

In particular, Ps.23,440 million of the increase was due to an increase in interest income from loans. The average volume of loans amounted to Ps.301,653 million for fiscal year 2018, as compared to Ps.264,122 million for the previous fiscal year. This increase was due to Ps.20,976 million increase in interest income from Loans, which resulted from a increase in interest rates earned from loans due to a 537 basis point (“bps”) increase in the average interest rate for loans, from 19.25% in 2017 to 24.62% in 2018.

The Ps.9,082 million increase in interest from debt securities was due to an increase in volume equal to Ps.5,094 million, and an increase in interest rates (accounting for Ps.3,988 million), mainly as a result of an increase in the average rate earned on government securities.

In terms of interest expenses, the Ps.17,228 million increase for the fiscal year ended December 31, 2018, as compared to the fiscal year ended December 31, 2017, is primarily a result of a increase in the interest rate payable on time deposits of Ps.11,764 million (which increased from 15.90% in 2017 to 21.61% in 2018).

The table below reflects such information for the fiscal years ended December 31, 2016 and 2015, which was prepared in accordance with Argentine Banking GAAP.

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(1) Non-accruing loans have been included in average loans.

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Debt and Equity Securities

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

 

As of December 31, 2018, the growth in our debt and equity securities was mainly a result of an increase in the volume of Leliqs issued by the Argentine Central Bank and the corresponding purchase of the same. Our government securities issued by the Argentine Central Bank increased Ps.43,730 million from Ps.26,368 million as of December 31, 2017 to Ps.70,098 million as of December 31, 2018.

The amount of Argentine government securities recorded at fair value as of December 31, 2018 for Ps.4,700 million corresponded to securities issued by the provinces of Neuquén (for Ps.266 million), Buenos Aires (for Ps.534 million), City of Buenos Aires (for Ps.42 million), Mendoza (for Ps.9 million) and Río Negro (for Ps.174 million); Argentine bonds (for Ps.1,485 million); and Treasury Bills (for Ps.2,189 million).

At December 31, 2018, the holding of public securities denominated in Dollars was composed mainly of Argentine Treasury Bills (Letes) (for Ps.283 million) and Government Bonds (for Ps.3,118 million), recorded at fair value and U.S. Treasury Bonds due in 2022 (for Ps.2 million), recorded at cost plus yield.

As of December 31, 2017, the amount of Argentine government securities, recorded at fair value for Ps.13,923 million, corresponded to our holdings of debt securities mainly issued by the provinces of Buenos Aires (for Ps.1,812 million), Neuquén (for Ps.1,291 million), Río Negro (for Ps.284 million), Córdoba (for Ps.24 million), Entre Ríos (for Ps.279 million) and City of Buenos Aires (for Ps.42 million); and Government Bonds (for Ps.1,253 million) and treasury bills (for Ps.7,848 million).

At December 31, 2017, the holding of public securities denominated in Dollars was composed mainly of Argentine Bonds (for Ps.433 million), recorded at fair value and Argentine Treasury Bills (Letes) (for Ps.7,836 million) and City of Buenos Aires government securities (for Ps.35 million), recorded at fair value.

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All local government securities, except for the Lebac and Leliq, which are issued by the Argentine Central Bank, were issued by the Argentine government.

The table below shows such information for the fiscal year ended December 31, 2016, which was prepared in accordance with Argentine Banking GAAP.

 

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Remaining Maturity and Weighted-Average Yield

The following table analyzes the remaining maturity and weighted-average yield of our holdings of debt securities at fair value through profit or loss as of December 31, 2018. Our government securities portfolio yields do not contain any tax equivalency adjustments.

 

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Loan and Other Financing Portfolio

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

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

As of December 31, 2018, Grupo Galicia’s loan and other financing portfolio before allowances for loan and other financing losses amounted to Ps.298,367 million, a 2% increase as compared to the year ended December 31, 2017.

For the fiscal year ended December 31, 2017, Grupo Galicia’s loan and other financing portfolio before allowances for loan and other financing losses amounted to Ps.293,590 million, a 15% increase year-over-year.

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The table below shows such information for the fiscal years ended December 31, 2016, 2015 and 2014, which was prepared in accordance with Argentine Banking GAAP.

(1)Includes local and international financial sectors.

(2) Before the allowance for loan losses.

Maturity Composition of the Loan Portfolio

The following table sets forth an analysis by type of loan and time remaining to maturity of our loan portfolio as of December 31, 2018.

 

 

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Interest Rate Sensitivity of Outstanding Loans

The following table presents the interest rate sensitivity of our outstanding loans due after one year by denomination as of December 31, 2018.

 

Credit Review Process

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

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

Banco Galicia

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

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

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

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The Risk Division’s responsibilities include:

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

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

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

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

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while maximizing efficiency, and recovery optimization, thus minimizing loan losses and optimizing efficiency in the credit extension process.

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

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

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

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

 

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

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

Tarjeta Naranja

Credit Risk

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

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

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by any company to which it lends money and (iii) has upper limits on the amount that it will invest in any given company.

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

Procedure for Credit Card Application

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

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

Determination of Credit Limits

Customer’s credit limits are determined on the basis of an assessment of each customer’s specific financial situation. Based on such assessment, customers are assigned one of five risk levels: A, B, C, D or E, with A being the lowest risk segment and E being the highest risk segment. In making such assignment, certain factors are considered, including, but not limited to, monthly income, number of family members, geographic location and occupation. The customer is then assigned a credit limit based on his or her risk level, which is shared among all credit cards associated with such customer, whether as a primary or additional cardholder. The credit limit assigned to each customer includes: (i) the monthly balance limit; (ii) the long-term purchase limit (the maximum amount for a customer to purchase in six or more installments using the credit card); (iii) the total credit limit (the maximum amount that may be owed to the Company); (iv) the maximum balance limit for cash advances, which represents 50% of the long-term purchase limit in a maximum amount of Ps.50,000 (the maximum amount for cash withdrawals) and (v) the limit for loans to be repaid in up to 50 months.

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

 

 

Tarjeta Naranja reviews such credit limits on a daily basis and a credit limit may be automatically increased for eligible cardholders meeting certain requirements, including payment history. In addition, Tarjeta Naranja

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reviews cardholders’ applications for increases in the monthly limit and may, in its sole discretion, increase such limits based on the individual customer’s payment history and total income level.

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

Financial Instruments Classification and Loss Provisions

General

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

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

Financial Instruments Classification

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

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

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

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Definition of Default

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

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

Methodology for Expected Credit Loss Estimation

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

IFRS 9 establishes the following standards regarding ECL:

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

In order to account for time value of money, Grupo Galicia assumes expected losses will take place proportionally over time. The ECL is determined by determining the Probability of Default, Exposure at Default and the Loss Given Default for each future month for each collective segment. These three components are multiplied and adjusted, as applicable, to take into account any forward-looking information, thus calculating ECL for each

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month on a forward-looking basis , which is then discounted back to the reporting date and summed. The discount rate used in the ECL calculation is the original effective interest rate (or an estimate thereof).

 

Credit Risk Exposure of Financial Instruments

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

 

 

 

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

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

The table below sets forth such information for the fiscal years ended December 31, 2016, 2015 and 2014, which was prepared in accordance with Argentine Banking GAAP.

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Loss Experience

The following tables present the changes in the loss allowance between January 1, 2018 and December 31, 2018:

 

The table below sets forth such information for the fiscal years ended December 31, 2016, 2015 and 2014, which was prepared in accordance with Argentine Banking GAAP.

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Allocation of the Allowance for Financial Instruments

The following table presents the allocation of our allowance for financial instruments losses among the various loan categories and shows such allowances as a percentage of our total loan and other financing portfolio before deducting the allowance for loan and other financing losses.

 

 

The table below sets forth such information for the fiscal years ended December 31, 2016, 2015 and 2014, which was prepared in accordance with Argentine Banking GAAP.

 

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Deposits

The following table sets out the composition of our deposits as of December 31, 2018 and 2017 and as of January 1, 2017.

 

In 2018, our consolidated deposits increased 22% mainly as a result of a Ps.11,065 million increase in time deposits in Pesos and a Ps.50,580 million increase in foreign currency savings accounts. These increases were mainly due to deposits received by Banco Galicia.

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In 2017, our consolidated deposits increased 7% mainly as a result of a Ps.13,219 million increase in deposits in saving accounts and a Ps.37,155 million increase in foreign currency savings accounts. These increases were mainly due to deposits received by Banco Galicia. For more information, see Item 5. “Operating and Financial Review and Prospects” – A.“Operating Results”- “Funding”.

The following table provides a breakdown of our consolidated deposits by contractual term and currency of denomination as of December 31, 2018.

 

The chart above shows that the highest concentration of maturities for time deposits was in the period of up to 89 days, representing 94% of total time deposits. As of December 31, 2018, the average term for the raising of non-adjusted Peso-denominated time deposits was 45 days, for UVA-adjusted deposits the average term was 221 days and for those in foreign currency the term was about 43 days. Foreign currency-denominated deposits, equal to Ps.162, 667 million, represented 46% of total deposits.

The table below sets forth such information for the fiscal year ended December 31, 2016, which was prepared in accordance with Argentine Banking GAAP.

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The following table provides information about the maturity of our outstanding time deposits exceeding US$100,000, as of December 31, 2018.

 

Return on Equity and Assets

The following table presents certain selected financial information and ratios for the periods indicated.

 

The table below sets forth such information for the fiscal years ended December 31, 2016 and 2015, which was prepared in accordance with Argentine Banking GAAP.

 

Short-Term Borrowings

Our short-term borrowings include all of our borrowings (including repurchase agreement transactions, debt securities and notes) with a contractual maturity of less than one year, owed to foreign or domestic financial institutions or holders of notes.

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As of December 31, 2018, our short-term borrowings consisted of (i) credit lines from the Argentine Central Bank, which represented 0.2% of our short-term borrowings; (ii) credit lines from domestic financial institutions (other than the Argentine Central Bank) and international banks, which represented 84% of our short term borrowings and repurchase agreements, which represented 16% of our short-term borrowings.

The table below shows such information for the fiscal years ended December 31, 2016 and 2015, which was prepared in accordance with Argentine GAAP.

 

We also borrow funds under various credit arrangements with domestic and foreign banks and /or lending agencies, which is reflected in the following table:

 

 

The table below shows such information for the fiscal years ended December 31, 2016 and 2015, which was prepared in accordance with Argentine GAAP.

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The following table sets forth the items listed below for our significant short-term borrowings for the fiscal years ended December 31, 2018, December 31, 2017 and as of January 1, 2017:

 

The table below shows such information for the fiscal years ended December 31, 2016 and 2015, which was prepared in accordance with Argentine GAAP.

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Regulatory Capital

Grupo Financiero Galicia

Grupo Financiero Galicia and its subsidiaries are regulated by the Argentine General Corporations Law. Section 186 of the General Corporations Law establishes the minimum capital amount of a corporation at Ps.100,000.

Grupo Financiero Galicia’s capital adequacy is not regulated by the Argentine Central Bank, however Grupo Financiero Galicia is required to comply with the minimum capital requirement established by the General Corporations Law. On October 8, 2012, through Decree No.1331/12, such amount was established as Ps.100,000.

Banco Galicia

With respect to regulatory capital, Banco Galicia must comply with the regulations set forth by the Argentine Central Bank. These regulations are based on the Basel Committee methodology, which provides the minimum capital requirements for financial institutions to cover the different risks inherent to its business activity and assets,such as credit risk, generated both by exposure to the private sector and to the public sector; operational risk (generated by the losses resulting from the non-adjustment or failures of internal processes) and market risk  (generated by positions in securities and in foreign currency).

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Computable capital is divided as follows:

The following percentages apply in determining minimum capital requirements:

The capital required for credit risk is calculated based on the balances as of the last day of each month. Computable capital is computed for the same month of the minimum capital requirement.

Minimum capital requirements must be met by the Bank, not only on an individual basis, but also on a consolidated basis with its significant subsidiaries.

The following table sets forth the capital required in accordance with the Argentine Central Bank regulations in force for each period indicated below.

 

In accordance with Argentine Central Bank rules applicable at each date

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As of December 31, 2018, the Bank’s computable capital exceeded the minimum capital requirement by Ps.22,166 million (or 81.60%). The minimum capital requirement was Ps.27,163 million for 2018. As of December 31, 2017, the Bank’s computable capital exceeded the minimum capital requirement by Ps.4,608 million (or 25.33%).

The minimum capital requirement increased by Ps.5,187 million for the year ended December 31, 2018 as compared to December 31, 2017, mainly due to an increase related to financing balances in an amount equal to Ps.21,045 million and operational risk in an amount equal to Ps.14,172 million.

Computable capital increased by Ps.19,944 million as compared to December 31, 2017, due to an increase of Ps.30,002 million in Tier I Common Capital, primarily as a result of the capital increase consummated by Grupo Galicia and the increase in net income for the year, partially offset by deductions of capital.

Tier II Common Capital increased by Ps.10,058 million as a result of the impact of the exchange rate increase on the outstanding balance of subordinated notes issued in July 2016 for an aggregate principal amount of US$250 million and the increase in the allowance for loan losses on current loan portfolios.

Regional Credit Card Companies

Since the Regional Credit Card Companies are not financial institutions, their capital adequacy is not regulated by the Argentine Central Bank. The Regional Credit Card Companieshave to comply with the minimum capital requirement established by the Corporations Law, which was Ps.100,000.

Minimum Capital Requirements of Insurance Companies

The insurance companies controlled by Sudamericana must meet the minimum capital requirements set by General Resolution No.39,957 of the National Insurance Superintendency. This resolution requires insurance companies to maintain a minimum capital level equivalent to the highest of the amounts calculated as follows:

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The minimum required capital must then be compared to computable capital, defined as shareholders’ equity less non-computable assets. Non-computable assets consist mainly of deferred charges, pending capital contributions, proposed distributions and excess investments in authorized instruments.

As of December 31, 2018, the computable capital of the companies controlled by Sudamericana exceeded the minimum requirement of Ps.656 million by Ps.263 million.

Sudamericana also owns Galicia Broker, a company dedicated to brokerage in different lines of insurance that is regulated by the guidelines of the Corporations Law, which provided for a minimum capital requirement of Ps.100,000.

Government Regulation

General

All companies operating in Argentina must be registered with the Argentine Public Registry of Commerce. In addition, any company with publicly issued equity or debt securities is subject to the rules and regulation of the CNV. Further, financial institutions, such as Grupo Financiero Galicia and Banco Galicia, are subject to Argentine Central Bank regulations. As companies listed in Argentina, Grupo Financiero Galicia and Banco Galicia must comply with the disclosure, reporting, governance and other rules applicable to such companies in the markets in which they are listed and those of regulators in the countries in which they are listed, including the Capital Markets Law (as amended by the Productive Financing Law No. 27,400 and including Decree No. 471/2018), Law No.20,643, the Decrees No.659/1974 and No.2220/1980 (as amended by Decree No. 572/1996), and CNV’s General Resolution No.622/2013 (as amended and/or supplemented, the “CNV Rules”).

In their capacity as public issuers of securities, Grupo Financiero Galicia and Banco Galicia are subject to the aforementioned rules. Since Grupo Financiero Galicia has publicly listed American Depository Shares (or “ADSs”) in the United States, it is also subject to the reporting requirements of the United States Securities and Exchange Act of 1934 (the “Exchange Act”) for foreign private issuers and to the provisions applicable to foreign private issuers under the Sarbanes Oxley Act. See Item 9. “The Offer and Listing”.

Banco Galicia’s operating subsidiaries are also subject to the following laws: Law No.25,156, as amended, including Law No.27,442 (the Competition Defense Law or, in Spanish “Ley de Defensa de la Competencia”), the Emergency Decree No. 274/2019 that repeals the Fair Business Practice Law (No. 22,802) and Law No.24,240, as amended (the Consumer Protection Law or, in Spanish “Ley de Protección del Consumidor”).

As a financial services holding company, we do not have a specific institution that regulates our activities. Our banking and insurance subsidiaries are regulated by different regulatory entities. The Argentine Central Bank is the main regulatory and supervising entity for Banco Galicia.

The banking industry is highly regulated in Argentina. Banking activities in Argentina are regulated by Law No.21,526, as amended (the “FIL”), which places the supervision and control of the Argentine banking system in the hands of the Argentine Central Bank. The Argentine Central Bank regulates all aspects of financial activity. See “Argentine Banking Regulation” below.

Banco Galicia and our insurance subsidiaries are subject to Law No.25,246 which was passed on April 13, 2000 (as amended, among others, by Laws No.26,087, 26,119, 26,683, 26,734, and 27,446 together to which we refer to as the Anti-Money Laundering Law), which provides for an anti-money laundering framework in Argentina, including Laws No.26,268 and 27,304, which amend Law No.25,246 to include activities associated with terrorism and Law No. 27,401, which provides for the criminal liability of corporate entities upon their direct or indirect execution of prohibited activities. Furthermore, the Anti-Money Laundering Law created the Financial Information Unit (Unidad de Información Financiera), which established an administrative criminal system, compliance monitoring and the ability to impose sanctions.

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Sudamericana’s insurance subsidiaries are regulated by the National Insurance Superintendency and Laws No.17,418, as amended and modified by Law No.20,091. Galicia Broker is regulated by the National Insurance Superintendency, through Law No.22,400.

The Regional Credit Card Companies and the credit card activities of Banco Galicia are regulated by Law No.25,065, as amended, including but not limited to Law No.27.444 (the “Credit Card Law”). Both the Argentine Central Bank and the Undersecretary of Domestic Trade have issued regulations to, among other things, enforce public disclosure of companies’ pricing (fees, interest rates, and advertising) in order to ensure consumer awareness of such pricing. See “Credit Cards Regulation”.

Net Investment is regulated by the Corporations Law, as previously noted, and is not regulated by any specific regulatory agency. Galicia Warrants is regulated by Law No.9,643 as amended.

On January 6, 2002, the Argentine Congress enacted Law No.25,561 (as amended and supplemented, the “Public Emergency Law” or in Spanish “Ley de Emergencia Pública”), which, together with various decrees and Argentine Central Bank rules, provided for the principal measures with which to manage the 2001-2002 financial crisis, including Asymmetric Pesification and eliminating the requirement that the Central Bank’s reserves in gold, foreign currency and foreign currency denominated debt be at all times equivalent to 100% of the monetary base, among others. The Argentine Government did not extend the term of the Public Emergency Law that was previously extended on an annual basis. On December 14, 2016, the Argentine Congress enacted Law No. 27,345, which extended the state of emergency on social matters until December 31, 2019.

Foreign Exchange Market

In January 2002, through the Public Emergency Law, Argentina declared a public emergency situation in respect of its social, economic, administrative, financial and foreign exchange matters and authorized the Argentine Executive Branch to establish a system to determine the foreign exchange rate between the Argentine Peso and foreign currencies and to issue foreign exchange-related rules and regulations. Within this context, on February 8, 2002, through Decree No.260/2002, the Argentine Executive Branch established (i) a single and free-floating foreign exchange market (a “MULC”, or “Mercado Único y Libre de Cambios”) through which all foreign exchange transactions in a foreign currency must be conducted, and (ii) that foreign exchange transactions in a foreign currency must be conducted at the foreign exchange rate to be freely agreed upon among the contracting parties, subject to the requirements and regulations imposed by the Argentine Central Bank.

On June 9, 2005, through Decree No.616/2005, the Argentine Executive Branch mandated that inflows of funds into the MULC arising from foreign debt incurred by residents (subject to certain exceptions) and all inflows of funds of non-residents channeled through the MULC for certain concepts were required to be credited into a local account and maintained for a “Minimum Stay Period”, requiring a mandatory deposit for 30% of the amount of the transaction for a period of 365 calendar days. Such requirements were eliminated by the Macri administration.

As a result of the new policies, on December 28, 2015 the Argentine Central Bank issued Communication “A” 5861 and Communication “A” 5864 which specifically abrogated both Communication “A” 4864 and Communication “A” 4882. On December 29, 2015, the CNV issued Resolution No.651, which abrogated the prior CNV regulations that complemented the restrictions issued by Communication “A” 4864 and “A” 4882.

In February 2017, the former Ministry of Economy and Public Finance (Ex Ministerio de Hacienda y Finanzas Públicas) issued Resolution No.1/2017, which reduced the “Minimum Stay Period” described above to zero days.

As of July 1, 2017, with the issuance of Communication “A” 6244, the foreign exchange rules and regulations described above were reversed. The main provisions which currently govern the foreign exchange market, as amended by Communication “A” 6312, are summarized below:

Access to the Foreign Exchange Market

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Access to the MULC is now available to all individuals and corporations for use with respect to incoming and outgoing funds to or from Argentina, irrespective of the individual’s or corporation’s domicile. Consequently, individuals and corporations may access the MULC without limitation and without the need to request prior authorization from the Argentine Central Bank in order to, among other things, make payments of principal and interest on foreign debt or for the prepayment of any debt, drawing on foreign credit facilities, making foreign investments, paying for imports of goods, paying for services abroad or entering into service contracts, making collections and payments between residents, making distributions or paying dividends abroad, and effecting the purchase or sale of non-performing financial assets.

Investments of residents abroad

Currently there are no restrictions, nor are prior authorizations required, for the purpose of making investments abroad. Residents (and non-residents) can freely access, without amount (or any other) limitations, the exchange market in order to make transfers abroad for investments.

Investments of non-residents and repatriation of funds abroad

Since current regulations no longer distinguish between foreign exchange transactions that can be made by residents and by non-residents, the latter can also freely access the foreign exchange market. As such, non-residents may make investments in Argentina and may also repatriate such funds at any time and without requesting prior authorization from the Argentine Central Bank.

Financial Indebtedness

Currently there are no restrictions or deadlines for the purpose of accessing the MULC to enter into or to repay financial loans provided by non-residents. There is no obligation to deposit in Argentina proceeds received from loans entered into outside of Argentina, not even as a condition to accessing the MULC in order to make payments on such loan.

In addition, there is no longer a prescribed “Minimum Stay Period” during which funds deposited in Argentina must remain in the country.

Argentine Central Bank Reporting Regime

In light of the foregoing, the Argentine Central Bank’s reporting regime has been updated as described below. Effective December 31, 2017, Communication “A” 6401 brought reporting requirements with respect to debt securities and external liabilities of the financial and private non-financial sector and direct investments of companies in such sector under one regime for “Assets and External Liabilities”. The reporting regime is divided into the following five subsections: (i) capital and mutual fund participations; (ii) non-negotiable debt instruments; (iii) negotiable debt instruments; (iv) financial derivatives; and (v) land, structures and real estate.

The completion and validation of the information corresponding to foregoing must be done electronically through the Federal Public Revenue Administration website. Such information must be reported within 180 calendar days of fiscal year end for annual statements, and within 45 calendar days as of fiscal quarter end for quarterly statements.

Taking into account the above, as of December 31, 2017, an Argentine resident investor must comply with this reporting regime only if the value of its investments abroad reaches or exceeds the equivalent of US$1,000,000 (based on the net value of its total external assets and liabilities during the previous calendar year or the balance of holdings of external assets and liabilities at the end of the previous calendar year). If the value of such resident investor’s investments is less than the equivalent of US$1,000,000, compliance with such reporting regime is optional. Further, if the value of such resident investor’s investments abroad reaches or exceeds the equivalent of US$1,000,000, but does not exceed the equivalent of US$50,000,000, the reporting regime must only be complied with on an annual basis.

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Foreign Exchange Criminal Regime

Exchange operations can only be carried out through the entities authorized for such purposes by the Argentine Central Bank. As such, any exchange operation that does not comply with the provisions of the applicable regulations will be subject to the Foreign Exchange Criminal Regime, which provides sanctions such as the imposition of fines of up to ten times the amount of the operation in breach and imprisonment in certain instances. The Criminal Exchange Regime is regulated by Law No.19,359 and Argentine Central Bank regulations.

These rules do not prevent the application of any other applicable law for the prevention of money laundering, terrorist financing and other illegal activities.

Compensation to Financial Institutions

For the Asymmetric Pesification and its Consequences

Decree No.214/02 provided for compensation to financial institutions, for (i) losses caused by the mandatory conversion into Pesos of most of their liabilities at the Ps.1.40 per US$1.00 exchange rate (which was greater than the Ps.1 per US$1.00 exchange rate established for the conversion into Pesos of their Foreign currency-denominated assets), through the delivery of a Peso-denominated Compensatory Bond issued by the Argentine government; and (ii) the currency mismatch left on financial institutions’ balance sheets after the compulsory pesification (conversion into pesos) of certain assets and liabilities, through the conversion of the abovementioned Peso-denominated Compensatory Bond into a Foreign currency-denominated Compensatory Bond, which was achieved by the purchase of a Foreign currency-denominated Hedge Bond. For such purpose, the Argentine government established the issuance of a Foreign currency-denominated bond bearing Libor and maturing in 2012 (Boden 2012 Bonds).

The compensation procedure applicable to Banco Galicia, under the terms of Decree No.214/02, was completed in April 2007.

For Differences Related to Amparo Claims

As a result of the provisions of Decree No.1,570/01, the Public Emergency Law, Decree No.214/02 and concurrent regulations, and as a result of the restrictions on cash withdrawals and of the issuance of measures that established the pesification and restructuring of foreign-currency deposits since December 2001, a significant number of claims have been filed against the Argentine government and/or financial institutions, formally challenging the emergency regulations and requesting prompt payment of deposits in their original currency. Most courts have declared the emergency regulations unconstitutional.

Through Communication “A” 3916, dated April 3, 2003, the Argentine Central Bank allowed for the recording of an intangible asset on account of the difference between the amount paid by financial institutions pursuant to legal actions, and the amount resulting from the conversion into Pesos of the balance of the foreign currency deposits reimbursed, at the exchange rate of 1.4 Pesos per Dollar (adjusted by the CER plus accrued interest as of the payment date). In addition, it established that the corresponding amount must be amortized in 60 monthly equal and consecutive installments beginning in April 2003.

On November 17, 2005, through Communication “A” 4439, the Argentine Central Bank established that, beginning in December 2005, from the date of such regulation forward, financial institutions providing new commercial loans with an average maturity of greater than two years could defer the losses related to the amortization of amparo claims. The maximum deferrable amount was 10% of a financial institution’s RPC or 50% of the new commercial loans. Likewise, financial institutions were not able to reduce the remainder of their commercial loan portfolio. This methodology was applied until December 2008, when the balances recorded as of that date began to be amortized in up to 36 monthly equal and consecutive installments.

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With respect to judicial deposits that have been subject to pesification, the Argentine Central Bank established that, beginning in July 2007, financial institutions must establish provisions in an amount equal to the difference that results from comparing such deposits’ balances at each month’s end, as measured in their original currency, and thecorresponding Peso balances actually recorded on their books. Such provision, established as of December 31, 2015 and charged to income, amounted to Ps.8 million in fiscal year 2016.

During fiscal year 2010, Banco Galicia amortized the total remaining balance of the deferred losses from amparo claims for Ps.281 million.

Banco Galicia has complied with Argentine Central Bank regulations concerning the amortization of amparo claims. However, Banco Galicia reserves the right to make claims in view of the negative effect on its financial condition caused by compliance with court orders, in excess of the provisions of the above-mentioned regulations. On December 30, 2003, Banco Galicia formally requested from the executive branch of the Government, with a copy of such request sent to the former Argentine Ministry of Economy and to the Argentine Central Bank, the payment of due compensation for the losses incurred in connection with Asymmetric Pesification.

In June 2014, through Resolution No.365, the former Ministry of the Economy and Public Finance rejected an administrative claim filed by Banco Galicia. Before the due date set for said action, the Bank’s Board of Directors decided not to pursue further legal action with respect to such claim.

Argentine Banking Regulation

The following is a summary of certain matters relating to the Argentine banking system, including provisions of Argentine law and regulations applicable to financial institutions in Argentina. This summary is not intended to constitute a complete analysis of all laws and regulations applicable to financial institutions in Argentina.

General

Since 1977, banking activities in Argentina have been regulated by the Argentine Financial Institutions Law (the “FIL”), which places the supervision and control of the Argentine banking system in the hands of the autonomous Argentine Central Bank, the principal monetary and financial authority in Argentina that operates independently from the Argentine government. The Argentine Central Bank enforces the FIL and grants authorization to banks to operate in Argentina. The FIL confers numerous powers to the Argentine Central Bank, including the ability to grant and revoke bank licenses, authorize the establishment of branches of Argentine banks outside of Argentina, approve bank mergers, capital increases and certain transfers of stock, set minimum capital, liquidity and solvency requirements and lending limits, grant certain credit facilities to financial institutions in cases of temporary liquidity problems and to promulgate other regulations and to enforce the FIL. The Argentine Central Bank has vested the Superintendency with most of the Argentine Central Bank’s supervisory powers. Such entity is responsible for enforcing Argentina’s banking laws, establishing accounting and financial reporting requirements for the banking sector, monitoring and regulating the lending practices of financial institutions and establishing rules for participation of financial institutions in the foreign exchange market and the issuance of bonds and other securities, among other functions. In this section, unless otherwise stated, references to the Argentine Central Bank should be understood to be references to the Argentine Central Bank acting through the Superintendency. FIL grants the Argentine Central Bank broad access to the accounting systems, books, correspondence, and other documents belonging to banking institutions. The Argentine Central Bank regulates the supply of credit and monitors the liquidity, and generally supervises the operation, of the Argentine banking system.

Current regulations equally regulate Argentine and foreign-owned banks.

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Principal Regulatory Changes since 2002

On January 6, 2002, the Argentine government enacted the Public Emergency Law, as amended and supplemented, to address the 2001-2002 economic crisis in its social, economic, administrative, financial and foreign exchange matters. The principal measures taken by the Argentine government during 2002, both through the enactment of the Public Emergency Law and a series of decrees and other regulations, include the following: (i) the ratification of the suspension of payments on most public debt, with the exception of debts owed to multilateral lending agencies; (ii) the repeal of sections of the Convertibility Law (Ley de Convertibilidad) that established, since 1991, a one to one parity between the Peso and the Dollar, the devaluation of the Peso, and an exchange rate fluctuation regime, which domestically resulted in a decrease in the value of the Peso against the Dollar of around 240% during 2002; (iii) the amplification of exchange controls and restrictions on transfers abroad, which measures began to be eased towards the end of 2002; (iv) the ratification and extension of the restrictions on cash withdrawals from bank deposits that were established in December 2001 (the “corralito”), and later lifted in December 2002; (v) Asymmetric Pesification, the specific details of which are as follows: (a) foreign currency-denominated debts of individuals and companies with financial institutions were converted into debt denominated in Pesos at an exchange rate of Ps.1.00 per US$1.00 (1:1), (b) foreign currency-denominated public sector debt to the financial sector were converted into Peso-denominated debt instruments at an exchange rate of Ps.1.40 per US$1.00 (1.40:1), and (c) foreign currency-denominated bank deposits were converted into Peso-denominated bank deposits at an exchange rate of Ps.1.40 per US$1.00 (1.40:1), while foreign regulated public sector debt held by banks and companies remained denominated in foreign currencies; (vi) the modification of the return on assets and cost of liabilities “pesified” at the rate of Ps.1.40 per US$1.00 through the establishment of maximum and minimum interest rates and capital adjustments in accordance with retail price or wage change indices; (vii) the extension of the maturities of Peso-denominated time deposits and deposits originally denominated in foreign currency, above a certain amount, which established a payment schedule with maturities in 2003 or 2005, depending on whether the deposits were originally made in Pesos or Dollars (the “corralón”); (viii) the voluntary exchange of corralito or corralón deposits for Argentine government bonds (through Decree No.739/03, dated April 1, 2003, thecorralón was eliminated); (ix) the amendment of the charter of the Argentine Central Bank (see “General” above); and (x) the compensation to financial institutions, through bonds issued by the Argentine government for the losses caused by asymmetric pesification. The executive branch of the Argentine government and the Argentine Central Bank have provided a set of rules for determining the amount of compensation for losses related to asymmetric pesification, although certain financial entities claim that the compensation established by such rules is not adequate to cover the losses that they have experienced.

The application of the Public Emergency Law was extended on annual basis until November 4, 2015, when the Argentine Congress extended the validity of the Public Emergency Law until December 31, 2017. On December 14, 2016, the Argentine Congress enacted Law No. 27,345, which extended the state of emergency until December 31, 2019.

Supervision

As the regulator of the Argentine financial system, the Argentine Central Bank requires financial institutions to submit information on a daily, monthly, quarterly, semiannual and annual basis. These reports, which include balance sheets and income statements, information relating to reserve funds, use of deposits, portfolio quality (including details on debtors and any established loan loss provisions) and other pertinent information, allow the Argentine Central Bank to monitor financial institutions financial condition and business practices.

The Argentine Central Bank periodically carries out formal inspections of all banking institutions in order to monitor compliance by banks with legal and regulatory requirements and confirm the accuracy of the information provided to the Argentine Central Bank. If Argentine Central Bank rules are breached, it may impose various sanctions depending on the magnitude of the infringement. These sanctions range from warning calls up to the imposition of fines, or even the revocation of the financial institution’s operating license. Moreover, non-compliance with certain rules may result in the obligatory presentation to the Argentine Central Bank of specific adequacy or regularization plans. The Argentine Central Bank must approve these plans in order for the financial institution to remain operational.

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Financial institutions operating in Argentina have been subject to the supervision of the Argentine Central Bank on a consolidated basis since 1994. Information regarding “Limitations on Types of Business”, “Capital Adequacy Requirements”, “Lending Limits”, and “Loan Classification System and Loan Loss Provisions” related to a bank’s loan portfolio is calculated on a consolidated basis. However, regulations relating to a bank’s deposits are not based on consolidated information, but on such bank’s deposits in Argentina (for example, liquidity requirements and contributions to the deposit insurance system).

Examination by the Argentine Central Bank

The Argentine Central Bank began to rate financial institutions based on the “CAMEL” quality rating system in 1994. Each letter of the CAMEL system corresponds to an area of the operations of each bank being rated, with: “C” standing for capital, “A” for assets, “M” for management, “E” for earnings, and “L” for liquidity. Each factor is evaluated and rated on a scale from one to five, with one being the highest rating an entity can receive. The Argentine Central Bank modified the supervision system in September of 2000. The objectives and basic methodology of the new system, referred to as “CAMELBIG,” do not differ substantially from the CAMEL system. The components were redefined in order to evaluate business risks separately from management risks. The components used to rate the business risks are: capital, assets, market, earnings, liquidity and business. The components to rate management risks are: internal control and the quality of management. By combining the individual factors under evaluation, a combined index can be populated that represents the final rating for the financial institution.

After temporarily halting such examinations as a result of the 2001-2002 financial and economic crisis, the Argentine Central Bank resumed the examination process, which remains in effect as of the date of this filing. In Banco Galicia’s case, the first examination after the 2001-2002 financial crisis was based on the information as of June 30, 2005. New examinations were conducted, the last one of which was based on information as of April 30, 2013.

Regulatory Capital (Minimum Capital Requirements)

Financial entities are subject to the capital adequacy rules of the Argentine Central Bank, consequently Banco Galicia, as a commercial bank, must maintain a minimum capital amount measured as of each month’s closing. Argentine Central Bank regulations establish that financial institutions legal capital should be equal to the greater value resulting from the comparison between the applicable basic requirement (corresponding to the type of entity) and the sum of those determined by credit and market risk, as well as operational risk.

The minimum basic capital requirement for a commercial bank located in the City of Buenos Aires, such as Banco Galicia, is a capital reserve of at least Ps.26 million. The minimum capital requirements related to credit risk, which are calculated according to a formula created by the Argentine Central Bank, are designed to establish the minimum capital necessary to offset the risk that the counterparty does not comply with its obligation in a transaction related to the assets that are being reviewed. The minimum capital requirements related to market risks are designed to offset the eventual losses generated by a change of market rates or of credit quality, which would affect the assets and liabilities of the bank. Such market risk includes (among other risks) liquidity risk and interest rate risk. Operational risk includes the possibility of incurring a failure or deficiency in losses as a result of external events or as a result of a failure or deficiency in internal processes, human error or internal systems.

Notwithstanding the foregoing, the regulatory capital of commercial banks acting as custodians of securities representing investments of the Fondo de Garantía de Sustentabilidad del Sistema Integrado Previsional Argentino must be equal to or exceed the greater of Ps.400 million or an amount equivalent to 1% of the total book value of the securities in custody.

In order to verify compliance with the minimum capital requirements, the Argentine Central Bank considers the computable regulatory capital (“RPC”) of a particular entity (i.e., capital that the entities actually have). Pursuant to the Argentine Central Bank’s regulations, a bank’s RPC is the sum of the minimum core capital (Tier I capital) and supplementary capital (Tier II capital), minus certain deductible concepts. The Argentine Central Bank considered Basel III requirements in order to regulate the RPC (and listed the assets included in each Tier as well the deductible concepts in accordance with such rules).

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According to the Argentine Central Bank’s regulations, any financial institution operating with an RPC under the minimum capital requirements must: (i) pay-in the correspondent amount within the following two months from the month in which it fails to comply with the requirement, or (ii) submit to the Superintendency a regularization and reorganization plan within the following 30 calendar days counted as from the last day of the month in which it fails to comply with the requirement. The Superintendency may appoint a supervisor and impose restrictions on distribution of dividends, among other actions, when non-compliance with the RPC requirements occurs or any warning from the Superintendency is received.

In addition, any financial institution operating under the daily integration of the minimum capital requirement related to market risk (when such failure is caused by the requirements established to guard against interest rate risk, foreign exchange risk or equity price risk), must pay-in the corresponding amount necessary to comply with the requirements and/or reduce its asset position until the applicable requirement is complied with, within a term of ten business days counted from the first failure to comply with the requirements. In case the non-compliance situation remains after such term has elapsed, the entity must submit to the Superintendency a regularization and reorganization plan within the following five days.

Legal Reserve

The Argentine Central Bank and FIL rules, requires that every year banks allocate to a legal reserve a percentage of their net profits established by the Argentine Central Bank, which currently amounts to 20% of their yearly income. Such reserve may only be used during periods in which such financial institution has incurred losses and has exhausted all other reserves. Distribution of dividends will not be allowed if the legal reserve is not met.

Profit Distribution

In accordance with Communications “A” 5827 (as amended), “A” 6464 (as amended) and “A” 6304 (as amended), financial institutions profit distribution (the concept under which a payment of dividends is included) must be authorized by the Superintendency. The Superintendency is entitled to intervene to verify the correct application of the procedures and regulations with respect to dividends issued by the Argentine Central Bank.

The Argentine Central Bank sets rules for the conditions under which financial institutions can make distributions of profits. Argentine Central Bank regulations require that 20% of a company’s profits, subject to certain adjustments, be allocated to legal reserves.

This requirement applies regardless of a company’s ratio of legal reserves to capital stock.

In addition to the foregoing, Argentine Central Bank regulations regarding profit distributions provide that profits can be distributed so long as a company’s results of operations are positive after deducting for require legal reserves, the difference between the carrying amount and the fair market value of public sector assets and/or debt instruments issued by the Argentine Central Bank not valued at fair market price, and the amounts capitalized for legal proceedings related to deposits and any unrecorded adjustments required by external auditors or the Argentine Central Bank. Furthermore, companies must also comply with capital adequacy rules, which set forth minimum capital requirements and required regulatory capital.

Effective as of January 2016, all Argentine financial institutions are also required to maintain capital in an additional capital reserve equal to 3.5% of risk-weighted assets, which is required to be comprised of only of Tier I Common Capital, net of deductible items. Profit distributions shall be restricted when a financial institution does not have the required computable regulatory capital as set forth above.

The prior authorization of the Argentine Regulatory Agency of Financial and Foreign Exchange Institutions is not be required for profit distributions, unless a financial institution does not have the required computable regulatory capital. Such restriction shall remain in effect until March 31, 2020.

Profits, if any, resulting from the first-time application of IFRS may not be distributed. Any such profits are required to be appropriated to a special reserve recorded under equity, which may only be released for capitalization purposes, or to otherwise to offset potential losses.

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Legal Reserve Requirements for Liquidity Purposes

The deposit amount minus the minimum cash requirement determines the “lending capacity” of a particular deposit.

The Argentine Central Bank modifies the applicable minimum cash requirement from time to time depending on monetary policy considerations.

The then-applicable minimum cash requirement will be applied to the monthly average of the daily balances of the assets, calculated at the close of each business day during the applicable calendar month, taken into account for the purpose of calculating “lending capacity”.

The averages will be obtained by dividing the sum of the daily balances by the total amount of days of each month. For days in which no movement is recorded, the balance corresponding to the immediately preceding day. Compliance with minimum cash requirements must be made in the same debt currency and/or instrument that corresponds to the requirement (with certain exceptions), and might be completed through (i) checking accounts, denominated in Pesos, opened by financial entities in the Argentine Central Bank; (ii) “Minimum Cash Accounts”, denominated in dollars or other foreign currencies, opened by financial entities in the Argentine Central Bank; (iii) special guarantee accounts in favor of clearing houses and for coverage of credit cards, vouchers and ATM operations and for transfer settlement of immediate funds; (iv) non-bank financial entities checking accounts opened in commercial banks for the requirement of minimum cash integration; (v) special accounts opened in the Argentine Central Bank linked for the provision of social security benefits in charge of National Social Security Administration (“Administración Nacional de la Seguridad Social” or ANSES) and (vi) “sub-accounts 60” minimum cash of public securities and debt instruments issued by the Argentine Central Bank, at market value.

According to Communication “A” 6341 (as modified and complemented), the percentages of minimum cash requirements applicable in accordance with Argentine Central Bank rules, are as follows:

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Deficiencies of minimum cash and daily integrations in pesos are subject to a fine equivalent to twice the BADLAR rate of private banks for pesos deposits, informed for the last business day of relevant period (according to Communication “A” 5356 and modifications).

Deficiencies of minimum cash and daily integrations in foreign currency are subject to a fine equivalent to twice the private banks BADLAR rate in dollars or twice the 30-day LIBOR rate for operations in that currency, informed for the last business day of relevant period or last available, whichever is higher (according to Communication “A” 5356 and modifications).

As of December 31, 2017, Banco Galicia was in compliance with its legal reserve requirements and continued to be in compliance as of the date of this annual report.

Limitations on Types of Business

In accordance with the provisions of the FIL, commercial banks are authorized to carry out all activities and operations which are not strictly prohibited by law or by the Argentine Central Bank regulations. Permitted activities include the capacity to: grant and receive loans; receive deposits from the general public in local and foreign currency; secure its customers’ debts; acquire, place and trade with shares and debt securities in the Argentine over-the-counter market (subject to prior approval of the CNV, if applicable); carry out operations in foreign currencies; act as trustee in financial trusts; and issue credit cards.

In order to calculate the legal reserves requirements for liquidity purposes described above, it is not necessary to deduct the capital stock allocated to foreign branches from a bank’s shareholders’ equity.

Pursuant to the Argentine Central Bank’s regulations, financial institutions are not allowed to hold more than a 12.5% interest (or more than a specific percentage of the financial institution’s adjusted shareholders’ equity) in the outstanding capital of a company which does not provide services complementary to those offered by financial institutions. The Argentine Central Bank determines which services are complementary to those provided by financial institutions. To date has been determined that such services mainly include those offered in connection with stock brokerage, the issuance of credit, debit or similar cards, financial intermediation in leasing and factoring transactions.

Non-banking financial institutions are not allowed to provide certain services and activities, such as opening checking accounts, among other activities.

Capitalization of Debt Instruments

Communication “A” 6304 (as amended) of the Argentine Central Bank provides that all regulations related to capital increases must be cash contributions. However, the regulation establishes that subject to the prior authorization of the Superintendency, the following instruments are allowed as capital contributions: (i) securities issued by the Argentine government, (ii) debt instruments issued by the Argentine Central Bank, and (iii) a financial institution’s deposits and other liabilities resulting from its financial brokerage activities, including subordinated obligations. With respect to instruments (i) and (ii), the contributions must be recorded at their market value. It is understood that an instrument has a market value when it is regularly listed on regulated local or foreign stock markets and traded on such markets in such amounts that the liquidation of such instruments does not significantly affect the listing price of such instruments. With respect to clause (iii) above, contributions must be recorded at their market value, as defined in the previous sentence or, in the case of financial institutions that publicly offer their stock, at the price determined by the applicable regulatory authority. If the aforementioned conditions are not met, the instruments in question will not be contributable as capital.

Deposits and other liabilities resulting from a given financial institution’s financial brokerage activities, including subordinated obligations that are not permitted to be traded in local or foreign regulated secondary markets, will be allowed to be contributed as capital at their accounting value, pursuant to Argentine Central Bank rules.

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Lending Limits

The total equity stake and credit amounts, including collateral, that a bank is allowed to grant to a customer at any time is based on the bank’s adjusted shareholders’ equity as of the last day of the immediately preceding month and on the customer’s shareholders’ equity.

In accordance with the Argentine Central Bank’s regulations, a commercial bank shall not lend or provide credit (“financial assistance”) in favor of, nor hold shares in the capital stock of, a single unaffiliated customer (together with its affiliates) for amounts higher than 15% of the bank’s adjusted shareholders’ equity or 100% of the customer’s shareholders’ equity. Nevertheless, a bank may provide additional financial assistance to such customer up to a sum equivalent to 10% of the bank’s adjusted shareholders’ equity, if the additional financial assistance is secured by certain liquid assets, including government or private debt securities.

The total amount of financial assistance a bank is authorized to provide to a borrower and its affiliates is also limited based on the borrower’s shareholders’ equity. The total amount of financial assistance granted to a borrower and its affiliates shall not be higher than, in the aggregate, 100% of such borrower’s shareholders’ equity, although such limit may be increased an additional 200% of the borrower’s shareholders’ equity if the sum does not exceed 2.5% of the bank’s adjusted shareholders’ equity.

Global exposure to the public sector (national, provincial and municipal public sector) shall not be higher than 75% of an institution’s adjusted shareholders’ equity. Additionally, Section 12 of Communication “A” 3911, as amended, establishes that the average monthly financial assistance to non-financial public sector, in the aggregate, shall not be higher than 35% of the bank’s total assets as of the end of the previous month.

The Argentine Central Bank also regulates the level of “total financial exposure” (defined as financial assistance or credit plus equity participations) of a bank to a “related party”. Until August 2013 a related party was defined as bank’s affiliates and related individuals, “affiliate” meaning any entity over which a bank, directly or indirectly, has control, is controlled by, or is under common control with, or any entity over which a bank has, directly or indirectly, significant influence with respect to such entity’s corporate decisions, and “related individuals” meaning bank’s directors, senior management, syndics and such persons’ direct relatives. On August 9, 2013, the Argentine Central Bank issued the Communication “A” 5472, through which the definition of related parties was modified and broadened to also include such individuals’ spouses and relatives.

The Argentine Central Bank limits the level of total financial exposure that a bank can have outstanding to related parties, depending on the rating granted to each bank by the Superintendency. Banks rated 4 or 5 are forbidden to extend financial assistance to related parties. For banks ranked between 1 and 3, the financial assistance without guarantees to related parties (and in the case of affiliates, only if the service provided by such affiliate is not complementary to the bank’s businesses) cannot exceed, together with any equity participation held by the bank in its affiliates, 5% of such bank’s RPC. The bank may increase its financing to such related parties up to an amount equal to 10% of such bank’s RPC if the financial assistance is secured. As of January 2019, Tier I Capital replaced RPC as the calculation standard.

However, a bank may grant additional financial assistance to such related parties up to the following limits:

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In addition, the aggregate amount of a bank’s total financial exposure to its related parties, except for the ones subject to individual maximum limits higher than 10% (complementary services companies), may not exceed 20% of such bank’s RPC.

Notwithstanding the limitations described above, financial assistance is also limited in order to prevent risk concentration. To that end, the total financial exposure independently of whether customers qualify as such bank’s related parties or not, in the case in which such exposure exceeds 10% of such bank’s RPC, may not exceed three times the bank’s RPC excluding total financial exposure to domestic financial institutions, or five times the bank’s RPC, including such exposure.

For a second grade financial institution (i.e., a financial institution that provides financial products to other banks and not to retail customers), the latter limit is ten times such financial institution’s RPC.

Banco Galicia has historically complied with such rules.

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Loan Classification System and Loan Loss Provisions

General

Banco Galicia is required to comply with the Argentine Central Bank regulations.In 1994, the Argentine Central Bank introduced the current loan classification system and the corresponding minimum loan-loss provision requirements applicable to loans and other types of credit (together, referred to as “loans”) to private sector borrowers.

The current loan classification system applies certain criteria to classify loans in a bank’s “consumer” portfolio, and another set of criteria to classify loans in its “commercial” portfolio. The classification system is independent of the currency in which the loan is denominated.

The loan classification criteria applied to loans in the consumer portfolio is based on objective guidelines related to the borrower’s credit score, legal status, and other information provided by credit rating agencies. However, if a borrower has defaulted on loans in the past or is non-current on obligations, a lower rating is assigned by the Bank. In the event of any discrepancy, the guidelines indicating the higher risk level should be considered.

For the purposes of the Argentine Central Bank’s regulations, consumer loans are defined as mortgage loans, pledge loans, credit card loans and other types of loans in installments granted to individuals. All other loans are considered commercial loans. In addition, in accordance with an option set forth in these regulations, Banco Galicia prospectively applies the consumer portfolio classification criteria to commercial loans of up to Ps.2.5 million. This classification is based on the level of fulfillment and the situation thereof.

The main classification criterion for loans in the commercial portfolio is each borrower’s ability to pay, mainly in terms of such borrower’s future cash flows. If a customer has both commercial and consumer loans, all of these loans will be considered as a whole to determine eligibility for classification in the corresponding portfolio. Loans backed with preferred guarantees will be considered at 50% of their face value.

By applying the Argentine Central Bank’s classification to commercial loans, banks must assess the following factors: the current and projected financial situation of the borrower, the customer’s exposure to currency risk, the customer’s managerial and operating background, the borrower’s ability to provide accurate and timely financial information, as well as the overall risk of the sector in which the borrower operates and the borrower’s relative position within that sector.

The Argentine Central Bank’s regulations also establish that a team independent from the departments responsible for credit origination must carry out a periodic review of the commercial portfolio. Banco Galicia’s Credit Division, which is independent from the business units that generate transactions, is responsible for these reviews.

The review must be carried out on each borrower with debt pending payment equal to the lesser of the following amounts: Ps.12.5 million or 1% of the bank’s computable capital (the “RPC”) but, in any case, the review shall cover at least 20% of the total loan portfolio. The frequency of the review of each borrower depends on the bank’s exposure to that borrower. The Argentine Central Bank requires that the larger the exposure is, the more frequent the review should be. This review must be conducted every calendar quarter when credit exposure to that borrower is equal to or in excess of 5% of the bank’s RPC, or every six months when exposure equals or exceeds the lesser of the following amounts: Ps.12.5 million or 1% of the bank’s RPC. In all cases, at least 50% of Banco Galicia’s commercial portfolio must be reviewed once every six months; and all other borrowers in Banco Galicia’s commercial portfolio must be reviewed during the fiscal year, so that the entire commercial portfolio is reviewed every fiscal year.

In addition, only one level of discrepancy is permitted between the classification assigned by a bank and the lowest classification assigned by at least two other banks whose combined credit to the borrower represents 40% or more of the total credit of the borrower, considering all banks. If Banco Galicia’s classification was different by

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more than one level from the lowest classification granted, Banco Galicia must immediately downgrade its classification of the debtor to the same classification level, or else within one classification level.

Loan Classification

The following tables contain the six loan classification categories corresponding to the different risk levels set forth by the Argentine Central Bank. Banco Galicia’s total exposure to a private sector customer must be classified according to the riskier classification corresponding to any part of such exposure.

Commercial Portfolio

 

 

Consumer Portfolio

 

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Limitation on Fees and Other Substantial Elements

The Argentine Central Bank has issued regulations limiting amounts that entities can charge as credit card fees, as well as fees that can be charged for financial services rendered by financial entities, credit card issuers (and other similar entities). Such regulations provide that such fees must be duly justified from a technical and economic point of view and must be in relation to the total financial costs incurred by any such financial institution. Further, such Laws provide that applicable interest rates must be set forth.

In addition, such regulations provide that in order to modify fees and other conditions established in agreements executed by and between financial entities and consumers, the following requirements must be met (i) reasons for fees increases must be established in the agreements and must be duly justified; (ii) modifications cannot change the core or fundamental provisions of the agreement; (iii) the consumer must be duly informed of any such changes; and (iv) for the imposition of new fees, the consumer’s consent must be obtained.

Foreign Currency General Position

The Foreign Currency General Position of a financial institution (defined as the assets and liabilities arising from financial intermediation and securities denominated in foreign currency) used to be limited by the Argentine Central Bank regulations. Currently, since the enactment of Communication “A” 6244 financial entities may determine their own Foreign Currency General Position.

Deposit Insurance System

In 1995, Law No.24,485 and Decree No.540/95, as amended, created a mandatory deposit insurance system for bank deposits and delegated to the Argentine Central Bank the organization and start-up of the deposit insurance system. The deposit insurance system was implemented through the creation of a fund named Fondo de Garantía de los Depósitos (“FGD”), which is administered by Seguros de Depósitos S.A. (“Sedesa”). The shareholders of Sedesa are the Argentine government, through the Argentine Central Bank, which holds at least one share, and a trust constituted by the financial institutions which participate in the fund.

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The Argentine Central Bank establishes the extent of participation by each institution in proportion to the resources contributed by each such institution to the FGD. Banks must contribute to the FGD on a monthly basis in an amount that is currently equal to 0.015% of the monthly average of daily balances of such institution’s deposits (both Peso- and foreign currency-denominated).

In addition, when the contributions to the FGD reach the greater of Ps.2 billion or 5.0% of total deposits, the Central Bank may suspend or reduce the monthly contributions and reinstate the same when contributions fall below such required level.

The deposit insurance system covers all Peso and foreign currency deposits held in demand deposit accounts, savings accounts and time deposits for an amount up to Ps.450,000 per person, account and deposit. Certain deposits are not covered by the guarantee of the deposit insurance system, such as deposits received at rates higher than the reference rate in accordance with the limits established by the Argentine Central Bank, deposits acquired by endorsement, and those made by persons related to the financial institution (as defined by Argentine Central Bank regulations). The Argentine Executive Branch through Decree No.1127/98 established the maximum amount for this insurance system to demand deposits and time deposits denominated either in Pesos and/or in foreign currency. Such limit was set at Ps.1,000 as of March 1, 2019.

The guarantee provided by the deposit insurance system must be made effective within 30 days from the revocation of the license of a financial institution, subject to the outcome of the exercise by depositors of their priority rights described under “—Priority Rights of Depositors” below. The Argentine Central Bank may modify, at any time, and with general scope, the amount of the mandatory deposit guarantee insurance.

Decree No.1292/96 enhanced Sedesa’s functions by allowing it to provide equity capital or make loans to Argentine financial institutions experiencing difficulties and to institutions that buy such financial institutions or their deposits. As a result of such decree, Sedesa has the flexibility to intervene in the restructuring of a financial institution experiencing difficulties prior to bankruptcy.

Debt securities issued by banks are not covered by the deposit insurance system.

Priority Rights of Depositors

According to section 49(e) of the FIL, in the event of a judicial liquidation or the bankruptcy of a financial entity, the holders of deposits in Pesos and foreign currency benefit from a general priority right to obtain repayment of their deposits up to the amount set forth below, with priority over all other creditors, with the exception of the following: (i) deposits secured by a mortgage or pledge, (ii) rediscounts and overdrafts provided to financial entities by the Argentine Central Bank, according to section 17 subsections (b), (c) and (f) of the Argentine Central Bank Charter, (iii) credits provided by the Banking Liquidity Fund, which was created by Decree No.32, dated December 26, 2001, secured by a mortgage and pledge and (iv) certain labor credits, including accrued interest until the date of their total repayment.

The holders of the following deposits are entitled to the general preferential right established by the FIL (following this order of preference):

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According to the FIL, the preferences set forth in previous paragraphs (i) and (ii) above are not applicable to deposits held by persons who are affiliates of the financial entity, either directly or indirectly as determined by the Argentine Central Bank.

In addition, pursuant to Section 53 of the FIL, the Argentine Central Bank has an absolute priority over all other creditors of the entity, except as provided by the FIL.

Deposit and Loans in Housing Units

In order to facilitate access to mortgage loans, through Communication “A” 5945, dated as of April 8, 2016, and complementary regulations, the Argentine Central Bank established a new type of loan denominated in housing units (Unidad de Valor Adquisitivoor “UVAs”). The value of such housing units will be updated using the Reference Stabilization Coefficient. The initial value of the UVA was Ps.46.86, representing the cost of construction of one thousandth square meter of housing as of December 31, 2018.

Financing Loans for Economic Development

The Argentine Central Bank has implemented several policies in order to promote economic development and productivity in Argentina, pursuant to which certain financial institutions are required to allocate a certain percentage of funds for specific investments, such as providing financing to SMEs and investment projects. The Argetine Central Bank established new requirements with respect to such requirements for 2018 in Communication “A” 6352, dated November 3, 2017.

Financial Institutions with Economic Difficulties

The FIL establishes that financial institutions, including commercial banks such as Banco Galicia, which evidence a deficiency in their cash reserves, have not complied with certain required technical standards, including minimum capital requirements, or whose solvency or liquidity is deemed to be impaired by the Argentine Central Bank, must submit a restructuring plan to the Argentine Central Bank. Such restructuring plan must be presented to the Argentine Central Bank on the date specified by the Argentine Central Bank, which should not be later than 30 calendar days from the date on which the request is made by the Argentine Central Bank. In order to facilitate the implementation of a restructuring plan, the Argentine Central Bank is authorized to provide a temporary exemption from compliance with technical regulations and/or the payment of charges and fines that arise from such non-compliance.

The Argentine Central Bank may also, in relation to a restructuring plan presented by a financial institution, require such financial institution to provide guarantees or limit the distribution of profits, and appoint a supervisor, to oversee such financial institutions’ management, with the power to veto decisions taken by the financial institution’s corporate authorities.

In addition, the Argentine Central Bank’s charter authorizes the Superintendency, subject only to the prior approval of the president of the Argentine Central Bank, to suspend for up to 30 days, in whole or in part, the operations of a financial institution if its liquidity or solvency have been adversely affected. Notice of this decision must be given to the board of directors of the Argentine Central Bank. If at the end of such suspension period the Superintendency considers renewal necessary, such renewal can only be authorized by the board of directors of the Argentine Central Bank for an additional period not to exceed 90 days. During the suspension period: (i) there is an automatic stay of claims, enforcement actions and precautionary measures; (ii) any commitment increasing the financial institution’s liabilities is void; and (iii) acceleration of indebtedness and interest accrual is suspended.

If, in the judgment of the Argentine Central Bank, a financial institution is in a situation which, under the FIL, would authorize the Argentine Central Bank to revoke the financial institution’s license to operate as such, the Argentine Central Bank may, prior to considering such revocation, order a variety of measures, including (i) taking steps to reduce, increase or sell the financial institution’s capital; (ii) revoking the approval granted to the shareholders of the financial institution to own an interest therein, giving a term for the transfer of such shares; (iii) excluding and transferring assets and liabilities; (iv) constituting trusts with part or all the financial institution’s assets; (v) granting of temporary exemptions to comply with technical regulations and/or pay charges and fines arising from such defective compliance; or (vi) appointing a bankruptcy trustee and removing statutory authorities.

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Furthermore, any actions authorized, commissioned or decided by the Argentine Central Bank under Section 35 of the FIL involving the transfer of assets and liabilities, or complementing such transfers, or that are necessary to execute the restructuring of a financial institution, as well as those related to the reduction, increase or sale of equity, are not subject to any court authorization and cannot be deemed inefficient in respect of the creditors of the financial institution which was the owner of the excluded assets, even though its insolvency preceded any such actions.

Dissolution and Liquidation of Financial Institutions

The Argentine Central Bank must be notified of any decision to dissolve a financial institution pursuant to the FIL. The Argentine Central Bank, in turn, must then notify a court of competent jurisdiction, which will determine who will liquidate the entity: the corporate authorities (extrajudicial liquidation) or an appointed independent liquidator (judicial liquidation). This determination is based on whether or not sufficient assurances exist regarding the ability of such corporate authorities to carry out the liquidation properly.

Pursuant to the FIL, the Argentine Central Bank no longer acts as liquidator of financial institutions. However, when a restructuring plan has failed or is not considered viable, local and regulatory violations exist, or substantial changes have occurred in the financial institution’s condition since the original authorization was granted, the Argentine Central Bank may decide to revoke the license of the financial institution to operate as such. In this case, the law allows judicial or extrajudicial liquidation as in the case of voluntary liquidation described in the preceding paragraph.

The bankruptcy of a financial institution cannot be adjudicated until the license is revoked by the Argentine Central Bank. No creditor, with the exception of the Argentine Central Bank, may request the bankruptcy of the former financial institution before 60 calendar days have elapsed since the revocation of its license.

Credit Cards Regulation

The Credit Cards Law establishes the general framework for credit card activities. Among other regulations, this law:

The Argentine Central Bank has issued regulations to enforce public disclosure of companies’ pricing (fees and interest rates) to ensure consumer awareness of such pricing.In addition, during 2014 the Argentine Central Bank issued a series of regulations in order to establish caps on interest rates on personal loans, pledge loans and credit card loans, as well as to establish a requirement for an authorization to increase fees. Through its Communication “A” 5853, dated December 17, 2015, the Argentine Central Bank rescinded regulations related to limits on interest rates in respect of lending transactions.

Concealment and Laundering of Assets of a Criminal Origin

Law No.25,246 (as amended in July 2011 by Law No.26,683) incorporates money laundering as a crime under the Argentine Criminal Code. Additionally, with the goal of preventing money laundering, the UIF was created under the jurisdiction of the Argentine Ministry of Justice, Security and Human Rights. As a result of such modification, money laundering is now classified as a separate offense.

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In addition to the above, Law No.26,683 punishes “self-laundering”, which punishes money laundering tied to a crime the individual in question committed his or herself. It also includes certain tax offenses described in Article 303 of the Argentine Penal Code as punishable laundering behavior. The new standard falls under Article 303 of the Argentine Penal Code in the chapter titled “Crimes against economic and financial order”.

The minimum and maximum of the criminal scale will be doubled when (i) the foregoing acts were crimes that are particularly serious, meaning those crimes with a punishment that is greater than three years of imprisonment; (ii) the perpetrator committed the crime for profit; and (iii) the perpetrator regularly performs concealment activities.

The criminal scale can only be increased once, even when more than one of the above-mentioned acts occurs. In such case, the court may take into consideration the multiple acts when determining the original punishment.

The “Committee for the Control and Prevention of Money Laundering and the Financing of Terrorist Activities” was formed in 2005 and is responsible for establishing and maintaining the general guidelines related to the Bank’s strategy to control and prevent money laundering and the financing of terrorism. For more information, see “Item 6. Directors, Senior Management and Employees—Functions of the Board of Directors of Banco Galicia”.

Banco Galicia has also appointed two directors to fulfill the roles of Compliance Officer and Substitute Compliance Officer. In addition, a specialized management unit was created in this area that is responsible for the execution of the policies approved by the committee and for the monitoring of the control systems and procedures to ensure that they are adequate.

Law No.26,734 enacted on December 22, 2011, incorporated terrorism financing and the financing of terrorism as an aggravating circumstance to all criminal conduct in the Argentine Criminal Code.

Such law punishes any individual who directly or indirectly collects or provides goods or money with the intention of being used, or knowing that they will be used, in whole or in part (i) to finance a crime with the purpose established in Section 41.5; (ii) for an organization who commits or attempts to commit crimes with the purpose established in Section 41.5; and (iii) for a person who commits or attempts to commit or participates in any way in committing crimes with the purpose established in Section 41.5.

The new legislation also punishes terrorism as an aggravating factor in other punishable crimes when any such offense was committed in order to terrorize the population.

The Bank has implemented measures to combat the use of the international financial system by criminal organizations. The Bank has policies, procedures and control structures in place to monitor operations based on client profiles and risk assessments based on the information and documentation related to the economic, patrimonial and financial situation of each client to detect clients that could be considered unusual, and eventual reporting to the UIF as appropriate. The Asset Laundering Prevention Management program is charged with the implementation of such control and prevention procedures, as well as communication of such procedures and measures within the Bank, drafting of compliance manuals and employee training. Such management program is also periodically reviewed by senior management.

The Bank has appointed a Director as Compliance Officer, in accordance with Resolution 30/2017 of the UIF, who is responsible for ensuring the observance and implementation of procedures and obligations in the matter. The Compliance Officer contributes to the prevention and mitigation of the risks of criminal transactions and is involved in the establishment of internal policies and measures to monitor and prevent the same.

 

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C. Organizational Structure

The following table illustrates our organizational structure as of December 31, 2018. Percentages indicate the ownership interests held by each entity.

 

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D. Property, Plants and Equipment

The following are our main property assets, as of December 31, 2018:

 

As of December 31, 2018, our distribution network consisted of:

 

Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and Financial Review and Prospects

A. Operating Results

The following discussion and analysis is intended to help you understand and assess the significant changes and trends in our historical results of operations and the factors affecting our resources. You should read this section in conjunction with our audited consolidated financial statements and their related notes included elsewhere in this annual report.

Overview

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In recent years, we have strengthened our position as a leading domestic private-sector financial institution, increasing our market share of loans and deposits and strengthening Banco Galica’s regulatory capital reserves through the issuance of subordinated bonds and follow-on equity offerings, the sale of CFA and internal profit origination.

Despite the deterioration of the Argentine economy, reduction in Argentine GDP, high levels of inflation and the devaluation of the Peso in 2018, we were able to increase our market share of deposits and loans, maintain our asset quality and adequately cover credit risks and maintain liquidity and profitability metrics at reasonable levels.

Fiscal year 2019 is expected to be a challenging year of transition as a result of presidential elections in October 2019 and residual macroeconomic imbalances in a volatile global economy, all of which could negatively impact the Argentine economy.

The Argentine Economy

The Argentine economy was affected by international political and economic factors in 2018, including aggressive trade policies promulgated by the United States, and in particular with China. Monetary policies implemented by central banks worldwide also affected international markets. For example, the Federal Reserve continued to raise interest rates in 2018 and, as a result, led a gradual decrease in growth rates. The volatility of financial markets, as well as some turbulence in emerging economies have also raised concerns among investors, thereby contributing to such decrease.

In 2018, the Dollar appreciated 3.9% and 10.5% vis-à-vis the currencies of other developed economies and the currencies of emerging economies, respectively, as compared to 2017. In addition, the two-year Treasury rose by 581 bps, while the 10-year Treasury rose by 254 bps, resulting in a flattened spread of 11 bps between the 10 and two-year Treasuries. Stocks performed poorly both in developed and emerging markets during 2018. The S&P 500 decreased 6.7%, the Dow Jones Industrial Average decreased 6.1% and the Nasdaq 100 decreased 4.5%. The EuroStoxx50 decreased 14.8% and Japan’s Nikkei 225 Index decreased 12.1% in 2018 as compared to 2017.

In 2018, commodity prices also decreased by 8.3% as compared to 2017, crude oil decreased 24% during the last quarter of 2018 as a result of the expected increase in the supply of American shale oil and the diminishment of global growth. There were also significant decreases in industrials such as aluminum and copper (-19% and -18%, respectively). The value of wheat increased 17% in 2018, whereas soy and corn decreased 6.7% and 5%, respectively.

Argentina’s economy continued to grow during the first quarter of 2018 (+2.9%). However, volatile markets abroad and domestically led to a net contraction of the Argentine economy in 2018 (-2.5%). The unemployment rate in Argentina reached 9% by the quarter ended September 31, 2018.

In the monetary sphere, the main monetary aggregates accelerated their pace, although still standing below the nominal growth of the economy. According to data provided by the Central Bank, the monetary base recorded a 40.7% expansion in 2018, 18.9% over the growth recorded in 2017. This monetary aggregate increased by Ps.407,864 million, primarily as a result of the repurchase of Lebacs in an amount equal to Ps.1,296,076 million. This was partially offset by the issuance of LELIQs by the Central Bank in an amount equal to Ps.709,470 million. This trend was not reflected in the performance of the private-sector M2 (money in circulation, and deposits in checking and savings accounts), which grew 36.9% in 2018. The M2 total (including deposits from the public sector) expanded 23%, after increasing by 25.6% in 2017.

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Domestic interest rates shifted with changes to expectations in prices and the foreign exchange market. Until May 2018, both expected depreciation and interest rates were kept relatively stable, but the upward pressure on the exchange rate during the second half of 2018 marked an important increase in the rates. Particularly, the Badlar rate was 49.5% as of December 31, 2018, as compared to 23.43% as of December 31, 2017.

The reference exchange rate established by the Argentine Central Bank increased form Ps.18.77 to Ps.37.81 per Dollar between December 29, 2017 and December 28, 2018 (equivalent to a 101% depreciation), while the average exchange rate increased form Ps.16.57 in 2017 to Ps.28.09 in 2018.

The national CPI published by INDEC reflected a 47.6% increase in consumer prices inter-annually, considerably above 2017 levels (24.8%). This acceleration was primarily a result of the exchange rate crisis.

In the fiscal area, tax revenues, including social security, recorded a growth of 28.4% inter-annually, compared to a 22.6% inter-annual growth in 2017. In turn, primary expenditures increased by 22.4%, slightly above the 21.8% level of 2017. Thus, the Argentine public sector achieved a primary deficit of Ps.338,987 million, equivalent to 2.4% of GDP, reflecting an improvement as compared to 2017 (3.8%), amounting to Ps.404,142 million. After interest payments for Ps.388,940 million, the financial deficit amounted to Ps.727,927 million, or equal to 5.1% of GDP.

Regarding the external sector, during 2018 the Foreign Exchange Balance Current Account published by the Argentine Central Bank (on a cash basis) reached a US$11,329 million deficit, a reduction as compared to US$17,052 million in 2017. The current account deficit, measured in terms of the INDEC’s official GDP, stood at about 2.1%, reflecting an improvement as compared to 2017. According to the Central Bank, this improvements resulted from a higher net income from assets (US$8,323 in 2018, as compared to US$4,028 million in 2017) and lower net expenses from services (US$9,460 in 2018, as compared to US$10,847 million in 2017). Exports amounted to US$50,998 million for the year ended December 31, 2018, a 13% decrease as compared to the year ended December 31, 2017. Meanwhile, payments for imported goods amounted to US$42,675 million for the year ended December 31, 2018, a decrease of 21.8% as compared to the year ended December 31, 2017.

The non-financial private sector capital account recorded a net foreign currency outflow of US$29,015 million, as compared to a net foreign currency outflow of US$4,617 million in 2017. The Central Bank’s international currency reserves amounted to US$65,806 million as of December 28, 2018, an increase of US$10,751 million as compared to December 31, 2017.

The Argentine Financial System

Total loans to the private sector in the financial system amounted to Ps.2,133,175 million as of December 31, 2018, a 32.8 % increase as compared to December 31, 2017. Mortgage loans had the most significant increase, amounting to Ps.224,409 million as of December 31, 2018, a 67.7% increase compared to the same date of the previous year. Commercial loans, comprised by overdrafts for checking account and notes (promissory notes and purchased/discounted notes), increased 36.5% in 2018 as compared to 2017, amounting to Ps.872,220 million as of December 31, 2018. Consumer credit lines comprised of loans through credit cards and personal loans, increased 23.8% in 2018 as compared to 2017, amounting to Ps.812,340 million as of December 31, 2018.

Total deposits in the financial system increased 66.1 % in 2018 as compared to 2017, amounting to Ps.4,028,100 million as of December 31, 2018, Deposits from the non-financial private sector increased 61.1% in 2018 as compared to 2017, amounting to Ps.3,137,477 million, while deposits from the public sector increased 87.3% in 2018 as compared to 2017, amounting to Ps.854,675 million as of December 31, 2018. Within deposits from the private sector, transactional deposits increased 52.6 % in 2018 as compared to 2017, amounting to Ps.1,776,615 million, while time deposits increased 77.2 % in 2018 as compared to 2017, amounting to Ps.1,276,823 million.

The average interest rate paid by private banks as of December 2018 for time deposits in Pesos of 30 to 35 days was 48.6%, an inter-annual increase of 25.4% as compared to December 2017. In the case of lending rates, the

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average interest rate applicable to checking account overdrafts was 70.8 %, an increase of 36.7% as compared to December 2017.

Including data as of December 2018, financial institutions increased their liquidity levels (in relation to total deposits) as compared to the same period of 2017, a ratio that stood at 56%, an increase of 14% inter-annually.

The net worth of the Argentine financial system increased by Ps.184,807 million during 2018, amounting to Ps.575,138, an increase of 47.3% in 2018 as compared to 2017. As of December 2018, the Argentine financial system’s profitability was equal to 3.8% of total assets, an increase of 0.8% in 2018 as compared to 2017, while return on shareholders’ equity amounted to 34.1%, an increase of 8.3% in 2018 as compared to 2017.

As of December 2018, income from interest and income from services amounted to 10.8% and 2.2% of total assets, respectively. In 2018, administrative expenses decreased to 6.3 % of total assets (a 83 bps decrease as compared to the same period in 2017), while provisions for loan losses amounted to 1.3 % (a 28 bps increase as compared to the same period in 2017).

The non-accrual loan portfolio to the non-financial private sector reached 2.9% in December 2018, a 117 bps increase as compared to December 2017.The coverage of the private sector non-accrual loan portfolio with allowances reached 122%, a 29% decrease as compared to December 2017.

As of December 31, 2018, the financial system was comprised of 78 financial institutions: 63 banks, 50 of which were private (34 domestically-owned and 16 foreign-owned) and 13 government-owned banks, in addition to 15 non-banking financial institutions.

The concentration of the financial system, measured by the market share of private sector deposits of the ten leading banks, reached 78.8% as of December 31, 2018, 1.5 bps higher than the percentage recorded as of December 31, 2017.

Based on information as of September 30, 2018, the Argentine financial sector employed 108,737 people, a 1.3% decrease as compared to September 30, 2017.

The Argentine Insurance Industry

According to the information published by the Superintencia de Seguros de la Nación, the insurance industry continued to grow throughout 2018. The total gross premiums in respect of property, life, and retirement insurance for such period was equal to Ps.391,719 million, an increase of 30% as compared to 2017.

During 2018, the automotive and workers’ compensation insurance sectors were affected by high inflation and an increase in the filing of claims for compensation. Although inflation is not decreasing as expected, financial income is expected to cover any increased costs as a result of the foregoing.

Home, life and personal accident insurance policies increased by 39% year-over-year. It is expected that this segment will continue to increase as the Argentine economy stabilizes. During this period, Galicia Seguros has maintained positive financial results. As of December 31, 2018, Galicia Seguros reported a net income equal to Ps.535 million, comprised of insurance premiums and surcharges (related to both direct insurance and reinsurance).

Inflation

Historically, inflation in Argentina has played a significant role in influencing, often negatively, the economic conditions in Argentina and, in turn, the operations and financial results of companies operating in Argentina, such as Grupo Financiero Galicia.

In fiscal year 2015, due to changes in the authorities at the Institute of Statistics, the Wholesale Price Index and CPI series were discontinued beginning in October 2015. The Wholesale Price Index was republished beginning January 2016. A new CPI series was launched in May 2016, but did not contain historical information.

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The chart below presents a comparison of inflation rates published by INDEC, measured by the Whole Price Index and the CPI, for the fiscal years 2018, 2017 and 2016. In 2016, annual variation of the CPI was calculated using the CPI of the City of Buenos Aires, an alternative measure of inflation proposed by INDEC after it discontinued its index.

In addition, the chart below presents the evolution of the CER and UVA indexes, published by the Argentine Central Bank and used to adjust the principal of certain of our assets and liabilities for the specified periods.

In 2018, the CPI published by INDEC reflected a 47.65% increase, while the CER and UVA indexes went up 47.16% and 46.86% during the same period, respectively.

In the first two months of 2019, the CPI published by INDEC reflected a 6.8% increase, while the CER and UVA indexes increased by 5.6% during the same period.

Currency Composition of Our Balance Sheet

The following table sets forth our assets and liabilities denominated in foreign currency, in Pesos and adjustable by the CER/UVA, as of the dates indicated.

Funding of Banco Galicia’s long position in CER/UVA-adjusted assets through Peso-denominated liabilities bearing a market interest rate (and no principal adjustment linked to inflation) exposes Banco Galicia to differential fluctuations in the inflation rate and in market interest rates, with a significant increase in market interest rates vis-à-vis the inflation rate (which is reflected in the CER/UVA variation), which has a negative impact on our gross brokerage margin.

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Two other currencies have been defined apart from the Argentine Peso: assets and liabilities adjusted by CER/UVA and foreign currency. Banco Galicia’s policy in force establishes limits in terms of maximum “net asset positions” (assets denominated in a currency which are higher than the liabilities denominated in such currency) and “net liability positions” (assets denominated in a currency which are lower than the liabilities denominated in such currency) for mismatches in foreign currency, as a proportion of Banco Galicia’s RPC, on a consolidated basis.

An adequate balance between assets and liabilities denominated in foreign currency characterizes the management strategy for this risk factor, seeking to achieve full coverage of long-term asset-liability mismatches and allowing a short-term mismatch management margin that contributes to the possibility of improving certain market situations. Short- and long-term goals are attained by appropriately managing assets and liabilities and by using the financial products available in our market, particularly “dollar futures” both in institutionalized markets (MAE and ROFEX) and in forward transactions performed with customers.

Transactions in foreign currency futures (specifically, Dollar futures) are subject to limits that take into consideration the particular characteristics of each trading environment.

 

Results of Operations for the Fiscal Years Ended December 31, 2018 and December 31, 2017

We discuss below our results of operations for the fiscal year ended December 31, 2018 as compared with our results of operations for the fiscal year ended December 31, 2017.

Consolidated Income Statement

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Net loss for the fiscal year ended December 31, 2018 was equal to Ps.3,830 million, as compared to net income equal to Ps.7,278 million for the fiscal year ended December 31, 2017, a Ps.11,108 million, or 153% decrease. Such decrease was primarily attributable to:

Such changes were partially offset by:

Net earnings per share for the fiscal year ended December 31, 2018 was equal to a Ps.2.43 per share loss, as compared to a Ps.4.76 per share gain for the fiscal year ended December 31, 2017.

The return on average assets and the return on average shareholders’ equity for the fiscal year ended December 31, 2018 was equal to a 0.61% and 5.76% loss, respectively, as compared to a 1.39% and 10.53% gain, respectively, for the fiscal year ended December 31, 2017.

The decrease in net loss for the year ended December 31, 2018 was mainly the result of a 165% increase in loss on net monetary position attributable to higher inflation levels and a 123% increase in loan and other receivables loss provisions attributable to an increase in loans in default. This decrease was partially offset by an increase in net operating income, which amounted to Ps.73,094 million for the fiscal year ended December 31, 2018, a 6% increase as compared to the fiscal year ended December 31, 2017 This increase was primarily due to an increase in our net results from financial instruments equal to Ps.8,892 million in 2018 as compared to 2017, a 105% increase.

Interest-Earning Assets

The following table shows our yields on interest-earning assets:

The average of interest-earning assets increased Ps.48,501 million, from Ps.322,234 million for the fiscal year ended December 31, 2017 to Ps.370,735 million for the fiscal year ended December 31, 2018, representing a 15% increase. Of this increase, Ps.37,531 million was due to an increase in the average size of the loan portfolio. The average yield on interest-earning assets was 25.04% in 2018, as compared to 18.69% in 2017, a 635 bps

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increase, that was primarily attributable to an increase in the average interest rate earned on government securities and an increase in the average interest rate earned on outstanding loans.

Interest-Bearing Liabilities

The following table shows our yields on cost of funds:

The average interest-bearing liabilities for the fiscal year ended December 31, 2018 were equal to Ps.308,724 million, as compared to Ps.239,137 million for the fiscal year ended December 31, 2017, an increase of 29% as compared to 2017. Such increase was primarily attributable to a Ps.50,646 million increase in total interest-bearing deposits (savings accounts and time deposits), which increased to Ps.250,735 million as of the fiscal year ended December 31, 2018 from Ps.200,089 million as of the fiscal year ended December 31, 2017, and a Ps.12,095 million increase in the average balance of other interest-bearing liabilities, which increased to Ps.23,159 million as of the fiscal year ended December 31, 2018 from Ps.11,064 million as of the fiscal year ended December 31, 2017.

Interest Income

Our consolidated interest income was composed of the following:

Interest income for the fiscal year ended December 31, 2018 was Ps.78,274 million, as compared to Ps.54,694 million for the fiscal year ended December 31, 2017, a 43% increase. Such increase was the result of a higher average volume of interest-earning assets and higher average interest rates charged thereon.

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The average amount of loans for the fiscal year ended December 31, 2018 was equal to Ps.301,653 million, a 14% increase as compared to the Ps.264,122 million for the fiscal year ended December 31, 2017. This increase was primarily attributable to the increase in overdraft, mortgage and credit card loans extended as part of the portfolio.

The average interest rate on total loans was 24.62% for the fiscal year ended December 31, 2018, as compared to 19.25% for the fiscal year ended December 31, 2017.

The average interest rate on Peso-denominated loans to the private sector was 32.59% for the fiscal year ended December 31, 2018, as compared to an average interest rate of 23.40% for the fiscal year ended December 31, 2017, representing a 919 bps increase year-over-year.

Interest income from banking activity amounted to Ps.62,718 million, a 55% increase as compared to the Ps.40,517 million recorded in the fiscal year ended December 31, 2017. This increase is primarily attributable to increased interest due on loans and other financing from the non-financial private sector. The principal variations were in interest income on overdraft accounts and mortgages.

According to Argentine Central Bank information, as of December 31, 2018, Banco Galicia’s estimated market share of loans to the private sector was 10.51% as of December 31, 2018, as compared to 9.65% as of December 31, 2017.

The following table indicates Banco Galicia market share in the segments listed below:

Interest income related to Regional Credit Cards amounted to Ps.15,140 million for the year ended December 31, 2018, an 11% increase as compared to the Ps.13,579 million recorded for the fiscal year ended December 31, 2017. This increase was primarily the result of additional interest earned on the outstanding balances on issued credit cards.

Interest income related to insurance activity amounted to Ps.423 million for the year ended December 31, 2018, a 1% decrease as compared to the Ps.428 million recorded for the fiscal year ended December 31, 2017.

Interest Expenses

Our consolidated interest expenses were comprised of the following:

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Interest expenses for the fiscal year ended December 31, 2018 were equal to Ps.44,910 million, as compared to Ps.24,820 million for the fiscal year ended December 31, 2017, representing a 81% increase. Such increase was primarily attributable to a 29% increase in the average balance of interest-bearing liabilities.

Interest expenses from deposits amounted Ps.32,708 million for the fiscal year ended December 31, 2018, as compared to Ps.17,514 million for the fiscal year ended December 31, 2017, an 87% increase. This increase was primarily due to increased interest expenses related to time deposits and investments, which was equal to Ps.28,706 million for the fiscal year ended December 31, 2018, representing a 71% increase as compared to Ps.16,758 million for the fiscal year ended December 31, 2017.

With respect to the total average interest-bearing deposits for the fiscal year ended December 31, 2018, Ps.135,427 million were Peso-denominated deposits and Ps.115,308 million were foreign currency-denominated deposits, as compared to Ps.130,690 million and Ps.69,399 million, respectively, for the fiscal year ended December 31, 2017. Average deposits recorded an increase of 25%, with an increase of 23% in savings account deposits and a 27% increase in time deposits.

Out of total interest-bearing time deposits (savings accounts and time deposits) for the fiscal year ended December 31, 2018, the average interest rate of time deposits was 11.19%, as compared to 8.07% for the fiscal year ended December 31, 2017, a 312 bps increase.

Peso-denominated deposits (savings accounts and time deposits) for the fiscal year ended December 31, 2018 accrued interest at an average rate of 20.53%, as compared to an average rate of 12.28% for the fiscal year ended December 31, 2017, a 825 bps increase. The rate of foreign currency-denominated deposits for the fiscal year ended December 31, 2018 was 0.22%, as compared to 0.12% for the fiscal year ended December 31, 2017, a 10 bps increase.

Interest expenses related to banking activity amounted Ps.39,102 million for the fiscal year ended December 31, 2018, as compared to Ps.20,792 million for the fiscal year ended December 31, 2017, representing a 88% increase. Such increase was primarily the result of a higher volume of deposits on which the Bank paid interest.

Using Argentine Central Bank information and considering only deposits from the private-sector deposits in checking and savings accounts and time deposits, Banco Galicia’s estimated Argentine deposit market share increased from 10.20% as of December 31, 2017 to 11.08% as of December 31, 2018.

The following table indicates Banco Galicia´s market share in the segments listed below:

Interest expenses related to Regional Credit Cards amounted Ps.5,962 million for the fiscal year ended December 31, 2018, as compared to Ps.4,028 million for the fiscal year ended December 31, 2017, representing a 48% increase. This increase was primarily the result of an increase in interest expenses on debt securities issued by Tarjetas Regionales or its subsidiaries.

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Net Fee Income

Our consolidated net fee income consisted of:

Our net fee income for the fiscal year ended December 31, 2018 was equal to Ps.20,238 million, as compared to Ps.22,146 million for the fiscal year ended December 31, 2017, a 9% decrease. This decrease was mainly due to a 19% decrease of fees related to credit cards.

Income from credit and debit card transactions, for the fiscal year ended December 31, 2018 was Ps.13,374 million, as compared to Ps.16,578 million for the fiscal year ended December 31, 2017, a 19% decrease. Such decrease was mainly attributable to an increase in costs associated with the maintenance of issued credit cards as a result of a decrease in credit card fees and stagnant consumer consumption as a result of the inflationary Argentine economy. The total number of credit cards for the fiscal year ended December 31, 2018 was 13,915,580, as compared to 13,894,319 as of December 31, 2017, a 0.15% increase.

The most significant increase in fees was to those related to foreign trade operations. Fees from foreign trade for the fiscal year ended December 31, 2018 were equal to Ps.2,362 million, as compared to Ps.1,584 million for the fiscal year ended December 31, 2017, a 49% increase.

Fees related to the maintenance of deposit accounts for the fiscal year ended December 31, 2018 were equal to Ps.2,874, as compared to Ps.2,705 million for the fiscal year ended December 31, 2017, a 6% increase. This increase was due to increase in the number of deposit accounts under management. Total deposit accounts for the fiscal year ended December 31, 2018 were 4.8million, as compared to 4.2 million for the fiscal year ended December 31, 2017, a 12% increase.

Total fee expenses for the fiscal year ended December 31, 2018 were equal to Ps.3,026 million, as compared to Ps.3,253 million for the fiscal year ended December 31, 2017, a 7% decrease. Such decrease was mainly attributable to a decrease in expenses related to credit and debit card transactions.

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The following table sets forth the number of credit cards outstanding as of the dates indicated:

Net fee income related to banking activity for the fiscal year ended December 31, 2018 was equal to Ps.12,476 million, as compared to Ps.12,163 million for fiscal year ended December 31, 2017, a 3% increase.

The main components of net fee income are fees related to foreign trade and mutual funds. The fees related to foreign trade for the fiscal year ended December 31, 2018 amounted Ps.2,362 million, as compared to Ps.1,584 million for the fiscal year ended December 31, 2017, a 49% increase. The fees related to mutual funds for the fiscal year ended December 31, 2018 amounted to Ps.402 million as compared to Ps.188 million for the fiscal year ended December 31, 2017, a 114% increase.

Fees related to deposit accounts and credit and debit card transactions were stable. With respect to revenue generated by credit and debit card transactions for the fiscal year ended December 31, 2018 was equal to Ps.5,299 million, as compared to Ps.6,496 million for the fiscal year ended December 31, 2017, a 18% decrease. For the fiscal year ended December 31, 2018, fees related to deposit accounts were equal to Ps.2,874 million, as compared to Ps.2,705 million for the fiscal year ended December 31, 2017, a 6% increase.

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Net fee income related to Regional Credit Cards for the fiscal year ended December 31, 2018 amounted to Ps.8,930 million, as compared to Ps.10,028 million for the fiscal year ended December,31 2017, an 11% decrease. This decrease was primarily the result of decrease in consumption by credit card users and a decrease in the number of credit cards issued due to the merger with Tarjeta Nevada.

Net Income from Financial Instruments

Our consolidated net income from financial instruments was comprised of:

Our net income from financial instruments for the fiscal year ended December 31, 2018 was equal to Ps.17,353 million, as compared to Ps.8,461 million for the fiscal year ended December 31, 2017, a 105% increase.

The average position in government securities for the fiscal year ended December 31, 2018 was Ps.52,704 million, as compared to Ps.41,240 million for the fiscal year ended December 31, 2017, a 28% increase. This increase was primarily attributable to an increase of Ps.9,172 million in the average position in Peso-denominated government securities and of Ps.2,292 million in the average position in foreign currency-denominated government securities.  

The average position in Peso-denominated government securities for the fiscal year ended December 31, 2018 was Ps.45,045 million, as compared to Ps.35,872 million for the fiscal year ended December 31, 2017, a 26% increase. This increase was primarily attributable to higher balances of securities issued by the Argentine Central Bank (Leliqs).The average position in foreign currency-denominated government securities for the fiscal year ended December 31, 2018 was Ps.7,659 million, as compared to Ps.5,367 million for the fiscal year ended December 31, 2017, a 43% increase.

The average yield on government securities for the fiscal year ended December 31, 2018 was 28.77%, as compared to 14.74% for fiscal year ended December 31, 2017. This increase was primarily attributable to a higher average yield with respect to Peso-denominated government securities.

The average interest rate on Peso-denominated government securities for the fiscal year ended December 31, 2018 was 33.21%, as compared to 16.24% for the fiscal year ended December 31, 2017.This increase, was primarily attributable to higher interest rates on securities (Leliqs) issued by the Argentine Central Bank. The average interest rate of foreign currency-denominated government securities for the fiscal year ended December 31, 2017 was 2.65%, as compared to 4.68% for fiscal year ended December 31, 2017. This decrease was primarily attributable to changes in the investment portfolio.

These variations were mainly a result of net income from financial instruments related to Banco Galicia, which represents 92% of our total consolidated financial instruments. Banco Galicia’s net income from financial instruments for the fiscal year ended December 31, 2018 amounted Ps.16,048 million, as compared to Ps.6,726 million for the fiscal year ended December 31, 2017, a 139% increase. This increase was primarily attributable to an increase in income from government securities.

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Gold and Foreign Currency Quotation Differences

Gold and foreign currency quotation differences for the fiscal year ended December 31, 2018 were equal to Ps.3,777 million, as compared to Ps.3,479 million for the fiscal year ended December 31, 2017, a 9% increase. This increase was primarily the result of an increase in foreign currency brokerage at Banco Galicia for the fiscal year ended December 31, 2018 equal to Ps.5,989 million, as compared to Ps.2,943 million of the fiscal year ended December 31, 2017, a 103% increase.

Other Operating Income

The following table sets forth the various components of other operating income.

Other operating income for the fiscal year ended December 31, 2018 was equal to Ps.11,793 million, as compared to Ps.8,997 million for the fiscal year ended December 31, 2017, a 31% increase. This increase was mainly the result of a increase in income from other fees for the fiscal year ended December 31, 2018, which was equal to Ps.4,082 million, as compared to Ps.3,177 million for the fiscal year ended December 31, 2017.

Other operating income related to banking activity was equal to Ps.7,183 million, as compared to Ps.5,082 million for the fiscal year ended December 31, 2017, a 41% increase.

Other operating income related to Regional Credit Cards for the fiscal year ended December 31, 2018 was equal to Ps.3,682 million, as compared to Ps.4,058 million for the fiscal year ended December 31, 2017, a 9% decrease.

Other operating income related to insurance activity for the fiscal year ended December 31, 2018 was equal to Ps.164 million, as compared to Ps.73 millon for the fiscal year ended December 31, 2017, a 125% increase.

Income from Insurance Activities

The following table shows the results generated by insurance activities:

Income from insurance activities (excluding administrative expenses and taxes, net of eliminations related to related-party transactions) for the fiscal year ended December 31, 2018 was equal to Ps.2,869 million, as compared to Ps.3,315 million for the fiscal year ended December 31, 2017, a 13% decrease. This decrease was

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mainly due to the decrease in the volume of earned premiums and surcharges, but was partially offset by a decrease in the number of insurance claims filed.

Loan and Other Receivables Loss Provisions

Loan and other receivables loss provisions for the fiscal year ended December 31, 2018 were equal to Ps.16,300 million, as compared to Ps.7,294 million for the fiscal year ended December 31, 2017, a 123% increase. This increase was primarily attributable to an increase in the amount of consumer loans in arrears and an increase in costs associated with compliance on current loans as a consequence of the increase in the size of the credit portfolio.

Loan and other receivables loss provisions related to banking activity were equal to Ps.10,873 million, as compared to Ps.3,899 million for the fiscal year ended December 31, 2017, a 179% increase. This increase was related to an increase in the loans in default and an increase in costs associated with compliance on current loans as a consequence of the increase in the size of the credit portfolio.

Loan and other receivables loss provisions related to Regional Credit Cards for the fiscal year ended December 31, 2018 were equal to Ps.5,349 million, as compared to Ps.3,273 million for the fiscal year ended December 31, 2017, a 63% increase. This increase was related to an increase in the loans in default and an increase in costs associated with compliance on current loans as a consequence of the increase in the size of the credit portfolio.

Personnel Expenses

Personnel expenses for the fiscal year ended December 31, 2018 were equal to Ps.17,026 million, as compared to Ps.17,089 million fo the fiscal year ended December 31, 2017, a Ps.63 million decrease. This decrease was primarily attributable to an agreement with labor unions to index employee salaries for inflation with the objective of maintaining wages in line with inflation.

Personnel expenses related to banking activity for the fiscal year ended December 31, 2018 were equal to Ps.11,544 million, as compared to Ps.11,356 million of the fiscal year ended December 31, 2017, a 2% increase.

Personnel expenses related to Regional Credit Cards for the fiscal year ended December 31, 2018 were equal to Ps.4,791 million, as compared to Ps.5,011 million for the fiscal year ended December 31, 2017, a 4% decrease. This decrease was primarily attributable to the reorganization as a result of the merger with Tarjeta Nevada.

Personnel expenses related to insurance activity for the fiscal year ended December 31, 2018 were equal to Ps.575 million, as compared to Ps.552 million for the fiscal year ended Decemeber 31, 2017, a 4% increase.

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Administrative Expenses

The following table sets forth the components of our consolidated administrative expenses:

 

Administrative expenses for the fiscal year ended December 31, 2018 were equal to Ps.16,079 million, as compared to Ps.14,424 million for the fiscal year ended December 31, 2017, an 11% increase.

Fees and compensation for services for the fiscal year ended December 31, 2018 were equal to Ps.1,217 million, as compared to Ps.519 million for the fiscal year ended December 31, 2017, a 134% increase. Our remaining administrative expenses remained stable year-over-year.

Administrative expenses related to banking activity for the fiscal year ended December 31, 2018 were equal to Ps.10,466 million, as compared to Ps.9,287 million for the fiscal year ended December 31, 2017, a 13% increase.

Administrative expenses related to Regional Credit Cards for the fiscal year ended December 31, 2018 were equal to Ps.4,955 million, as compared to Ps.4,516 million for the fiscal year ended December 31, 2017, a 10% increase. This increase was primarily attributable to an increase in costs related to different services rendered.

Administrative expenses related to insurance activity for the fiscal year ended December 31, 2018 were equal to Ps.409 million, as compared to Ps.450 million for the fiscal year ended December 31, 2017, a 9% decrease.

Depreciation and Impairment of Assets

Depreciation and impairment of assets for the fiscal year ended December 31, 2018 was equal to Ps.1,652 million, as compared to Ps.1,439 million for the fiscal year ended December 31, 2017, a 15% increase. This increase was primarily attributable to an increase in the depreciation of property, plants and equipment equal to Ps.1,116 million for the fiscal year ended December 31, 2018, as compared to Ps.1,040 million for the fiscal year ended December 31, 2017.

Depreciation and impairment of assets related to banking activity for the fiscal year ended December 31, 2018 was equal to Ps.1,019 million, as compared to Ps.918 million for the fiscal year December 31, 2017, a 11% increase.

Depreciation and impairment of assets related to Regional Credit Cards for the fiscal year ended December 31, 2018 was equal to Ps.533 million, as compared to Ps.460 million for the fiscal year ended December 31, 2017, a 16% increase.

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Depreciation and impairment of assets related to insurance activity for the fiscal year ended December 31, 2018 was equal to Ps.91 million, as compared to Ps.48 million for the fiscal year ended December 31, 2017, a 98% increase.

Other Operating Expenses

 

 

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Other operating expenses for the fiscal year ended December 31, 2018 were equal to Ps.16,899 million, as compared to Ps.14,605 million of the fiscal year ended December 31, 2017, a 16% increase. This increase was primarily attributable to a 24% increase in turnover tax.

Other operating expenses related to banking activity for the fiscal year ended December 31, 2018 were equal to Ps.12,824 million, as compared to Ps.10,507 million of the fiscal year ended December 31, 2017, a 22% increase.

Other operating expenses related to Regional Credit Cards for the fiscal year ended December 31, 2018 were equal to Ps.4,005 million, as compared to Ps.4,020 million of the fiscal year ended December 31, 2017, a 0.4% decrease.

Loss on Net Monetary Position

Loss on net monetary position for the fiscal year ended December 31, 2018 was equal to Ps.18,064 million, as compared to Ps.6,823 million of the fiscal year ended December 31, 2017, a 165% increase.

Loss on net monetary position related to banking activity for the fiscal year ended December 31, 2018 was equal to Ps.11,205 million, as compared to Ps.2,629 million of the fiscal year ended December 31, 2017, a 326% increase.

Loss on net monetary position related to Regional Credit Cards for the fiscal year ended December 31, 2018 was equal to Ps.3,845 million, as compared to Ps.2,140 million of the fiscal year ended December 31, 2017, a 80% increase.

Loss on net monetary position related to insurance activity for the fiscal year ended December 31, 2018 was equal to Ps.561 million, as compared to Ps.346 million of the fiscal year ended December 31, 2017, a 62% increase.

 

Profits from Joint Ventures

Grupo Galicia did not recognize any income in connection with profits from joint ventures as result of the sale of Nova Re Compañia Argentina de Reaseguros S.A. (sold in September 2017) and the reclassification of results from Prisma Medios de Pago S.A. to other operating income.

Income Tax from Continuing Operations

Income tax from continuing operations for the fiscal year ended December 31, 2018 was equal to Ps.6,913 million, as compared to Ps.7,319 million for the fiscal year ended December 31, 2017, a 6% increase.

Income tax from continuing operations related to banking activity for the fiscal year ended December 31, 2018 was equal to Ps.6,637 million, as compared to Ps.4,478 million for the fiscal year ended December 31, 2017, a 48% increase.

Income tax from continuing operations related to Regional Credit Cards for the fiscal year ended December 31, 2018 was equal to Ps.1,286 million, as compared to Ps.2,721 million for the fiscal year ended December 31, 2017, a 53% decrease.

Income tax from continuing operations related to insurance activity for the fiscal year ended December 31, 2018 was equal to Ps.310 million, as compared to Ps.411 million for the fiscal year ended December 31, 2017, a 25% decrease.

 

 

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Net Loss from Discontinued Operations

Net loss from discontinued operations for the fiscal year ended December 31, 2018 was equal to Ps.291 million, as compared to Ps.322 million for the fiscal year ended December 31, 2017, a 10% decrease.

Net Loss

Based on the above our net loss for the fiscal year ended December 31, 2018 was equal to Ps.3,830 million, as compared to net income equal to Ps.7,278 million for the year ended December 31, 2017, a 153% decrease in net income.

Consolidated Assets

The main components of our consolidated assets as of the dates indicated below were as follows:

 

 

Of our Ps.569,692 million total assets as of December 31, 2018, Ps.511,338 million, or 91%, corresponded to Banco Galicia on an individual basis and Ps.52,713 million, or 9% corresponded to Tarjetas Regionales on a consolidated basis. The remaining 1% was primarily attributable to Sudamericana on a consolidated basis. The composition of our assets demonstrates an increase in the amounts of all line items.

The item “Cash and Due from Banks” included cash for Ps.143,309 million, balances held at the Argentine Central Bank for Ps.119,191 million and balances held in correspondent banks for Ps.2,929 million. The balance held at the Argentine Central Bank is used for meeting the minimum cash requirements set by the Argentine Central Bank.

Our holdings of debt securities as of December 31, 2018 was Ps.75,935 million. Our holdings of government and private securities are shown in more detail in Item 4. “Information on the Company”—B. “Operating Overview”─ “Selected Statistical Information”— “Debt and Equity Securities”.

Our total net loans and other financing were Ps.282,710 million as of December 31, 2018, of which Ps.243,232 million corresponded to Banco Galicia’portfolio and Ps.44,051 corresponded to Regional Credit Card Companies’ portfolios, the remaining amount to secured loans held by Sudamericana. For more information on loan and other financing activities portfolios, see Item 4. “Information on the Company”—B. “Operating Overview”─ “Selected Statistical Information”— “Loan and Other Financing Portfolio”.

 

Exposure to the Argentine Public Sector

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The following table shows our total net exposure, primarily related to Banco Galicia, to the Argentine public sector as of December 31, 2018 and 2017 and as of January 1, 2017.

 

 

As of December 31, 2018, the exposure to the public sector amounted to Ps.84,060 million, an increase of 97% as compared to Ps.42,737million for the year ended December 31, 2017. Excluding the debt securities issued by the Argentine Central Bank, the Bank’s exposure amounted to Ps.13,849 million equal to 2% of total assets.

Funding

Banco Galicia’s and the Regional Credit Card Companies’ lending activities are our main asset-generating businesses. Accordingly, most of our borrowing and liquidity needs are associated with these activities. We also have liquidity needs at the level of our holding company, which are discussed in Item 5. “Operating and Financial Review and Prospects”—B. “Liquidity and Capital Resources”—“Liquidity-Holding Company on an Individual Basis”. Our objective is to maintain cost-effective and well diversified funding to support current and future asset growth in our businesses. For this, we rely on diverse sources of funding. The use and availability of funding sources depends on market conditions, both local and foreign, and prevailing interest rates. Market conditions in Argentina include a structurally limited availability of domestic long-term funding.

Our funding activities and liquidity planning are integrated into our asset and liability management and our financial risks management and policies. The liquidity policy of Grupo Financiero Galicia is described in Item 5. “Operating and Financial Review and Prospects”—B. “Liquidity and Capital Resources”—“Liquidity Management” and our other financial risk policies, including interest rate, currency and market risks are described in Item 11. “Quantitative and Qualitative Disclosures about Market Risk”. Our funding sources are discussed below.

Traditionally, our primary source of funding has been Banco Galicia’s deposit taking activity. Although Banco Galicia has access to Argentine Central Bank financing, management does not view this as a primary source of funding in line with our overall strategies discussed herein. Other important sources of funding have traditionally included issuing foreign currency-denominated medium and long-term debt securities issued in foreign capital markets and borrowing from international banks and multilateral credit agencies. Banco Galicia entered into a master loan agreements with the IFC in 2016, for US$130 million, divided into two parts, one of them with the purpose of funding long-term loans to SMEs and the other part with the purpose of funding renewable energy project and efficiency energy power project. Aditionally, Banco Galicia entered into master bond agreements with the IFC for US$100 million in order to expand its loan program for environmental efficiency projetcs.

Selling government securities under repurchase agreement transactions has been a recurrent source of funding for Banco Galicia. Although not presently a key source of funding, repurchase agreement transactions are part of the liquidity policy of the Bank. Within its liquidity policy, Banco Galicia considers its unencumbered liquid government securities holdings as part of its available excess liquidity. See Item 5. “Operating and Financial Review and Prospects” —B. “Liquidity and Capital Resources”—“Liquidity Management”.

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The Regional Credit Card Companies fund their business through the issuance of notes in the local and international capital markets, borrowing from local financial institutions and debt with merchants generated in the ordinary course of business of any credit card issuing company. In 2018, the Regional Credit Card Companies issued notes in an amount equal to US$1,000 million.

Below is a breakdown of our funding as of the dates indicated:

 

 

The main sources of funds are deposits from the private sector, lines of credit extended by local banks and entities, international banks and multilateral credit agencies, repurchase transactions mainly related to government securities, mid- and long-term debt securities placed in the local and international capital market and debts with stores due to credit card transactions.

As of December 31, 2018, deposits represented 63% of our funding, up from 61% as of December 31, 2017. Our deposit base increased 22% in 2018 as compared to 2017. During fiscal year 2018, the Ps.63,730 million increase in deposits was due to an increase in transactional deposits (deposits in savings accounts and time deposits, with increases of 34% and 20%, respectively). For more information on deposits, see Item 4. “Information on the Company”—B. “Business Overview” — “Selected Statistical Information”—“Deposits”.

As of December 31, 2018, credit lines from international banks and credit agencies amounted to Ps.12,114 million. Of this total, Ps.5,644 million corresponded to prefinancing and foreign trade transactions; Ps.4,591 million corresponded to amounts received from the IFC pursuant to a loan agreement and Ps.1,879 million corresponded to amounts received from the IDB pursuant to a loan agreement.

Our debt securities outstanding (only principal) were Ps.39,752 million as of December 31, 2018, as compared to Ps.27,407 million as of December 31, 2017.

Of the total debt securities outstanding as of December 31, 2018, Ps.26,133 million corresponded to Peso-denominated debt, of which Ps.11,671 million corresponded to notes issued by Banco Galicia and Ps.14,462 million corresponded to notes issued by Tarjeta Naranja (which includes notes issued by Tarjetas Cuyanas). The remaining Ps.13,619 million of outstanding debt securities corresponded to foreign currency-denominated debt in respect of subordinated notes due in 2026 issued by Banco Galicia and the master bond agreement with the IFC.

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As of December 31, 2018, the breakdown of our debt was as follows:

 

 

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For more information see “—Contractual Obligations” below.

Ratings

The following are our ratings as of the date of this annual report:

 

 

Debt Programs

On March 9, 2009, Grupo Financiero Galicia’s shareholders, during an ordinary shareholders’ meeting, and the Board of Directors created a global short‑, medium‑ and long‑term notes program, for a maximum outstanding amount of US$60 million. This program was authorized by the CNV pursuant to Resolution No.16,113 of April 29, 2009.

In August 2012, during an extraordinary shareholders’ meeting, it was decided to ratify the decision made at the ordinary and extraordinary shareholders’ meeting held in April 2010 with regard to the approval of the US$40 million increase in the amount of Grupo Financiero Galicia’s global notes program. Therefore, once approved by the CNV, the amount was for up to US$100 million or its equivalent in other currencies. On May 8, 2014, the CNV, pursuant to Resolution No.17,343, granted an extension of the debt program for another five year period.

On January 30, 2014, Grupo Financiero Galicia issued its Class V notes, in two series, in an aggregate principal amount of Ps.180 million with the following terms and conditions: (i) Ps.102 million of Series I notes, with a variable interest rate equal to the benchmark rate (Badlar) plus 4.25%, with an 18 month maturity and (ii) Ps.78 million of Series II notes, with a variable interest rate equal to the benchmark rate (Badlar) plus 5.25%, with a 36 month maturity. Both series pay interest on a quarterly basis. In addition, certain of the Class V notes were subscribed for with Class III notes for a face value of Ps.20,622,455.

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In October 2014, Grupo Financiero Galicia issued its Class VI notes, in two series, in an aggregate principal amount ofPs.250.0 million with the following terms and conditions: (i) Ps.140.2 million of Series I notes, with a variable interest rate equal to the benchmark rate (Badlar) plus 3.25%, with an 18 month maturity and (ii) Ps.109.8 million of Series II notes, with a variable interest rate equal to the benchmark rate (Badlar) plus 4.25%, with a 36 month maturity. Both series pay interest on a quarterly basis. In addition, certain of the Class VI notes were subscribed with Class IV notes for a face value of Ps.30,997,382.

In July 2015, Grupo Financiero Galicia issued its Class VII notes for an aggregate principal amount of Ps.160 million. Such notes mature on the date that is 24 months after the date of their issuance and accrue interest at a fixed rate equal to 27% from the date of their issuance through the ninth month after their issuance and at a floating rate equal to Badlar plus 4.25% from the 10th month of their issuance through their maturity date. The Class VII notes pay interest on a quarterly basis. The aggregate principal amount of such notes will be repaid upon maturity. On July 31, 2015 Grupo Financiero Galicia cancelled, upon maturity, all of its outstanding Class V Series I notes.

In April 2016, Grupo Financiero Galicia cancelled, upon maturity, all of its outstanding Class VI Series I notes.

On January 31, 2017, Grupo Financiero Galicia cancelled, upon maturity, all of its outstanding Class V, Series II notes.

On July 27, 2017, Grupo Financiero Galicia cancelled, upon maturity, all of its outstanding Class VII notes.

On October 23, 2017, Grupo Financiero Galicia cancelled, upon maturity, all of its outstanding Class VI Series II notes.

Currently, Grupo Financiero Galicia does not have any outstanding debt under its notes program that was put into place in 2009.

Banco Galicia has a program in place for the issuance and re-issuance of non-convertible notes, subordinated or non-subordinated, floating or fixed-rate, secured or unsecured, with a term from 30 days to up to 30 years, for a maximum outstanding principal amount of up to US$342.5 million. This program was originally approved by the CNV on November 4, 2005 and was mostly recently extended on January 26, 2017 by the CNV until January 26, 2022. Pursuant to Resolution No.18,480, the CNV also approved an increase of the maximum outstanding principal amount under the program to US$1,100 million. Pursuant to Resolution No.19,520, dated May 17, 2018, the CNV approved an increase of the maximum outstanding principal amount under the program to US$2,100 million and the modification of the terms and conditions of the same.

During the 2016 fiscal year, Banco Galicia issued certain subordinated Class II notes due 2026 for a nominal value of US$250 million. The proceeds of this issuance were used to redeem the Bank’s outstanding subordinated notes due 2019.

During the 2017 fiscal year, Banco Galicia issued Class III notes in an aggregate principal amount of US$150.5 million due 2020 and Class IV notes in an aggregate principal amount of Ps.2,000 million due 2020.

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During the 2018 fiscal year, Banco Galicia issued Series I Class V notes in an aggregate principal amount of Ps.4,209 million due 2020 and Series II Class V noties in an , aggregate principal amount of Ps.2,032 million due 2020.

Tarjeta Naranja has a Global Short-Term, Medium-Term and Long-Term Note Program for the issuance of up to US$1,000 million (or the equivalent amount in other currencies) that was approved by the CNV on May 10, 2018. Such notes may be unsecured or secured, denominated in Pesos, Dollars or, at Tarjeta Naranja’s option, in other currencies, with maturities of not less than 30 days after their issuance date. Also, they may be offered in separate classes and/or series and may be re issued, as applicable, in the amounts, at the prices and under the conditions to be established and specified in the applicable pricing supplement.  

The program contains certain restrictions on liens, subject to the provisions established in the applicable pricing supplement with respect to each class and/or series of notes, so long as any note issued under such program remains outstanding.

Certain notes issued under Tarjeta Naranja’s program are subject to covenants that limit the ability of Naranja and their subsidiaries, subject to important qualifications and exceptions, to declare or pay any dividend or make any distribution in respect of its capital stock; redeem, repurchase or retire its capital stock; make certain restricted payments; consolidate, merge or transfer assets; and incur any indebtedness, among others.

As a result of the merger with Tarjetas Cuyanas, as of October 1, 2017, Tarjeta Naranja incorporated into its assets Tarjetas Cuyanas’ outstanding debt. Beginning on October 1, 2017, Tarjeta Naranja made principal and interest payments in respect of such debt.  

As of December 31, 2018, Tarjeta Naranja’s total debt issued under both programs was equal to an outstanding principal amount outstanding of Ps.11,805 million (approximately US$365.1 million).

Contractual Obligations

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The table below identifies the total amounts (principal and interest) of our main on balance-sheet contractual obligations, their currency of denomination, remaining maturity and interest rate and the breakdown of payments due as of December 31, 2018.

 

 

Principal and interest. Includes the UVA adjustment, where applicable.

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Off- Balance Sheet Contractual Obligations

Operating Leases

As of December 31, 2018, we also had off-balance sheet contractual obligations arising from the leasing of certain properties used as a part of our distribution network. The estimated future lease payments in connection with these properties are as follows:

 

 

Off-Balance Sheet Arrangements

Our off-balance sheet risks mainly arise from Banco Galicia’s activities. In the normal course of its business and in order to meet customer financing needs, Grupo Galicia is a party to financial instruments with off-balance sheet risk. These instruments expose us to credit risk in addition to loans recognized on our consolidated balance sheets. These financial instruments include commitments to extend credit, standby letters of credit and guarantees.

The same internal regulations and policies apply for commitments to extend credit, standby letters of credit and guarantees. Outstanding commitments and guarantees do not represent an unusually high credit risk for Grupo Galicia.

Commitments to Extend Credit

Commitments to extend credit are agreements to lend to a customer at a future date, subject to meeting certain contractual terms. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent actual future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis.

Guarantees

Guarantees are agreements and/or commitments to reimburse or make payment on account of any losses or non-payments by a borrower in an event of default scenario and include surety guarantees in connection with transactions between two parties.

Stand-By Letters of Credit and Foreign Trade Transactions

Standby letters of credit and guarantees granted are conditional commitments issued by Banco Galicia to guarantee the performance of a customer to a third party. Banco Galicia also provides conditional commitments for foreign trade transactions.

Our exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, guarantees granted and acceptances is represented by the contractual notional amount of those investments.

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Our credit exposure related to these items as of December 31, 2018 is set forth below:

 

As of December31, 2018, the primary fees related to the above-mentioned commitments were as follows.

 

The credit risk of these instruments is similar as the credit risk associated with credit facilities provided to individuals and companies. To provide guarantees to our customers, we may require counter-guarantees, which are classified as follows:

 

In addition, checks to be debited and credited, notes, invoices and miscellaneous items subject to collection are recorded in memorandum accounts until such instruments are approved or accepted.

The risk of loss in these offsetting transactions is not significant.

 

Grupo Galicia acts as trustee pursuant to trust agreements to secure obligations in connection with financing transaction undertaken by its customers. The amount of funds and securities held in trust as of December 31, 2018 is as follows:

 

These funds and securities are not included in Grupo Galicia’s consolidated financial statements as it does not have control over the same. For additional information regarding off-balance sheet financial instruments, see Note 49 to our audited consolidated financial statements.

Principal Trends

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Related to Argentina

In early 2018, Argentina was able to obtain one third of its financing needs for the remainder of the fiscal year after regaining access to the international markets in 2017.

With respect to the foreign exchange market, proceeds from foreign currency-denominated debt issuances represented the main source of foreign currency, until this trend reverted as a result of a highly volatile foreign currency exchange rate. Following the depreciation of the Peso during 2018, the exchange rate is expected to remain stable in real terms throughout 2019. With respect to monetary policy, following a difficult 2018, contractionary trends may continue until the market’s inflationary expectations are brought in line with Argentine Central Bank objectives.

As the financing goals for 2018 set by the Argentine Treasury were surpassed, we expect that during 2019 the Argentine Treasury will continue to focus on gradually stabilizing the Argentine government’s budget balance. Improvements in exports, together with a moderate increase in real salaries, are expected to contribute to an increase in economic growth in Argentina in 2019.

Related to the Financial System

We believe that the Argentine financial system will continue to increase its interaction with the private sector, which is expected to maintain its current capital structure, characterized by a focus on short term credit and high liquidity assets. We do not expect credit to grow in terms of GDP during 2019.

In terms of the financial reputation of the Argentine financial system, it is expected that the net results of the system in 2018 will enable the system overall to meet minimum capitalization requirements set forth in the Basel Committee regulations. Income from holdings, in particular those associated with returns on liquidity, is expected to be a main source of operating income in 2019 and it is also expected that banks will continue to improve their operating efficiency.

Portfolio quality indicators are expected to be influenced by macroeconomic factors, although a solid systemic position is expected to prevail, even as compared to other strong economies in South America.

We believe that the Argentine financial system will continue to demonstrate strong fundamental indicators in 2019. In addition, increases in hedging arrangements and excess capital will be a source strength to the extent loan portfolios in default continue to increase. Low leverage levels as compared to companies and individuals in the region demonstrate the potential for Argentine financial institutions to remain strong despite volatility in inflation and the Peso.

Related to Us

It is expected that the level of activity of all the subsidiaries of Grupo Financiero Galicia will be consistent with the overall expectations for the Argentine economy and the Argentine Financial System. Given that Banco Galicia is the most significant asset of Grupo Financiero Galicia, we refer to the trends related to Banco Galicia.

In 2019, Banco Galicia expects to continue its strategy of providing distinguishing experiences to its clients and offering high-quality products and services to satisfy the needs of each segment of customers, working to increase its volume of financial intermediation activities with the private sector and to improve its recurring operating results, controlling administrative expenses in an effort to improve operational efficiency and maintaining an adequate diversification and risk coverage.

The analysis of these trends should be read in conjunction with the discussion in Item 3. “Key Information”— D. “Risk Factors”, and with consideration that the Argentine economy has been historically volatile, which has negatively affected the volume and growth of the financial system.

 

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B. Liquidity and Capital Resources

Liquidity - Holding Company on an Individual Basis

We generate our net earnings/losses from our operating subsidiaries, specifically Banco Galicia, our main operating subsidiary. Banco Galicia’s dividend-paying ability has been affected since late 2001 by the effects of the 2001-2002 liquidity crisis and its impact on Banco Galicia’s income-generation capacity. In addition, there were other restrictions on Banco Galicia’s ability to pay dividends resulting from applicable Argentine Central Bank rules and the loan agreements entered into by Banco Galicia as part of its foreign debt restructuring. See Item 8. “Financial Information”─A. “Consolidated Statements and Other Financial Information”— “Dividend Policy and Dividends.”

From 2002 to 2010 we did not receive any dividends from Banco Galicia, which is the primary source of funds available to us. On April 27, 2011, during the shareholders’ meeting of Banco Galicia, a distribution of cash dividends for a total amount of Ps.100 million was approved. Since that date, regulations issued by the Argentine Central Bank have affected Banco Galicia´s ability to pay dividends.

On April 25, 2017, Banco Galicia’s shareholders approved the distribution of cash dividends for a total amount of Ps.1,500 million for the year ended December 31, 2018, which is expected to be distributed to shareholders in May 2019.

The extent to which a banking subsidiary may extend credit or otherwise provide funds to a holding company is limited by Argentine Central Bank rules. For a description of these rules, see Item 4. “Information on the Company”─B.”Business Overview”─”Argentine Banking Regulation”─”Lending Limits.”

For the years ended December 31, 2017 and 2016, Grupo Financiero Galicia received dividends in an amount of Ps.431 million (equivalent to Ps.847 million as of December 2018), and Ps.658 million (equivalent to Ps.1,084 million as of December 2018), respectively, from its subsidiaries. For the year ended December 31, 2018, Grupo Financiero Galicia received dividends in an amount of Ps.1,152 million (equivalent to Ps.1,478 million as of December 2018) and, during March 2019, Grupo Financiero Galicia received dividends in an amount of Ps.365 million.

In accordance with Grupo Financiero Galicia’s policy for the distribution of dividends and due to Grupo Financiero Galicia’s financial condition for the year ended December 31, 2018 and the fact that the majority of profits for the years ended December 31, 2018, 2017 and 2016 corresponded to income from holdings (with just a fraction corresponding to the realized and liquid profits meeting the requirements to be distributed as per Section 68 of the Corporations Law), a distribution of cash dividends in an amount of Ps.2,000 million was approved at the April 25, 2019 shareholders’ meeting, which is expected to be paid in May 2019. This amount represents 140.18% with regard to 1,426,764,597 class A and B ordinary shares with a face value of Ps.1 each.

For fiscal year 2016, the shareholders’ meeting held on April 25, 2017 approved the distribution of cash dividends in an amount of Ps.240 million, equivalent to Ps.406 million as of December 2018, which represents a dividend of 18.46% with respect to 1,300,264,597 class A and B ordinary shares of Grupo Financiero Galicia with a face value of Ps.1 each. Similarly, for fiscal year 2017, the shareholders’ meeting held on April 24, 2018 approved the distribution of cash dividends for Ps.1,200 million, equivalent to Ps.1,617 million as of December 2018, which represents a dividend of 84.11% with respect to 1,426,764,597 class A and B ordinary shares of Grupo Financiero Galicia with a face value of Ps.1 each.

Due to Act. No.27,260, Grupo Financiero Galicia neither reimbursed nor withheld any amount for tax purposes on the dividends paid for fiscal year 2016 and 2017. For fiscal year 2018, due to Act. No.27,430, Grupo Financiero Galicia may withhold some amount for tax purposes on the dividends to be distributed.

As of December 31, 2018, Grupo Financiero Galicia, on an individual basis, had cash and amounts due from banks in an amount of Ps.0.2 million and short-term investments made up of special checking account deposits, mutual funds and government securities in an amount of Ps.885 million.

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As of December 31, 2017, Grupo Financiero Galicia, on an individual basis, had cash and due from banks in an amount ofPs.0.4 million and short-term investments made up of special checking account deposits, mutual funds and government securities in an amount of Ps.1,663 million, equivalent to Ps.2,455 million as of December 2018.

As of December 31, 2016, Grupo Financiero Galicia, on an individual basis, had cash and due from banks in an amount of Ps.0.3 million and short-term investments made up of special checking account deposits, mutual funds and government securities in an amount of Ps.166 million, equivalent to Ps.306 million as of December 2018.

For a description of the notes issued by Grupo Financiero Galicia, see —Item 5 “Operating and Financial Review and Prospects”─.A.“Operating Results”─”Funding”─”Debt Programs”.

Each of our subsidiaries is responsible for their own liquidity management. For a discussion of Banco Galicia’s liquidity management, see “Liquidity Management─Banco Galicia (Unconsolidated) Liquidity Management”.

Consolidated Cash Flows

Our consolidated statements of cash flows were prepared in accordance with IAS 7 (Statements of Cash Flows). See our consolidated cash flow statements as of and for the fiscal years ended December 31, 2018 and December 31, 2017, included in this annual report.

As of December 31, 2018, on a consolidated basis, we had Ps.225,868 million in available cash (defined as total cash and cash equivalents), representing a Ps.93,910 million increase as compared to the Ps.131,958 million in available cash as of December 31, 2017.

Cash equivalents are comprised of the following: Argentine Central Bank debt instruments (Nobac and Lebac) having a remaining maturity that does not exceed 90 days, securities in connection with reverse repurchase agreement transactions with the Argentine Central Bank, local interbank loans and overnight placements in correspondent banks abroad. Cash equivalents also comprise, in the case of the Regional Credit Card Companies, time deposit certificates and mutual fund shares.

The table below summarizes the information from our consolidated statements of cash flows for the fiscal years ended December 31, 2018 and 2017.

 

Our operating activities include the operating results, the origination of loans and other financing transactions with the private sector, as well as raising customer deposits and entering into sales of government securities under repurchase agreement transactions. Our investing activities primarily consist of the acquisition of equity investments and purchasing of bank premises and equipment. Our financing activities include issuing bonds in the local and foreign capital markets and borrowing from foreign and local banks and international credit agencies.

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Management believes that cash flows from operations and available cash and cash equivalent balances, will be sufficient to fund our financial commitments and capital expenditures for fiscal year 2019.

Cash Flows from Operating Activities

In fiscal year 2018, net cash generated in operating activities including the inflationary effect amounted to Ps.86,266 million, mainly due to: (i) a Ps.141,704 million net decrease in transactions related to the extension of loans and other financing, especially to the non-financial private sector and residents abroad and related to credit cards, advances and promissory notes, and (ii) a Ps.40,438 million net decrease of debt securities measured at fair value. Such amounts were partially offset mainly due to a Ps.105,618 million related to a decrease in deposits, primarily corresponding to a decrease of deposits from the non-financial private sector and residents abroad.

In fiscal year 2017, net cash used in operating activities including the inflationary effect amounted to Ps.4,187 million, mainly due to: (i) a Ps.7,053 million decrease in deposits, mostly corresponding to a decrease of Ps.5,264 million in deposits from non-financial private sector and residents abroad and (ii) a Ps.10,585 million decrease in transactions related to loans and other financing, mainly related to credit cards, overdraft and promissory

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notes, (iii) a Ps.5,911 million due to the increase of net other non -financial assets provided by operating activities, (iv) a Ps.7,150 million decrease in other financial liabilities related to credit card operations and (v) a Ps.8,776 million decrease in debt securities measured at fair value.

Cash Flows from Investing Activities

In fiscal year 2018, net cash used by investing activities amounted to Ps.2,207 million mainly attributable to the acquisition of property, plants and equipment, intangible assets for Ps.3,688 million. Such amount was partially offset by funds provided by discontinued operations for Ps.1,331 million.

In fiscal year 2017, net cash used by investing activities amounted to Ps.1,643 million mainly attributable to the acquisition of property, plant and equipment, intangible assets and other assets for Ps.3,259 million.

Cash Flows from Financing Activities

In fiscal year 2018, financing activities provided cash in the amount of Ps.10,397 million due to: Ps.6,433 million of collections from international banks and lending entities and Ps.17,507 million from the Argentine Central Bank. Such amounts were partially offset by financing activities which used cash due to: (i) a decrease of Ps.6,127 million as a consequence of the payments of principal and interest on unsubordinated debt securities, partially offset by issuances of notes for approximately Ps.9,088 million during the same period, (ii) a decrease in loans from Argentine financial institutions for Ps.3,905 million and (iii) a net decrease in other fluctuations of Ps.1,617 million corresponding to other financing activities, mainly related to the payment of dividends.

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In fiscal year 2017, financing activities provided cash in the amount of Ps.15,521 million due to: (i) payments of loans from Argentine financial institutions from Ps.3,237 million, (ii) Ps.983 million as a consequence of the increase in foreign credit facilities and (iii) an increase in loans from the Argentine Central Bank for Ps.15,918 million.

Effect of Exchange Rate on Cash and Cash Equivalents

In fiscal year 2018, the effect of the exchange rate on consolidated cash flow amounted to Ps.44,832 million, an increase of Ps.47,621 million as compared to fiscal year 2017. The exchange rate as of December 31, 2018 was Ps.37.8083 per US$1.

In fiscal year 2017, the effect of the exchange rate on consolidated cash flow amounted to Ps.2,789 million. The exchange rate as of December 31, 2017 was Ps.18.7742 per US$1.

For a description of the types of financial interests we use and the maturity profile of our debt, currency and interest rate structure, see Item 5. “Operating and Financial Review and Prospects”— A.“Operating Results”.

 

Liquidity Management

Consolidated Liquidity Gaps

Liquidity risk is the risk that Banco Galicia does not have a sufficient level of liquid assets to meet its contractual commitments and the operational needs of the business without affecting market prices. The goal of liquidity management is to maintain an adequate level of liquid assets that allows it to meet financial commitments at contractual maturity, take advantage of potential investment opportunities and meet demand for credit. To monitor and control liquidity risk, Banco Galicia monitors and systematically calculates gaps in liquidity through the application of an internal model that is subject to periodic review.

Banco Galicia’s liquidity policy covers three areas of liquidity risk:

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As of December 31, 2018, the consolidated gaps between maturities of Grupo Financiero Galicia´s financial assets and liabilities based on contractual remaining maturity were as follows:

 

The table above is prepared taking into account contractual maturity. Therefore, all financial assets and liabilities with no maturity date are included in the “Less than One Year” category.

Banco Galicia (Unconsolidated) Liquidity Management

The following is a discussion of Banco Galicia’s liquidity management, excluding the consolidated companies.

Banco Galicia’s policy is to maintain a level of liquid assets that allows it to meet financial commitments at contractual maturity, take advantage of potential investment opportunities, and meet customer’s credit demand. To set the appropriate level, forecasts are made based on historical experience and on an analysis of possible scenarios. This enables management to project funding needs and alternative funding sources, as well as excess liquidity and placement strategies for such funds. As of December 31, 2018, Banco Galicia’s unconsolidated liquidity structure was as follows:

 

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Legal requirements correspond to the minimum cash requirements for Peso- and foreign currency-denominated assets and liabilities as per the rules and regulations of the Argentine Central Bank.

The assets that can be taken into account for compliance with this requirement are the balances of the Peso- and foreign currency-denominated deposit accounts at the Argentine Central Bank, the liquidity bills and Bote 2020, and the escrow accounts held at the Argentine Central Bank in favor of clearing houses.

Management liquidity, defined as a percentage over deposits and other liabilities, is made up of the following items: balances of checking accounts held by the Argentine Central Bank exceeding minimum cash requirements, Letes, Leliq and placements held by the Argentine Central Bank, overnight placements in banks abroad, net short-term interbank loans (call loans), technical cash and placements at the Argentine Central Bank in excess of the amounts necessary to cover minimum cash requirements.

Capital

Our capital management policy is designed to ensure prudent levels of capital. The following table analyzes our capital resources as of the dates indicated.

For information on our capital adequacy and that of our operating subsidiaries, see Item 4. “Information on the Company”—B.”Business Overview”─”Selected Statistical Information”—“Regulatory Capital”.

Capital Expenditures

In the ordinary course of business, our capital expenditures are mainly related to fixed assets, construction and organizational and IT system development. Generally, our capital expenditures are not significant when compared to our total assets.

For a more detailed description of our capital expenditures in 2018 and our capital commitments for 2019, see Item 4. “Information on the Company”— A. “History and Devolopment of the Company”─”Capital Investments and Divestitures”. For a description of financing of our capital expenditures, see —“Consolidated Cash Flows”.

E. Off-Balance Sheet Arrangements

See Item 5. “Operating and Financial Review and Prospects”─A. “Operating Results”─ “Off-Balance Sheet Arrangements” and“Contractual Obligations”.

F. Contractual Obligations

See Item 5. “Operating and Financial Review and Prospects─A. Operating Results—Contractual Obligations”.

G. Safe Harbor

These matters are discussed under “Forward-Looking Statements.”

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Item 6. Directors, Senior Management and Employees

Our Board of Directors

Our ordinary and extraordinary shareholders’ meeting took place on April 25, 2019. The following table sets out the members of our Board of Directors as of that date (all of whom reside in Buenos Aires, Argentina), the positions they hold within Grupo Financiero Galicia, their dates of birth, their principal occupations and the dates of their appointment and on which their current terms will expire. Terms expire when the annual shareholders’ meeting takes place.

 

The following is a summary of the biographies of the members of our Board of Directors:

Eduardo J. Escasany: Mr. Escasany obtained a degree in economics at the Universidad Católica Argentina. He was associated with Banco Galicia from 1973 to 2002. He was appointed to Banco Galicia’s board of directors in 1975. In 1979, he was elected as the vice chairman and from 1989 to March 21, 2002 he served as the chairman of Banco Galicia’s board of directors and its chief executive officer. He served as the vice chairman of the Argentine Bankers Association from 1989 to 1993 and the chairman of such association from 1993 to 2002. He was chairman of the Board of Directors from April 2002 to June 2002. In April 2005, he was re-elected as member of the Board of Directors and appointed as chairman in 2010. He is also a lifetime trustee and vice chairman of the Fundación Banco de Galicia y Buenos Aires. He is the chairman of Helena Emprendimientos Inmobiliarios S.A. and an alternate director for RPE Distribución S.A. and Hidro Distribución S.A. Mr. Escasany is Mr. Silvestre Vila Moret’s uncle.

Pablo Gutierrez: Mr. Gutierrez obtained a degree in business administration at the Universidad de Buenos Aires. He has been associated with Banco Galicia since 1985, where he served in different positions. In April 2005, he was appointed to the board of directors of Banco Galicia. Mr. Gutierrez is chairman of Tarjetas Regionales, vice president of Sudamericana Holding, regular director of Tarjeta Naranja S.A. and an alternate trustee of the Fundación Banco de Galicia y Buenos Aires. He was an alternate director of Grupo Financiero Galicia from April 2003 to April 2010 when he was appointed as vice chairman. In April 2012, he was appointed as the vice chairman of Banco Galicia. Mr. Gutierrez is Mr. Abel Ayerza’s nephew.

Abel Ayerza:Mr. Ayerza obtained a degree in business administration at the Universidad Católica Argentina. He was associated with Banco Galicia from 1966 to 2002. Mr. Ayerza is also the chairman of Aygalpla S.A., a lifetime trustee and second vice chairman of the Fundación Banco de Galicia y Buenos Aires and the managing partner of Cribelco S.R.L., Crisabe S.R.L. and Huinca Cereales S.R.L. He has been a member of the Board of Directors since September, 1999. Mr. Ayerza is the uncle of Mr. Pablo Gutierrez.

Federico Braun: Mr. Braun obtained a degree in industrial engineering at the Universidad de Buenos Aires. He was associated with Banco Galicia from 1984 to 2002. Mr. Braun is also the chairman of Patagonia Logística S.A., Campos de la Patagonia S.A., Estancia Anita S.A., Tarjeta del Mar and S.A. Importadora y Exportadora de la Patagonia; the vice chairman of Asociación Empresaria Argentina and Asociación de Supermercados Unidos. He is a director of Inmobiliaria Financiera “La Josefina” S.A. and an alternate director of Martseb S.A. He is a lifetime

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trustee of the Fundación Banco de Galicia y Buenos Aires. He has been a member of the Board of Directors since September 1999.

Silvestre Vila Moret: Mr. Vila Moret obtained a degree in banking administration at the Universidad Católica Argentina. He was associated with Banco Galicia from 1997 until May 2002. Mr. Vila Moret is also vice chairman of El Benteveo S.A. and Santa Ofelia S.A. He has served as on the Board of Directors since June 2002. Mr. Vila Moret is the nephew of Mr. Eduardo J. Escasany.

Daniel Antonio Llambías: Mr. Llambías obtained a degree in national public accounting at the Universidad de Buenos Aires. He has been associated with Banco Galicia since 1964. He was elected as an alternate director of Banco Galicia in September 1997 and served as a director from September 2001 until August 2009, when he was appointed Chief Executive Officer. Mr. Llambías is also a director of Tarjeta Naranja and Tarjetas Regionales and an alternate trustee of the Fundación Banco de Galicia y Buenos Aires. He served as the chairman of ADEBA from April 2016 to April 2017. Mr. Llambías was appointed as a director of Grupo Financiero Galicia in April 2017.

Pedro Alberto Richards: Mr. Richards obtained a degree in economics from the Universidad Católica Argentina. He holds a Master of Science in Management from the Sloan School of Management at the Massachusetts Institute of Technology. He was the director of the National Development Bank. He has been associated with Banco Galicia since 1990. He was a member of the board of directors of Galicia Capital Markets S.A. between 1992 and 1994 and vice chairman of Net Investment between September 2001 and May 2007. Since August 2000, he served as Grupo Financiero Galicia’s managing director and from 2010 as our Chief Executive Officer. Mr. Richards is also Director of Galicia Warrants, and director of Galicia Administradora de Fondos S.A. Mr. Richards was an alternate director of Grupo Financiero Galicia from April 2003 until April 2005, after which he served as a director until April 14, 2010. He was appointed as a director of Grupo Financiero Galicia in April 2017.

Enrique Mariano Garda Olaciregui: Mr. Garda Olaciregui obtained a degree in law at the Universidad del Salvador. He has a masters in finance from Universidad del CEMA and a degree in Corporate Law from Universidad Austral. He has been associated with Banco Galicia since 1970. He served as legal advisor to Banco Galicia between September 2001 and April 2003. He served as a Secretary Director between April 2003 and April 2010, when he was designated as regular syndic of Banco Galicia. Additionally, he is a regular syndic of Tarjetas Regionales, Galicia Seguros, Galicia Valores, Galicia Warrants, Sudamericana Holding and other subsidiaries of Banco Galicia and Grupo Financiero Galicia. He was appointed as a director of Grupo Financiero Galicia in April 2019.

Claudia Raquel Estecho: Mrs. Estecho obtained a degree in accounting at the Universidad de Buenos Aires. She has also completed specialized training programs in the areas of Human Resources, Risk and Executive Management at the Univesidad Austral. She has held different positions at Banco Galicia and Grupo Financiero Galicia since 1976 from 2016, in the areas of Finance, Planning and Risk Management.

Sergio Grinenco: Mr. Grinenco obtained a degree in economics from the Universidad Católica Argentina and a master’s in business administration from Babson College in Wellesley, Massachusetts. He has been associated with Banco Galicia since 1977. He has served as an alternate director of Grupo Financiero Galicia since September 2001 and as the vice chairman from April 2003 to 2011. Mr. Grinenco is also an alternate trustee of the Fundación Banco de Galicia y Buenos Aires. In 2012, he was appointed as the chairman of Banco Galicia.

Alejandro María Rojas Lagarde: Mr. Rojas obtained a degree in law from the Universidad de Buenos Aires. He has held a variety of positions at Banco Galicia since 1963. From 1965 to January 2000, he served as the general counsel office of Banco Galicia. He has served as an alternate director of Grupo Financiero Galicia since 2000. He is also a manager of Rojas Lagarde S.R.L., alternate director of Santiago Salud S.A. and a lifetime trustee of the Fundación Banco de Galicia y Buenos Aires.

Ana María Bertolino: Mrs. Bertolino obtained a degree in law from Universidad de Buenos Aires. She joined Banco Galicia in 1972 and has held positions in Credit and Corporate Banking, until 2009. She was appointed as an alternate director of Grupo Financiero Galicia in April 2019.

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Ricardo Alberto Gonzalez: Mr. Gonzalez served in various positions at Grupo Financiero Galicia between 1973 and December 2009, mainly in the retail division and the credit department. He retired as general manager of the corporate banking division. In April 2019, he was appointed as an alternate director of Grupo Financiero Galicia.

Our Board of Directors may consist of between three and nine permanent members. Currently our Board of Directors has nine members. In addition, the number of alternate directors who act in the temporary or permanent absence of a director has been set at four. The regular and alternate directors are elected by the shareholders at our annual general shareholders’ meeting.

Directors and alternate directors are elected for a maximum term of three years. Mr. Sergio Grinenco is also a director of Banco Galicia. In addition, some members of our Board of Directors may serve on the board of directors of any subsidiary.

Five of our directors are members of the families that are the controlling shareholders of Grupo Financiero Galicia.

Our Audit Committee

Grupo Financiero Galicia complies with the provisions set forth by the Capital Markets Law and the regulations set forth by the CNV, which require that companies which make a public offering of shares should form an Audit Committee, and develop a charter with regulations for its operation.

Accordingly, the Board of Directors established an Audit Committee with three members. For fiscal year 2018, Messrs. Antonio R. Garcés, C. Enrique Martin and Daniel Llambías were the members of the Audit Committee, with Antonio R. Garcés and C. Enrique Martin being considered independent pursuant to the CNV and Nasdaq requirements. In July 2018, Mr. Silvestre Vila Moret resigned from the Audit Committee to assume a new position on the Executive Committee and was replaced by Mr. Daniel Llambías. All members of the Audit Committee are financially literate and have extensive managerial experience. Mr. Antonio Garcés was the financial expert serving on our Audit Committee during fiscal year 2018.

For fiscal year 2019, Mr. Enrique Mariano Garda Olaciregui, Ms. Claudia Raquel Estecho and Mr. Daniel Llambías were appointed to the Audit Committee by the Board of Directors, with Mr. Enrique Mariano Garda Olaciregui and Ms. Claudia Raquel Estecho being considered independent pursuant to the CNV and Nasdaq requirements. All members of the Audit Committee are financially literate and have extensive managerial experience.

According to the CNV rules, the Audit Committee is primarily responsible for (i) issuing a report on the Board of Directors’ proposals for the appointment of the independent auditors and the compensation for the Directors, (ii) issuing a report detailing the activities performed according to the CNV requirements, (iii) issuing the Audit Committee’s annual plan and implementing it each fiscal year, (iv) evaluating the external auditors’ independence, work plans and performance, (v) evaluating the plans and performance of the internal auditors, (vi) supervising the reliability of our internal control systems, including the accounting system, and of external reporting of financial or other information, (vii) following-up on the use of information policies on risk management at Grupo Financiero Galicia’s main subsidiaries, (viii) evaluating the reliability of the financial information to be filed with the CNV and the SEC, (ix) verifying compliance with the applicable conduct rules, and (x) issuing a report on related party transactions and disclosing any transaction where a conflict of interest exists with corporate governance bodies and controlling shareholders. The Audit Committee has access to all information and documentation that it requires and is broadly empowered to fulfill its duties. During 2018, the Audit Committee held 11 meetings.

 

Our Supervisory Committee

Our bylaws provide for a Supervisory Committee consisting of three members who are referred to as syndics (“syndics”) and three alternate members who are referred to as alternate syndics (“alternate syndics”). In accordance with the Corporations Law and our bylaws, the syndics and alternate syndics are responsible for ensuring that all of our actions are in accordance with applicable Argentine law. Syndics and alternate syndics are

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elected by the shareholders at the annual general shareholders’ meeting. Syndics and alternate syndics do not have management functions. Syndics are responsible for, among other things, preparing a report to shareholders analyzing our financial statements for each year and recommending to the shareholders whether to approve such financial statements. Alternate syndics act in the temporary or permanent absence of a syndic. Currently, there are three syndics and three alternate syndics. Syndics and alternate syndics are elected for a one-year term.

The following table shows the members of our Supervisory Committee. Each of our syndics was appointed at the ordinary shareholders’ meeting held on April 25, 2019. Terms expire when the annual shareholders’ meeting takes place or as set forth below.

 

 

The following is a summary of the biographies of the members of our Supervisory Committee:

Antonio Roberto Garcés: Mr. Garcés obtained a degree in accounting from the Universidad de Buenos Aires. He has been associated with Banco Galicia since 1959 and with Grupo Financiero Galicia since 2002. In April 1985, he was appointed as an alternate director of Banco Galicia. Subsequently, he was appointed as the vice chairman of Banco Galicia in September 2001, as the chairman of the board of directors of Banco Galicia from March 2002 until August 2002 and then as the vice chairman from August 2002 until April 2003, when he was elected to serve as chairman of Banco Galicia’s board of directors until 2011. From 2003 to 2010 he was the chairman of Grupo Financiero Galicia. From April 2012 until April 2019, Mr. Garcés was appointed as a regular director of Grupo Financiero Galicia. He was elected as a regular syndic of Banco Galicia and Grupo Financiero Galicia in April 2019. Additionally, he is a regular syndic of Galicia Valores and Galicia Warrants.

José Luis Gentile: Mr. Gentile obtained a degree in accounting from the Universidad de Buenos Aires. He has provided services to Grupo Financiero Galicia since 1999 to March 2017, when he was Chief Financial Officer. He was elected as a regular syndic of Banco Galicia and Grupo Financiero Galicia in April 2017. Additionally, he is a regular syndic of Galicia Valores and Galicia Warrants, and an alternate syndic of Cobranzas Regionales, Tarjeta Naranja, and of other subsidiaries of Banco Galicia and Grupo Financiero Galicia.

Omar Severini: Mr. Severini obtained a degree in accounting from the Universidad de Belgrano and a degree in finance with a concentration in capital markets from UCEMA. He has been associated with Banco Galicia since 1978 and served in positions responsible for the regular audit from 1986 to 2009. He served as Internal Auditor Manager to Banco Galicia between 2009 and 2017. He was elected as a regular syndic of Banco Galicia and Grupo Financiero Galicia in April 2018. Additionally, he is a regular syndic of Galicia Valores, Galicia Warrants, Tarjetas Regionales, Tarjeta Naranja, and of other subsidiaries of Banco Galicia and Grupo Financiero Galicia.

Miguel Norberto Armando:Mr. Armando obtained a law degree from the Universidad de Buenos Aires. He was first elected as an alternate syndic of Banco Galicia from 1986 until 2017. He also acted as an alternate syndic of Grupo Financiero Galicia between 1999 and January 2009 at which point he became a regular syndic until April 2009 and was reelected as an alternate syndic of Grupo Financiero Galicia until April 2018. He was elected as an alternate syndic of Banco Galicia and Grupo Financiero Galicia in April 2019. He is the chairman of Arnoar S.A. Mr. Armando is also a regular syndic of EBA Holding S.A., Electrigal S.A. and an alternate syndic of Galicia Valores, Galicia Seguros, Sudamericana Holding, Marin and Finisterra, among others.

Fernando Noetinger: Mr. Noetinger obtained a law degree from the Universidad de Buenos Aires. He has been associated with Banco Galicia since 1987. He was and has been an alternate syndic of Grupo Financiero Galicia from September 1999 to June 2002 and from April 2006 to date. Mr. Noetinger is also chairman of Villa Rosa S.A. and Doña Ines S.A., an alternate director of Arnoar S.A., and an alternate syndic of EBA Holding S.A., Electrigal S.A., Tarjetas Regionales, Galicia Warrants, Galicia Valores, Banco Galicia, Galicia Retiro, Galicia Seguros, and Sudamericana Holding, among others.

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Horacio Tedín: Mr. Tedín obtained a law degree from the Universidad de Buenos Aires. In 1981, he founded his own law firm, which has actively worked for Banco Galicia and other corporations. Mr. Tedín has been an alternate syndic of Grupo Financiero Galicia since 2006. He is also a regular syndic of Marin S.A., Santamera S.A., Nucleamiento Inversor S.A. and Electrigal S.A. and an alternate syndic of EBA Holding S.A. and Galicia Valores, among others.

Management of Grupo Financiero Galicia

Our organizational structure consists of Chief Executive Officer who reports to the Board of Directors, and the Chief Financial Officer who reports to the Chief Executive Officer and is in charge of the Financial and Accounting Division.

The Chief Executive Officer’s primary responsibilities consist of implementing the policies defined by the Board of Directors, as well as providing recommendations to the Board of Directors regarding future plans, budgets and company organization. He is also responsible for supervising the Financial and Accounting Division and assessing the attainment of performance goals of Grupo Financiero Galicia. The Chief Executive Officer also participates in meetings of the Board of Directors of the Company and certain subsidiaries.

Our Chief Executive Officer is Mr. Pedro A. Richards, please see “─ Our Board of Directors”.

Our Chief Financial Officer is Mr. José Luis Ronsini. Mr. Ronsini obtained a degree in accounting from the Universidad Católica Argentina. He holds a Master in Finance from the University of CEMA, and attended the Senior Management Program at the Universidad de San Andrés. He has been associated with Banco Galicia since 2001. He previously served as the Chief Credit Risk auditor, responsible for subsidiaries, Tarjetas Regionales, and Galicia Administradora de Fondos S.A. Mr. Ronsini has served as General Accountant of Banco Galicia since 2012.

The Financial and Accounting Division is mainly responsible for the assessment of investment alternatives, thus suggesting whether to invest or withdraw Grupo Financiero Galicia’s positions in different companies or businesses. It also plans and coordinates Grupo Financiero Galicia’s administrative services and financial resources in order to guarantee its proper management. This division also aims at meeting requirements set by several controlling authorities, complying with information and internal control needs and budgeting purposes. Furthermore, it includes functions aimed at planning, preparing, coordinating, controlling and providing financial information to the stock exchanges where Grupo Financiero Galicia’s shares are listed, regulatory bodies and both domestic and international investors and analysts. It facilitates the provision of materials and responses to questions sent by shareholders and investors in general through a specifically designed “contact us”, located in our web page.

Our compensation policy, which is essentially the same as the policy followed by the companies that we control, consists of arranging salary levels in order of importance based on a system that describes and assesses job positions based on objective factors (the Hay System). The purpose of such system is to pay compensation that is similar to the compensation that is paid for a similar position in the domestic market. Managers who are our employees or our controlled companies’ employees receive a fixed salary and may receive a bonus based on individual performance. This policy for compensation includes the possibility of having access to retirement insurance. We do not maintain stock-option, profit-sharing or pension plans or any other retirement plans for the benefit of our managers.

We have established a Disclosure Committee in response to the U.S. Sarbanes-Oxley Act of 2002. The main responsibility of this committee is to review and approve controls over the public disclosure of financial and related information, and other procedures necessary to enable our Chief Financial Officer and Chief Executive Officer to provide their certifications of our annual report that is filed with the SEC. The members are Messrs. Pedro A. Richards, José Luis Ronsini, Adrián Enrique Pedemonte and Ms. Mariana Saavedra. In addition, at least one of the members of this committee attends all the meetings of our principal subsidiaries’ disclosure committees.

Board of Directors of Banco Galicia

At the ordinary shareholders’ meeting held on April 25, 2019, the size of Banco Galicia’s board of directors was set at six members and three alternate directors. The following table sets forth the members of Banco Galicia’s board of directors as of April 25, 2019, all of whom are residents of Buenos Aires, Argentina, the position currently

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held by each of them, their dates of birth, their principal occupations, the dates of their appointment and the year in which their current terms will expire. The business address of the members of the Banco Galicia’s board of directors is Tte. General J. D. Perón 430, 24th floor (C1038AAI) Buenos Aires, Argentina.

 

(1) In accordance with the rules of the CNV, and pursuant to the classifications adopted by the CNV, Mrs. Casasnovas is an independent director. Mrs. Casasnovas is also an independent director in accordance with the Nasdaq rules.

(2) In accordance with the rules of the CNV, and pursuant to the classifications adopted by the CNV, Messrs. Gonzalez and García Pinto are independent alternate directors. We would replace the independent director in case of vacancy. Messrs. González and García Pinto are also independent directors in accordance with the Nasdaq rules.

The following are the biographies of the members of the board of directors of Banco Galicia:

Sergio Grinenco: See “—Our Board of Directors”.

Raúl Héctor Seoane: Mr. Seoane obtained a degree in economics from the Universidad de Buenos Aires. He has been associated with Banco Galicia since 1988. Mr. Seoane was first elected as an alternate director of Banco Galicia from 2005 until December 2011, and in April 2012 was elected as a director. He is also a vice chairman of Distrocuyo S.A. and an alternate trustee of Fundación Banco de Galicia y Buenos Aires.

Guillermo Juan Pando: Mr. Pando has been associated with Banco Galicia since 1969. He was first elected as an alternate director of Banco Galicia from September 2001 until June 2002, and in April 2003 he was elected as a director. He is also the chairman of Santiago Salud S.A. and Distrocuyo S.A., vice chairman of Electrigal S.A., and an alternate trustee of Fundación Banco de Galicia y Buenos Aires.

María Elena Casasnovas: Mrs. Casasnovas obtained a degree in law from the Universidad Católica Argentina. She completed the Program for High Management at Universidad Torcuato Di Tella and the Senior Management Program at Universidad San Andrés. She has been associated with Banco Galicia since 1972. In April 2016, she was elected as a director.

Juan Carlos L’Afflitto: Mr. L’Afflitto obtained a degree in national public accounting at the Universidad de Buenos Aires. He worked as advisor and accountant at Morgan, Benedit y Asociados and until 1990 he was a professor at the Universidad Católica Argentina. He has been associated with Banco Galicia since 1986. In April 2016, he was elected as a director.

Gastón Bourdieu: Mr. Bourdieu obtained a degree in agricultural administration from the Universidad Argentina de la Empresa. He has been associated with Banco Galicia from 1981 to 2017. He was appointed as a director of Banco Galicia in April 2018. He is also a director of Maradona S.A.

Ignacio Abel González: Mr. González obtained a degree in national public accounting from the Universidad de Buenos Aires and a master in Auditing at Drew University, New Jersey. Previously, he served as a Member of the International Committee of Finance & Value Sharing, PricewaterhouseCoopers. He was appointed as director of Banco Galicia in April 2010 and he was elected as an alternate director in April 2018. He is also director of IDEA and syndic of Sociedad Anónima La Nación, Nuevos Medios La Nación, Publirevistas, Sociedad Anónima Importadora y Exportadora de la Patagonia, and the founder and president of P.O.D.E.R (Polo de Desarrollo Educativo Renovador).

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Enrique García Pinto: Mr. García Pinto has been associated with Banco Galicia since 1970. Previous to such time he served at Nobleza Piccardo SAYCYF and Saturno Agropecuaria SCA. Mr. García Pinto was appointed as an alternate director of Banco Galicia at the shareholders’ meeting held on April 28, 2009. He is also director of Distrocuyo S.A.

Augusto Rodolfo Zapiola Macnab: Mr. Zapiola Macnab obtained a degree in economics from the Pontificia Universidad Catolica Argentina. He has been associated with Banco Galicia from June 1978 until September 2002. He was elected as an alternate director of Banco Galicia in April 2013. He was elected as an alternate director on the Board of Directors of Grupo Galicia in April 2015.

Functions of the Board of Directors of Banco Galicia

Banco Galicia’s board of directors may consist of three to nine permanent members. In addition, there can be one or more alternate directors who can act during the temporary or permanent absence of a director. As of the date of this annual report, none of the directors were also employees.

The Board of Directors formally meets at least twice a week and informally every day, and is in charge of Banco Galicia's general management and takes all the necessary decisions to fulfill said task.

Members of the Bank’s Board of Directors serve in the following committees:

Human Resources and Governance Committee: It is composed of two Directors, the Chief Executive Officer, and the Organizational Development and Human Resources Division Manager. This Committee is responsible for presenting a succession plan for the Chief Executive Officer and the Division Manager positions, analyzing and establishing the compensation for the Chief Executive Officer and Division Managers, and monitoring the performance matrix of Division Managers and Department Managers. The Committee meets every two months or whenever there are issues that require urgent consideration. Its resolutions are summarized in writing in minutes.

Strategy and New Businesses Committee: This Committee is composed of three Directors, the Chief Executive Officer, and the Planning and Risk Management Division Managers. It is in charge of analyzing new businesses. The Committee meets at least once every two months. It can hold extraordinary meetings in case there is any issue that requires urgent consideration. Its resolutions are summarized in writing in minutes.

Risk and Capital Allocation Committee: This Committee is composed of five Directors, the Chief Executive Officer, and the Risk Management and Planning Division Managers. It is in charge of analyzing and approving capital allocations, establishing risk policies and monitoring the Bank’s risks. The Committee meets at least once every two months. Its resolutions are summarized in writing in minutes.

Liquidity Crisis Committee:This Committee is composed of three Directors and the Chief Executive Officer. The Committee may call those officers whose participation is deemed relevant. It is in charge of evaluating the situation upon facing a liquidity crisis and deciding the steps to be implemented to tackle it. The Committee shall meet when convened by the Board of Directors and shall hold sessions as may be required until the liquidity crisis ends. Its resolutions are summarized in writing in minutes.

Asset and Liability Management Committee (ALCO): Three Directors, the Chief Executive Officer, the Retail Banking, the Wholesale Banking, the Financial Banking, the Risk and Planning Division Managers are members of this Committee. It is in charge of fund raising and different asset allocations. Moreover, this Committee is in charge of the follow-up and control of liquidity, interest-rate and currency gaps. The Committee meets at least once a month. Its resolutions are summarized in writing in minutes.

High Credit Committee: This Committee is composed of four Directors, the Chief Executive Officer, the Risk Division Manager and the Wholesale Banking Manager. It is in charge of approving and granting ratings and loans to high risk customers and groups. The Committee meets at least once a week. Approved operations are recorded in chronologically numbered spreadsheets.

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Low Credit Committee: This Committee is composed of two Directors, the Chief Executive Officer and the Risk Division Manager. This Committee is responsible for approving and granting ratings and loans to medium risk customers and groups. The Committee meets at least twice a week. Approved operations are recorded in chronologically numbered spreadsheets.

Audit Committee: In accordance with the Argentine Central Bank’s regulations, the Bank formed an Audit Committee composed of two Directors and the Internal Audit Manager. The Committee is in charge of supervising the adequacy and conformity, as well as the effective functioning of the internal control systems so as to ensure compliance with all the Bank’s rules submitted to the Argentine Central Bank and the self-regulated entities of the capital market. The Committee meets at least once a month. Its resolutions are entered in minutes, which are transcribed in signed books.

Committee for the Control and Prevention of Money Laundering and Funding of Terrorist Activities: This Committee is composed of four Directors, the Chief Executive Officer, the Compliance and Prevention of Money Laundering Manager, the Internal Audit Manager, and the Managers of the following Divisions: Risk, Financial Banking, Wholesale Banking, Retail Banking and Comprehensive Corporate Services. The Financial Banking Division Manager is the officer in charge of financial intermediation transactions. The Syndics can be invited to attend any meeting called by this Committee. This Committee is responsible for planning, coordinating and enforcing compliance with the policies on the issue established and approved by the Board of Directors. The Committee meets at least once per quarter. Resolutions must be registered in a minutes book.

Committee for Information Integrity: This Committee is composed of three Directors, the Chief Executive Officer and the Planning Division Manager. The Syndics can be invited to attend any meeting called by this Committee. A member of the Committee that was created for the same purpose by Grupo Financiero Galicia S.A. shall also attend the meetings held by this Committee. This Committee is in charge of promoting compliance with the provisions set forth in the Sarbanes-Oxley Act of 2002 of the United States of America. The Committee meets at least every three months or whenever there are issues that require consideration. Its resolutions are summarized in writing in minutes.

Information Technology Committee: This Committee is composed of three Directors, the Chief Executive Officer and the Comprehensive Corporate Services Division Manager. This Committee is in charge of supervising and approving the development plans of new systems and their budgets, as well as supervising these systems’ budget control. It is also responsible for approving the general design of the systems’ structure, the main processes thereof and the systems implemented, as well as monitoring the quality of the Bank’s systems, within the policies established by the Board of Directors. The Information Technology Committee meets at least once every three months. It can hold extraordinary meetings in case there is any issue that requires urgent consideration. Its resolutions are summarized in writing in minutes.

Income Statement Reporting Committee: This Committee is composed of five Directors, the Chief Executive Officer and the Planning Division Manager. It is in charge of monitoring management and income statements, along with evaluating the macroeconomic situation. The Committee meets at least once per quarter. Its resolutions are summarized in writing in minutes.

Compliance Committee: This Committee is composed of five Directors, the Chief Executive Officer, the Risk Division Manager and the Compliance and Prevention of Money Laundering Manager. This Committee is responsible for promoting respect for standards, principles of good conduct and ethical values of Banco Galicia, and mitigating the risk of non-compliance with the same by establishing policies, controls and reporting protocols. The Committee meets at least once per quarter or whenever there are issues that require urgent consideration. Its resolutions are summarized in writing in minutes.

Committee of Protection to the User of Financial Services: This Committee is composed of least two Directors, the Compliance and Prevention of Money Laundering Manager, the Operational Risk Manager, the Legal Advice Manager and the Experience Management Manager of the Customer Experience Area. This Committee is responsible of monitoring the activities of managers and senior directors involved in the internal processes for customer protection to ensure such employees are adequately complying with legal and regulatory standards. The Committee meets at least once per quarter or whenever there are issues that require urgent consideration. Its resolutions are summarized in writing in minutes.

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These committees provide written minutes on a monthly basis to the Board of Directors .

Banco Galicia’s Supervisory Committee

Banco Galicia’s bylaws provide for a Supervisory Committee consisting of three syndics and three alternate syndics. Pursuant to Argentine law and to the provisions of Banco Galicia’s bylaws, Banco Galicia’s syndics and alternate syndics are responsible of ensuring that all of Banco Galicia’s actions are in accordance with applicable Argentine law. Syndics and alternate syndics do not participate in business management and cannot have managerial functions of any type. Syndics are responsible for, among other things, the preparation of a report to the shareholders analyzing Banco Galicia’s financial statements for each year and the recommendation to the shareholders as to whether to approve such financial statements. Syndics and alternate syndics are elected at the ordinary shareholders’ meeting for a one-year term and they can be re-elected. Alternate syndics act in the temporary or permanent absence of a syndic.

The table below shows the composition of Banco Galicia’s Supervisory Committee as they were re-elected by the annual shareholders’ meeting held on April 25, 2019.

 

 

*“Ad referendum” of the authorization of the Argentine Central Bank.

For the biographies of Messrs, Omar Severini, José Luis Gentile, Antonio R. Garces, Fernando Noetinger and Miguel N. Armando and Horacio Tedín, see “—Our Supervisory Committee”.

Banco Galicia’s Executive Officers

On October 7, 2015, Mr. Fabián Enrique Kon was appointed as the Chief Executive Officer of Banco Galicia. The Chief Executive Officer is responsible for implementing the strategic goals established by Banco Galicia’s Board of Directors and coordinating with the Managers of the Bank’s Divisions. Mr. Kon reports to the Board of Directors.

Fabián Enrique Kon: Mr. Kon obtained a degree in national public accounting from the Universidad de Buenos Aires. He has worked at Pistrelli, Diaz y Asociados, Accenture, Exolgan Container Terminal and Tradecom, in managerial positions. From 2006 to February 2014, he served as Galicia Seguros’ Chief Executive Officer and was appointed as Banco Galicia’s retail banking manager in March 2014. Mr. Kon is also the chairman of Sudamericana Holding, vice chairman of Tarjetas Regionales and director of Tarjeta Naranja.

As of the date of this annual report, the following divisions and department managers report to Banco Galicia’s Chief Executive Officer:

 

 

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Wholesale Banking Division: This division is responsible for designing, planning and implementing the vision, strategies, policies and goals for the Wholesale Banking’s businesses and for each customer segment (large-corporations, middle-market and agricultural companies) and products. It is also responsible for defining and controlling this division’s business goals, ensuring that these goals meet market demands and remain aligned with the Bank’s strategic objectives, guaranteeing volume, profitability, quality and customer satisfaction, within the preset risk levels. Furthermore, this division is responsible for proposing and developing banking products for the corporate segment and a customer service model tailored to each customer segment in order to ensure that growth and profitability targets are met. The following departments report to this division: Large-Corporations Banking, Investment Banking and Capital Market, Wholesale Products and Marketing, Agribusiness Sector and Middle-Market Banking.

Retail Banking Division: This division is responsible for designing, planning and implementing the vision, strategies, policies and goals for the Retail Banking’s businesses and for each customer segment (Private Banking, Eminent, Individuals, and SMEs) and the distribution channels (Branch Network and Alternative Channels). It is also responsible for defining and controlling this division’s business goals, ensuring that these goals meet market demands and remain aligned with the Bank’s strategic objectives and guaranteeing volume, profitability, quality and customer satisfaction, while managing risk levels. Furthermore, this division is responsible for proposing and developing the advertising plan, banking products for their consumer segments and a customer service model tailored to each customer segment and also ensuring that growth, profitability and customer service targets are met. The following departments report to this division: Segments, Products, Private Banking, Advertising, Branches, Digital, Customer Contact Center and Retail Planning.

Financial Banking Division: This division is responsible for designing, planning and implementing the vision, strategies, policies and goals for the Financial Banking Division, to ensure the provision of funding, compliance with mismatch policies, and the attainment of liquidity targets, while optimizing performance and ensuring the achievement of the Bank’s business goals with respect to volume and profitability. Furthermore, this division is responsible for managing the financial position of the Bank, negotiating rates, funds, incentives and campaigns with different areas, and providing regulatory, information and technical support for the management of assets and liabilities, aiming to guarantee the control of liquidity, rate, currency and market risks and the compliance with applicable legal and policy provisions. In addition, this division plans, proposes and implements the strategy for the development and maintenance of business relations with international banks, international entities, international mutual funds and bi-national clearing houses with the aim of enhancing the Bank’s image in international markets and ensuring efficient business operations based on the growth and profitability targets established by the organization. The following departments report to this division: Commercial, Financial Institutions, Public Sector, Investment Products and Global Custody and Trading.

Risk Management Division: This division is responsible for elaborating, suggesting and agreeing on credit, financial and operational risk strategies and policies designed for the Bank and its affiliated companies, monitoring efficiency and compliance with control procedures with a focus on prevention and categorizing and measuring risks in order to be able to minimize or eliminate risks and/or allocate the appropriate capital to successfully prevent such risks. This division is also responsible for the monitoring and oversight of compliance with the policies on control and prevention of money laundering and funding of terrorist activities in order to minimize reputational risks, thus ensuring compliance with applicable regulations and international standards. The following departments report to this division: Financial Risk, Retail Credit, Wholesale Credit, Recovery, Strategic Risk Management, Model Factory and Information Security.

Comprehensive Corporate Services Division: This division is responsible for designing, planning and implementing the strategies and policies for the IT, Operations, and Infrastructure divisions, and the maintenance thereof, with the goal of ensuring and maintaining the administrative support for its operations and activities, by means of a functional coordination of all services, and the human and technological resources available to the Bank. Furthermore, this division is responsible for developing and proposing innovations and new solutions to business processes, and preparing the expense and investment budget. The following departments report to this division: Operations, Systems, and Engineering and Maintenance.

Organizational Development and Human Resources Division: This division is responsible for designing, planning and implementing Human Resources strategies and policies, as well as defining and controlling

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management goals of the Bank’s human resources with the purpose of ensuring consistent practices, availability of qualified and motivated personnel, and a proper work environment, in accordance with the applicable social security and employment legislation and with the Bank’s culture and values. Furthermore, this division is responsible for directing corporate social responsibility activities and the internal communication, with the goal of enhancing the Bank’s image with focus on social responsibility, promoting employee loyalty, and applying social marketing to obtain the Bank’s competitive advantage. The following departments report to this division: Human Resources Advisory, Human Resources Management, Compensation, Sustainability, Talent Management, Internal Communications and Culture, Labor Relations and Safety.

Planning Division: This division is responsible for planning, coordinating and controlling the development and maintenance of budget, planning, accounting, tax and legal activities, with the aim of providing management with information to facilitate decision-making processes, management control, and compliance with disclosure requirements, as well as guaranteeing the availability of information that may allow the Bank to obtain strategic, long-term financing. Furthermore, this division is responsible for planning and ensuring compliance with the liquidity, interest rates and currency mismatches strategies, within the limits of the policies established, formulating proposals to the Asset and Liabilities Committee related to the management of such mismatches in order to maximize income in conformity with the Bank’s policies. In addition, it provides legal advice to different sectors of Banco Galicia to conduct business in accordance with applicable regulations. The following departments report to this division: Accounting, Management Control, Tax Advice, Research and Strategic Planning, Assets and Liabilities Management, Legal Advice, Purchases and Institutional Relations.

Customer Experience: This division is responsible for defining and pursuing the Bank’s customer experience strategy to gain a competitive and differentiating edge in the financial services market. The following departments report to this division: NPS Operation, Organization, Initiatives, and Analysis and Indicators.

The following departments report to the board of directors of Banco Galicia:

 

 

Internal Audit Department Division: This division is responsible for assessing and monitoring the effectiveness, conformity and efficiency of internal control systems with the goal of ensuring compliance with applicable laws and regulations.

Compliance and Prevention of Money Laundering Department Division: This division is responsible for coordinating and monitoring compliance with the policies established by Banco Galicia’s Board of Directors on control and prevention of money laundering and funding of terrorist activities in order to minimize reputational risks, thus ensuring compliance with applicable regulations and international standards. This division is responsible for encouraging compliance with Banco Galicia’s rules, good conduct principles and ethical values, and mitigating the risk of non-compliance by defining policies, establishing controls and reports in the best interest of the Bank, its employees, shareholders and customers.

The following are the biographies of Banco Galicia’s senior executive officers mentioned above:

Marcelo Iraola: Mr. Iraola obtained a degree in law from the Universidad de Buenos Aires. He completed the Program for Executive Development at Instituto Argentino de Empresas and a business management program at the Universidad de San Andres. He has been associated with Banco Galicia since 1988. He is also the chairman of Galicia Warrants, a director of Sudamericana Holding S.A. and an alternate director of Tarjetas Regionales.

Germán Alejandro Ghisoni: Mr. Ghisoni obtained a degree in business management from the Universidad Católica Argentina. He completed the Program for Executive Development at Instituto Argentino de Empresas, the Strategic Management in Banking Program at INSEAD and the Customer Centric Organitatios at Kellogg School of Management. He has been associated with Banco Galicia since 1995. He is also a director of Sudamericana Holding and an alternate director of Tarjetas Regionales and Tarjeta Naranja.

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Pablo Maria Leon: Mr. Leon obtained a degree in finance from the Universidad de Palermo and two executive development programs at Instituto Argentino de Empresas and IMD in Lausanne, Switzerland. He has been associated with Banco Galicia since 1987. He is also the chairman of Galicia Valores and director of Argenclear S.A.

Diego Rivas: Mr. Rivas obtained a degree in business administration from the Universidad Argentina de la Empresa. He also completed a postgraduate degree in finance at the CEMA and management development programs at IMD in Lausanne, Switzerland, as well as a postgraduate degree in Risk Management at the Wharton School at University of Pennsylvania. Mr. Rivas has been associated with Banco Galicia since 1987. In May 2016, he was appointed Risk Control Area Manager of Banco Galicia. Mr. Rivas is also vice chairman of Ondara and an alternate director of Tarjeta Naranja.

Maria Marcela Fernie: Ms. Fernie obtained a degree in economics from the Universidad Católica Argentina. She has been associated with Banco Galicia since 2011. She is a director of COELSA and an alternate director of Tarjetas Regionales and Tarjeta Naranja.

Rafael Pablo Bergés: Mr. Bergés obtained a degree in industrial engineering from Universidad de Buenos Aires. He has been associated with Banco Galicia since August 2010. Prior to such time, he worked at Techint and at a several multinational companies in managerial positions. From 1998 to 2009, he was vice president of the Human Resources Division of Grupo Telefónica.

Bruno Folino: Mr. Folino obtained an accounting degree from the Universidad de Buenos Aires. He completed a post-graduate degree in Tax & Legal at the Universidad Austral and a Master in Science of Management from GSB Stanford University. He started his career as an auditor at Price Waterhouse & Co. before moving to the Tax & Legal Department. He has been associated with Banco Galicia since 1997 as Tax Manager and Planning Manager. In 2012, he was appointed Planning Manager.

Flavio Dogliolo: Mr. Dogliolo obtained a degree in business administration from the Universidad Católica Argentina. He received an MBA from the Universidad Austral. He was the manager of means of payments and automatic banking at Banco Bansud S.A., manager of quality and service productivity at Banco Río de la Plata S.A. and he worked in marketing database and commercial planning at Siembra AFJP S.A. He has been associated with the Bank since 1998.

Claudio Scarso: Mr. Scarso obtained a degree in systems engineering from the Universidad Argentina de la Empresa. He has been associated with Banco Galicia since 1995.

Teresa del Carmen Piraino: Ms. Piraino obtained a degree in accounting from the Universidad Argentina de la Empresa. She completed a post-graduate degree in Anti-Money Laundering and Financial Crime Prevention from the Universidad de Buenos Aires. She has been associated with Banco Galicia since 1992.

Compensation

Compensation of Our Directors

Compensation for the members of the Board of Directors is considered by the shareholders at the shareholders’ meeting once the fiscal year has ended. Directors are paid an annual fee based on the functions they carry out and they may receive partial advance payments during the year. At the ordinary shareholders’ meeting held on April 25, 2019 the compensation for the Board of Directors was set at Ps.57,859,561 for the year ended December 31, 2018. For a description of the amounts to be paid to the board of directors of Banco Galicia, see “– Compensation of Banco Galicia’s Directors and Officers” below.

We do not maintain a stock-option, profit-sharing or pension plan for the benefit of our directors.

We do not have a policy establishing any termination benefits for our directors.

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Compensation of Banco Galicia’s Directors and Officers

Banco Galicia’s board of directors establishes the policy for compensation of Banco Galicia’s personnel. Banco Galicia’s managers receive a fixed compensation. Seven directors are not employees of Banco Galicia. These non-employee directors, receive a fixed compensation, provided that payments do not exceed the standard levels of similar entities in the Argentine financial market, a provision that is applicable to managers as well. The officers’ compensation regime includes the possibility of acquiring a retirement insurance policy. Banco Galicia does not maintain stock-option plans or pension plans or any other retirement plans for the benefit of its directors and managers. Banco Galicia does not have a policy establishing any termination benefits for its directors.

At the ordinary shareholders’ meeting held on April 25, 2019, the compensation for the directors of Banco Galicia was set for a total amount of Ps.25.5 million for the year ended December 31, 2018.

Nasdaq Corporate Governance Standards

Pursuant to Nasdaq Marketplace Rule 5615(a) (3), a foreign private issuer may follow home country corporate governance practices in lieu of the requirements of the Rule 5600 Series, provided that the foreign private issuer complies with certain sections of the Rule 5000 Series, discloses each requirement that it does not follow and describes the home relevant country practice followed in lieu of such requirement. The requirements of the Rule 5000 Series and the Argentine corporate governance practice that we follow in lieu thereof are described below:

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Other than as noted above, we are in full compliance with all other applicable Nasdaq corporate governance standards.

Employees

The following table shows the composition of our staff:

 

Within the current legal framework, membership in an employee union is voluntary and there is only one union of bank employees with national representation. As of December 31, 2018, approximately 38% of Banco Galicia’s employees were affiliated with the national bank employee union. As of December 31, 2018, approximately 90% of the Regional Credit Card Companies’ work force was party to the merchant union’s Collective Bargaining Agreement No.130/75 applicable to trade employees and 6% of which were members of a labor union.

In general, during the first four months of 2018, the bank employees union and the national commerce employees union commenced negotiations on their respective collective labor agreements to establish new minimum wages. As a result of such negotiations, the minimum wage was increased for these positions. In 2018, due to the significant increases in the inflation index, the increases in the banking agreement were carried out in the months of January, May, July, August, September, October, November and December. In 2018, the Argentine union that represents employees in the banking sector declared general strikes. These strikes were not specific to any bank, but affected all banks in Argentina. Certain of the Bank’s employees who are members of the union participated in the strike; however, the Bank was able to continue its operations during such time as not all employees are members of the union. While employees of Banco Galicia have participated in general strikes against the Argentine banking sector, Banco Galicia has not experienced a targeted strike by its employees since 1973 and the Regional Credit Card Companies have never experienced a targeted employee strike. We believe that our relationship with our employees is stable and positive.

We have a human resources policy that aims at providing our employees possibilities for growth and personal and socio-economic achievement. We will continue our current policy of monitoring both wage levels and labor conditions in the financial industry in order to be competitive. Our employees receive fixed compensation and may receive variable compensation according to their level of achievement. We do not maintain any profit-sharing programs for our employees.

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In a survey conducted in 2018 by Great Place to Work®, Banco Galicia ranked first for the second consecutive year among the best companies to work in Argentina with more than 1,000 employees, while Tarjeta Naranja ranked second for the second consecutive year among the best companies to work in Argentina with more than 1,000 employees.

The Fundación Banco de Galicia y Buenos Aires (the “Fundación”) is an Argentine non-profit organization that provides various services to Banco Galicia employees. The various activities of the Fundación include, among others, purchasing school materials for the children of Banco Galicia’s employees and making donations to hospitals and other charitable causes, including cultural events. The Fundación is managed by a Council, certain members and alternate members of which are members of our Board of Directors and supervisory committee. Members and alternate members of the Council do not receive remuneration for their services as trustees.

Share Ownership

For information on the share ownership of our directors and executive officers as of December 31, 2018, see Item 7. “Major Shareholders and Related Party Transactions—A. Major Shareholders”.

 

Item 7. Major Shareholders and Related Party Transactions

A. Major Shareholders

As of March 31, 2019, our capital structure was made up of class A shares, each of which is entitled to five votes and class B shares, each of which is entitled to one vote. As of March 31, 2019, we had 1,426,764,597 shares outstanding composed of 281,221,650 class A shares and 1,145,542,947 class B shares.

Our controlling shareholders are members of the Escasany, Ayerza and Braun families and the Fundación. As of March 31, 2019, the controlling shareholders owned 100% of our class A shares through EBA Holding (representing 19.7% of our total outstanding shares) and 9.8% of our class B shares (or 7.8% of our total outstanding shares), therefore directly and indirectly owning 27.5% of our shares and 59.5% of total votes.

Based on information that is available to us, the table below sets forth, as of March 31, 2019, the number of our class A and class B shares held by holders of more than 5% of each class of shares, the percentage of each class of shares held by such holder, and the percentage of votes that each class of shares represent as a percentage of our total possible votes.

Class A Shares

 

 

Class B Shares

 

 

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Based on information that is available to us, the table below sets forth, as of March 31, 2018, the shareholders that either directly or indirectly have more than 5% of our votes or shares.

 

Members of the three controlling families have owned the majority of the issued share capital of Banco Galicia since 1959. Members of the Escasany family have been on the board of directors of Banco Galicia since 1923. The Ayerza and Braun families have been represented on Banco Galicia’s board of directors since 1943 and 1947, respectively. Currently, there are five members of these families on our Board of Directors.

On September 13, 1999, the controlling shareholders of Banco Galicia formed EBA Holding S.A., an Argentine corporation, which is 100% owned by our controlling shareholders. EBA Holding holds 100% of our class A shares.

Currently, EBA Holding only has class A shares outstanding. EBA Holding’s bylaws provide for certain restrictions on the sale or transfer of its class A shares. While the class A shares of EBA Holding may be transferred to any other class A shareholder of EBA Holding, any transfer of such class A shares to third parties would automatically result in the conversion of the sold shares into class B shares of EBA Holding having one vote per share. In addition, EBA Holding’s bylaws contain rights of first refusal, buy-sell provisions and tag-along rights.

As of March 31, 2019, we had 122 identified United States record shareholders (not considering The Bank of New York), of which 20 held our class B shares and 102 held our ADSs. Such United States holders, in the aggregate, held approximately 259 million of our class B shares, representing approximately 18.2% of our total outstanding capital stock as of such date.

B. Related Party Transactions

Grupo Financiero Galicia and its non-banking subsidiaries are not a party to any transactions with, and have not made any loans to any (i) enterprises that directly or indirectly through one or more intermediaries, control or are controlled by Grupo Financiero Galicia or its non-banking subsidiaries, (ii) associates (i.e., an unconsolidated enterprise in which Grupo Financiero Galicia or its non-banking subsidiaries has a significant influence or which has significant influence over Grupo Financiero Galicia or its non-banking subsidiaries), (iii) individuals owning, directly or indirectly, an interest in the voting power of Grupo Financiero Galicia or its non-banking subsidiaries that gives them significant influence over Grupo Financiero Galicia or its non-banking subsidiaries, as applicable, and close members of any such individual’s family (i.e., those family members that may be expected to influence, or be influenced by, that person in their dealings with Grupo Financiero Galicia or its non-banking subsidiaries, as applicable), (iv) key management personnel (i.e., persons that have authority and responsibility for planning, directing and controlling the activities of Grupo Financiero Galicia or its non-banking subsidiaries, including directors and senior management of companies and close members of such individual’s family) or (v) enterprises in which a substantial interest is owned, directly or indirectly, by any person described in (iii) or (iv) over which such a person is able to exercise significant influence nor are there any proposed transactions with such persons. For purposes of this paragraph, this includes enterprises owned by directors or major shareholders of Grupo Financiero Galicia or its non-banking subsidiaries that have a member of key management in common with Grupo Financiero Galicia or its non-banking subsidiaries, as applicable. In addition, “significant influence” means the power to participate in the financial and operating policy decisions of the enterprise but means less than control. Shareholders beneficially owning a 10% interest in the voting power of Grupo Financiero Galicia or its non-banking subsidiaries are presumed to have a significant influence on Grupo Financiero Galicia or its non-banking subsidiaries, as applicable.

Some of our directors and the directors of Banco Galicia have been involved in certain credit transactions with Banco Galicia as permitted by Argentine law. The Corporations Law and the Argentine Central Bank’s

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regulations allow directors of a limited liability company to enter into a transaction with such company if such transaction follows prevailing market conditions. Additionally, a bank’s total financial exposure to related individuals or legal entities is subject to the regulations of the Argentine Central Bank. Such regulations set limits on the amount of financial exposure that can be extended by a bank to affiliates based on, among other things, a percentage of a bank’s RPC. See Item 4. “Information on the Company—Argentine Banking Regulation—Lending Limits”.

Banco Galicia is required by the Argentine Central Bank to present to its board of directors, on a monthly basis, the outstanding amounts of financial assistance granted to directors, controlling shareholders, officers and other related entities, which are transcribed in the minute books of the board of directors of Banco Galicia. The Argentine Central Bank establishes that the financial assistance to directors, controlling shareholders, officers and other related entities must be granted on an equal basis with respect to rates, tenor and guarantees as loans granted to the general public.

In this section “total financial exposure” comprises equity interests and financial assistance (all credit related items such as loans, holdings of corporate debt securities without quotation, guarantees granted and unused balances of loans granted, among others), as this term is defined in Item 4. “Information on the Company—Argentine Banking Regulation—Lending Limits”.

“Related parties” refers mainly to our directors and the directors of Banco Galicia, our senior officers and senior officers of Banco Galicia, our syndics and Banco Galicia’s syndics, our controlling shareholders as well as all individuals who are related to them by a family relationship and any entities directly or indirectly affiliated with any of these parties, not required to be consolidated.

The following table presents the aggregate amounts of total financial exposure of Banco Galicia to related parties, the number of recipients, the average amounts and the single largest exposures as of the end of the two fiscal years ended December 31, 2017 and 2018, and as of March 31, 2018, the last date for which information is available.

 

 

The financial assistance granted to our directors, officers and related parties by Banco Galicia was granted in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other non-related parties, and did not involve more than the normal risk of collectability or present other unfavorable features.

In June 2011, Banco Galicia entered into an agreement with Galicia Seguros, a company indirectly controlled by Grupo Financiero Galicia, pursuant to which the Bank can offer insurance products on behalf of Galicia Seguros. In addition, they entered into an agreement for a one-year period pursuant to which Galicia Seguros insures the Bank for the balances of certain loans in the case of death of its clients. On July 31, 2014, Banco Galicia renewed both agreements with Galicia Seguros, for an additional year, with automatic deferral. Such agreements were considered to be “related party transactions” pursuant to Section 72 of the Capital Markets Law.

On March 11, 2015, Banco Galicia’s board of directors granted a checking account overdraft in favor of Grupo Financiero Galicia for up to Ps.230 million with a maturity date of June 30, 2016 (equivalent to Ps.659 million as of December 2018), which was increased on April 5, 2016 to Ps.300 million with a maturity date of June 30, 2017 (equivalent to Ps.625 million as of December 2018).

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On March 14, 2017, Banco Galicia’s board of directors decided to grant a checking account overdraft in favor of Grupo Financiero Galicia for up to Ps.500 million with a maturity date of June 30, 2018 (equivalent to Ps.868 million as of December 2018), which was increased in September 2017 to Ps.854 million (equivalent to Ps.1.338 million as December 2018).

 

Item 8. Financial Information

A. Consolidated Statements and Other Financial Information

Consolidated Financial Statements

We have elected to provide the financial information set forth in Item 18 of this annual report.

Legal Proceedings

We are a party to the following legal proceedings:

Banco Galicia

In response to certain pending legal proceedings, Banco Galicia has recorded reserves to cover (i) various types of claims filed by customers against it (e.g., claims for thefts from safe deposit boxes, collections of checks that had been fraudulently altered, discrepancies related to deposit and payment services rendered to Banco Galicia’s customers, etc.) and (ii) estimated amounts payable under labor-related lawsuits filed against Banco Galicia by former employees.

With regard to the Autonomous City of Buenos Aires’claims on account of other items, Banco Galicia cited to the System for the Settlement of Tax Liabilities in Arrears (Law No.3,461 and related regulations), which contemplated the total relief of interest and fines.

In connection with the assessments made by the tax collection authorities from the Province of Buenos Aires, under the framework of some of the processes under discussion at the Provincial Tax Court, at this stage of proceedings the decision issued was favorable with regard to the non taxability thereof. Therefore, Banco Galicia adhered to the System for the Regularization of Tax Debts (Regulatory Decision No.12 and related decisions), which contemplated discounts on the amounts not related to the Compensatory Bond. The Bank’s adherence to such system was communicated within the framework of the respective cases before the corresponding judicial authorities. In turn, the authorities from the Province of Buenos Aires objected to the judgment rendered by the Provincial Tax Court with regard to the Compensatory Bond, and requested the Court of Appeals in Administrative Matters of La Plata to set such decision aside. Banco Galicia entered an appearance and filed a motion for lack of jurisdiction, since it believes only the Argentine Supreme Court of Justice has jurisdiction to issue a decision on such matter. On April 15, 2014, the aforementioned court sustained the motion for lack of jurisdiction and ordered the proceedings to be filed. The authorities from the Province of Buenos Aires filed an appeal before the Supreme Court of Justice of the Province of Buenos Aires, which has not issued a decision to date.

Furthermore, Banco Galicia has been expressing its disagreement regarding claims made by various jurisdictions at the corresponding administrative and/or legal proceedings.These proceedings and their possible effects are constantly being monitored by the Bank’s management. Even though Banco Galicia believes it has complied with its tax liabilities in full pursuant to current regulations, adequate reserves in respect of such proceedings have been allocated.

Consumer Protection Associations, on behalf of consumers, have filed claims against Banco Galicia in connection with the collection of certain financial charges. The Bank does not believe that the resolution of these controversies will have a significant impact on its financial condition.

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Regional Credit Card Companies

The AFIP, Provincial Revenue Boards and Municipalities are in the process of conducting audits and assessments, in differing stages of completion, on the companies controlled by Tarjetas Regionales. Said agencies have served notices and made claims regarding taxes applicable to Tarjetas Regionales’s subsidiaries. Such companies are taking the corresponding administrative and legal steps in order to solve such issues. The original amount claimed for taxes totaled approximately Ps.38 million.

As of December 1, 2017, Tarjeta Naranja had filed a reimbursement claim before the AFIP regarding its income tax for the 2014-2016 fiscal years in an amount equal to Ps.856,612. The claim was based on the failure to apply the inflation adjustment standards set forth in Section VI of the Income Tax Law, which led to a substantial difference in the taxable income exceeding the reasonable limits of taxation. The same claim was presented on behalf of Tarjetas Cuyanas as of May 17, 2018, for 2014-2016, amounting Ps.145,178. Both claims remain pending before the AFIP.

Based on the opinion of tax advisors, each of Tarjeta Naranja and Tarjetas Cuyanas believes that such claims are unfounded and that the taxes related to such claims have been correctly calculated in accordance with the tax regulations then in effect and Argentine case law.

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Dividend Policy and Dividends

Dividend Policy

Grupo Financiero Galicia’s policy for the distribution of dividends envisages, among other factors, the obligatory nature of establishing a legal reserve, financial condition and indebtedness, the business requirements of affiliated companies and, mainly, that the profits recorded in the financial statements are, to a great extent, income from holdings and not realized and liquid profits, a requirement of Section 68 of the Corporations Law so that it is possible to distribute them as dividends. The proposal to distribute dividends arising from such analysis has to be approved at the shareholders’ meeting that discusses the Financial Statements corresponding to each fiscal year.

We may only declare and pay dividends out of our retained earnings representing the profit realized on our operations and investments. The Corporations Law and our bylaws state that no profits may be distributed until prior losses are covered. Dividends paid on our class A shares and class B shares will equal one another on a per share basis. As required by the Corporations Law, 5% of our net income is allocated to a legal reserve until the reserve equals 20% of our outstanding capital. Dividends may not be paid if the legal reserve has been impaired until it is fully restored. The legal reserve is not available for distribution to shareholders.

Our ability to pay dividends to our shareholders principally depends on (i) our net income, (ii) cash availability, (iii) indebtedness, and (iv) applicable legal requirements.

Holders of our ADSs will be entitled to receive any dividends payable in respect of our underlying class B shares. We will pay cash dividends to the ADSs depositary in Pesos, although we reserve the right to pay cash dividends in any other currency, including Dollars. The ADSs deposit agreement provides that the depositary will convert cash dividends received by the ADSs depositary in Pesos to Dollars and, after deduction or upon payment of fees and expenses of the ADSs depositary and deduction of other amounts permitted to be deducted from such cash payments in accordance with the ADSs deposit agreement (such as for unpaid taxes by the ADSs holders in connection with personal asset taxes or otherwise), will make payment to holders of our ADSs in Dollars.

Dividends

Grupo Financiero Galicia

As a holding company, our principal source of cash from which to pay dividends on our shares is dividends or other intercompany transfers from our subsidiaries, primarily Banco Galicia. Due to dividend restrictions contained in Banco Galicia’s loan agreements in connection with Banco Galicia’s foreign debt restructuring that were lifted when such debt was fully paid during fiscal year 2016 and in some Argentine Central Bank regulations, our ability to distribute cash dividends to our shareholders has been materially and adversely affected since late 2001 until 2010, when Banco Galicia obtained the authorization to distribute its profits.

After the end of fiscal year 2011, the Argentine Central Bank modified its regulations governing the minimum capital requirements and dividend distribution and, consequently, Banco Galicia was not able to pay dividends. However, for fiscal year 2018 the Bank has met the aforementioned regulations and approved the distribution of cash dividends in an amount equal to Ps.1,500 million at its April 2019 shareholders’ meeting. During 2017, Grupo Financiero Galicia paid cash dividends for Ps.240 million for fiscal year 2016, representing Ps.0.1846 per share, equivalent to Ps.406 million as of December 2018. During 2018, Grupo Financiero Galicia paid cash dividends for fiscal year 2017 in the amount of Ps.1,200 million, representing Ps.0.8411 per share, equivalent to Ps.1,617 million as of December 2018.

Due to the fact that most of the profits in fiscal year 2018 correspond to holdings income that does not meet the requirements for distribution set forth in Section 68 of the Corporations’ Law and given Grupo Financiero Galicia’s financial condition, a proposal was made by the Board of Directors to pay cash dividends in an amount equal to Ps.2,000 million (which represents 140.1772%) with regard to 1,426,764,597 class A and B ordinary shares with a face value of Ps.1 each. The shareholders’ meeting held on April 25, 2019 approved such proposal.

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Pursuant Act No.27,260, Grupo Financiero Galicia neither reimbursed nor withheld any amount for tax purposes on the dividends paid for fiscal year 2017.

Pursuant Act No.27,430 Grupo Financiero Galicia may withhold some amount for tax purposes on the dividends to be paid for fiscal year 2018.

For more information on requirements for dividend distribution, see Item 4. “Information on the Company”─B.”Business Overview”—“Argentine Banking Regulation”—“Profit Distribution”.

BancoGalicia

During the ordinary and extraordinary shareholders’ meeting held on April 25, 2019, the shareholders approved the payment of a cash dividend, in the amount of Ps.1,500 million, corresponding to the 2018 fiscal year.

Sudamericana Holding

On September 14, 2018, Sudamericana held an extraordinary shareholders’ meeting, at which shareholders approved the payment of a cash dividend in the amount of Ps.440 million.

B. Significant Changes

Prisma Medios de Pago S.A.

Within the framework of the divestment commitment undertaken by Prisma Medios de Pago S.A. and its shareholders to the Argentine Commission of Competence Defense, on January 21, 2019, Banco Galicia, along with the other shareholders, accepted an offer made by AI Zenith (Netherlands) B.V. to buy 3,182,444 book-entry common shares, with face value of $1 each and one vote per share, representing 7.7007% of such entity's capital stock.

The estimated total price of the transaction amounted to US$106,258, of which Banco Galicia received US$63,073 on February 1, 2019. The balance (US$43,185) will be paid over the next five years as follows: (i) 30% will be payable in Pesos at the applicable UVA rate, plus an annual nominal 15% rate, and (ii) 70% will be payable in Dollars at an annual nominal 10% rate.

Banco Galicia continues to hold 3,057,642 shares in Prisma Medios de Pago S.A., which represents 7.3988% of its capital stock.

 

 

Item 9. The Offer and Listing

Shares and ADSs

Our class B shares are listed on the BYMA, MAE and the Córdoba Stock Exchange under the symbol “GGAL”. Our class B shares have started listing on MAE since October 28, 2015. Our ADSs, each representing ten class B shares, are listed on the Nasdaq Capital Market, under the symbol “GGAL”. Our ADSs have been listed on Nasdaq Capital Market since August 2002. Previously, our ADSs had been listed on the Nasdaq National Market since July 24, 2000.

 

Argentine Securities Market

The principal and oldest exchange for the Argentine securities market is the BYMA. The BYMA started operating in 1854 and handles the largest proportion of all equity trading in Argentina. Securities listed on the BYMA include corporate equity and debt securities and government securities. Debt securities listed on the BYMA may also be listed on the MAE. The MERVAL, which is affiliated with the BYMA, was founded in 1929 and is the

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largest stock market in Argentina. The MERVAL is a private entity, whose capital is integrated by shares admitted to public offer regime and was registered as a market by the CNV under N°16. Its capital is composed of 104 outstanding shares and there are 224 agents registered as members of the Merval market. We are member of the Merval through Galicia Valores, a subsidiary that owns one share. Additionally, the Bank, within the framework of the Capital Market Law, was authorized by the CNV to act as a settlement and clearing agent and trading agent-comprehensive, and was added as member of the MERVAL.

Trading on the BYMA is conducted mostly through the Sistema Integrado de Negociación Asistida por Computación (Integrated Computer Assisted Trading System, “SINAC”) although there are still some transactions carried out by continuous open outcry, the traditional auction system, from 11:00 a.m. to 5:00 p.m. each business day of the year. SINAC is a computer trading system that permits trading in debt and equity securities and is accessed by brokers directly from workstations located at their offices. As a result of an agreement between the MERVAL and the MAE, equity securities are traded exclusively on the BYMA and corporate and government debt securities are traded on the MAE and the BYMA. Currently, all transactions relating to listed corporate and government debt securities can be effected on SINAC. In addition, a substantial over-the-counter market exists for private trading in listed debt securities and, prior to the agreement described above, equity securities. Such trades are reported on the MAE.

Although companies may list all of their capital stock on the BYMA, in most cases the controlling shareholders retain the majority of a company’s capital stock. This results in only a relatively small percentage of most companies’ stock being available for active trading by the public on the BYMA. Even though individuals have historically constituted the largest group of investors in Argentina’s equity markets, in recent years, banks and insurance companies have shown an interest in these markets. Argentine mutual funds, by contrast, continue to have very low participation in the market. Although 104 companies had equity securities listed on the BYMA as of December 31, 2018, the 5 most-traded companies on the exchange accounted for approximately 45.6% of total trading value during 2018, from a 38.6% recorded in 2017. Our shares were the first-most traded shares on the BYMA in 2018, with a 15.2% share of trading volume from an also first position of 10.44% recorded during 2017.

The Córdoba Stock Exchange is another important stock market in Argentina. Securities listed on the Córdoba Stock Exchange include both corporate equity and debt securities and government securities. Through an agreement with the BYMA, all the securities listed on the BYMA are authorized to be listed and subsequently traded on the Córdoba Stock Exchange. Thus, many transactions that originate on the Córdoba Stock Exchange relate to companies listed on the BYMA and such trades are subsequently settled in Buenos Aires.

The MAE is a self-regulated organization that is supervised by the CNV. MAE is mainly comprised by private banks, either composed by national or foreign capital, national banks, provincial banks, municipal Banks, cooperative Banks, financial companies, exchange companies and agents.

Market Regulations

The CNV oversees the Argentine securities markets and is responsible for authorizing public offerings of securities and supervising brokers, public companies and mutual funds. Argentine pension funds and insurance companies are regulated by separate Argentine government agencies, while financial institutions are regulated mainly by the Argentine Central Bank. The Argentine securities markets are regulated by the CNV, which was created by Law No.17,811, as amended.

In compliance with the provisions of Law No.20,643 and the Decrees No.659/74 and No.2220/80, most debt and equity securities traded on the exchanges and the MAE must, unless otherwise instructed by the shareholders, be deposited by the shareholders in Caja de Valores, which is a corporation owned by the BYMA. Caja de Valores is the central securities depository of Argentina, which provides depository facilities for securities and acts as a transfer and paying agent in connection therewith. It also handles settlement of securities transactions carried out on the BYMA and operates the computerized exchange information system.

Pursuant to the requirements of the Argentine regulations, there may be less publicly available information about Argentine companies than is regularly published by or about companies in the U.S. and other countries. However, the CNV has taken steps to strengthen disclosure and regulatory standards for the Argentine securities

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market, including the issuance of regulations prohibiting insider trading and requiring insiders to report on their ownership of securities, with associated penalties for non-compliance.

In order to improve the regulation of the Argentine securities market, the CNV passed Decree No.677/01 (the “Decree for Transparency in Public Offerings”). This decree has come to be regarded as the financial consumer’s “bill of rights”. Its objective is to provide transparency and protection to participants in the capital markets. The decree was applied to individuals and entities that participate in the public offering of securities and to stock exchanges as well. Among its key provisions, the decree expanded the definition of “security”; regulated the treatment of negotiable securities; forced publicly listed companies to form audit committees composed of three or more members of the board of the directors (the majority of whom must be independent under CNV regulations); authorized market-stabilization transactions under certain circumstances, and provides for the increased regulation of insider trading, market manipulation securities fraud, going-private transactions and the acquisition of voting shares .

In order to offer securities to the public in Argentina, an issuer must meet certain requirements of the CNV regarding assets, operating history, management and other matters, and only securities for which an application for a public offering has been approved by the CNV may be listed on the corresponding stock exchange. This approval does not imply any kind of certification of assurance related to the merits of the quality of the securities, or the solvency of the issuer. Issuers of listed securities are required to file unaudited quarterly financial statements and audited annual financial statements, as well as various other periodic reports, with the CNV and the corresponding stock exchange.

Securities can currently be freely traded on the Argentine markets, however the Argentine government has periodically imposed certain restrictions regarding access by residents and non-residents to the local foreign exchange market and to transfers of foreign exchange abroad. See Item 4. “Information on the Company—Government Regulation—Foreign Exchange Market”.

On October 2007, the CNV passed Resolution No. 516/07, which was amended in May 2012 by Resolution No. 606/12 to provide for the voluntary adoption of a corporate governance code. This resolution established the minimum requirements for corporate governance codes and recommends adoption of such code by public companies. This resolution also requires that their policy with respect to each recommendation be detailed in a template provided by such resolution in the annual report. The Resolution No. 516/07 was effective for fiscal years beginning on January 1, 2008 and after and, therefore, public companies, including us, have to report on their degree of fulfillment of each topic of such code.

 

On December 2012, the Argentine Congress passed the Capital Markets Law (Law No. 26,831), which became effective on January 2013, replacing Law No.17,811 and Decree No. 677/01, with the goal of regulating capital markets transactions subject to the supervision of the CNV and broadening the CNV’s powers. Additionally, under the Capital Markets Law, the self-regulation of markets was eliminated, and authorization, supervision, control and disciplinary and regulatory powers were conferred to the CNV. On September 9, 2013, the CNV published CNV Rules supplementing the Capital Markets Law. The CNV Rules have been in force since September 18, 2013.

 

On May 9, 2018, the Argentine Congress passed Law No. 27,440 (Ley de Financiamiento Productivo) with the goal of developing the Argentine domestic capital markets. The draft bill provides for the amendment and update of the Argentine Capital Markets Law, the Mutual Funds Law and the Argentine Negotiable Obligations Law, among others. Such Law No. 27,440 sets forth certain regulations that are intended to provide SMEs with better access to financial instruments and to create an electronic credit invoice for MSMEs that replace the receipts from sales and credit invoices. Also, Law No. 27,440 improves the regulatory framework by introducing the new products for SMEs, such as discounts for access to the financial market and the amendment of certain tax provisions, regulations relating to derivatives and the promotion of a financial inclusion program.

 

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Item 10. Additional Information

B. Memorandum and Articles of Association

Description of Our Bylaws

General

Set forth below is a brief description of certain provisions of our bylaws and Argentine law and regulations with regard to our capital stock. Your rights as a holder of our capital stock are subject to Argentine corporate law, which may differ from the corporate laws of other jurisdictions. This description is not purported to be complete and is qualified in its entirety by reference to our bylaws, Argentine law and the rules of the BYMA, the Córdoba Stock Exchange as well as the CNV. A copy of our bylaws has been filed with and can be examined at the CNV in Buenos Aires and the SEC in Washington, D.C.

We were incorporated on September 14, 1999, as a stock corporation under the laws of Argentina and registered on September 30, 1999, with the IGJ, under corporate registration number 14,519 of Book 7, Volume of Stock Corporations. Our domicile is in Buenos Aires, Argentina. Under our bylaws, our duration is until June 30, 2100 and we are exclusively a financial and investment company (as stated in “Chapter 2. Purpose. Article 3.” of our bylaws). This duration may be extended by resolution taken at an extraordinary shareholders’ meeting.

Our bylaws do not contain any provision governing the ownership threshold above which shareholder ownership must be disclosed.

Outstanding Capital Stock

Our total subscribed and paid-in share capital as of December 31, 2018, amounted to Ps.1,426,764,947, composed of class A shares and class B shares, each with a par value of Ps.1. The following table presents the number of our shares outstanding as of December 31, 2018, and the voting interest that the shares represent.

 

 

Registration and Transfer

The class B shares are book-entry common shares held through Caja de Valores. Caja de Valores maintains a stock registry for us and only those persons listed in such registry will be recognized as our shareholders. Caja de Valores periodically delivers to us a list of the shareholders as at a certain date.

The class B shares are transferable on the books of Caja de Valores. Caja de Valores records all transfers in our registry. Within ten days of any such transfer, Caja de Valores is required to confirm the registration of transfer with the transferor.

Voting Rights

At shareholders’ meetings, each class A share is entitled to five votes and each class B share is entitled to one vote. However, class A shares are entitled to only one vote in certain matters, such as:

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All distinctions between our class A shares and our class B shares will be eliminated upon the occurrence of any of the following change of control events:

Limited Liability of Shareholders

Shareholders are not liable for our obligations. Shareholders’ liability is limited to the payment of the shares for which they subscribe. However, shareholders who have a conflict of interest with us and do not abstain from voting may be held liable for damages to us. Also, shareholders who willfully or negligently vote in favor of a resolution that is subsequently declared void by a court as contrary to Argentine law or our bylaws may be held liable for damages to us or to third parties, including other shareholders, resulting from such resolutions.

Directors

Our bylaws provide that the Board of Directors shall be composed by at least three and at most nine members, as decided at a general ordinary shareholders’ meeting. To be appointed to our Board of Directors, such person must have been presented as a candidate by shareholders who represent at least 10% of our voting rights, at least three business days before the date the general ordinary shareholders’ meeting is to be held. Our bylaws do not state an age limit over which the directors cannot serve on our board.

At each annual shareholders’ meeting, the term of one-third of the members of our Board of Directors (no fewer than three directors) expires and their successors are elected to serve for a term of three years. The shareholders’ meeting shall have the power to fix a shorter period (one or two years) for the terms of office of one, several or all the directors. This system of electing directors is intended to help maintain the continuity of the board. Alternate directors replace directors until the following general ordinary shareholders’ meeting is held. Directors may also be replaced by alternate directors if a director will be absent from a board meeting. The Board of Directors is required to meet at least once every month and anytime any one of the directors or syndics so requests.

Our bylaws state that the Board of Directors may decide to appoint an executive committee and/or a delegate director.

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Our bylaws do not provide for any arrangements or understandings with major shareholders, customers, suppliers or others, pursuant to which any person referred to in this annual report was selected as a director or member of senior management.

Additionally, pursuant to our bylaws, any borrowing powers on behalf of the Company are granted to our Board of Directors. Our Board of Directors has the power to delegate these borrowing powers to our directors through a power of attorney and currently certain of our directors have powers of attorney to negotiate the terms of and borrow money on behalf of the Company. Furthermore, as stated by our bylaws, the chairman of our Board of Directors is also the legal representative of the Company. Although our bylaws do not expressly address a director’s power to vote on proposals, arrangements or contracts in which the director has a material interest, pursuant to customary Argentine business practice and certain tenants of Argentine corporate law, our directors do not vote on proposals, arrangements or contracts in which the director has a material interest.

Appointment of Directors and Syndics by Cumulative Voting

The Corporations Law provides for the use of cumulative voting to enable minority shareholders to appoint members of the board of directors and syndics. Upon the completion of certain requirements, shareholders are entitled to appoint up to one third of the vacancies to be filled on the board of directors by cumulative voting. Each shareholder voting cumulatively has the number of votes resulting from multiplying the number of votes to which such shareholder would normally be entitled by the number of vacancies to be filled. Such shareholder may apportion his votes or cast all such votes for one or a number of candidates not exceeding one-third of the vacancies to be filled.

Compensation of Directors

The Corporations Law and the CNV establish rules regarding the compensation of directors. The maximum amount of aggregate compensation that the members of the board of directors may receive, including salaries and other compensation for the performance of permanent technical and administrative services, may not exceed 25.0% of profits of each fiscal year. This maximum amount shall be limited to 5.0% when no dividends are distributed to the shareholders and shall be increased proportionately to the dividend distribution until the 25.0% limit is reached when all profits are distributed.

The Corporations Law provides that aggregate director compensation may exceed the maximum percentage of computable profit in any one year when the company’s profits are non-existent or too small as to allow payment of a reasonable compensation to board members which have been engaged in technical or administrative services to the company, provided that such proposal is described in the notice of the agenda for the ordinary shareholders’ meeting and is approved by a majority of shareholders present at such shareholders’ meeting.

In addition to the above, our bylaws establish that best practices and national and international market standards regarding directors with similar duties and responsibilities shall be considered when determining the compensation of board members.

Syndics

Our bylaws, in accordance with Argentine law, provide for the maintenance of a supervisory committee whose members are three permanent syndics and three alternate syndics. Syndics are elected for a one-year term and may be re-elected. Alternate syndics replace permanent syndics in case of absence. For the appointment of syndics, each of our class A shares and class B shares has only one vote. Fees for syndics are established by the shareholders at the annual ordinary shareholders’ meeting. Their function is to oversee the management of the Company, to control the legality of the actions of the board of directors, to attend all board of directors’ meetings, to attend all shareholders’ meetings, to prepare reports for the shareholders on the financial statements with their opinion, and to provide information regarding the Company to shareholders that represent at least 2% of the capital stock. Syndics’ liabilities are joint and several and unlimited for the non-fulfillment of their duties. They are also jointly and severally liable, together with the members of the board of directors, if the proper fulfillment of their duties as syndics would have avoided the damage or the losses caused by the members of the board of directors.

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Shareholders’ Meetings

Shareholders’ meetings may be ordinary meetings or extraordinary meetings. An annual ordinary shareholders’ meeting is required to be held in each fiscal year to consider the matters outlined in Article 234 of the Corporations Law, including, among others:

Extraordinary shareholders’ meetings may be called at any time to discuss matters beyond the competence of the ordinary meeting, including but not limited to amendments to the bylaws, matters related to the liquidation of a company, limitation of the shareholders’ preemptive rights to subscribe new shares, issuance of bonds and debentures, transformation of the corporate form, a merger into another company and spin-offs, early winding-up, change of the Company’s domicile to outside Argentina, total or partial repayment of capital for losses, and a substantial change in the corporate purpose set forth in the bylaws.

Shareholders’ meetings may be convened by the board of directors or by the syndics. A shareholder or group of shareholders holding at least 5.0% in the aggregate of our capital stock may request the board of directors or the syndics to convene a general shareholders’ meeting to discuss the matters indicated by the shareholder.

Once a meeting has been convened with an agenda, the agenda limits the matters to be decided upon at such meeting and no other matters may be decided upon.

Additionally, our bylaws provide that any shareholder holding at least 5% in aggregate of our capital stock may present, in writing, to the Board of Directors, before February 28 of each year, proposals of items to be included in the agenda at the annual general ordinary shareholders’ meeting. The Board of Directors is not obligated to include such items in the agenda.

Class B shares represented by ADSs will be voted or caused to be voted by the Depositary in accordance with instructions of the holders of such ADSs. In the event instructions are not received from the holder, the Depositary shall give a discretionary proxy for the shares represented by such ADSs to a person designated by us.

Notice of each shareholders’ meeting must be published in the Official Gazette, and in a widely circulated newspaper in the country’s territory, at least twenty days prior to the meeting but not more than forty-five days prior to the date on which the meeting is to be held. The board of directors will determine the appropriate publication of notices outside Argentina in accordance with the requirements of the jurisdictions and exchanges on which our shares are traded. In order to attend a meeting and to be listed on the meeting registry, shareholders must submit evidence of their book-entry share account held at Caja de Valores at least three business days prior to the scheduled meeting date without counting the meeting day.

The quorum for ordinary meetings consists of a majority of stock entitled to vote, and resolutions may be adopted by the affirmative vote of 50% plus one vote (an “absolute majority”) of the votes present whether in person or participating via electronic means of communication. If no quorum is present at the first meeting, a second meeting may be called at which the shareholders present, whatever their number, shall constitute a quorum. Resolutions are to be adopted by an absolute majority of the votes present. The second meeting may be convened to be held one hour later on the same day as the first meeting had been called for, provided that it is an ordinary shareholders’ meeting, or within 30 days of the date for which the first ordinary meeting was called.

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The quorum for extraordinary shareholders’ meetings consists of 60% of stock entitled to vote, and resolutions may be adopted by an absolute majority of the votes present. If no quorum is present at the first meeting, a second meeting may be called at which the shareholders present, whatever their number, shall constitute a quorum. Resolutions are to be adopted by an absolute majority of the votes present. The second meeting has to be convened to be held within 30 days of the date for which the first extraordinary meeting was called, and the notice must be published for three days, at least eight days before the date of the second meeting. Some special matters require a favorable vote of the majority of all the stock holding voting rights, the class A shares being granted the right to only one vote each. The special matters are described in “—Voting Rights” above.

Dividends

Dividends may be lawfully paid and declared only out of our retained earnings representing the profit realized and liquid on our operations and investments reflected in our annual financial statements, as approved at our annual general shareholders’ meeting. No profits may be distributed until prior losses are covered. Dividends paid on our class A shares and class B shares will equal one another on a per-share basis.

As required by the Corporations Law, 5% of our net income is allocated to a legal reserve until the reserve equals 20% of our outstanding capital. Dividends may not be paid if the legal reserve has been impaired. The legal reserve is not available for distribution to shareholders.

Our Board of Directors submits our financial statements for the previous fiscal year, together with reports prepared by our supervisory committee, to our shareholders for approval at the general ordinary shareholders’ meeting. The shareholders, upon approving the financial statements, determine the allocation of our net income.

Our Board of Directors is allowed by law and by our bylaws to decide to pay anticipated dividends on the basis of a balance sheet especially prepared for purposes of paying such dividends.

Under BYMA regulations, cash dividends must be paid to shareholders within ten days of the shareholders’ meeting approving said dividend. Payment of dividends in shares requires authorization from the CNV, the BYMA and the Córdoba Stock Exchange, whose authorizations must be requested within ten business days after the shareholders’ meeting approving the dividend. We must make a distribution of the shares available to shareholders not later than three months after receiving authorization to do so from the CNV.

Shareholders may no longer claim the payment of dividends from us after three years have elapsed from the date on which the relevant dividends were made available to such shareholders.

Capital Increases and Reductions

We may increase our capital upon resolution of the general ordinary shareholders’ meeting. All capital increases must be reported to the CNV, published in the Official Gazette and registered with the Public Registry of Commerce. Capital reductions may be voluntary or mandatory. A voluntary reduction of capital must be approved by an extraordinary shareholders’ meeting after the corresponding authorization by the BYMA, the Córdoba Stock Exchange and the CNV and may take place only after notice of such reduction has been published and creditors have been given an opportunity to obtain payment or guarantees for their claims or attachment. A reduction of capital is mandatory when losses have exceeded reserves and more than 50% of the share capital of the Company.

Preemptive Rights

Under Argentine law, it is mandatory that a shareholder of ordinary shares of any given class have preemptive rights, proportional to the number of shares he or she owns, to subscribe for shares of capital stock of the same class or of any other class if the new subscription offer does not include all classes of shares. Shareholders may only decide to suspend or limit preemptive rights by supermajority at an extraordinary shareholders’ meeting and only in exceptional cases. Shareholders may waive their preemptive rights only on a case-by-case basis.

In the event of an increase in our capital, holders of class A shares and class B shares have a preemptive right to subscribe for any issue of class B shares in an amount sufficient to maintain the proportion of capital then

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held by them. Holders of class A shares are entitled to subscribe for class B shares because no further class A shares carrying five votes each are allowed to be issued in the future. Under Argentine law, companies are prohibited from issuing stock with multiple voting rights after they have been authorized to make a public offering of securities.

Preemptive rights are exercisable following the last publication of the notification to shareholders of the opportunity to exercise preemptive rights in the Official Gazette and an Argentine newspaper of wide circulation for a period of 30 days, provided that such period may be reduced to no less than ten days if so approved by an extraordinary shareholders’ meeting.

Shareholders who have exercised their preemptive rights and indicated their intention to exercise additional preemptive rights are entitled to additional preemptive rights (“accretion rights”), on a pro rata basis, with respect to any unsubscribed shares, in accordance with the terms of the Corporations Law. Class B shares not subscribed for by shareholders through the exercise of their preemptive or accretion rights may be offered to third parties.

Holders of ADSs may be restricted in their ability to exercise preemptive rights if a registration statement relating to such rights has not been filed or is not effective or if an exemption from registration is not available.

Appraisal Rights

Whenever our shareholders approve:

any shareholder that voted against such action or did not attend the relevant meeting may exercise its right to have its shares canceled in exchange for the book value of its shares, determined on the basis of our latest balance sheet prepared in accordance with Argentine laws and regulations, provided that such shareholder exercises its appraisal rights within the periods set forth below.

There is, however, doubt as to whether holders of ADSs, will be able to exercise appraisal rights with respect to class B shares represented by ADSs.

Appraisal rights must be exercised within five days following the adjournment of the meeting at which the resolution was adopted, in the event that the dissenting shareholder voted against such resolutions, or within 15 days following such adjournment if the dissenting shareholder did not attend such meeting and can prove that he was a shareholder on the date of such meeting. In the case of a merger or spin-off involving an entity authorized to make a public offering of its shares, appraisal rights may not be exercised if the shares to be received as a result of such transaction are listed on any stock exchange. Appraisal rights are extinguished if the resolution giving rise to such rights is overturned at another shareholders’ meeting held within 75 days of the meeting at which the resolution was adopted.

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Payment of the appraisal rights must be made within one year from the date of the shareholders’ meeting at which the resolution was adopted, except if the resolution was to delist our capital stock, in which case the payment period is reduced to 60 days from the date of the related resolution.

Preferred Stock

According to the Corporations Law and our bylaws, an ordinary shareholders’ meeting may approve the issuance of preferred stock. Such preferred stock may have a fixed dividend, cumulative or not cumulative, with or without additional participation in our profits, as decided by shareholders at a shareholders’ meeting when determining the conditions of the issuance. They may also have other preferences, such as a preference in the event of our liquidation.

The holders of preferred stock shall not be entitled to voting rights. Notwithstanding the foregoing, in the event that no dividends are paid to such holders for their preferred stock, and for as long as such dividends are not paid, the holders of preferred stock shall be entitled to voting rights. Holders of preferred stock are also entitled to vote on certain special matters, such as the transformation of the corporate form, a merger into another company and spin-offs (when we are not the surviving entity and the surviving entity is not listed on any stock exchange), early winding-up, a change of our domicile to outside Argentina, total or partial repayment of capital for losses and a substantial change in the corporate purpose set forth in our bylaws or in the event our preferred stock is traded on stock exchanges and such trading is suspended or terminated.

Conflicts of Interest

As a protection to minority shareholders, under the Corporations Law, a shareholder is required to abstain from voting on any resolution in which its direct or indirect interests conflict with that of or are different than ours. In the event such shareholder votes on such resolution, and such resolution would not have been approved without such shareholders’ vote, the resolution may be declared void by a court and such shareholder may be liable for damages to the Company as well as to any third party, including other shareholders.

Redemption or Repurchase

According to the Capital Markets Law, a stock corporation may acquire the shares issued by it, provided that the public offering and listing thereof has been authorized, subject to the following terms and conditions and those set forth by the CNV. The above-mentioned conditions are: (i) the shares to be acquired shall be fully paid up; (ii) there shall be a resolution signed by the board of directors to such effect; (iii) the acquisition shall be made out of net profits or free or voluntary reserves; and (iv) the total amount of shares acquired by the Company, including previously acquired shares, shall not exceed 10% of the capital stock or such lower percentage determined by the CNV. The shares acquired by the Company in excess of such limit shall be disposed of within the term of 90 days after the date of the acquisition originating such excess.

The shares acquired by the Company shall be disposed of by the Company within the maximum term of three years counted as from the date of acquisition thereof. Upon disposing of the shares, the Company shall make a preemptive offer thereof. Such an offer will not be obligatory if the shares are used in connection with a compensation plan or program for the Company’s employees or if the shares are distributed among all shareholders pro rata their shareholdings. If shareholders do not exercise, in whole or in part, their preemptive rights, the sale shall be made at a stock exchange.

Liquidation

Upon our liquidation, one or more liquidators may be appointed to wind up our affairs. If no such appointment is made, our Board of Directors will act as liquidator. All outstanding common shares will be entitled to participate equally in any distribution upon liquidation. In the event of liquidation, in Argentina and in any other country, our assets shall first be applied to satisfy our debts and liabilities.

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Other Provisions

Our bylaws are governed by Argentine law and the ownership of any kind of our shares represents acceptance of our bylaws and submission to the exclusive jurisdiction of the ordinary commercial courts of Buenos Aires for any claim or dispute related to us, our shareholders, directors and members of the supervisory committee.

C. Material Contracts

Bonds

During the 2016 fiscal year, Banco Galicia issued subordinated Class II notes due 2026 in an aggregate principal amount of US$250 million. The proceeds of this issuance were used to redeem the Bank’s outstanding subordinated notes due 2019. During the 2017 fiscal year, Banco Galicia issued Class III notes in an aggregate principal amount of US$150.5 million due 2020 and Class IV notes in an aggregate principal amount of Ps.2,000 million due 2020. During the 2018 fiscal year, Banco Galicia issued Class V Series I notes due 2020 and Series II notes due 2020 in an aggregate principal amount of Ps.4,209 million and Ps.2,032 million, respectively.  

The pricing supplements for the issuances described above set forth certain covenants Banco Galicia must comply with for the benefit of the holders of such notes, which include, among others, restrictions on mergers, acquisitions or dispositions (subject to certain exceptions) and restrictions on the incurrence of additional debt.  

For additional detail regarding the notes issued during fiscal year 2018, see Note 28 to our financial statements.

Loans

In May 2016, the IFC granted Banco Galicia a credit line in an amount of up to US$130 million. As of May 2018, Banco Galicia has drawn all of the commited amount and the loan was amortized for Ps.8 million.

On March 23, 2018, Banco Galicia announced the issuance of a green bond to raise US$.100 million in order to expand its loan program for environmental efficiency projects. This is the first green bond issued by a private financial institution in Argentina, marking Banco Galicia’s commitment to finance projects with a positive impact on the environment.The bonds were underwritten on June 21, 2018 by the IFC. To date, loans for US$10 million were granted.

D. Exchange Controls

For a description of the exchange controls that would affect us or the holders of our securities, see Item 4. “Information on the Company—Government Regulation—Foreign Exchange Market”.

E. Taxation

The following is a summary of the principal Argentine and U.S. federal income tax consequences arising from the acquisition, ownership and disposition of our class B shares and ADSs. This summary is based on Argentine and U.S. federal tax laws, as well as the regulations in effect as of the date of this annual report. Further, this summary is subject to any subsequent changes in laws and regulations that may come into effect after this date. Any change could apply retroactively and could affect the continued validity of this summary. This summary does not constitute legal advice or a legal opinion with respect to the transactions that the holders of our class B shares or ADSs may enter into. This summary is only a brief description of certain (but not all) aspects of the Argentine and U.S. federal income tax systems, as they relate to the acquisition, ownership and disposition of our class B shares and ADSs. In addition, although the Company believes that the following summary is a reasonable interpretation of the current taxation rules and regulations, Grupo Galicia cannot assure that the applicable authorities or tribunals will agree with all, or any of the tax consequences outlined below. Currently, there is no tax treaty between the United States and Argentina.

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Argentine Taxes

Law No.26,893, enacted on September 12, 2013 and published in the Official Gazette on September 23, 2013, introduced changes to Income Tax Law No.20,628, including the derogation of Section 78 of Decree No.2284/1991; which provides that foreign holders with no permanent establishment in Argentina are exempt from paying income tax on the capital gains arising from the sale or other disposition of shares or ADSs.

Decree No.2334/2013 has regulated Law No.26,893. This decree provides that changes introduced by Law No.26,893 are effective from the date of publication of such law in the Official Gazette and apply to taxable events carried out from such date onwards.

Law No.27,430 enacted on December 27, 2017 and published in the Official Gazette on December 29, 2017, introduced several changes to Income Tax Law No.20,628. The principal change resulting from such law is a corporate income tax rate reduction in two phases. For fiscal years beginning on or after January 1, 2018 until December 31, 2019, the government has reduced the corporate income tax rate from 35% to 30%. After December 31, 2019, the corporate tax rate will be further reduced to 25%.

This reform includes additional changes, such as the confirmation that ADRs and ADSs generate Argentine-sourced income. Non- residents, however, will be exempted from the current 15% capital gains tax on the sale of ADRs or ADSs if they reside in a jurisdiction having an exchange of information agreement with Argentina or if these invested funds come from a cooperating jurisdiction.

Taxation of Dividends

As from the effectiveness of Law No. 27,430, dividends distributions (other than stock dividends) made by local entities to individuals, undivided estates, and foreign entities are subject to a withholding tax at a rate of 7% (while the corporate income tax is 30%) and at a rate of 13% beginning January 1, 2020. Thus, the combined rate on dividend/profit distribution would remain around the current 35% rate, as Argentina has not levied a withholding tax on dividends or branch profits, since it eliminated the same in 2016.

Decree No.1170/2018 provides for further guidance on Law No.27,430. This decree provides that dividend payments on ADSs or ordinary shares, whether in cash, property, or stock, would be subject to Argentine withholding tax and the exemption referred to in the last paragraph of “—Argentine Taxes” above shall not apply.

Equalization Tax

There is a specific rule under which a 35% tax (“equalization tax”) will be imposed on certain dividends approved by shareholders. The equalization tax will be applied only to the extent that distributions of dividends exceed the taxable income of the company increased by non-taxable dividends received by the distributing company in prior years and reduced by Argentine income tax paid by the distributing company.

The equalization tax will be imposed as a withholding tax on the shareholder receiving the dividend. Dividend distributions made in kind (other than cash) will be subject to the same tax rules as cash dividends. Stock dividends are not subject to Argentine taxation.

In addition, the foregoing tax reforms abolished the equalization tax for profits generated beginning January 1, 2018. Such equalization tax is a withholding tax levied at a rate of 35% on dividend distributions in excess of tax earnings that would remain applicable for the stock of non-distributed earnings and profits as of December 31, 2017.

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Taxation of Capital Gains

In accordance with Law No.27,430 capital gains derived by non-resident individuals or foreign companies from the sale, exchange or other disposition of ADSs or class B shares are subject to the following regulations:

Tax on Minimum Notional Income

The tax reform in force since 1999 reinstituted a tax on assets of Argentine companies. This tax is similar to the asset tax that was previously in effect in Argentina from 1990 to 1995. It applies at a general rate of 1% on a broadly defined asset base encompassing most of the taxpayer’s gross assets at the end of any fiscal year ending after December 31, 1998.

Specifically, the Law establishes that banks, other financial institutions and insurance companies will consider a taxable base equal to 20% of the value of taxable assets.

Income tax and asset tax payments for a tax year will reduce a company’s tax liability on assets for that tax year; and can be carried forward to be applied against the company’s income tax liability in any of the next 10 tax years.

According to Law No.27,260, this tax will be repealed as of 2019.

Personal Assets Tax

 

Individuals domiciled and undivided estates located in Argentina or abroad will be subject to an annual tax in respect of assets located in Argentina and abroad. Applicable wealth tax rates and minimum non-taxable asset values for the general taxpayer regime are replaced with effect as of fiscal year 2019 by Law No.27,480. The following is the new scheme:

 

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Individuals domiciled abroad will pay the tax only in respect of the assets they hold in Argentina. In the case of individuals domiciled abroad, the tax will be paid by the individuals or entities domiciled in Argentina which, as of December 31 of each year, hold the joint ownership, possession, use, enjoyment, deposit, safekeeping, custody, administration or tenure of the assets located in Argentina and subject to the tax belonging to the individuals domiciled abroad. When the direct ownership of notes, government securities and certain other investments, except shares issued by companies ruled by the Corporations Law, are part of companies domiciled abroad in countries that do not enforce registration systems for private securities (with the exception of insurance companies, open-end investment funds, pension funds or banks and financial entities with head offices in countries that have adopted the international banking supervision standards laid down by the Basel Committee on Banking Supervision) or that pursuant to their bylaws, charter, documents or the applicable regulatory framework, have as their principal activity investing outside of the jurisdiction of their organization or domicile, or are generally restricted from doing business in their country of incorporation, it will be assumed, without admission of any proof to the contrary, that these assets belong ultimately to individuals and therefore the system for paying the tax for such individuals domiciled abroad applies to them.

An exception pursuant to a tax reform was published in the Official Gazette as Law No.25,585, which went into effect on December 31, 2002. This tax reform introduced a mechanism to collect the personal assets tax on shares issued by companies ruled by the Corporations Law, which ownership belongs to individuals domiciled in Argentina or abroad, and companies or entities domiciled abroad. In the case of companies or entities domiciled abroad, it will be assumed, without admitting any proof to the contrary, that these shares ultimately belong to individuals domiciled abroad.

The tax was assessed and paid by those companies ruled by the Corporations Law at the rate of 0.5% on the value of the shares or equity interest. Since fiscal year 2016, after amendments introduced by Law No.27,260, the tax rate applicable to participations in domestic entities has been reduced from 0.50% to 0.25%. The valuation of the shares, whether listed or not, must be made according to their proportional equity value. These companies may eventually seek reimbursement from the direct owner of the shares, in respect of any amounts paid to the Argentine tax authorities as a personal asset tax. Grupo Financiero Galicia has sought reimbursement for the amount paid corresponding to December 31, 2002. The Board of Directors submitted the decision on how to proceed with respect to fiscal year 2003 to the annual shareholders’ meeting held on April 22, 2004. At that meeting, our shareholders voted to suspend all claims on our shareholders for any amount unpaid for fiscal year 2002 and to have the Company absorb the amounts due for fiscal year 2003 onward, when not withheld from dividends.

Pursuant to Law No.27,260, Argentine companies that have properly fulfilled their tax obligations during the two prior fiscal years to the 2016 fiscal year, and which comply with certain other requirements, may qualify for an exemption from personal asset taxes for the 2016, 2017 and 2018 fiscal years. The request for this tax exemption should be filed before March 31, 2017. Grupo Financiero Galicia filed this request. Notwithstanding, we cannot assure that in the future, Grupo Financiero Galicia can fulfill these requirements and maintain such exemption.

 

Other Taxes

There are no Argentine federal inheritance, succession or gift taxes applicable to the ownership, transfer or disposition of ADSs or class B shares. There are no Argentine stamps, issue, registration or similar taxes or duties payable by holders of ADSs or class B shares.

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Deposit and Withdrawal of Class B Shares in Exchange for ADSs

No Argentine tax is imposed on the deposit or withdrawal of class B shares in exchange for ADSs.

United States Federal Income Taxes

The following is a summary of the material U.S. federal income tax consequences of the acquisition, ownership and disposition of class B shares and ADSs, as their terms are set forth in the documents or the forms thereof, relating to such securities as in existence on the date hereof, but it does not purport to address all the tax considerations that may be relevant to a decision to purchase, own or dispose of class B shares or ADSs. This summary assumes that the class B shares or ADSs will be held as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”), and does not address tax consequences to all categories of investors, some of which (such as dealers or traders in securities or currencies, real estate investment trusts, regulated investment companies, grantor trusts, tax-exempt entities, banks, insurance companies, persons that received class B shares or ADSs as compensation for the performance of services, persons owning (or deemed to own for U.S. federal income tax purposes) 10% or more (by voting power or value) of our shares, U.S. Holders (as defined below) whose functional currency is not the Dollar and persons that hold the class B shares or ADSs as part of a position in a “straddle” or as part of a “hedging” or “conversion” transaction for U.S. federal income tax purposes) may be subject to special tax rules. Moreover, this summary does not address the U.S. federal estate and gift or alternative minimum tax consequences of the acquisition, ownership and disposition of class B shares or ADSs.

This summary (i) is based on the Code, existing, proposed and temporary United States Treasury Regulations and judicial and administrative interpretations thereof, in each case, as in effect and available on the date hereof, and (ii) is based in part on representations of the Depository and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms. All of the foregoing are subject to change, which change could apply retroactively and could affect the tax consequences described below.

For purposes of this summary, a “U.S. Holder” is a beneficial owner of class B shares or ADSs that, for U.S. federal income tax purposes, is (i) a citizen or resident of the United States, (ii) a corporation organized in or under the laws of the United States or any state thereof or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if such trust validly elects to be treated as a United States person for U.S. federal income tax purposes or if (a) a United States court can exercise primary supervision over its administration and (b) one or more United States persons have the authority to control all of the substantial decisions of such trust. A “Non-U.S. Holder” is a beneficial owner of class B shares or ADSs that is neither a U.S. Holder nor a partnership (or other entity or arrangement treated as a partnership for U.S. federal income tax purposes).

If a partnership (or any other entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds class B shares or ADSs, the tax treatment of the partnership and a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its tax advisor as to its tax consequences.

Each prospective purchaser should consult its own tax advisor with respect to the U.S. federal, state, local and non-U.S. tax consequences of acquiring, owning and disposing of class B shares or ADSs.

Ownership of ADSs in General

In general, for U.S. federal income tax purposes, holders of ADSs will be treated as the owners of the class B shares represented by such ADSs. For purposes of the discussion below, we assume that intermediaries in the chain of ownership between the holder of an ADS and Grupo Financiero Galicia are acting consistently with the claiming of U.S. foreign tax credits by U.S. Holders.

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Taxation of Distributions

Subject to the discussion below under “Passive Foreign Investment Company Considerations”, for U.S. federal income tax purposes, the gross amount of distributions by Grupo Financiero Galicia of cash or property (other than certain distributions, if any, of class B shares or ADSs distributed pro rata to all shareholders of Grupo Financiero Galicia, including holders of ADSs) made with respect to the class B shares or ADSs before reduction for any Argentine taxes withheld therefrom, will constitute dividends to the extent that such distributions are paid out of Grupo Financiero Galicia’s current or accumulated earnings and profits, as determined for U.S. federal income tax purposes, and will be included in the gross income of a U.S. Holder as dividend income. Subject to the discussion below under “Passive Foreign Investment Company Considerations”, non-corporate U.S. Holders generally will be taxed on such distributions on ADSs (or class B shares that are readily tradable on an established securities market in the United States at the time of such distribution) at the lower rates applicable to long-term capital gains (i.e., gains from the sale of capital assets held for more than one year). Non-corporate U.S. Holders that (i) do not meet a minimum holding period requirement with respect to such ADSs (or class B shares), (ii) elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4)(B) of the Code or (iii) receive dividends with respect to which they are obligated to make related payments for positions in substantially similar or related property will not be eligible for the reduced rates of taxation. In addition, dividends will not be eligible for the dividends received deduction generally allowed to corporations under the Code.

Subject to the discussion below under “Passive Foreign Investment Company Considerations”, if distributions with respect to the class B shares or ADSs exceed Grupo Financiero Galicia’s current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, the excess will be treated first as a tax-free return of capital to the extent of such U.S. Holder’s adjusted tax basis in the class B shares or ADSs. Any amount in excess of such adjusted basis will be treated as capital gain from the sale or exchange of such class B shares or ADSs. Grupo Financiero Galicia does not maintain calculations of its earnings and profits under U.S. federal income tax principles.

Dividends paid in Pesos will be included in the gross income of a U.S. Holder in an amount equal to the Dollar value of the Pesos on the date of receipt, which, in the case of ADSs, is the date they are received by the Depositary. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution. Any gains or losses resulting from the conversion of Pesos between the time of the receipt of dividends paid in Pesos and the time the Pesos are converted into Dollars will be treated as ordinary income or loss, as the case may be, of a U.S. Holder. Dividends received by a U.S. Holder with respect to the class B shares or ADSs will be treated as foreign source income, which may be relevant in calculating such holder’s foreign tax credit limitation. Subject to certain conditions and limitations, Argentine tax withheld on dividends may be deducted from taxable income or credited against a U.S. Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific categories of income. For this purpose, dividend income with respect to class B shares or ADSs should generally constitute “passive category income”, or in the case of certain U.S. Holders, “general category income”. The rules governing the foreign tax credit are complex. Prospective holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.

Subject to the discussion below under “Backup Withholding and Information Reporting”, a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on dividends received on class B shares or ADSs, unless such income is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States.

Taxation of Capital Gains

Subject to the discussion below under “Passive Foreign Investment Company Considerations,” U.S. Holders will recognize capital gain or loss for U.S. federal income tax purposes upon a sale or exchange of class B shares or ADSs in an amount equal to the difference between such U.S. Holder’s adjusted tax basis in the class B shares or ADSs and the amount realized on their disposition. In the case of a non-corporate U.S. Holder, the maximum marginal U.S. federal income tax rate applicable to such gain will be lower than the maximum marginal U.S. federal income tax rate for ordinary income (other than certain dividends) if the U.S. Holder’s holding period in the class B shares or ADSs exceeds one year at the time of the sale or exchange. Gain or loss, if any, recognized by a

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U.S. Holder generally will be treated as United States source income or loss for U.S. foreign tax credit purposes. Consequently, a U.S. Holder may not be able to use the foreign tax credit arising from any Argentine tax imposed on the disposition of class B shares or ADSs unless such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from foreign sources. Certain limitations apply to the deductibility of capital losses for U.S. federal income tax purposes.

A U.S. Holder’s initial tax basis in the class B shares or ADSs is the Dollar value of the Pesos denominated purchase price determined on the date of purchase. If the class B shares or ADSs are treated as traded on an “established securities market”, a cash basis U.S. Holder (or, if it elects, an accrual basis U.S. Holder) will determine the Dollar value of the cost of such class B shares or ADSs by translating the amount paid at the spot rate of exchange on the settlement date of the purchase.

With respect to the sale or exchange of class B shares or ADSs, the amount realized generally will be the Dollar value of the payment received, before reduction for any Argentine taxes withheld therefrom, determined on (i) the date of receipt of payment in the case of a cash basis U.S. Holder and (ii) the date of disposition in the case of an accrual basis U.S. Holder. If the class B shares or ADSs are treated as traded on an “established securities market”, a cash basis taxpayer (or, if it elects, an accrual basis taxpayer) will determine the Dollar value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale.

Subject to the discussion below under “Backup Withholding and Information Reporting,” a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on gain realized on the sale or exchange of class B shares or ADSs unless (i) such gain is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States or (ii) in the case of gain realized by an individual Non-U.S. Holder, the Non-U.S. Holder is present in the United States for 183 days or more in the taxable year of the sale or exchange and certain other conditions are met.

Passive Foreign Investment Company Considerations

A non-U.S. corporation will be classified as a “passive foreign investment company”, or a PFIC, for U.S. federal income tax purposes in any taxable year in which, after applying certain look-through rules, either (1) at least 75 percent of its gross income is “passive income” or (2) at least 50 percent of the average value of its gross assets is attributable to assets that produce “passive income” or is held for the production of passive income. Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from commodities and securities transactions, other than certain income derived in the active conduct of a banking business.

The application of the PFIC rules is unclear both generally and specifically with respect to banks. The United States Internal Revenue Service (“IRS”) has issued a notice and certain proposed Treasury Regulations that exclude from passive income any income derived in the active conduct of a banking business by a qualifying foreign bank (the “Active Bank Exception”). However, the IRS notice and proposed Treasury Regulations are inconsistent in certain respects. Because final Treasury Regulations have not been issued, there can be no assurance that Grupo Financiero Galicia or its subsidiaries will satisfy the Active Bank Exception for any given taxable year.

Based on certain estimates of its gross income and gross assets (which estimates are inherently imprecise), the nature of its business, and reliance on the Active Bank Exception, Grupo Financiero Galicia believes that it should not be classified as a PFIC for the taxable year ended December 31, 2018. Grupo Financiero Galicia’s status in future years will depend on its assets and activities in those years. Grupo Financiero Galicia has no reason to believe that its assets or activities will change in a manner that would cause it to be classified as a PFIC, but there can be no assurance that Grupo Financiero Galicia will not be considered a PFIC for any taxable year. If Grupo Financiero Galicia were a PFIC, a U.S. Holder of class B shares or ADSs generally would be subject to imputed interest charges and other disadvantageous tax treatment with respect to any gain from the sale or exchange of, and certain distributions with respect to, the class B shares or ADSs.

If Grupo Financiero Galicia were a PFIC, a U.S. Holder of class B shares or ADSs could make a variety of elections that may alleviate certain of the adverse tax consequences referred to above, and one of these elections may be made retroactively. However, it is expected that the conditions necessary for making certain of such

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elections will not apply in the case of the class B shares or ADSs. U.S. Holders should consult their own tax advisors regarding the tax consequences that would arise if Grupo Financiero Galicia were treated as a PFIC.

Reporting Requirements

Non-corporate U.S. Holders, including individuals, that hold “specified foreign financial assets”, as defined in the Treasury Regulations (which may include class B shares or ADSs), other than in an account at a U.S. financial institution or the U.S. branch of a non-U.S. financial institution, are required to report certain information relating to such assets. U.S. Holders are urged to consult their tax advisors regarding the effect, if any, of this and any other reporting requirements on their ownership and disposition of class B shares or ADSs. Failure to comply with applicable reporting requirements could result in the imposition of substantial penalties.

Backup Withholding and Information Reporting

United States backup withholding tax and information reporting requirements generally apply to certain payments to certain holders of stock.

Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, class B shares or ADSs made within the United States, or by a U.S. payor or U.S. middleman, to a holder of class B shares or ADSs (other than an exempt recipient, such as a payee that is not a United States person and that provides an appropriate certification).

Payments of dividends on, or proceeds from the sale or redemption of, class B shares or ADSs within the United States, or by a U.S. payor or U.S. middleman, to a holder (other than an exempt recipient, such as a payee that is not a United States person and that provides an appropriate certification) will be subject to backup withholding if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, such backup withholding tax requirements. The backup withholding tax rate is currently 24%.

FATCA

Beginning on the date that is two years after the date on which final Treasury Regulations are published defining the term “foreign passthru payment”, Grupo Financiero Galicia may be required, pursuant to Sections 1471 through 1474 of the Code, and the Treasury Regulations promulgated thereunder (often referred to as the “Foreign Account Tax Compliance Act” or “FATCA”) to withhold U.S. tax at a 30% rate on all or a portion of any distribution on class B shares or ADSs which is treated as a “foreign passthru payment”.

Assuming that distributions from Grupo Financiero Galicia constitute “foreign passthru payments” and that Grupo Financiero Galicia enters into an agreement with the IRS to report the information required by FATCA or, if Argentina has entered in an intergovernmental agreement with the United States (an “IGA”), Grupo Financiero Galicia complies with such IGA, then an investor considered to have a “U.S. account” maintained by Grupo Financiero Galicia may be required to provide the information described below or be subject to U.S. withholding tax on any distribution on class B shares or ADSs that is treated as a “foreign passthru payment”. Investors in class B shares or ADSs that are financial institutions, or financial institutions that receive payments on behalf of other persons, and that have not entered into an agreement with the IRS (or otherwise established an exemption from FATCA, including pursuant to an applicable IGA) would also be subject to this U.S. withholding tax.

FATCA is particularly complex and its application to Grupo Financiero Galicia is uncertain at this time. Each holder of class B shares or ADSs should consult its own tax advisor to obtain a more detailed explanation of FATCA and to learn how it might affect such holder under its particular circumstances.

Medicare Tax on Investment Income

Certain U.S. Holders that are individuals, estates or trusts are required to pay a 3.8% tax on the lesser of (i) the U.S. Holder’s “net investment income” for the taxable year and (ii) the excess of the U.S. Holder’s modified

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adjusted gross income for the taxable year over a certain threshold. Net investment income includes, among other things, dividends and capital gains from the sale or other disposition of class B shares or ADSs.

THE ABOVE SUMMARIES ARE NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSEQUENCES RELATING TO THE ACQUISITION, OWNERSHIP AND DISPOSITION OF CLASS B SHARES OR ADSs. PROSPECTIVE HOLDERS SHOULD CONSULT AN INDEPENDENT TAX ADVISOR CONCERNING THE TAX CONSEQUENCES IN THEIR PARTICULAR CIRCUMSTANCES.

H. Documents on Display

We are subject to the informational requirements of the Exchange Act. In accordance with these requirements, we file reports and other information with the SEC. These materials, including this annual report and its exhibits, may be inspected and printed or copied for a fee at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These materials are also available on the SEC’s website at http://www.sec.gov. Material submitted by us can also be inspected at the offices of the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006-1506.

Item 11. Quantitative and Qualitative Disclosures About Market Risk

General

Market risks faced by us are the risks arising from the fluctuations in interest rates and in foreign exchange rates. Our market risk arises mainly from the operations of Banco Galicia in its capacity as a financial intermediary. Our subsidiaries and other entities in which we have a minority equity interest are also subject to market risk. However, the amount of these risks is not significant and they are not discussed below. Policies regarding these risks are applied at the level of our operating subsidiaries.

In compliance with the Argentine Central Bank’s regulations, based on the best practices and international standards, Banco Galicia has a Risk Management Division responsible for identifying, monitoring and actively and integrally managing the different risks Banco Galicia and its subsidiaries are exposed to (credit, financial and operational risks). The aim of the Division is to guarantee Banco Galicia’s board of directors that it is fully aware of the risks Banco Galicia is exposed to. It also creates and proposes the policies and procedures necessary to mitigate and control such risks. The Risk Management Committee, made-up of four members of the board of directors of Banco Galicia, the Chief Executive Officer and the managers of the Risk Management Division, the Planning Division and Internal Audit, is the highest corporate body to which Banco Galicia’s board of directors delegates integral risk management and the executive responsibility to define and enforce risk management policies, procedures and controls. This Committee is also responsible for setting specific limits for the exposure to each risk and approving, when applicable, temporary excesses over such limits as well as being informed of each risk position and compliance with policies.

See Item 6. “Directors, Senior Management and Employees”—“Functions of the Board of Directors of Banco Galicia”. Liquidity management is discussed in Item 5 “Operating and Financial Review and Prospects”─.B.“Liquidity and Capital Resources”. Credit risk management is discussed in Item 4. “Information on the Company”—B.“Business Overview”─ “Selected Statistical Information”—“Credit Review Process” and other sections under Item 4. “Information on the Company”—B.”Business Overview”─ “Selected Statistical Information” describing Grupo Galicia’s financial instruments portfolio and financial instruments loss experience.

The following sections contain information on Banco Galicia’s sensitivity to interest-rate risk and exchange-rate risk that constitute forward-looking statements that involve risks and uncertainties. Actual results could differ from those projected in the forward-looking statements.

Interest Rate Risk

A distinctive and natural characteristic of financial brokerage is the existence of interest-earning assets and interest-bearing liabilities with different maturities (or different rate repricing periods) and interest rates that can be

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fixed or variable. This situation leads to a gap or mismatch that arises from the balance sheet and measures the imbalance between fixed- and variable-rate assets and liabilities, and results in the so-called interest-rate risk or balance sheet structural risk. A commercial bank can face the interest rate risk on both sides of its balance sheet: with regard to the income generated by assets (loans and securities) and the expenses related to the interest-bearing liabilities (deposits and other sources of funds).

The policy currently in force defines this gap as the risk that the financial margin and the economic value of equity may vary as a consequence of fluctuations in market interest rates. The magnitude of such variation is associated with the sensitivity to interest rates of the structure of the Bank’s assets and liabilities.

Aimed at managing and limiting the sensitivity of Banco Galicia's economic value and results with respect to variations in the interest rate inherent to the structure of certain assets and liabilities, the following caps have been determined:

Limit on the Gross Brokerage Margin for the First Year

The effect of interest rate fluctuations on the gross brokerage margin for the first year is calculated using the methodology known as scenario simulation. On a monthly basis, gross brokerage margin for the first year is simulated in a base scenario and in a “+400 bps” scenario for peso currency and “+200 bps” scenario for dollar scenario. In order to prepare each scenario, different criteria are assumed regarding the sensitivity to interest rates of assets and liabilities, depending on the historical performance observed of the different balance sheet items. Gross brokerage margin for the first year in the “+400 bps” and “+200 bps” scenario is compared to the gross brokerage margin for the first year in the “base” scenario. The resulting difference is related to the annualized accounting gross brokerage margin for the last calendar trailing quarter available, for Banco Galicia on a consolidated basis.

The limit on a potential loss was established at 10% of the gross brokerage margin for the first year, as defined above. At fiscal year-end, the negative difference between the gross brokerage margin for the first year corresponding to the “+400/200 bps” scenario and that corresponding to the “base” scenario accounted for -6.4% of the gross brokerage margin for the first year.

The tables below show as of December 31, 2018 and December 31, 2017, in absolute and percentage terms, the change in Banco Galicia’s gross brokerage margin (“GBM”) of the first year, as compared to the gross brokerage margin of the “base” scenario corresponding to various interest-rate scenarios in which interest rates change 50, 100, 150 and 200 bps from those in the “base” scenario. Banco Galicia’s net portfolio is broken down into trading and non-trading. The trading net portfolio represents primarily securities issued by the Argentine Government.

 

 

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Limit on the Net Present Value of Assets and Liabilities

The net present value of assets and liabilities is also calculated on a monthly basis and taking into account the assets and liabilities of Banco Galicia’s consolidated balance sheet. The methodology used for calculating interest rate risk is based on the net present value of the underlying asset of liability.

The net present value of the consolidated assets and liabilities, as mentioned, is calculated for a “base” scenario in which the listed securities portfolio is discounted using interest rates obtained according to yield curves determined based on the market yields of different reference bonds denominated in Pesos, foreign currency and adjusted by CER/UVA. Yield curves for unlisted assets and liabilities are also created using market interest rates. The net present value of assets and liabilities is also obtained for a second scenario called “critical”, where through a significant number of statistical simulations of the interest rate track record, a “critical” scenario is obtained as a result of the interest rate risk exposure presented by the balance sheet structure.

The economic capital is obtained from the resulting difference between the “critical” scenario and the net present value of assets and liabilities of the “base” scenario, and considering a 99.5% degree of accuracy.

The limit on interest rate risk exposure, expressed as a difference between the net present value of assets and liabilities in the “base” scenario and the “critical” scenario cannot exceed 15% of the consolidated RPC. As of December 31, 2018, the “Value at Risk” was -14.2% of the RPC.

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Foreign Exchange Rate Risk

Exchange-rate sensitivity is the relationship between the fluctuations of exchange rates and Banco Galicia’s net financial income resulting from the revaluation of Banco Galicia’s assets and liabilities denominated in foreign currency. The impact of variations in the exchange rate on Banco Galicia’s net financial income depends on whether Banco Galicia has a net asset foreign currency position (the amount by which foreign currency denominated assets exceed foreign currency denominated liabilities) or a net liability foreign currency position (the amount by which foreign currency denominated liabilities exceed foreign currency denominated assets). In the first case an increase/decrease in the exchange rate results in a gain/loss, respectively. In the second case, an increase/decrease results in a loss/gain, respectively. Banco Galicia has established limits for its consolidated foreign currency mismatches for the asset and liability positions of -9 % and + 30% of Banco Galicia’s RPC. At the end of the fiscal year, Banco Galicia’s net asset position in foreign currency represented 0.6%.

As of December 31, 2018, Banco Galicia had a net asset foreign currency position of Ps.620 million (US$16 million) after adjusting its on-balance sheet net liability position of Ps.591 million (US$13 million) by net forward purchases of foreign currency without delivery of the underlying asset, for Ps.101 million (US$3 million), recorded off-balance sheet.

As of December 31, 2017, Banco Galicia had a net asset foreign currency position of Ps.519 million (US$27 million), after adjusting its on-balance sheet net asset position of Ps.2033million (US$108 million) by net forward purchases of foreign currency without delivery of the underlying asset, for Ps.2,552 million (US$136 million), recorded off-balance sheet.

As of January 1, 2017, Banco Galicia had a net asset foreign currency position of Ps.1,041 million (US$65 million) after adjusting its on-balance sheet net liability position of Ps.1,371 million (US$87 million) by net forward purchases of foreign currency without delivery of the underlying asset, for Ps.2,412 million (US$152 million), recorded off-balance sheet

 

The tables below show the effects of changes in the exchange rate of the Peso vis-à-vis the Dollar on the value of Banco Galicia’s foreign currency net asset position as of December 31, 2018, 2017 and January 1, 2017. As of these dates, the breakdown of Banco Galicia’s foreign currency net asset position into trading and non-trading is not presented, as Banco Galicia’s foreign currency trading portfolio was not material

 

 

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Currency Mismatches

The funding and the use of funds in loans and/or investments can be carried out in assets and liabilities denominated in different currencies. As such, there is the potential for a currency mismatch between liabilities and the use thereof on assets, generating a risk. Currency risk is defined as the risk of incurring equity losses as a result of variations in the foreign currency exchange rates in which assets and liabilities are denominated.

The management of the Bank’s currency risk mismatch involves the monitoring of foreign currency-denominated assets and liabilities that may change in the short- and or mid-term. One of the available market instruments for the management of currency mismatches of assets and liabilities are “currency futures” transactions, which are traded on the MAE (MAE – OCT) and Mercado a Término de Rosario (ROFEX).

The policy framework currently in force establishes limits in terms of maximum net asset positions (assets denominated in a currency which are higher than the liabilities denominated in such currency) and net liability positions (assets denominated in a currency which are lower than the liabilities denominated in such currency) for mismatches in foreign currency, as a proportion of the Bank’s computable regulatory capital (“RPC”), on a consolidated basis.

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The table below shows the composition of the Bank’s Shareholders’ Equity as of December 31, 2018, by currency and type of adjustment:

 

 

As of December 31, 2018, considering the adjustments from forward transactions recorded under memorandum accounts, Banco Galicia had net asset positions in foreign currency and Pesos adjusted and non-adjusted.

The paragraphs below describe the composition of the different currency mismatches of assets and liabilities as of December 31, 2018:

Assets and Liabilities Denominated in Foreign Currency

As of December 31, 2018, the Bank’s assets denominated in foreign currency were mainly comprised of the following: (i) Ps.95,614 million of cash and balances from the Argentine Central Bank and correspondent banks; (ii) Ps.95,707 million for loans (principal plus interest, net of allowances) and other financing, including Ps.1,002 million for receivables for financial leases; (iii) Ps.4,375 million for debt securities, primarily financial trusts; (iv) Ps.2,893 million for assets pledged as collateral, including forward purchases of government securities and (v) Ps.1,459 million for government and private securities.

The liabilities denominated in foreign currency consisted mainly of: (i) Ps.162,668 million for deposits (principal, interest and quotation differences); (ii) Ps.13,955 million for payables to banks and international credit entities; (iii) Ps.13,619 million for subordinated and unsubordinated notes issued by Banco Galicia; (iv) Ps.8,003 million for other financial liabilities, mainly collections on behalf of third parties; (v) Ps.1,895 million for repurchase transactions; and (vi) Ps.1,087 million for sales of government securities and foreign currency pending settlement.

A net asset position of Ps.361 million stemmed from the consolidated balance sheet. Furthermore, forward transactions in foreign currency without delivery of the underlying asset were recorded in memorandum accounts, which, in terms of their notional value, were equal to a net asset position of Ps.101 million. Therefore, as of that date, the net position in foreign currency adjusted to reflect these transactions was a net asset position of Ps.462 million, equivalent to US$12 million.

Banco Galicia has set limits as regards foreign-currency mismatches at -9% of the Bank’s RPC for its net liability position and at +30% of the Bank’s RPC for its net asset position. At the fiscal year-end, Banco Galicia's net asset position in foreign currency represented 0.8% of its RPC.

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Non-Adjusted Peso-Denominated Assets and Liabilities

The Bank’s non-adjusted Peso-denominated assets at December 31, 2018 were mainly comprised of the following: (i) Ps.168,546 million for loans (principal plus interest, net of allowances) including Ps.1,167 million for receivables from financial leases and Ps.974 million for miscellaneous receivables; (ii) Ps.70,098 million for the holding of securities issued by the Argentine Central Bank. (Leliq); (iii) Ps.52,883 million for cash and balances held at the Argentine Central Bank and correspondent banks (including the balance of escrow accounts); (iv) Ps.14,438 million for the holding of government and private securities; (v). Ps.8,351 million for “Other Financial Assets”, out of which Ps.4,223 million was related to mutual funds of regional credit-card companies; (vi) Ps.2,736 million pledged as collateral; and (vii) Ps.2,068 million for repurchase transactions.

Banco Galicia’s non-adjusted Peso-denominated liabilities at December 31, 2018 were mainly comprised of the following (i) Ps.194,223 million for deposits (principal plus interest); (ii) Ps.36,895 million for liabilities payable to stores, credit card transactions of Banco Galicia and Tarjetas Regionales; (iii) Ps.26,133 million for notes issued by Banco Galicia and Tarjetas Regionales; (iv) Ps.16,567 million for amounts payable for future transactions and transactions pending settlement of government securities and foreign currency; and (v) Ps.5,631 million for debt incurred with local financial institutions.

The net asset position in non-adjusted Peso-denominated assets and liabilities was Ps.35,908 million at December 31, 2018.

Peso-Denominated Assets and Liabilities Adjusted by UVA

At December 31, 2018, the net asset position amounted to Ps.15,250 million, which is primarily comprised of Ps.17,474 million for loans, mainly UVA mortgage loans and Ps.984 million for miscellaneous receivables.

With respect to liabilities, Ps.2,481 million was related to UVA-adjusted time deposits and Ps.726 million related to balances of the unemployment fund of construction workers.

Other Assets and Liabilities

As of December 31, 2018, “Other Assets - Liabilities” mainly included the following: (i) property, plant and equipment, miscellaneous and intangible assets for Ps.26,450 million; and (ii) miscellaneous receivables for Ps.1,068 million.

As of December 31, 2018, liabilities mainly included the following: (i) Ps.14,098 million recorded in “Other Non-financial Liabilities”; (ii) Ps.1,100 million for insurance contract liabilities; and (iii) Ps.1,449 million for provisions for other contingencies.

Market Risk

The exposure to portfolios of listed financial instruments, whose value varies according to the movement in their market prices, is subject to a specific policy framework that regulates the risk of incurring a loss as a consequence of the variation of the market price of financial assets whose value is subject to negotiation.

Brokerage transactions and/or investments in government securities, currencies, notes, derivative products and debt instruments issued by the Argentine Central Bank are governed by the policy that limits the maximum tolerable losses in a given fiscal year.

In order to gauge and monitor this source of risk, the model known as VaR is used, among others. This model determines intra-daily, for the Bank individually, the possible loss that could be generated by the positions in equity securities, currencies, derivative instruments, and debt securities issued by the Argentine Central Bank and currencies under certain parameters.

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The parameters taken into consideration are as follows:

Banco Galicia’s policy requires that the Risk Management and Treasury Divisions agree on the parameters under which the models work, and establishes the maximum losses authorized both for equity securities, foreign-currency, Argentine Central Bank’s debt instruments and derivative products in a fiscal year. Maximum losses were established in:

 

 

Furthermore, the policy includes the regular undertaking of stress tests, the goal of which is to assess the risk positions and their results, under adverse market conditions. Finally, “contingency plans” were designed for each transaction, which include the actions to be implemented in a critical scenario.

Cross-Border Risk

Cross-border risk represents the risk of incurring equity losses as a consequence of the impairment or failure to collect on foreign credit exposures (loans, securities holdings, equity investments, and cash) abroad. It includes risks generated by entering into transactions with public or private counterparties domiciled outside of Argentina.

In order to regulate risk exposures in international jurisdictions, limits were established taking into consideration the jurisdiction’s credit rating, the type of transaction and a maximum exposure acceptable for each counterparty.

The Bank defined its policy by setting maximum exposure limits measured as a percentage of its RPC and taking into account if the counterparty is considered investment grade:

 

 

Overseas Foreign Currency Transfer Risk

With a view towards mitigating the risk resulting from a potential change in domestic laws that may affect overseas foreign currency transfers and in order to meet incurred liabilities, a policy was devised to set a limit for liabilities transferred abroad, as a proportion to total consolidated liabilities. Such ratio was fixed at 15%.

As of December 31, 2018, such exposure was 7.4% over total liabilities.

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Risk Exposures in the Non-Financial Public Sector

The Argentine Central Bank imposes restrictions with respect to financing for the non-financial Public Sector and establishes limits in connection with the agencies that can be aided, the types of permitted loans and maximum amounts that can be granted. Such maximum amounts are set on the basis of the Bank’s RPC.

Banco Galicia provides two types of financial assistance to such sector: (i) assistance through the issuance of government securities; and (ii) direct assistance through loans, leasing, corporate securities, discounted notes, overdrafts, guarantees granted, foreign trade transactions, payroll loans, credit cards, etc.

Risk exposures on loans granted to such sector in national, provincial and municipal jurisdictions are governed by a specific policy, applicable to agencies within such jurisdictions, decentralized entities, companies and trust funds with underlying cash flows from the non-financial public sector.

 

Item 12. Description of Securities Other Than Equity Securities

D. American Depositary Shares

Fees and Charges Applicable to ADS Holders

The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.

 

 

Fees and Direct and Indirect Payments Made by the Depositary to Us

Past Fees and Payments

Grupo Financiero Galicia received a payment of US$267,815 for fiscal year 2018, US$286,530 for fiscal year 2017 and US$280,601 for fiscal year 2016 in relation to continuing annual stock exchange listing fees, standard out-of-pocket maintenance costs for the ADRs (consisting of the expenses of postage and envelopes for mailing

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annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. federal tax information, mailing required tax forms, stationery, postage, facsimile and telephone calls), accounting fees and legal fees.

Future Fees and Payments

The Bank of New York Mellon, as depositary, has agreed to reimburse the Company for expenses they incur that are related to establishment and maintenance expenses of the ADSs program. The depositary has agreed to reimburse the Company for its continuing annual stock exchange listing fees and certain accounting and legal fees. The depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consists of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls. It has also agreed to reimburse the Company annually for certain investor relationship programs or special investor relations promotional activities. There are limits on the amount of expenses for which the depositary will reimburse the Company, but the amount of reimbursement available to the Company is not tied to the amount of fees the depositary collects from investors.

The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.

We expect to receive a similar reimbursement from the depositary for expenses for the fiscal year ending December 31, 2019 to the one we received for the fiscal year ended December 31, 2018.

 

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PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

Not applicable.

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

Not applicable.

Item 15. Controls and Procedures

(a) Disclosure Controls and Procedures.

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as amended). We performed an evaluation of the effectiveness of our disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file with or submit to the SEC under the Exchange Act, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and is communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure. Our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this annual report, our disclosure controls and procedures were effective to provide reasonable assurance of their reliability. Notwithstanding the effectiveness of our disclosure controls and procedures, these disclosure controls and procedures cannot provide absolute assurance of achieving their objectives because of their inherent limitations. Disclosure controls and procedures are processes that involve human diligence and compliance and are subject to error in judgment. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by our disclosure controls and procedures.

(b) Management’s Annual Report on Internal Control over Financial Reporting.

1) Our management is responsible for establishing and maintaining adequate internal control over financial reporting for us and our consolidated subsidiaries. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act, as amended, as a process designed by, or under the supervision of, our principal executive and principal financial officers, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with applicable generally accepted accounting principles. Internal controls and procedures are processes that involve human diligence and compliance and are subject to error in judgment. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

2) Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control–Integrated Framework 2013.

3) Based on our assessment, we and our management have concluded that our internal control over financial reporting was effective as of December 31, 2018.

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4) Price Waterhouse & Co. S.R.L., an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2018, as stated in their report to our consolidated financial statements.

(c) See Item 18. “Financial Statements–Report of the Independent Registered Public Accounting Firm” for our registered public accounting firm’s attestation report on the effectiveness of our internal control over financial reporting.

(d) Changes in Internal Control over Financial Reporting During the Year Ended December 31, 2018.

During the period covered by this report, there have not been any changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

Item 16A. Audit Committee Financial Expert

Mr. Antonio R. Garcés was the financial expert serving on our Audit Committee for the year ended December 31, 2018. Mr. Garcés also considered independent as such term is defined under Nasdaq National Market listing requirements.

Item 16B. Code of Ethics

We have adopted a code of ethics (for Grupo Financiero Galicia and its main subsidiaries) in accordance with the requirements of Section 406 of the Sarbanes-Oxley Act of 2002. We did not modify our code of ethics during the fiscal year ended December 31, 2018. In addition, we did not grant any waivers to our code of ethics during the fiscal year ended December 31, 2018. In June 2009, we adopted a Code of Good Practice in Corporate Governance in accordance with Argentine legal requirements that received minor modifications in 2016, 2017 and 2018. On May 23, 2012 the CNV issued Rule No. 606 (modifying Rule No. 516) which established new standards for the filing of the Code of Good Practices in Corporate Governance. Our code of ethics and our code of corporate governance good practices are attached hereto as Exhibits 11.1 and 11.2.

Item 16C. Principal Accountants’ Fees and Services

The following table sets forth the total amount billed to us by our independent registered public accounting firm, Price Waterhouse & Co. S.R.L., during the fiscal years ended December 31, 2018 and 2017.

 

 

Audit Fees

Audit fees are mainly the fees billed in relation with professional services for auditing our consolidated financial statements under local and U.S. GAAP requirements for the fiscal years ended December 31, 2018 and December 31, 2017.

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Audit-Related Fees

Audit-related fees are fees billed for professional services related to attestation, review and verification services with respect to our financial information and the provision of services in connection with special reports in 2018 and 2017.

Tax Fees

Tax fees are fees billed with respect to tax compliance and advisory services related to tax liabilities.

All Other Fees

All other fees include fees paid for professional services other than the services reported above under “audit fees”, “audit related fees” and “tax fees” in each of the fiscal periods above.

Audit Committee Pre-approval

Our audit committee is required to pre-approve all audit and non-audit services to be provided by our independent registered public accounting firm. Our Audit Committee has reviewed and approved audit and non-audit services fees proposed by our independent auditors.

Item 16D. Exemptions from the Listing Standards for Audit Committees

Not applicable.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Item 16F. Change in Registrant’s Certifying Accountant.

Not applicable.

Item 16G. Corporate Governance

See Item 6. “Directors, Senior Management and Employees”—“Nasdaq Corporate Governance Standards” for a summary of ways in which the Company’s corporate governance practices differ from those followed by U.S. companies.

Item 16H. Mine Safety Disclosure

Not applicable.

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PART III

Item 17. Financial Statements

Not applicable.

Item 18. Financial Statements

Report of the Independent Registered Public Accounting Firm as of and for the fiscal year ended December 31, 2018.

Consolidated Balance Sheets as of December 31, 2018 and 2017 as of January 1, 2017.

Consolidated Statements of Income for the years ended December 31, 2018 and 2017.

Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017.

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2018 and 2017.

Notes to the Consolidated Financial Statements.

You can find our audited consolidated financial statements on pages F-1 to F-120 of this annual report.

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Item 19. Exhibits

 

 

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SIGNATURE

The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

Date: May 15, 2019

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GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES

 

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of Grupo Financiero Galicia S.A.

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of Grupo Financiero Galicia S.A. and its subsidiaries (the “Company”) as of December 31, 2018, December 31, 2017 and January 1, 2017, and the related consolidated income statement, statements of other comprehensive income, of changes in shareholders’ equity and of cash flows for each of the two years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”).  We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018, December 31, 2017 and January 1, 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.  

 

Basis for Opinions

 

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing on Item 15.  Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

  

We conducted our audits in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.  

 

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.  Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinions.

 

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations

F-1

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of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

 

Buenos Aires, Argentina

May 14, 2019.

 

We have served as the Company’s auditor since 1999.

 

 

F-2

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GRUPO FINANCIERO GALICIA S.A.

CONSOLIDATED BALANCE SHEET

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

The accompanying Notes and Schedules are an integral part of these consolidated financial statements.

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GRUPO FINANCIERO GALICIA S.A.

CONSOLIDATED BALANCE SHEET (Continued)

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

The accompanying Notes and Schedules are an integral part of these consolidated financial statements.

F-4

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GRUPO FINANCIERO GALICIA S.A.

CONSOLIDATED INCOME STATEMENT

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

 

The accompanying Notes and Schedules are an integral part of these consolidated financial statements.

F-5

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GRUPO FINANCIERO GALICIA S.A.

CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

The accompanying Notes and Schedules are an integral part of these consolidated financial statements.

 

 

F-6

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GRUPO FINANCIERO GALICIA S.A.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

F-7

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GRUPO FINANCIERO GALICIA S.A.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

 

 

F-8

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GRUPO FINANCIERO GALICIA S.A.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

 

F-9

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($) and Thousands of U.S. Dollars (US$), Except as Otherwise Stated

NOTE 1. ACCOUNTING POLICIES AND BASIS FOR PREPARATION

Grupo Financiero Galicia S.A. (individually referred to as the “Company” and jointly with its subsidiaries as the “Group”) was constituted on September 14, 1999, as a financial services holding company organized under the laws of Argentina. The Company’s main asset is its interest in Banco de Galicia y Buenos Aires S.A.U. ("Banco Galicia" or the “Bank”) which is a private-sector bank that offers a full spectrum of financial services both to individuals and corporate customers. In addition, the Company has a controlling interest in Tarjetas Regionales S.A., which maintains investments related to the issuance of credit cards and supplementary services; Sudamericana Holding S.A., a company engaged in the insurance business; Galicia Administradora de Fondos S.A., a mutual fund manager, and Galicia Warrants S.A., a company engaged in the issuance of warrants.

These consolidated financial statements were approved and authorized for publication through Minutes of Board of Directors’ Meeting No. 586 dated May 14, 2019.

1.1.FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

These consolidated financial statements have been prepared in accordance and in compliance with the International Financial Reporting Standards issued by the IASB and the interpretations of the IFRIC (jointly, “IFRS”). All the IFRSs in force as of the date of preparation of these consolidated financial statements have been applied. The Group has applied IFRSs for the first time during the fiscal year starting on January 1, 2018, the transition date being January 1, 2017.

In the light of the fact that the Group is subject to the provisions of Article 2 – Section I – Chapter I of Title IV: Periodical Reporting Requirements of the National Securities Commission (“C.N.V.”) regulations, it is also required to present its financial statements in accordance with the valuation and disclosure criteria set forth by the Argentine Central Bank. As required by the aforementioned article, we hereby report that:

The Argentine Central Bank, through Communiqué “A” 5541, as amended, set forth a convergence plan towards the application of International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and the interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), for entities under the its supervision, effective for fiscal years commencing January 1, 2018. The convergence plan had two exceptions to the application of IFRS: (i) item 5.5 (Impairment) of IFRS 9 “Financial Instruments”, and (ii) IAS 29 “Financial Reporting in Hyperinflationary Economies”, both of which were waived until January 1, 2020, at which time entities will be required to apply the provisions of IFRS in full. The Group has presented its local financial statements under these rules on March 7, 2019. Shareholders’ equity under the rules of the Argentine Central Bank is presented in Note 54.

The Group'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.”

Comparative figures and figures as of the transition date (January 1, 2017) have been modified conform to IFRS.

Note 3 presents a reconciliation of the figures disclosed in the consolidated balance sheet, consolidated statement of comprehensive income, consolidated statement of other comprehensive income, and consolidated statement of cash flows comprising the consolidated financial statements issued under the prior accounting framework to the figures in accordance with IFRS, as well as the effects of adjustments to cash flows as of the transition date (January 1, 2017) and as of the adoption date (December 31, 2017).

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

It has been concluded that these consolidated financial statements fairly present the Group's financial position, financial performance and cash flows, in accordance with IFRS.

1.2.BASIS FOR PREPARATION

These consolidated financial statements have been prepared in accordance with IFRS.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Groups´ accounting policies. The areas involving higher degree of judgement or complexities or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 2.

(a)Going Concern

As of the date of these consolidated financial statements, there are no uncertainties related to events or conditions that may cast significant doubt upon the Group´s ability to continue as a going concern.

(b)Measurement Unit

IAS 29 “Financial Reporting in Hyperinflationary Economies” requires that the financial statements of an entity whose functional currency is that of a hyperinflationary economy be restated in terms of the current measurement unit as of the reporting period-end, irrespective of whether they are based on the historical cost or the current cost method. Accordingly, in general terms, non-monetary items should be adjusted for inflation occurring since the acquisition date or since the revaluation date, as the case may be. These requirements are also applicable to the comparative information reported in the financial statements. According to IAS 29, monetary assets and liabilities are not required to be restated, for they are stated in the measurement unit as of the end of the reporting period. Assets and liabilities subject to adjustments based on specific agreements will be adjusted on the basis of such agreements. Non-monetary items measured at their fair values at the end of the reporting period, such as net realizable value or otherwise, will not be restated. The other non-monetary assets and liabilities will be restated by applying a general price index. The income (loss) from the net monetary position will be charged to net income for the reporting period in a separate item.

In order to conclude whether a given economy qualifies as hyperinflationary pursuant to the terms of IAS 29, the standard sets forth certain factors that should be considered, including a three-year cumulative inflation rate reaching or exceeding 100%.

In this regard, the Argentine Federation of Professional Councils in Economic Sciences (F.A.C.P.C.E.) through Resolution J.G.539/18 and the Professional Council in Economic Sciences of the Autonomous City of Buenos Aires (C.P.C.E.C.A.B.A.) through Resolution C.D. 107/2018 have pointed out that, effective for fiscal years ending on July 1, 2018 and thereafter, entities reporting under IFRS will be required to apply IAS 29 since the conditions for such application have been satisfied. In addition, Law No. 27468 enacted in November 2018 abrogated the prohibition to present the financial statements adjusted for inflation, as established by Decree 664/2003, entrusting each regulatory agency with its application. In this regard, on December 26, 2018, the C.N.V. issued General Resolution No. 777/2018 authorizing the issuing entities to present accounting information in constant currency for annual financial statements for interim and special periods ending on December 31, 2018 and thereafter, except for financial institutions and insurance companies.

On February 22, 2019, through Communiqué "A" 6651, the Argentine Central Bank established that entities subject to its control shall restate the financial statements into constant currency for the fiscal years commencing January 1, 2020. However the Group has applied IAS 29 in these consolidated financial statements in order for them to comply with IFRS.

(c)Changes in Accounting Criteria/New Accounting Standards

Certain new accounting standards and interpretations have been published that are not mandatory for December 31, 2018 reporting periods and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and interpretations is set out below.

IFRS 16 “Leases”: IFRS 16 was issued in January 2016. It will result in almost all leases being recognised on the balance sheet by lessees, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases as provided for in IAS 17. However, the new accounting model for lessee is expected to have an impact on negotiations between lessors and lessees. Entities are required to apply IFRS 16 for fiscal years commencing on or after January 1, 2019.

The application of such standard is expected to cause an increase of about $2.500 million in total assets for recording the right of use of assets net of their accumulated depreciation, coupled with an increase for the same amount in liabilities for recording the financial liability arising from the lease.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

IFRS 17 “Insurance Contracts”: On May 18, 2017, the IASB issued IFRS 17 “Insurance Contracts,” establishing a comprehensive accounting framework based on measurement and disclosure principles for insurance contracts. The new standard supersedes IFRS 4 “Insurance Contracts,” and requires entities to measure an insurance contract at initial recognition at the total of the fulfilment cash flows (comprising the estimated future cash flows, an adjustment to reflect the time value of money and an explicit risk adjustment for non-financial risk) and the contractual service margin. The fulfilment cash flows are remeasured on a current basis each reporting period. The unearned profit (contractual service margin) is recognized over the coverage period. Entities are required to apply IFRS 17 for fiscal years commencing on or after January 1, 2021. The Group is assessing the potential impact this standard will have on its financial statements.

IFRIC 23 “Uncertainty over Income Tax Treatment”: This interpretation clarifies how the recognition and measurement requirements of IAS 12 “Income Tax” are applied when there is uncertainty over the income tax treatment. IFRIC 23 was published in June 2017 and entities will be required to apply it for fiscal years commencing on or after January 1, 2019.

Prepayment Features with Negative Compensation – Amendments to IFRS 9: This amendment to IFRS 9 enables entities to measure at amortized cost some prepayable financial assets with negative compensation. The assets affected, that include some loans and debt securities, would otherwise have been measured at fair value through profit or loss. To qualify for amortized cost measurement, the negative compensation must be “reasonable compensation for early termination of the contract” and the asset must be held within a ‘held to collect’ business model. Entities are required to apply this amendment to IFRS 9 for fiscal years commencing on or after January 1, 2019. The Group believes that the application of this standard will not have a material impact.

Investments in Associates and Joint Ventures – Amendments to IAS 28: The amendments clarify the accounting for investments in associates and joint ventures for which the equity method is not applied. Entities shall account for such investments according to IFRS 9 "Financial Instruments". This includes the impairment requirements in IFRS 9. Entities are required to apply the amendments to IAS 28 for fiscal years commencing on or after January 1, 2019. The Group believes that the application of this standard will not have a material impact.

Annual Improvements to IFRS 2015–2017 Cycle: The following improvements were agreed in December 2017.

Entities are required to apply these amendments for fiscal years commencing on or after January 1, 2019. The Group believes that the application of this standard would not have a material impact.

There are no other IFRS or IFRIC interpretations that are not yet effective and that would have a material impact on the Group.

1.3.CONSOLIDATION

Subsidiaries are all entities, including structured entities, over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. The existence and effect of substantive rights, including potential voting rights, is taken into account when assessing whether the Group has control over another entity. In order for a right to be substantive, it must be exercisable by its holder when decisions about the direction of the entity's relevant activities need to be made. The Group may have control over an entity, even if it is entitled to less than a majority of voting rights.

In addition, other investors’ protective rights, such as those related to substantive changes to the investee's activities or only applicable under exceptional circumstances, do not prevent the Group from having power over an investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The following table shows the subsidiaries consolidated into the Group’s consolidated financial statements, at their different levels:

 

 

As a result of the application of IFRS 10 “Consolidation,” the Group has started to consolidate Financial Trusts Saturno Créditos and Financial Trust Galtrust I in its consolidated financial statements, and deconsolidated Compañía Financiera Argentina S.A. and Cobranzas y Servicios S.A., as these two companies have been classified as held for sale as of December 31, 2017 and January 1, 2017.

For purposes of consolidation, the Group used the subsidiaries' financial statements for the fiscal year ended December 31, 2018. Accounting policies of Sudamericana Holding S.A. have been adjusted in order for them to reflect similar criteria to those applied by the Group in preparing its consolidated financial statements.

Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated.

Non-controlling interests in the results and equity of consolidated are shown separately in the consolidated income statement, consolidated statement of other comprehensive income, consolidated statement of changes in equity and consolidated balance sheet respectively.

According to the provisions set forth in IFRS 3 “Business Combinations,” the acquisition of subsidiaries is accounted for by applying the acquisition method. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date.

Goodwill is measured as the difference, as of the acquisition date, of the identifiable assets acquired, the liabilities assumed, the value of the consideration transferred, the amount of the non-controlling interest in the investee, and the fair value of previously held interest in the investee before the acquisition date.

The consideration transferred in a business combination is measured at the fair value of the assets transferred by the acquirer, the liabilities assumed, and the equity instruments issued by the acquirer. Transaction costs are recognized as expenses in the periods in which costs were incurred and services were received, other than transaction costs incurred in issuing equity instruments which are deducted from equity and the transaction costs incurred in issuing debt instruments, which are deducted from their carrying amount.

1.4.TRANSACTIONS WITH NON-CONTROLLING INTEREST

The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognised within equity attributable to owners of the Group.

1.5.ASSOCIATES

Associates are entities over which the Group has significant influence (either directly or indirectly), but not control joint control. This is generally the case where the Group holds between 20 and 50% interest in voting rights. Investments in associates are accounted for using the equity method and are initially recognized at cost. The carrying amount of associates includes the goodwill identified in the acquisition, net of accumulated impairment losses, if any. Dividends received from associates reduce the carrying amount of the investment. Other changes subsequent to the

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

acquisition of the Group's interest in an associate’s net assets are recognized as follows: (i) the Group’s interest in the profits or losses of the associates is accounted for in the income statement under Share of Profit from Associates and Joint Ventures, and (ii) the Group’s interest in other comprehensive income is recognized in the consolidated statement of other comprehensive income and is disclosed separately. However, when the Group’s share of losses in an associate equals or exceeds its interest the entity, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the other entity.

Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associate; unrealized losses are also eliminated, provides evidence of an impairment of the asset transferred.

1.6.Segment Reporting

An operating segment is a component of an entity (a) that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), (b) whose operating results are regularly reviewed by the Group’s CODM (chief operating decision maker) to make decisions about resources to be allocated to the segment and assess its performance, and (c) for which discrete financial information is available.

Operating segments are reported consistently with the internal reports submitted to the Board of Directors (CODM of the Group), which is responsible for making the Group's strategic decisions, allocating resources and assessing the performance of the operating segments.

1.7.Foreign Currency Translation

(a)Functional and Presentation Currency

The figures disclosed in the consolidated financial statements for each of the Group’s entities are measured in their functional currency, that is, the currency of the main economic environment in which they operate. These consolidated financial statements are stated in Argentine Pesos, which is the Group's functional and presentation currency. (See Note 1.2).

(b)Transactions and Balances

Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates are generally recognized in the income statement under “Gold and Foreign Currency Quotation Differences,”. They are deferred in equity if they relate to qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation.

Assets and liabilities in foreign currency are measured at the reference exchange rate of the U.S. dollar set by the Argentine Central Bank prevailing at the close of operations on the last working day of each month.

As of December 31, 2018, December 31, 2017, and January 1, 2017, balances in U.S. Dollars were converted applying the reference exchange rate ($37.8083, $18.7742 and $15.8502, respectively) set by the Argentine Central Bank. Assets and liabilities valued in foreign currencies other than the U.S. Dollar were converted into the latter currency using swap rates reported by the Argentine Central Bank.

1.8.Cash and Due from Banks

The item Cash and Due from Banks includes cash available and unrestricted deposits held in banks, which are short-term liquid instruments and have original maturities of less than three months.

The assets disclosed under cash and cash equivalents are accounted for at amortized cost which approximates its fair value.

1.9.Financial Instruments

Initial Recognition

The Group recognizes a financial asset or liability in its consolidated financial statements, as the case may be, when it becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of financial assets are recognized on trade-date, the date on which the group commits to purchase or sell the asset.

Upon initial recognition, the Group measures financial assets and liabilities at fair value, plus or less, in the case of instruments that are not recognized at fair value through profit or loss, the transaction costs directly attributable to the acquisition, such as fees and commissions.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Where the fair value differs from the acquisition cost at the time of initial recognition, the Group recognizes the difference as follows:

Financial Assets

a.Debt Instruments

The Group classifies as debt instruments such instruments that are considered financial liabilities for the issuer, including loans, government and private securities, bonds, and accounts receivable from customers.

Classification

As set out in IFRS 9, the Group classifies financial assets as subsequently measured at amortized cost, at fair value through in other comprehensive income or at fair value through profit or loss, on the basis of:

Business Model

The business model is the manner in which the Group manages a set of financial assets to achieve a specific business goal. It represents the manner in which the Group manages its financial assets in order to generate cash flows.

The Group may follow several business models; whose objective is:

The Group's business model does not depend on the intended purpose of an individual instrument. Accordingly, this condition is not an approach for classification of instruments on an individual basis. Instead, such classification is determined at a higher level of aggregation.

The Group only reclassifies an instrument if and when the business model for managing financial assets has changed. Such reclassification takes place as from the commencement of the period in which the change has occurred. Such changes are not expected to be frequent, with no changes having occurred during the fiscal year.

Characteristics of Contractual Cash Flows

The Group assesses whether the cash flows from the aggregated instruments represent payments of solely principal and interest on the principal amount outstanding; otherwise, such instruments should be measured at fair value through profit or loss.

Based on the aforementioned, Financial Assets are classified into three categories:

Financial assets are measured at amortized cost when:

These financial instruments are initially recognized at fair value plus the incremental and directly attributable transaction costs, and are subsequently measured at amortized cost.

The amortized cost of a financial asset is equal to its acquisition cost, net of accumulated amortization plus accrued interest (calculated applying the effective rate method), net of impairment losses, if any.

F-15

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Financial assets are measured at fair value through other comprehensive income when:

These instruments are initially recognized at fair value plus the incremental and directly attributable transaction costs, and are subsequently measured at fair value through other comprehensive income. The gains and losses arising from the changes in fair value are included in other comprehensive income under a separate component of equity. Losses or impairment reversals, interest income, and exchange gains and losses are charged to income. Upon the sale or disposal of the instrument, the accumulated gains or losses previously recognized in other comprehensive income are reclassified from the income statement.

(ii)Financial assets at fair value through profit or loss:

Financial assets at fair value through profit or loss are:

These financial instruments are initially recognized at fair value and any fair value measurement is charged to the income statement.

The Group classifies a financial instrument as held for trading if such instrument is acquired or incurred for the main purpose of selling or repurchasing it in the short term, or if it is part of a portfolio of financial instruments which are managed together and for which there is evidence of short-term profits, or if it is a derivative financial instrument not designated as a hedging instrument. Derivatives and trading securities are classified as held for trading and are measured at fair value.

Furthermore, financial assets may be measured at fair value through profit or loss when, in doing so, the Group eliminates or substantially reduces a measurement or recognition inconsistency.

b.Equity Instruments

Equity instruments are those considered as such by the issuer; in other words, instruments which do not include a contractual obligation to pay cash and which evidence a residual interest on the issuer's assets after deducting all of its liabilities.

Such instruments are measured at fair value through profit or loss, except where management has used, at the time of their initial recognition, the irrevocable option to measure them at fair value through other comprehensive income. This option is only available when instruments are not held for trading. The gains or losses of these instruments will be recognized in Other Comprehensive Income, with no reclassification, to profit or loss even if when they are realized. Dividends receivable from such instrument will be charged to income only at the time the Group becomes entitled to receive payment.

Financial Liabilities

Classification

The Group classifies its financial liabilities at amortized cost using the effective interest rate method, except for:

Financial liabilities measured at fair value through profit or loss: The Group may, upon initial recognition, use the irrevocable option to designate a financial liability at fair value through profit or loss, if and only if exercising such option results in a better information because:

F-16

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Financial guarantee contracts: Financial guarantee contracts require the issuer to make specified payments to reimburse the holder for a loss it may incur if a specified debtor fails to make payment when due under a debt instrument´s original modified terms.

Financial guarantee contracts and loan commitments at lower than market rates are initially measured at fair value and then remeasured at the higher of the unaccrued premium at year-end and the applicable allowance for impairment.

Derecognition of Financial Instruments

Financial Assets

A financial asset or, where applicable, a portion of a financial asset or a portion of a group of similar financial assets, is derecognized when: (i) the rights to receive cash flows from the asset have expired; or (ii) the Group has transferred its rights to receive cash flows from the asset or has assumed the obligation to remit all cash flows received to a third party without material delay under a pass-through agreement ; and substantially all risks and rewards inherent to the asset have been transferred or, if substantially all risks and rewards inherent to the asset have not been transferred or retained, when control over such asset has been transferred.

When the contractual rights to receive the cash flows generated by the asset have been transferred or a pass-through agreement has been entered into, the entity will assess whether or not, and to which extent, it has retained the risks and rewards inherent to ownership of an asset. If an entity has neither transferred nor retained substantially all risks and rewards inherent to ownership of an asset, nor has it transferred control over such asset, then it will continue recognizing such asset in its financial statements to the extent of its continuing involvement.

In this case, the entity will also recognize the related liability. The transferred asset and the related liability are measured in such a manner as to reflect the rights and obligations the Group has retained.

When continuing involvement takes the form of collateral over the transferred asset, it is measured at the lower of (i) the original carrying amount, and (ii) the maximum amount of the consideration received the entity could be required to repay.

Financial Liabilities:

A financial liability is derecognized when the payment obligation is satisfied, is canceled or expires. When an existing financial liability is exchanged for another with the same borrower under substantially different terms, or the prevailing terms are substantially modified, such exchange or modification will be treated as a derecognition of the original liability, and a new liability will be recognized. The difference between the carrying amount of the initial financial liability and the consideration paid is recognized in the consolidated income statement. When renegotiation terms do not substantially differ or the terms are not significantly modified, the flows of modified financial liabilities are discounted at the original contract rate.

1.10.DERIVATIVE FINANCIAL Instruments

Derivative Financial instruments, including foreign exchange contracts, interest rate futures, forwards, interest rate and currency swaps, and currency and interest rate options, are carried at fair value.

All derivative financial instruments are accounted for as assets when fair value is positive and as liabilities when fair value is negative, relative to the agreed-upon price. Changes in the fair value of derivative instruments are charged to income for the fiscal year.

The Group has not applied hedge accounting in these consolidated financial statements.

1.11.Repo Transactions

Reverse Repo Transactions

According to the derecognition principles set out in IFRS 9, these transactions are treated as secured loans for the risk has not been transferred to the counterparty.

Loans received in the form of reverse repo agreements are accounted for under “Repo Transactions”, classified by counterparty (i.e. financial debtors, Argentine Central Bank and non-financial debtors) and also by the type of assets received as collateral.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

At the end of each month, accrued interest income is charged against “Repo Transactions” with its corresponding offsetting entry in “Interest Income.”

The assets received and sold by the Group are derecognized at the end of the repo transaction, and an in-kind liability is recorded to reflect the obligation of delivering the security disposed of.

Repo Transactions

Loans received in the form of repo agreements are accounted for under “Repo Transactions”, classified by counterparty (financial creditors, Argentine Central Bank and non-financial creditors) and also by the type of asset pledged as collateral.

In these transactions, when the recipient of the underlying asset becomes entitled to sell it or pledge it as collateral, it is reclassified to “Financial Assets Pledged as Collateral” At the end of each month, these assets are measured according to the category they had before they were subject to the repo transaction, and results are charged against the applicable accounts, depending on the type of asset.

At the end of each month, accrued interest expense is charged against “Repo Transactions” with its corresponding offsetting entry in “Interest-related Expenses.”

1.12.Allowances for Loan Losses

The Group assesses on a forward-looking basis the expected credit losses (“ECL”) associated with its debt instruments assets carried at amortized cost and FVOCI, together with the exposure arising from loan commitments and financial guarantee contracts. The Group recognizes a loss allowance for such losses at each reporting date. The measurement of ECL reflects:

Note 46 provides more detail of how the expected credit loss allowance is measured.

1.13.Leases

1.13.1.Operating Leases

Leases where the lessor retains a substantial portion of the risks and rewards of ownership are classified as operating leases. Payments made under operating leases (net of lease incentives) are recognized in profit or loss on a straight-line basis over the term of the lease.

1.13.2.Finance Leases

Finance leases are capitalized, at the lease’s inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments.

Each lease payment is allocated between the liability and finance cost. The finance cost is charged to the profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Assets acquired under a finance lease are depreciated during the shorter of the asset useful life and the lease term.

1.14.Property, Plant and Equipment

The Group has used the option set out in IFRS 1 “First-time Adoption of IFRS” and has adopted the fair value as deemed cost for certain items of property, plant and equipment on transition date to IFRS as mentioned in Note 3.

Assets are stated at historical cost adjusted for inflation (as explained in Note 1.2.b.) less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of items. The items of property, plant and equipment acquired in a business combination were initially measured at their estimated fair value at the time of the acquisition.

Subsequent costs are included in the value of the asset and are recognized as a separate asset, as the case may be, if and only if future economic benefits are expected to flow to the Group and its cost can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognized when replaced. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred.

F-18

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Depreciation is calculated on a straight-line basis, using annual rates sufficient to extinguish the value of the assets at the end of their estimated useful life. If an asset is comprised by significant components with varying useful lives, such components will be recognized and depreciated as separate item. Property, plant and equipment residual values, useful lives and depreciation methods are reviewed and adjusted, as needed, as of each year-end or when indicators of impairment exist.

The carrying amount of property, plant and equipment is immediately reduced to its recoverable value when the carrying amount exceeds the estimated recoverable value.

Gains and losses from the disposal of items of property, plant and equipment are calculated by comparing the proceeds from the disposal to the carrying amount of the respective asset and are charged to income.

1.15.Intangible Assets

1.15.1. Licenses

Separately acquired licenses are shown at historical cost, restated in accordance with Note 1.2.b. while licenses acquired through business combinations are measured at their estimated fair value on the acquisition date and restated in accordance with 1.2.b.

As of the date of these consolidated financial statements, intangible assets with definite useful life are disclosed net of accumulated amortization and/or impairment losses, if any. These assets are tested for impairment on an annual basis or when indicators of impairment exist.

Licenses acquired by the Group were classified as intangible assets with definite useful life and are amortized on a straight-line basis over the license term.

Intangible assets with indefinite useful life are those arising from contracts or other legal rights renewable at no significant cost and for which, on the basis of an analysis of all relevant factors, there is no foreseeable time limit during which the asset is expected to generate net cash flows for the Group. These intangible assets are not amortized, but are rather tested for impairment on an annual basis or when indicators of impairment exist, either individually or at the cash-generating unit level. The determination of the indefinite useful life is reviewed on an annual basis to confirm whether it is still applicable.

1.15.2.Software

Costs associated with software maintenance are recognized as an expense when incurred.

Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the group are recognized as intangible assets when the following criteria are met:

1.16.Assets Held for Sale and Discontinued Operations

1.16.1.Assets Held for Sale

The assets, or group of assets, classified as held for sale pursuant to IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations,” are disclosed separately from the other assets.

 

Non-current assets or disposal groups (including the loss of control over a subsidiary) are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable. In order for an asset to be classified as held for sale, it must meet the following conditions:

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Assets, or groups of assets, classified as held for sale pursuant to IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations,” are measured at the lower of their carrying amount and fair value less costs to sell and are restated in accordance with Note 1.2.b.

 

Non-current assets (including those that are part of a disposal group) are not depreciated or amortized while they are classified as held for sale.

1.16.2.Discontinued Operations

A discontinued operation is a Group's component that either has been disposed of, or classified as held for sale, and meets any of the following conditions:

Any gain or loss on the remeasurement of an asset (or disposal group) classified as held for sale which does not meet the requirements to be classified as a discontinued operation will be recognized in income from continuing operations.

1.17.Impairment of Non-financial Assets

Assets with indefinite useful life are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or, at least, on an annual basis.

An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period.

1.18.Trust Assets

Assets held by the Group in its capacity as trustee are not included in the consolidated balance sheet because the Group has neither control over the trust nor the risks and benefits of the underlying assets. Commissions and fees earned on trust activities are disclosed in "Fee Income".

1.19.Offsetting

Financial assets and liabilities are offset and the net amount reported in the balance sheet where the Group currently has a legally enforceable right to offset the recognized amounts, and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously.

1.20.Loans from the Argentine Central Bank and Other Financial Institutions

The amounts owed to other financial institutions are recorded at the time the bank disburses the proceeds to the economic group. The non-derivative financial liability is measured at amortized cost. Where the Group buys back its own debt, such debt will be derecognized from its consolidated financial statements and the difference between the residual value of the financial liability and the amount paid will be recognized as financial income or expense, as the case may be.

1.21.Provisions / Contingencies

A provision will be recognized when:

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The Group will be deemed to have a constructive obligation where (a) the Group has assumed certain responsibilities as a consequence of past practices or public policies, and (b) as a result, the Group has created an expectation that it will discharge those responsibilities.

The Group recognizes the following provisions:

The provision amount recognized by the Group must be the best estimate at the reporting year-end of the disbursement required to settle the current obligation.

Where the financial effect of the discount is material, the provision amount must be the present value of the disbursements expected to be required to settle the obligation, applying a pre-tax interest rate that reflects prevailing market conditions on the time value of money and the risks specific to such obligation. The increase in the provision due to the passage of time is recognized under Financial Income (Loss), Net in the income statement.

The Group will not account for positive contingencies, other than those arising from deferred taxes and those whose occurrence is virtually certain.

As of the date of these consolidated financial statements, the Group's management believes there are no elements leading to determine the existence of contingencies that might be materialized and have a negative impact on these consolidated financial statements other than those disclosed in Note 47.

1.22.Other Non-financial Liabilities

Non-financial accounts payable are accrued when the counterparty has fulfilled its contractual obligations and are measured at amortized cost.

1.23.DEBT INSTRUMENTS Issued

The Debt Instruments Issued by the Group are measured at amortized cost. Where the Group buys back its own debt, the liability in respect of such debt instrument will be deemed extinguished and, accordingly, the debt instrument will be derecognized. Where the Group buys back its own debt, such debt will be derecognized from its consolidated financial statements and the difference between the residual value of the financial liability and the amount paid will be recognized as financial income or expense, as the case may be.

1.24.ASSETS AND LIABILITIES ARISING FROM INSURANCE CONTRACTS

Assets and liabilities arising from the Group's insurance contracts are measured and recorded according to the criteria set forth in IFRS 4 "Insurance Contracts".

Assets for Insurance Contracts

Insurance contracts are those contracts under which the Group (the insurer) has accepted an insurance risk from the other party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.

Once a contract has been classified as an insurance contract, it continues to be an insurance contract for its remaining useful life, even if the insurance risk is significantly reduced during this period, unless all the rights and obligations are extinguished or expire.

The insurance contracts offered by the Group include property insurance covering fire, homeowners’ insurance, theft and similar risks, property damages, personal accidents, among other risks. They also include life and retirement insurance.

Total premiums are recognized as an account receivable on the date of issuance of the policy. At the same time, a reserve for unaccrued premiums representing premiums for risks that have not yet expired is recorded in liabilities. Unaccrued premiums are recognized as revenue during the contract period, which is also the coverage and risk period. The carrying amount of accounts receivable from insurance is reviewed for impairment provided that events or circumstances indicate that the carrying amount may not be recoverable. The impairment loss is charged to the income statement.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Liabilities Recognized for the Insurance Business

Debts with Insured Reserves

Reserves for insurance losses account for debts with insured for losses reported to the company and the estimated losses that have already been incurred but to date have not been reported to the company (IBNR losses). Reported losses are adjusted based on technical reports received from independent appraisers.

Debts with Reinsurers and Co-insurers

The Group mitigates the risk for some of its insurance businesses through coinsurance or reinsurance contracts with other companies. In the case of coinsurance, the company associates with another company to cover the risk assuming only a share thereof and, accordingly, of the premium as well. In the case of reinsurance, the risk is transferred to another insurance company both proportionally (as a share of the risk) and non-proportionally (the excess of loss is covered above a specified limit). The transferred reinsurance agreements do not release the Group from its obligations towards the insured.

Liabilities for coinsurance and reinsurance represent the amounts owed under the same terms and amounts payable are estimated consistently with the contract that has given rise thereto.

Debts with Insurance Brokers

They represent the liabilities with insurance brokers and representative agents arising from commissions on insurance operations they originate for the Group's companies. They also include the current account balances with those entities.

Statutory Reserves

Statutory reserves include the reserves for obligations of future benefits by virtue of their life insurance policies, annuities and accidents, and the reserves for retirement insurance contracts.

The Group evaluates, at the end of the reporting period, the adjustment of insurance liabilities that have been recognized, using the current estimates of future cash flows from insurance contracts. If the evaluation shows that the carrying amount of its liabilities for insurance contracts (less deferred acquisition costs and related intangible assets) is not adequate, considering the estimated future cash flows, the total amount of the inadequacy will be recognized in profit or loss. According to IFRS 4, the Group will be required to determine the adequacy of the carrying amount recorded pursuant to the guidelines set out in IAS 37.

1.25.SHAREHOLDERS' EQUITY

Shareholders’ equity accounts are restated in accordance with Note 1.2.b., except for the item "Capital Stock", which is carried at face value. The restatement adjustment is included in "Adjustments to Shareholders' Equity.”

Ordinary shares are recognized in shareholders’ equity and carried at face value. When any company comprising the Group buys shares of the Company's capital stock (treasury stock), the payment made, including any cost directly attributable to the transaction (net of taxes), is deducted from shareholders’ equity until the shares are either canceled or disposed of.

1.26.Profit Reserves

Pursuant to Section 70 of the General Corporations Law, the Company and its subsidiaries, other than Banco Galicia, are required to appropriate 5% of the net income for the fiscal year to the Legal Reserve until such reserve is equal to 20% of capital stock, plus the balance of the Capital Adjustment account.

As concerns Banco Galicia, according to the regulations set forth by the Argentine Central Bank, 20% of net income for the fiscal year, net of previous years’ adjustments, if any, is required to be appropriated to the legal reserve. Notwithstanding the aforementioned, in appropriating amounts to other reserves, Financial Institutions are required to comply with the provisions laid down by the Argentine Central Bank in the revised text on distribution of dividends described in Note 54.8.

1.27.Distribution of Dividends

The distribution of dividends to the Group's shareholders is recognized as a liability in the consolidated financial statements for the fiscal year in which dividends are approved by the Group’s shareholders.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

1.28.Revenue Recognition

Financial income and expense is recognized in respect of all debt instruments in accordance with the effective interest rate method, pursuant to which all gains and losses which are an integral part of the transaction effective interest rate are deferred.

Gains or losses included in the effective interest rate embrace disbursements or receipts relating to the creation or acquisition of a financial asset or liability, such as preparation and processing of the documents required to consummate the transactions, and payments received for the extension of credit arrangements. The Group accounts for its non-derivative financial liabilities at amortized cost, except for those included in “Liabilities at Fair Value through Profit or Loss,” which are measured at fair value.

Fees and commissions earned by the Group on the origination of syndicated loans are not part of the product effective interest rate, and are recognized in the income statement at the time the service is delivered, to the extent the Group does not retain a portion of the same, or such effective interest rate is maintained under the same conditions as the other participants. Commissions and fees earned by the Group on negotiations in third parties’ transactions are not part of the effective interest rate either, and are recognized at the time the transactions are executed.

IFRS 15 establishes the principles that an entity shall apply to recognize revenue and cash flows from contracts with customers.

The amount that should be recognized will be the amount that reflects the consideration to which the entity expects to be entitled in exchange for the services delivered to customers.

The Group's income from services is recognized in the income statement as performance obligations are fulfilled, part of the consideration received is allocated to the point granted for the Group´s customer loyalty programs. Consideration is allocated based on the relative standalone selling prices for services rendered and points granted.  Points are accumulated based on the redemption rate, once they are redeemed by customers, the Group recognizes the revenue associated to them.

Revenue recognized during the year is restated as explained in Note 1.2.b.

Below is a summary of the main commissions earned by the Bank:

 

 

1.29.Income Tax and Minimum Presumed Income Tax

1.29.1.Income Tax

The income tax expense for the year includes current and deferred tax. Income tax is recognized in the consolidated income statement, except for items required to be recognized directly in other comprehensive income. In this case, the income tax liability related to such items is also recognized in such statement.

The current income tax expense is calculated on the basis of the tax laws enacted or substantially enacted as of the balance sheet date in the countries where the Group operates and generates taxable income. The Group periodically assesses the position assumed in tax returns in connection with circumstances in which the tax laws are subject to interpretation. On the other hand, when required, the Group sets up provisions in respect of the amounts expected to be required to pay to the tax authorities.

Deferred income tax is determined, in its entirety, by applying the liability method on the temporary differences arising from the carrying amount of assets and liabilities and their tax base. However, the deferred tax arising from the initial recognition of an asset or liability in a transaction other than a business combination which, at the time of the transaction does not affect income or loss for accounting or tax purposes, is not recorded. The deferred tax is determined using tax rates (and laws) enacted as of the date of the financial statements and that are expected to be applicable when the deferred tax assets are realized or the deferred tax liabilities are settled.

Deferred tax assets are recognized only to the extent future tax benefits are likely to arise against which the temporary differences might be offset.

F-23

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The Group recognizes a deferred tax liability for taxable temporary differences related to investments in subsidiaries and affiliates, except that the following two conditions are met:

The balances of deferred tax assets and liabilities are offset when a legal right exists to offset current tax assets against current tax liabilities and to the extent such balances are related to the same tax authority of the Group or its subsidiaries, where tax balances are intended to be, and may be, settled on a net basis.

1.29.2.Minimum Presumed Income Tax

The Group determines the minimum presumed income tax at the effective rate of 1% of the computable assets at each fiscal year-end. This tax is supplementary to income tax. The Group’s tax liability is equal to the higher of the two taxes. However, if the minimum presumed income tax were to exceed income tax in a given fiscal year, such excess may be computed as a payment on account of the income tax that could be generated in any of the next ten fiscal years.

The minimum presumed income tax credit disclosed under "Current Income Tax Assets" is the portion the Group expects to offset against the income tax in excess of minimum presumed income tax to be generated in the following ten fiscal years.

1.30.Earnings per Share

Basic earnings per share are calculated as income (loss) attributable to the owners of the Parent, divided by average ordinary shares outstanding.

Diluted earnings per share are calculated by adjusting income (loss) attributable to owners of the Parent and average ordinary shares outstanding adjusted for the effects of the potential conversion into equity instruments of all convertible instruments held by the Group at period-end.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

The preparation of these consolidated financial statements in accordance with IFRS requires the use of certain significant accounting estimates. It also requires Management to make judgments in applying the accounting standards to define the Group's accounting policies.

The Group has identified the following areas which involve a higher degree of judgment or complexity, or the areas in which the assumptions and estimates are material for these consolidated financial statements, which are essential to understand the underlying accounting/financial reporting risks.

a.Fair Value of Derivative Instruments and Other Instruments

The fair value of financial instruments not listed in active markets is determined using valuation techniques. Such techniques are validated and reviewed periodically by qualified personnel independent from the area which developed them. All models are assessed and adjusted before being put into use in order to ensure that results reflect current information and comparable market prices. Where possible, models rely on observable inputs only; however, certain factors, such as the Group's own and the counterparty's credit risk, volatilities and correlations, require the use of estimates. Changes in the assumptions about these factors may affect the reported fair value of financial instruments.

b.Impairment Losses on Loans and Advances

The Group recognizes the allowance for loan losses under the expected credit losses method included in IFRS 9. The most significant judgments of the model relate to defining what is considered to be a significant increase in credit risk, determining the life of revolving facilities, and in making assumptions and estimates to incorporate relevant information about past events, current conditions and forecasts of economic conditions. A high degree of uncertainty is involved in making estimations using assumptions that are highly subjective and very sensitive to the risk factors.

c.Impairment of Non-financial Assets

Intangible assets with definite useful life and property, plant and equipment are amortized or depreciated on a straight-line basis during their estimated useful life. The Group monitors the conditions associated with these assets to determine whether the events and circumstances require a review of the remaining amortization or depreciation term and whether there are factors or circumstances indicating impairment in the value of the asset which might not be recoverable.

Identifying the indicators of impairment of property, plant and equipment and intangible assets requires the use of judgment. The Group has concluded that there were no indicators of impairment for any of the years reported in its consolidated financial statements.

F-24

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

d.Income Tax and Deferred Tax

The assessment of current and deferred tax assets and liabilities requires a significant level of judgment. Current income tax is accounted for according to the amounts expected to be paid, while deferred income tax is accounted for on the basis of the temporary differences between the carrying amount of assets and liabilities and their tax base, at the rates expected to be in force at the time of reversal of such differences.

A deferred tax asset is recognized when future taxable income is expected to exist to offset such temporary differences, based on Management's assumptions about the amounts and timing of such future taxable income. Then, management needs to determine whether deferred tax assets are likely to be used and offset against future taxable income. Actual results may differ from these estimates, for instance, changes in the applicable tax laws or the outcome of the final review of the tax returns by the tax authorities and tax courts.

Future taxable income and the number of tax benefits likely to be available in the future are based on a medium-term business plan prepared by management, on the basis of expectations which are deemed reasonable.

NOTE 3. TRANSITION TO IFRS

3.1.Requirements for the Transition to IFRS

The following is a reconciliation between the shareholders' equity, consolidated income statement, consolidated other comprehensive income and consolidated statement of cash flows amounts related to the consolidated financial statements issued according to the accounting framework prior to the transition date (January 1, 2017) and the adoption date (December 31, 2017), and the amounts presented according to the IFRS (see Note 1.1) in these consolidated financial statements, as well as the effects of adjustments to cash flows.

 

 

F-25

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

F-26

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

F-27

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

F-28

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

The significant adjustments to Cash Flows, as required by IFRS 1, paragraph 25 are as follows:

 

The reconciliation of cash and cash equivalents is as follows:

 

F-29

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

The reconciliation of cash flows is as follows:

 

 

 

 

 

F-30

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

3.2.Optional Exemptions to IFRS

IFRS 1 allows entities that adopt IFRS for the first time to consider certain one-time exemptions. Such exemptions have been established by the IASB to make the first application of certain IFRS simpler, eliminating the mandatory nature of their retrospective application.

Below are the optional exemptions applicable to the Group under IFRS 1:

The accumulated fair value totaled $6,880,487 and the adjustment to the carrying amount presented according to the prior accounting framework amounted to $4,832,716, out of which $4,475,869 was recorded under "Property, Plant and Equipment" and $356,847 under "Other Non-financial Assets".

The Group has not made use of other exemptions available in IFRS 1.

3.3.Mandatory Exceptions to IFRS

Below are the mandatory exceptions applicable to the Group under IFRS 1:

The other exceptions established by IFRS 1 have not been applied because of not being material to the Group.

F-31

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

3.4.RECLASSIFICATIONS

The items recognized under the prior accounting framework, which were reclassified according to IFRS and as detailed in point 3.1., are described below.

3.4.1.Assets

Spot Purchases and Sales Pending Settlement: According to prior accounting framework, these transactions were recorded as "Other Receivables Resulting from Financial Brokerage" and "Other Liabilities Resulting from Financial Brokerage", respectively. Upon adopting the trade-date accounting, a spot purchase transaction pending settlement will imply recording the security to be received in the respective account, with the applicable measurement criterion, while the spot sale pending settlement will imply the derecognition of the security. The currency transactions pending settlement have been reclassified as cash equivalents and those related to securities have been included in the respective holdings.

Reverse Repo Transactions: Under the prior accounting framework, the security was recognized in the holding and the obligation to deliver it at the end of the transaction in "Other Liabilities Resulting from Financial Brokerage". The loan granted was recorded in "Other Receivables Resulting from Financial Brokerage". Under IFRS, the financial assets acquired through reverse repo transactions for which the risks and rewards have not been transferred shall be recognized as a loan granted with securities offered as collateral. Therefore, the securities were derecognized.

Leasehold Improvements: According to the prior accounting framework, they were disclosed under "Intangible Assets". According to IFRS, they are part of "Property, Plant and Equipment".

Equity Investments: In Prisma Medios de Pago S.A.’s Ordinary and Extraordinary Shareholders’ Meeting held on August 31, 2017, the shareholders decided to transfer all of the shares held in the investee (see Note 55). Therefore, according to IFRS 5 is the investment was reclassified to "Non-current Assets Held for Sale" and measured at the lower of the carrying amount and fair value less costs to sell at closing. Such reclassification was made as of December 31, 2017.

Compañía Financiera Argentina S.A. and Cobranzas y Servicios S.A. were disposed of on February 2, 2018 (see Note 23). Under the prior accounting framework they were disclosed under "Equity Investments". Under IFRS they were reclassified to "Non-current Assets Held for Sale" and measured at the lower of the carrying amount and fair value less cost to sell.

Repurchase of Debt Securities: Repurchased debt securities were included within the debt investment portfolio under the prior accounting framework. Under IFRS an issuer's repurchase of its own debt is considered a settlement of the related obligation.

Repurchase of Non-controlling Interests: As of December 31, 2017, a financial liability has been recognized for the purchase of a 6% interest in Tarjetas Regionales S.A. IFRS 32, paragraph 23, sets forth that a commitment to buy own shares is to be accounted for as a financial liability for the present value of the redemption price. The liability is recognized with its corresponding offsetting entry in equity, for the risks and rewards associated with the shares are retained by the non-controlling shareholders until the actual transfer of such shares. The transaction totaled $1,364,452 and the amount recognized against other shareholders' equity reserves was $593,980.

3.4.2. Income Statement

Fees on Origination of Loans and Lending Expenses: According to the prior accounting framework, structuring fees were disclosed under "Fee Income" and lending expenses under "Fee-related Expenses". According to IFRS 9, such fees are part of the cash flows taken into account to determine the IRR on loans.

3.5.ADJUSTMENTS AS OF THE DATE OF TRANSITION

 

 

F-32

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The adjustment disclosed is the result of measuring at fair value through profit or loss the securities classified in that business model.

The Group has classified the following financial assets into this category: Holdings in government and private securities, in instruments issued by the Argentine Central Bank, in debt securities and certain investments in debt securities issued by financial trusts.

 

 

 

 

The Financial Trust Galtrust I has measured its holding of government securities at fair value through OCI in accordance with IFRS, based on the business model assessments and the instrument’s cash flow characteristics (SPPI).

 

 

F-33

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

By applying the prior accounting framework, Banco Galicia only recognized the current tax for the fiscal year.

 

F-34

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4. FINANCIAL INSTRUMENTS

Schedule P "Categories of Financial Assets and Liabilities" discloses the measurement categories to which the consolidated balance sheet items and the fair value hierarchies relate.

As of the indicated dates, the Group maintains the following portfolios of financial instruments:

 

 

F-35

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

NOTE 5. FAIR VALUES

The Group classifies the fair values of financial instruments in three levels, according to the reliability of the inputs used to determine them.

Fair Value Level 1: The fair value of financial instruments traded in active markets (such as, publicly-traded derivatives, debt securities or available for sale) is based on the quoted prices of markets (unadjusted) as of the date of the reporting period. If the quote price is available and there is an active market for the instrument, it will be included in Level 1. Otherwise, it will be included in Level 2.

Fair Value Level 2: The fair value of financial instruments that are not traded in active markets, for example, over-the-counter derivatives, is determined using valuation techniques that maximize the use of observable market data and rely as little as possible on the Group's specific estimates. If all the significant inputs required to fair value and instrument are observable, the instrument is included in Level 2. If the inputs used to determine the price are not observable and significant, the instrument will be included in Level 3.

Fair Value Level 3: If one or more significant inputs are not based on observable market data, the instrument is included in Level 3. This is the case of unlisted equity instruments.

That is to say, when observable market prices are no longer available, the instrument will be transferred into Level 3. Only when an instrument has an observable listed price in the market, it will return to Level 1 and will keep that Level while it continues to be quoted. This is known as transfer among levels.

Valuation Techniques

Valuation techniques to determine fair values include:

The valuation technique to determine the fair value Level 2 is based on inputs other than the quoted price included in Level 1 that are readily observable for the asset or liability (i.e., prices). For those instruments for which there is no secondary market and, if positions should be disposed of, the Group should sell to the Argentine Central Bank at the originally agreed-upon rate, as established by the Regulator, the price has been determinated based on such rate accrual.

The valuation technique to determine the fair value of Level 3 financial instruments is based on a method that compares the existing spread between the curve of sovereign bonds and the average yield of primary offerings, for different segments, according to the different risk ratings. If there are no representative primary offerings during the month, the following alternatives will be used:

F-36

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

As stated above, the rates and spreads to be used to discount future cash flows and originate the price of the instrument are determined.

All the changes to valuation methods are previously discussed and approved by the Group's key personnel.

The Group's financial instruments measured at fair value at fiscal year-end are as follows:

 

 

It relates to Secured Bonds issued by Argentina measured at fair value with changes in OCI.

 

 

 

 

 

 

Changes in instruments included in fair value Level 3 are as follows:

F-37

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

The Group's policy is to recognize transfers among fair value levels only as of year-end dates. They resulted from the transfer to Level 3 of the instruments that no longer have observable inputs as of the year-end the movement to Level 1 of the instruments that have observable quoted prices.

The Group included below the fair value of the instruments not carried at fair value as of the year-end.

 

NOTE 6. CASH AND CASH EQUIVALENTS

Cash equivalents are held to meet short-term payment commitments, rather than for investment or similar purposes. In order for a financial asset to be classified as cash equivalents, it should be readily convertible into a certain amount of cash and its risk of changes in value should be immaterial. Accordingly, an investment with original maturity of three months or less is classified as cash equivalent. Equity interests are excluded from cash equivalents.

Cash and cash equivalents break down as follows:

 

 

The analysis of risk of "Cash and Cash Equivalents" is disclosed in Note 46. Related-party information is disclosed in Note 52.

 

NOTE 7. FAIR VALUE DEBT SECURITIES AT FAIR VALUE THROUGH PROFIT OR LOSS

The Group's fair value debt securities through Profit or Loss are detailed in Schedule A.

The credit quality of debt securities is disclosed in Note 46.

F-38

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS

FORWARD PURCHASE-SALE OF FOREIGN CURRENCY WITHOUT DELIVERY OF THE UNDERLYING ASSET

Mercado Abierto Electrónico (MAE) and Rosario Futures Exchange (ROFEX) have trading environments for the closing, recording and settlement of financial forward transactions carried out among its agents, being Banco Galicia one of them. The general settlement mode for these transactions is without delivery of the traded underlying asset. Settlement is carried out on a daily basis, in Pesos, for the difference, if any, between the closing price of the underlying asset and the closing price or value of the underlying asset corresponding to the previous day, the difference in price being charged to income.

The transactions are recorded in Off-Balance Sheet Items for the notional value traded. The accrued balances pending settlement are disclosed in the "Derivative Financial Instruments" line of Assets and/or Liabilities, as the case may be.

INTEREST RATE SWAPS

These transactions are conducted within the environment created by the MAE, and the settlement thereof is carried out on a daily or monthly basis, in Pesos, for the difference between the cash flows calculated using a variable rate (Badlar for private banks for time deposits of 30 to 35 days) and the cash flows calculated using a fixed rate, or vice versa, on the notional value agreed, the difference in price being charged to income.

CROSS CURRENCY SWAPS

These swap transactions in pesos and US Dollars relate to an exchange of a periodic flow of principal and interest. They are settled for the difference and it is a bilateral transaction with a counterparty abroad.

Both the interest rate swap and cross currency swaps are recorded in "Off-Balance Sheet Items" for the notional value traded. The accrued balances pending settlement are disclosed in the "Derivative Instruments" line of Assets and/or Liabilities, as the case may be.

WRITTEN AND PURCHASED CALL OPTIONS ON DOLLAR GOLD FUTURES WITHOUT DELIVERY OF THE UNDERLYING ASSET

These transactions have been conducted with the purpose of hedging the variable yield of the deposits received by Banco Galicia and set forth by the Argentine Central Bank.

The contract date, the term to exercise the option and the underlying asset are the same as those for the related deposit. Notional amounts have been computed so that the offset value of derivative financial instruments is similar to the variable yield of the investment. Changes in the value of the underlying asset at the time of the arrangement and at fiscal year-end, equivalent to the variable yield, have been recognized in income and are recorded under “Derivative Financial Instruments " line of Assets and/or Liabilities, as appropriate. Premiums received and/or paid have been accrued on a straight-line basis during the contract term.

WRITTEN AND PURCHASED DOLLAR FUTURES WITHOUT DELIVERY OF THE UNDERLYING ASSET

These transactions have been traded on ROFEX. Derivatives are accrued for at fair value. Premiums received are part of the fair value calculation.

The amounts of transactions conducted as of the indicated dates are as follows:

F-39

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

See Schedule O for further details.

NOTE 9. REPO TRANSACTIONS

As of the indicated dates, the Group maintains the following repo transactions:

 

 

 

The Group carries out repo transactions in which it sales a security with the related forward purchase thereof, thus substantially retaining all the risks and rewards associated with the instruments and recognizing them in "Financial Assets Pledged as Collateral" at year-end, as the provisions set out in point 3.4.2 (Derecognition of Assets) of IFRS 9 "Financial Instruments") are not met.

 

 

The residual values of assets transferred under repo transactions are disclosed in Note 8 and Schedule O.

NOTE 10. OTHER FINANCIAL ASSETS

As of the indicated dates, the balances of "Other Financial Assets" relate to:

 

 

 

Related-party information is disclosed in Note 52.

 

NOTE 11. NET LOANS AND OTHER FINANCING

"Net Loans and Other Financing" break down as follows as of the indicated dates:

 

 

Classification of "Loans and Other Financing" by status and collateral in Schedule B.

The concentration of "Net Loans and Other Financing" is detailed in Schedule C.

The breakdown by term of "Net Loans and Other Financing" is detailed in Schedule D.

F-40

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The analysis of risk of “Loans and Other Financing" is disclosed in Note 46.

Related-party information is disclosed in Note 52.

NOTE 12. OTHER DEBT SECURITIES

The Group's "Other Debt Securities" are detailed in Schedule A.

Changes in the "Allowances for Loan Losses" related to "Other Debt Securities" are detailed in Note 46.

NOTE 13. FINANCIAL ASSETS PLEDGED AS COLLATERAL

"Financial Assets Pledged as Collateral" valued according to their underlying asset for the fiscal years under analysis break down as follows:

 

 

Restricted assets are detailed in Note 54.2.

NOTE 14. CURRENT INCOME TAX ASSETS

As of the indicated dates, the balances of "Current Income Tax Assets" relate to:

 

 

Tax loss carryfoward expiration dates of Minimum Presumed Income Tax are as follows:

 

 

NOTE 15. INVESTMENTS IN EQUITY INSTRUMENTS

The Group's "Investments in Equity Instruments" are detailed in Schedule A.

F-41

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 16. EQUITY INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES

16.1.Equity Investments in Subsidiaries

The basic information regarding Grupo Financiero Galicia’s consolidated subsidiaries is detailed as follows:

 

 

The following are the balances of subsidiaries, according to IFRS as of the indicated dates:

 

 

 

 

F-42

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The Bank's General Ordinary and Extraordinary Shareholders' Meeting held on April 24, 2018 approved the amendment to Article 1 of the Bylaws, changing the corporate name of Banco de Galicia y Buenos Aires S.A. for Banco de Galicia y Buenos Aires S.A.U. The Argentine Central Bank, through Resolution No. 200 issued by its Board of Directors on July 5, 2018, did not object to such change. On October 2, 2018, the Corporation Control Authority registered the change under Number 18709 of Book 91 of Stock Companies.

The General Ordinary Shareholders' Meeting of Net Investment S.A. held on May 16, 2017 resolved to unanimously approve the early dissolution and subsequent liquidation of the company, under the provisions set out in Section 94, subsection 1, of General Corporations Law, i.e., by the shareholders' decision. The financial statements as of December 31, 2017 are the latest financial statements available before Net Investment S.A.'s final liquidation.

16.2.Investments in Associates and Joint Ventures

"Investments in Associates and Joint Ventures" break down as follows as of the indicated dates:

 

 

NOTE 17. LEASES

17.1.Financial Leases

The "Property, Plant and Equipment" account includes the following amounts in which the Group is lessee under the terms of financial lease contracts.

 

 

 

 

17.2.Operating Leases

The Group records contractual obligations derived from the lease of certain properties used as part of the distribution network. The term of these contracts ranges from one to five years and most of them are renewable upon their expiration at market values. The estimated future lease payments in connection with these properties are as follows:

 

 

NOTE 18. PROPERTY, PLANT AND EQUIPMENT

Changes in "Property, Plant and Equipment" are detailed in Schedule F.

The carrying amounts of "Property, Plant and Equipment" do not exceed their recoverable values.

 

F-43

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 19. INTANGIBLE ASSETS

Changes in "Intangible Assets" are detailed in Schedule G.

The carrying amounts of "Intangible Assets" do not exceed their recoverable values.

NOTE 20. DEFERRED INCOME TAX ASSETS/LIABILITIES

Changes in "Deferred Income Tax Assets and Liabilities" during the fiscal years ended December 31, 2018 and December 31, 2017 are as follows:

Deferred Tax Assets

 

 

Deferred Tax Liabilities

 

 

Deferred Tax Assets

 

F-44

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Deferred Tax Liabilities

 

 

In addition, the expiration dates of tax loss carry-forwards are as follows:

 

 

The Group has determined an allowance for impairment as of December 31, 2018 amounting to $3,764, as it is not probable that future taxable amounts will be available to utilize those temporary differences and losses as of the date of these financial statements.

NOTE 21. ASSETS/LIABILITIES FOR INSURANCE CONTRACTS

Assets related to insurance contracts as of the indicated dates are detailed as follows:

 

 

Liabilities related to insurance contracts as of the indicated dates are detailed as follows:

 

 

F-45

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

Insurance liabilities were recorded according to the liability adequacy test, using the current estimates of future cash flows derived from insurance contracts. The assumptions used are as follows:

 

 

NOTE 22. OTHER NON-FINANCIAL ASSETS

"Other Non-financial Assets" break down as follows:

 

 

Related-party information is disclosed in Note 52.

F-46

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 23. NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

The Group has classified the following assets as "Assets Held for Sale and Discontinued Operations":

 

 

Prisma Medios de Pago S.A.: The Ordinary and Extraordinary Shareholders’ Meeting of Prisma Medios de Pago S.A. held on August 31, 2017, decided to transfer all of the shares of the Company in one-year term. Therefore, according to IFRS 5 the Group considered the investment as a "Non-current Assets Held for Sale" and measured the investment at the lowest of cost or fair value less cost to sell. The carrying amounts of the investment were $414,778 and $374,937 as of December 31, 2018 and 2017, respectively. The change is due to the company's capital stock increases, which took place in April and December 2018 in order to adjust it to its corporate businesses.

The General Ordinary Shareholders’ Meeting held on May 8, 2018 approved the distribution of cash dividends. According to the Bank’s equity interest, it was entitled to dividends in the amount of $490,393, which were recorded in the income statement.

On February 1, 2019, 51% of such company's equity interest was transferred. (See Note 55).

Compañía Financiera Argentina S.A. and Cobranzas y Servicios S.A.: On January 12, 2017, the Bank's Board of Directors accepted an offer to buy the equity investment in the subsidiaries Compañía Financiera Argentina S.A. and Cobranzas y Servicios S.A., made by Mr. Julio Alfredo Fraomeni and Galeno Capital S.A.U. By virtue of Resolution No. 414, the Argentine Central Bank authorized such transaction.

The sale of the shares in both companies was consummated on February 2, 2018, with the new holders having been registered in each of these companies’ books. The sale price was subject to the buyers' consent, who were entitled to raise objections for a term of up to 45 consecutive days to be counted as from January 29, 2018. On March 26, 2018, the sale of shares in Compañía Financiera Argentina S.A. and Cobranzas y Servicios S.A. was completed, establishing a final price of $1,527,013 and $31,790, respectively. The Loss from the sale of Compañía Financiera Argentina S.A. amounted to $(278,645) and the sale of Cobranzas y Servicios S.A has thrown an income of $18,889. The income tax impact for discontinued operations is disclosed separately in the "Income Tax from Discontinued Activities" account, which amounts to $31,675 as of December 31, 2018.

The information below is related to the Group's discontinued operations (Compañía Financiera Argentina S.A. and Cobranzas y Servicios S.A.):

 

 

 

F-47

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

NOTE 24. DEPOSITS

Deposits break down as follows as of the indicated dates:

 

 

The concentration of deposits is detailed in Schedule H.

The breakdown of deposits by remaining term is detailed in Schedule I.

The breakdown of deposits by sector is detailed in Schedule P.

Related-party information is disclosed in Note 52.

 

NOTE 25. LIABILITIES MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS

"Liabilities measured at fair value through profit or loss" are detailed in Schedules I and P. They include liabilities for transactions with third-party government securities.

NOTE 26. OTHER FINANCIAL LIABILITIES

The account breaks down as follows as of the indicated dates:

 

F-48

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 27. LOANS FROM THE ARGENTINE CENTRAL BANK AND OTHER FINANCIAL INSTITUTIONS

The account breaks down as follows as of the indicated dates:

 

The following table details the credit lines with local and international financial institutions and entities as of the indicated dates:

 

F-49

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 28. DEBT SECURITIES

The following is a breakdown of the Global Programs for the Issuance of Debt securities outstanding:

 

 

 

F-50

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The Company has the following Unsubordinated Debt securities outstanding issued under the Global Programs detailed in the table above as of December 31, 2018, net of repurchases of Own Debt:

(*) It includes principal and interest.

(**) Not convertible into shares.

(***) Negotiable Obligations merged into by Tarjeta Naranja S.A. following its merger with Tarjetas Cuyanas S.A.

(1)  As specified in the terms and conditions of the issuance, they were converted to $2,360,360 Investor assumes the exchange rate risk since the service of interest and principal is calculated on the basis of the principal amount in Pesos converted into US Dollars on each payment date.

(2) The net proceeds from this issuance of negotiable obligations was applied to investments in working capital, loans, other loans and other uses envisaged by the provisions of the Law on Negotiable Obligations and the Argentine Central Bank regulations.

(3) Variable rate equal to the simple arithmetic average of private Badlar, plus 2.69%, which will be payable quarterly as from May 17, 2017.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

(4) Variable rate equal to the simple arithmetic average of private Badlar, plus 2.98%, which will be payable quarterly as from August 18, 2017.

(5) Annual nominal fixed 25.98% rate; principal and interest will be settled in full upon maturity.

(6) Variable rate equal to the simple arithmetic average of private Badlar, plus 3.5%, which will be payable quarterly as from July 26, 2018. Principal in respect of this Series will be repaid upon maturity.

On June 21, 2018, Banco de Galicia y Buenos Aires S.A.U. issued the “Green Bond” which was entirely acquired by the International Finance Corporation. The Green Bond is a 7-year facility, with interest payable every six months. The Green Bond has a 36-month grace period in respect of the repayment of principal, followed by payments in 9 installments due every six months. As of December 31, 2018, the carrying amount of the Green Bond totals $3,850,692.

 

Under the Global Program for the Issuance of Debt Securities outstanding, after year-end, Banco Galicia issued Class VI for a face value of US$82,713 at a fixed 4.8% rate, with a 7-months maturity after issuance.

 

The Company has the following Unsubordinated Debt Securities outstanding issued under the Global Programs detailed in the table above as of December 31, 2017, net of repurchases of Own Debt:

 

(*) It includes principal and interest.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

(**) Not convertible into shares.

(***) Negotiable Obligations merged into by Tarjeta Naranja S.A. following its merger with Tarjetas Cuyanas S.A.

(1) As specified in the terms and conditions of the issuance, they were converted to $2,360,360. Investor assumes the exchange rate risk since the service of interest and principal is calculated on the basis of the principal amount in Pesos converted into US Dollars on each payment date.

(2) The net proceeds from this issuance of negotiable obligations was applied to investments in working capital, loans, other loans and other uses envisaged by the provisions of the Law on Negotiable Obligations and the Argentine Central Bank regulations.

(3) Variable rate equal to the simple arithmetic average of private Badlar, plus 2.69%, which will be payable quarterly as from May 17, 2017.

(4) Variable rate equal to the simple arithmetic average of private Badlar, plus 2.98%, which will be payable quarterly as from August 18, 2017.

 

The Company has the following Unsubordinated Debt securities outstanding issued under the Global Programs detailed in the table above as of January 1, 2017, net of repurchases of Own Debt securities:

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

(*) It includes principal and interest.

(**) Not convertible into shares.

(1) Annual nominal 27% fixed rate during the first nine months, and variable Badlar plus an annual 4.25% rate for the following 15 months.

(2) On May 4, 2017, Banco Galicia redeemed all outstanding negotiable obligations due 2018, at a price equal to 100% of their residual face value, plus accrued interest up to, but excluding, the redemption date.

(3) The net proceeds from this issuance of negotiable obligations was applied to investments in working capital, loans, other loans and other uses envisaged by the provisions of the Law on Negotiable Obligations and the Argentine Central Bank regulations.

The repurchases of Own Debt securities as of the indicated dates are as follows:

 

(*) It includes principal and interest.

(**) Debt securities merged into by Tarjeta Naranja S.A. following its merger with Tarjetas Cuyanas S.A.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

(*) It includes principal and interest.

(**) Debt securities merged into by Tarjeta Naranja S.A. following its merger with Tarjetas Cuyanas S.A.

 

(*) It includes principal and interest.

(**) Debt securities merged into by Tarjeta Naranja S.A. following its merger with Tarjetas Cuyanas S.A.

Related-party information is disclosed in Note 52.

NOTE 29. SUBORDINATED DEBT SECURITIES

The Company has the following subordinated debt securities not convertible into shares issued under the Global Programs detailed in Note 28 as of the close of the fiscal year:

 

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

NOTE 30. PROVISIONS

The account breaks down as follows as of the indicated dates:

 

 

Changes in the "Provisions" account for FY 2018 are detailed in Schedule J.

See Note 47 for further details.

Changes for FY 2017 are disclosed below:

 

 

NOTE 31. OTHER NON-FINANCIAL LIABILITIES

The account breaks down as follows as of the indicated dates:

 

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Deferred income resulting from contracts with customers includes the liabilities for the “Quiero” Customers Loyalty Program. The Group estimates the fair value of the points assigned to customers under the above-mentioned program. This value is estimated by means of the use of a mathematical model that takes into account certain assumptions of redemption rates, the fair value for the exchanged points based on the combination of available products and the customers' preferences, as well as breakage. As of December 31, 2018, $918,375 was recorded for non-exchanged points, whereas as of December 31, 2017 and January 1, 2017, such amount totaled $1,061,197 and $834,413, respectively.

The following table shows the estimated use of the liabilities recorded as of this fiscal year-end.

 

 

NOTE 32. CAPITAL STOCK

The capital stock structure is detailed in Schedule K.

The Ordinary and Extraordinary Shareholders’ Meeting of Grupo Financiero Galicia S.A. held on August 15, 2017 decided to approve an increase in capital stock by means of the issuance of up to 150,000,000 ordinary book-entry Class “B” shares, entitled to one vote per share and with a face value of $1 each. These shares are entitled to dividends with the same rights to the shares outstanding at the time of the issuance.

On September 7, 2017, the Board of Directors of the C.N.V., by means of Joint Resolution No. RESFC-2017-18927-APN-DIR#CNV, decided to authorize the public offering of 130,434,600 ordinary book-entry Class “B” shares, with a face value of $1 and one vote per share and, in case of over-subscription, an increase in such offering up to 19,565,190 ordinary book-entry Class “B” shares, with a face value of $1 and one vote each to be offered for public subscription, with preemptive and accretion rights.

The primary offering year ended on September 26, 2017, with 109,999,996 Class “B” shares having been subscribed at a price of US$5 each. On September 29, 2017, such shares were issued and integrated.

The Company granted over-subscription rights to international placement agents who, on October 2, 2017, enforced such rights and were awarded additional 16,500,004 Class “B” shares at a price of US$5 each, the issuance and payment of which took place on October 4, 2017.

The capital increase amounted to $11,004,383  (which is equal to $17,212,307 as of December 31, 2018), the expenses related thereto amounted to $146,347 (which is equal to $229,358 as of December 31, 2018) and were deducted from additional paid-in capital.

On November 8, 2017, the capital increase was registered with the Public Registry of Commerce.

The Company has no own shares in portfolio.

The Company's shares are listed on Bolsas y Mercados Argentinos (BYMA), Mercado Abierto Electrónico S.A. (MAE) and the National Association of Securities Dealers Automated Quotation (NASDAQ).

NOTE 33. INCOME STATEMENT BREAKDOWN

Breakdown of: Interest Income, Fee Income and Net Income from Financial Instruments Measured at Fair Value through Profit or Loss are detailed in Schedule Q.

NOTE 34. GOLD AND FOREIGN CURRENCY QUOTATION DIFFERENCES

The account breaks down as follows as of the indicated dates:

 

 

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 35. OTHER OPERATING INCOME

The account breaks down as follows as of the indicated dates:

 

 

NOTE 36. UNDERWRITING INCOME FROM INSURANCE BUSINESS

The account breaks down as follows as of the indicated dates:

 

 

NOTE 37. LOAN LOSS PROVISION

The changes in the loss allowance between the beginning and the end of the annual period are detailed in Note 46.

 

 

NOTE 38. PERSONNEL EXPENSES

The following are the items included in the account as of the indicated dates:

 

 

NOTE 39. ADMINISTRATIVE EXPENSES

The Group presented its statement of comprehensive income by function. Under this method, expenses are classified according to their function as part of the item “Administrative Expenses”.

The table below provides the required additional information about expenses by nature and function as of the indicated dates:

 

 

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 40. DEPRECIATION AND IMPAIRMENT OF ASSETS

The account breaks down as follows as of the indicated dates:

 

 

NOTE 41. OTHER OPERATING EXPENSES

The account breaks down as follows as of the indicated dates:

 

 

NOTE 42. INCOME TAX/DEFERRED TAX

The following is a reconciliation of income tax charged to income as of December 31, 2018, as compared to the previous fiscal year:

 

 

 

 

 

In September 2017, Banco Galicia filed with A.F.I.P. both actions for recovery of income tax paid in excess for fiscal years 2014 and 2016, totaling $433,815 and $944,338, respectively. These actions were grounded on case law that declared unconstitutional certain rules and regulations banning the application of the inflation adjustment for tax purposes, with the ensuing confiscatory effects. At the closing of these financial statements, Banco Galicia has not recorded balances in respect of the contingent assets stemming from the aforementioned actions.

Tax Reform

On December 29, 2017, the National Executive Branch enacted Income Tax Law No. 27430. This law has introduced several changes to the previous income tax treatment. Some of the key changes involved in the reform include:

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Dividends distributed from profits earned until the fiscal year before that commenced on January 1, 2018 shall remain subject, in respect of all beneficiaries, to withholding at the 35% rate on the amount in excess of tax-free distributable accumulated profits (equalization tax transition period).

NOTE 43. DIVIDENDS

The Ordinary and Extraordinary Shareholders' Meeting held on April 24, 2018 approved the financial statements as of December 31, 2017 and the treatment of income for the fiscal year then ended.

The dividends approved by such Shareholders' Meeting amounted to $1,200,000 (which is equal to $1,616,849 as of December 31, 2018) and represented $0.84 (figure stated in Pesos) per share. The dividends mentioned above were paid to the Group's shareholders on May 9, 2018.

The Ordinary and Extraordinary Shareholders' Meeting held on April 25, 2017 approved the financial statements as of December 31, 2016 and the treatment of income for the fiscal year then ended.

The dividends approved by such Shareholders' Meeting amounted to $240,000 (which is equal to $405,825 as of December 31, 2017) and represented $0.18 (figure stated in Pesos) per share. The dividends mentioned above were paid to the Group's shareholders on May 9, 2017.

NOTE 44. EARNINGS PER SHARE

Earnings per share are calculated by dividing income attributable to the Group's shareholders by the weighted average of outstanding common shares during the year. As the Group does not have preferred shares or debt convertible into shares, basic earnings are equal to diluted earnings per share.

 

 

NOTE 45. SEGMENT REPORTING

The Group determines segments based on management reports that are reviewed by the Board of Directors and updated as they show changes.

Reportable segments are one or more operating segments with similar economic characteristics, distribution channels and regulatory environments.

Below there is a description of each business segment’s composition:

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The operating income (loss) of the Group's different operating segments is monitored separately in order to make decisions on resource allocation and the evaluation of each segment's performance. Segment performance is evaluated based on operating income or losses and is consistently measured with the operating income and losses of the consolidated income statement.

Intersegment transactions are at arm's length similarly to transactions performed with third parties. Income, expenses and income (losses) resulting from the transfers among operating segments are then eliminated from consolidation.

The Group operates in one geographic segment, Argentina.

The relevant segment reporting as of the indicated dates is as follows:

 

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

F-64

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 46. CAPITAL MANAGEMENT AND RISK POLICIES

The tasks related to risk information and internal control of each of the companies controlled by Grupo Financiero Galicia are defined and carried out rigorously by each of them.

Apart from applicable local regulations, Grupo Financiero Galicia S.A., in its capacity as a listed company in the United States of America, complies with the certification of its internal controls pursuant to Section 302 of the Sarbanes Oxley Act (Sarbanes Oxley). Corporate risk management is monitored by the Audit Committee, which as well gathers and analyzes the information submitted by the main controlled companies.

As concerns risks, Banco Galicia embraces a policy that takes into consideration several aspects of the business and operations, abiding by the main guidelines of internationally accepted standards.

The specific function of the comprehensive management of Banco Galicia’s risks has been allocated to the Risk Division, guaranteeing its independence from the rest of the business areas since it directly reports to the Bank’s General Division and, at the same time, is involved in the decisions made by each area. In addition, the control and prevention of risks related to money laundering, funding of terrorist activities and other illegal activities are allocated to the Prevention of Asset Laundering Division, which reports to the Board of Directors. The aim of both divisions is to guarantee the Board of Directors is fully aware of the risks that the Bank is exposed to, and to design and propose policies and procedures necessary to identify, assess, follow up, control and mitigate such risks.

A Risk Appetite framework has been specified, which has risk acceptance levels, both on an individual and a consolidated basis. Metrics have been defined within such framework, which are monitored in order to detect situations that may affect the normal course of business, the noncompliance with the strategy and undesired results and/or situations of vulnerability in the face of changes in market conditions. The Risk and Capital Allocation Committee considers and controls the Bank’s risk profile through a risk appetite report, and defines the actions to be carried out in case of potential deviations from the thresholds set.

Capital Management

The Company's goals are to generate returns to its shareholders, benefits to other groups of interest and keep the best capital structure. The latter will be given by the needs for investment in subsidiaries and new ventures, keeping the expected profitability levels and complying with the liquidity and solvency goals set.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Banco Galicia's subsidiary determines the minimum capital requirement for each risk, in accordance with Argentine Central Bank regulations. The capital risk management is cross-sectional with respect to the other risks. Senior management is responsible for monitoring, overseeing, adjusting and ensuring compliance with its stated goals concerning capital management.

The Capital Adequacy Assessment Process (Proceso de Evaluación de Suficiencia de Capital - PESC) (reflected in the Capital Adequacy Report - IAC, as per its acronym in Spanish) enables to assess the relationship between own resources available and necessary resources to maintain an appropriate risk profile. This process also allows for the identification of both the economic capital needs and the sources to meet such needs.

To perform stress tests, four scenarios with different likelihood of occurrence are defined, which could affect the solvency and liquidity. The most-likely to occur scenarios are used in management stress testing and are referred to when defining Risk Appetite thresholds. The least-likely to occur or least-severe scenarios are used in developing the Recovery Plan, which specifies the protocol defined for situations or events that may compromise the Bank's operational capacity.

As of December 31, 2018 and December 31, 2017, Banco Galicia complied with the minimum capital requirement established by the Argentine Central Bank regulations.

Computable Regulatory Capital (R.P.C., as per the initials in Spanish) is made up of Core Capital and Supplementary Capital. Banco Galicia's balance for such items as of December 31, 2018 and December 31, 2017 is as follows:

 

 

The breakdown of the minimum capital requirement determined for the Group is shown below:

 

 

Financial Risks

Financial risk is a phenomenon inherent to the financial brokerage activity. The exposure to the different financial risk factors is a natural circumstance that cannot be completely avoided without affecting the Group’s long-term economic viability. However, the lack of management with regard to risk exposures is one of the most significant short-term threats. Risk factors need to be identified and managed within a specific policy framework that envisages the profile and the level of risk it has been decided to take to achieve long-term strategic goals.

Market Risk

The "price risk" is the possibility of incurring losses as a consequence of the variation of the market price of financial assets whose value is subject to negotiation. Financial assets subject to "trading" or allocated to "own positions" will be government and private debt securities, shares, currencies, derivatives and debt instruments issued by the Argentine Central Bank.

Brokerage/trading transactions that are allowed and regulated by the Policy are as follows:

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

For the fiscal year 2018, the following limits were established, within which the estimated risk for each type of instrument described above should be classified:

 

 

The "price risk" (market) is daily managed according to the strategy approved, the purpose of which is to keep the Group present in the different currencies, variable- and fixed-income and derivatives markets, while obtaining the maximum return as possible on brokerage, without exposing the latter to excessive risk levels. Finally, the designed policy contributes to providing transparency and facilitates the perception of the risk levels to which it is exposed. In order to measure and monitor risks derived from the variation in the price of financial instruments that form the trading or brokerage securities portfolio, a model known as “Value at Risk” (also known as "VaR") is used. This model determines the possible loss that could be generated by different financial instruments at each time under the following critical parameters.

Currency Risk

The Group's exposure to the foreign exchange risk as of year-end by type of currency is shown below:

 

 

 

 

Interest Rate Risk

The different sensitivity of assets and liabilities to changes in "market interest rates" exposes the Group to the "interest rate risk". It is the risk that the financial margin and the economic value of equity may vary as a consequence of fluctuations in market interest rates. The magnitude of such variation is associated with the sensitivity to interest rates of the structure of the Group's assets and liabilities.

This risk factor (the change in interest rates) has an impact on two key variables: the "Net Financial Income (Expense)" and the "Present Value of Shareholders' Equity".

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

These methodologies imply a "short-term" approach for which a "base scenario" is subject to an increase in "interest rates" estimating the variation in "Financial Income (Expense)". Caps on such changes in variables subject to control are fixed. As regards the "long-term" approach, statistical interest rate simulations are made and a "critical" scenario results from the interest rate risk exposure presented by the financial statements structure. The economic capital arises from the resulting difference between the "critical" scenario and the market value as per the financial statements.

The Group's exposure to the interest rate risk is detailed below. This table shows the residual value of assets and liabilities, classified by the sooner of the interest renegotiation date or the maturity date.

 

 

The table below shows the sensitivity to potential additional changes in interest rates in the next fiscal year, taking into account the breakdown as of December 31, 2018. The percentage change budgeted by the Group for fiscal year 2018 was determined considering 100 bps and changes are considered reasonably possible on the basis on an observation of market conditions.

 

 

Liquidity Risk

It contemplates the risk that the Group is unable to offset or liquidate a position at market value because:

In measuring and daily following up the "stock liquidity" an internal model is used, which contemplates the characteristics of behavior of the Group's main funding sources. Based on the Group's experience in connection with the changes in deposits and other liabilities, this model determines the "liquidity requirements" applied to liabilities subject to the policy and give rise to the "Management Liquidity Requirement". In determining these liquid resources, the remaining term of liabilities is also contemplated, as well as the currency in which they are denominated. The resulting liquidity requirement is allocated to "eligible assets" set by the policy. The management liquidity requirement, along with the legal minimum cash requirements, are part of the total liquidity available.

Daily liquidity management is supplemented by the estimated available funds or needs for the day, considering the opening balance of Argentine Central Bank's account, deducting the daily minimum requirement and including the main movements for the day. The latter results in the overestimated/underestimated balance that will be taken into account by operators in order to place funds or meet the financing needs.

The monthly liquidity follow-up and control from the "flow" standpoint, called "liquidity mismatch/liquidity gap", are performed by estimating the accumulated mismatches within the first year as a percentage of total liabilities. The gap methodology used (contractual gaps) is consistent with the best international practices in the field.

In addition, the concentration of deposits is followed up and measured. In order to mitigate this risk factor, the policy designed restricts the involvement of two groups of customers to the total deposits: the first 10 customers and second 50 customers.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The table below shows an analysis of maturities of assets and liabilities, determined on the basis of the remaining period as of December 31, 2018 and December 31, 2017, based on undiscounted cash flows:

 

 

 

Credit Risk

Credit risk arises from the possibility of suffering losses due to a debtor’s or counterparty’s noncompliance with its contractual obligations. It is the one that requires the greatest need for capital, including that arising from the risk of individual and sectorial concentration, which represents supplementary approximations to the intrinsic credit risk.

Accordingly, the Group uses credit assessment and risk monitoring tools that allow the entity to manage risks in a streamlined and controlled manner and that foster the adequate diversification of portfolios, both on an individual basis and by economic sector, thus controlling its exposure to potential risks.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The credit quality of debt securities as of December 31, 2018 is as follows:

 

 

The credit quality of debt securities as of December 31, 2017 is as follows:

 

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Summary of credit risk

The following disclosure presents the gross carrying/nominal amount of financial instruments to which the impairment requirements in IFRS 9 are applied and the associated allowance for ECL.

Loans classified as uncollectible for 7 months are eliminated from the Group’s assets and are recognized in "Off-Balance Sheet Items".

The credit quality related to loans granted is detailed in Schedule B.

The breakdown by term of "Net Loans and Other Financing" is detailed in Schedule D.

Impairment of financial assets

The “Expected Credit Loss” (“ECL”) model applies to financial assets which are valued at both amortized cost and fair value through OCI.

The standard establishes three categories to classify financial instruments, primarily taking into account the credit risk evolution over time. Stage 1 includes financial assets with normal or no significant risk associated; Stage 2 includes financial assets for which a significant increase in credit risk (“SICR”) has been identified but they are not yet deemed to be credit-impaired and Stage 3 comprises financial assets which are impaired and/or subject to serious risk of impairment.

To calculate the provisions for credit impairment risk, IFRS 9 differentiates between each of the three stages. The resulting concepts are explained as follows:

A pervasive concept in measuring ECL in accordance with IFRS 9 is that it should consider forward looking information. The Group has included below an explanation on how it has incorporated this in its ECL models.

 

Grouping of instruments for losses measured on a collective basis

For expected credit loss provisions modelled on a collective basis, a grouping of exposures is performed on the basis of shared risks characteristics, such that risk exposures within group are homogeneous. In performing this grouping, there must be sufficient information for the group to be statistically credible. Where sufficient information is not available internally, the Group has considered benchmarking internal/external supplementary data to use for modelling purposes. The Group has identified four groupings: Retail, Retail-like, Wholesale and Tarjeta Naranja, amongst these four segments the Group estimates parameters in a more granular way based on the shared risk characteristics.

Stage classification

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

In the case of wholesale portfolios, it considers every client whose Central Bank of the Argentine Republic (B.C.R.A.) situation indicates a normal status (A¹) (i.e. low risk of bankruptcy).

 

 

For wholesale portfolios, it considers every client whose B.C.R.A. situation indicates serious risk of bankruptcy (C, D, E, F).

 

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Significant Increase in credit risk

The Group considers a financial instrument to have experienced a significant increase in credit risk when any of the following conditions exist:

 

 

Definition of Default

A financial asset is considered to be in default whenever a payment is more than 90 days past due, or if the Company considers the payment will not be fully reimbursed.

However, given the credit analysis for wholesale loans is not managed and classified the same way as retail loans, the default definition associated to wholesale portfolios is ultimately linked to the individual analysis provided by credit analysts.

The default definition has been applied consistently to model the Probability of Default (PD), Exposure at Default (EAD) and Loss given Default (LGD) throughout the Group’s expected loss calculations:

 

 

An instrument is considered to no longer be in default when it no longer meets any of the default criteria above mentioned.

Methodology for Expected Credit Loss estimation

Expected credit loss impairment allowances recognized in the financial statements reflect the effect of a range of possible economic outcomes, calculated on a probability-weighted basis, based on the economic scenarios described below. The recognition and measurement of expected credit losses (‘ECL’) involves the use of significant judgment and estimation. It is necessary to formulate multiple forward-looking economic forecasts and incorporate them into the ECL estimates. Grupo Galicia uses a standard framework to form economic scenarios to reflect assumptions about

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

future economic conditions, supplemented with the use of management judgment, which may result in using alternative or additional economic scenarios and/or management adjustments.

IFRS 9 establishes the following standards regarding the estimation of credit loss:

According to IFRS 9, the company prepared three different scenarios with different probabilities: a central scenario with 70 % probability of occurrence, a downside scenario with 15 % probability of occurrence and an upside scenario with 15 % probability of occurrence.

In order to account for time value of money, the Company assumes expected losses will take place according to the PD behavior.

The ECL is determined by projecting the PD, EAD and LGD for each future month or collective segment. These three components are multiplied together and adjusted for forward looking information. This effectively calculates an ECL for each future month, which is then discounted back to the reporting date and summed. The discount rate used in the ECL calculation is the original effective interest rate or an approximation thereof.

Key macroeconomic variables used in the scenarios described below are shown in the table:

This variations were calculated bases on data from December-2018

Grupo Galicia has also carried out sensitivity analysis to assess the impact of volatility on macroeconomic variables on the result of the expected credit losses.

 

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Percentages refer to increase/decrease against real December 2018.

Maximum exposure to credit risk

Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when they are 30 days past due (“DPD”) and are transferred from stage 1 to stage 2. The following disclosure presents the ageing of stage 2 financial assets. It distinguishes those assets that are classified as stage 2 when they are less than 30 days past due (1-29 DPD) from those that are more than 30 DPD (30 and >DPD). Past due financial instruments are those loans where customers have failed to make payments in accordance with the contractual terms of their facilities.

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

 

 

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

The Grupo Galicia employs a range of policies and practices to mitigate credit risk. The most common of these is accepting collateral for loans or funds advanced. The Group has internal policies on the acceptability of specific classes of collateral.

The Grupo Galicia policies regarding obtaining collateral have not significantly changed during the reporting period and there has been no significant change in the overall quality of the collateral held by the Group since the prior period.

This table provides information on balance sheet items and their collateral in offsets as well as loan and other credit-related commitments.

The following table shows information about the mortgage portfolio LTV distribution.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees

The following disclosure provides a reconciliation by stage of the Group’s gross carrying/nominal amount and allowances for loans and advances to banks and customers, including loan commitments and financial guarantees. The transfers of financial instruments represents the impact of stage transfers upon the gross carrying/nominal amount and associated allowance for ECL. The net remeasurement of ECL arising from stage transfers represents the increase or decrease due to these transfers, for example, moving from a 12-month (stage 1) to a lifetime (stage 2) ECL measurement basis. This is captured, along with other credit quality movements in the ‘changes in PD/LGD/EAD’ line item. The ‘New financial assets originated or repurchased’ represent the gross carrying/nominal amount and associated allowance ECL impact from volume movements within the Group’s lending portfolio.

The following tables explain the changes in the loss allowance between the beginning and the end of the annual period due to these factors:

 

 

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

F-78

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

The following table further explains changes in the gross carrying amount of specific segment portfolio to help explain their significance to the changes in the loss allowance:

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Use of information

Grupo Financiero Galicia, according to IFRS 9 standards, uses all information available, past, present and future to identify and estimate expected credit loss.

Operational Risk

The operational risk management is understood as the identification, assessment, monitoring, control and mitigation of this risk. It is an ongoing process carried out throughout the Group, which fosters a risk management culture at all organization levels through an effective policy and a program led by Senior Management.

Identification

The starting point of the operational risk management is the identification of risks and their association with the controls established to mitigate them, considering internal and external factors that may affect the process development. The results of this exercise are entered into a log of risks, which acts as a central repository of the nature and status of each risk and controls thereof.

Assessment

Once risks have been identified, the size in terms of impact, frequency and likelihood of risk occurrence is determined, considering the existing controls. The combination of impact with likelihood of occurrence determines the risk exposure level. Finally, the estimated risk levels are compared to pre-established criteria, considering the balance of potential benefits and adverse results.

Monitoring

The monitoring process allows detecting and correcting the possible deficiencies in operational risk management policies, processes and procedures and their update.

Risk Control and Mitigation

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The control process ensures compliance with internal policies and analyzes risks and responses to avoid, accept, mitigate or share them, by aligning them with the risk tolerance defined.

IT Risk

The Group manages the IT risk inherent to its products, activities and business processes. It also manages the risk associated with the material information systems, technology and information security processes. It also covers the risks derived from subcontracted activities and from services rendered by providers.

Reputational Risk

The reputational risk may result from the materialization of other risks: Legal, Compliance, Operational, Technological, Strategic, Market, Liquidity, Credit, etc.

The groups of interest are at the core of management, being considered upon establishing any type of mitigation measure.

Banco Galicia's reputational risk management function was allocated to the Compliance Management Division, seeking to obtain a more comprehensive vision and be able to make immediate decisions that protect the entity's image and reputation by using tools that enable to monitor and follow up to the perception of different groups of interest.

Banco Galicia defined an internal policy to reduce the occurrence of reputational events with negative impact, by defining a governance model with roles and responsibilities, and identifying critical scenarios that require management and visibility.

Contacts have been established with key business areas, devising a work scheme based on synergy and ongoing communication in order to spread the risk culture across the organization.

The Reputational Crisis Committee is in charge of becoming aware of the events that may affect the Bank's reputation. In the face of an event of such characteristics, all the necessary information is gathered in the shortest time possible in order to be able to make assertive decisions, formally declare the crisis situation, if appropriate, and define the action plan to alleviate the crisis. In addition, such committee determines the communication strategy to be followed, considering the groups of interest involved. Finally, the strategy and related actions are followed to tackle the crisis.

Strategic Risk

Strategic risk is that which arises from an inappropriate business strategy or an adverse change in forecasts, parameters, goals and other functions that support such strategy.

It represents the possibility of fluctuations in placements that prevent Banco Galicia or its subsidiaries from obtaining the expected results of operations. This potential affected results of operations would give rise to lower income or higher costs regardless of what was budgeted.

Money Laundering Risk

As regards the control and prevention of asset laundering and funding of terrorist activities, Banco Galicia complies with the regulations set forth by the Argentine Central Bank, the Financial Information Unit and Law No. 25246, as amended, which creates the Financial Information Unit (U.I.F.), within the purview of Argentina’s Ministry of Treasury and Public Finance with functional autarchy. The Financial Information Unit is in charge of analyzing, addressing and reporting the information received, in order to prevent and avoid both asset laundering and funding of terrorist activities.

The Bank has promoted the implementation of measures designed to fight against the use of the international financial system by criminal organizations. For such purposes, Banco Galicia has control policies, procedures and structures that are applied using a “risk-based approach”, which allow for the monitoring of transactions, pursuant to the "customer profile" (defined individually based on the information and documentation related to the economic and financial condition of the customer), in order to detect such transactions that should be considered unusual, and to report them to the U.I.F. in applicable cases. The Anti-Money Laundering Management Division (“PLA”, as per its initials in Spanish) is in charge of managing this activity, through the implementation of control and prevention procedures as well as the communication thereof to the rest of the organization by drafting the related handbooks and training all employees. In addition, the management of this risk is regularly reviewed by Internal Audit.

The Bank has appointed a director as Compliance Officer, pursuant to Resolution 121/11, as amended, handed down by the U.I.F., who shall be responsible for ensuring compliance with and implementation of the proceedings and obligations on the issue.

The Bank contributes to the prevention and mitigation of risks from these transaction-related criminal behaviors, by being involved in the international regulatory standards adoption process.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Cybersecurity Risk

The use of technologies in place facilitates us a significant number of tools that expedite and improve the Bank's processes, having a positive impact on our products and services. However, along with the above-mentioned benefits, risks and/or threats related to these new opportunities provided by digital technologies appear.

The cybersecurity-related risk is a matter inherent to the introduction of these new technologies. On one hand, such risk management stands out among Banco Galicia's main goals, and, on the other, all the personnel's as well as customers' awareness of the considerations as regards the use of the above-mentioned technologies. In this respect, it is vital for the organization to understand thoroughly its internal processes, the tools used and the available techniques to mitigate cybersecurity-related risks.

NOTE 47. CONTINGENCIES AND COMMITMENTS

a) Tax Issues

At the date of these consolidated financial statements, provincial tax collection authorities, as well as tax collection authorities from the Autonomous City of Buenos Aires, are in the process (in different degrees of completion) of conducting reviews and assessments mainly in respect of matters resulting from applying turnover tax.

These proceedings and their possible effects are constantly being monitored. Even though it is considered that it has complied with its tax liabilities in full pursuant to current regulations, the provisions deemed adequate pursuant to the evolution of each proceeding have been set up.

b) Consumer Protection Associations

Consumer Protection Associations, on behalf of consumers, have filed claims against Banco Galicia with regard to the collection of certain financial charges.

The Group believes that the resolution of these controversies will not have a significant impact on its financial condition.

Penalties Imposed on Banco de Galicia y Buenos Aires S.A.U. and Summary Proceedings Commenced by the Argentine Central Bank

The penalties imposed and the summary proceedings commenced by the Argentine Central Bank are detailed in Note 54.

The provisions for contingencies recorded are as follows:

 

 

NOTE 48. OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES

The disclosures in the following tables include financial assets and liabilities that:

Similar agreements include derivative offsetting agreements and master netting agreements with clearing houses. Similar financial instruments include derivatives, loans and other financing, and other financial liabilities. Financial instruments such as loans and deposits are not disclosed in the following tables since they are not offset in the consolidated balance sheet.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The financial instruments subject to offsetting, master netting agreements and similar agreements as of December 31, 2018 are as follows:

 

 

NOTE 49. OFF-BALANCE SHEET ITEMS

In the normal course of business and in order to meet customers' financing needs, off-balance sheet transactions are performed. These instruments expose the Group to the credit risk, in addition to loans recognized in assets. These financial instruments include credit lending commitments, letters of credit reserve, guarantees granted and acceptances.

The same credit policies for agreed credits, guarantees and loan granting are used. Outstanding commitments and guarantees do not represent an unusually high credit risk.

Agreed Credits

They are commitments to grant loans to a customer in a future date, subject to compliance with certain contractual agreements that usually have fixed maturity dates or other termination clauses and may require a fee payment.

Commitments are expected to expire without resorting to them. The total amounts of agreed commitments do not necessarily represent future cash requirements. Each customer's solvency is evaluated case by case.

Guarantees Granted

The issuing bank commits to reimbursing the loss to the beneficiary if the secured debtor does not comply with its obligation upon maturity.

Export and Import Documentary Credits

They are conditional commitments issued by the Group to secure a customer's compliance towards a third party.

Responsibilities for Foreign Trade Transactions

They are conditional commitments for foreign trade transactions.

Our exposure to credit loss upon the other party's default in the financial instrument is represented by the contractual notional amount of the same investments.

The credit exposure for these transactions is detailed below.

 

 

The fees and commissions related to the items mentioned above as of the indicated dates were as follows:

 

 

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The credit risk of these instruments is essentially the same as that involved in lending credit facilities to customers.

To grant guarantees to our customers, we may require counter-guarantees, which, classified by type, amount to:3

 

 

Additionally, checks to be debited and credited, as well as other elements in the collection process, such as, notes, invoices and miscellaneous items, are recorded in memorandum accounts until the related instrument is approved or accepted.

The risk of loss in these offsetting transactions is not significant.

 

 

The Group acts as trustee by virtue of trust agreements to secure obligations derived from several agreements between parties. The amounts of trust funds and securities held in custody as of the indicated dates are as follows:

 

 

These trusts are not included in the consolidation since the Group does not exert control on them.

NOTE 50. TRANSFER OF FINANCIAL ASSETS

All transfers of financial assets qualify for derecognition of financial assets in their entirety.

In derecognizing a financial asset, the difference between the carrying amount and the amount received as consideration is charged to income.

The Group mainly makes non-recourse portfolio sales. The loan portfolio sold, net of allowances, amounted to: $561,812 as of December 31, 2018, $480,021 as of December 31, 2017 and $226,798 as of January 1, 2017; whereas cash flows received from such transactions amounted to: $138,510 as of December 31, 2018, $45,987 as of December 31, 2017 and $166,454 as of January 1, 2017.

NOTE 51. NON-CONTROLLING INTEREST

The following tables provide information about each subsidiary that has a non-controlling interest.

The non-controlling equity investment percentages and votes as of the indicated dates are as follows:

 

 

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Changes in the Group's non-controlling interests as of the indicated dates were as follows:

 

 

 

Summary information on subsidiaries is detailed in Note 16.

NOTE 52. RELATED PARTY TRANSACTIONS

Related parties are considered to be all those entities that directly, or indirectly through other entities, have control over another, are under the same controlling party or may have significant influence on another entity's financial or operational decisions.

The Group controls another entity when it has the power over other entities' financial and operating decisions and also has a share of profits thereof.

Additionally, the Group considers that it has joint control when there is an agreement between parties regarding the control of a common economic activity.

Finally, those cases where the Group has significant influence is due to the capacity to take part in decisions about the company's financial policy and operations. Those shareholders who hold an equity investment equal to or higher than 20% of the total votes of the Group or its subsidiaries are considered to have significant influence. To determine those situations, not only the legal aspects are observed, but also the nature and substance of the relationship.

Furthermore, the key personnel of the Group's Management (Board of Directors members and Managers of the Group and its subsidiaries), as well as the entities over which the key personnel may have significant influence or control are considered as related parties.

The Group is controlled by:

 

 

Key Personnel's Compensation

The compensation earned by the Group's key personnel as of December 31, 2018 and December 31, 2017 amounts to $522,038 and $442,289, respectively.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Key personnel's structure as of the indicated dates is as follows:

 

 

The following table shows the total credit assistance granted by the Group to key personnel, syndics, majority shareholders, as well as all individuals who are related to them by a family relationship of up to the second degree of consanguinity or first degree by affinity (pursuant to the Argentine Central Bank’s definition of related individual) and any entity affiliated with any of these parties, not required to be consolidated.

 

 

Financial assistance, including the one that was restructured, was granted in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other non-related parties. Besides, this financial assistance did not involve more than the normal risk of loan losses or present other unfavorable features.

The information about the credit assistance granted to affiliates based on the quality of receivables, their documentation and preferred guarantees is stated in Schedule N.

The amounts of related party transactions conducted as of the indicated dates are as follows:

 

 

 

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 53. ACQUISITION OF DEBT SECURITIES UNDER SECTION 35 BIS OF FINANCIAL INSTITUTIONS LAW

Banco Finansur S.A. was temporarily suspended to operate by the Argentine Central Bank from November 9, 2017 to February 9, 2018. On January 12, 2018, Banco Galicia reported about its participation in the process under Section 35 bis of Financial Institutions Law. In addition, on March 9, 2018, Banco Galicia reported that the Argentine Central Bank approved the transfer of certain secured liabilities of Banco Finansur S.A. in exchange for debt securities by creating a Private Financial Trust called Fidensur.

Banco Galicia holds debt securities but it does not hold the participation certificate in the Financial Trust not it is the Beneficiary of the Financial Trust. As Consequence we understand that the Group is neither exposed to variable returns nor to the Trust's residual risk. Therefore, the holding was recorded as an investment in a financial debt instrument measured at amortized cost.

As a result of the foregoing, the trust was not consolidated in these consolidated financial statements.

The Group recorded debt securities in the "Other Debt Securities" account, which are measured at amortized cost in the amount of $74,775 as of December 31, 2018.

NOTE 54. ADDITIONAL INFORMATION REQUIRED BY THE ARGENTINE CENTRAL BANK

54.1.Contribution to the Deposit Insurance System

Law No. 24485 and Decree No. 540/95 established the creation of the Deposit Insurance System to cover the risk attached to bank deposits, in addition to the system of privileges and safeguards envisaged in the Financial Institutions Law.

The National Executive Branch through Decree No. 1127/98 established the maximum amount for this insurance system to demand deposits and time deposits denominated either in Pesos and/or in foreign currency. Such limit was set at $1,000 as from March 1, 2019.

This system does not cover deposits made by other financial institutions (including time deposit certificates acquired through a secondary transaction), deposits made by parties related to the Bank, either directly or indirectly, deposits of securities, acceptances or guarantees and those deposits set up at an interest rate exceeding the one established regularly by the Argentine Central Bank.

Deposits acquired through endorsement, placements made as a result of incentives other than interest rates and locked-up balances from deposits and other excluded transactions are also excluded. This system has been implemented through the creation of the Deposit Insurance Fund (“FGD”), which is managed by a company called Seguros de Depósitos S.A. (“SEDESA”). SEDESA’s shareholders are the Argentine Central Bank and the financial institutions in the proportion determined for each one by the Argentine Central Bank based on the contributions made to the fund.

The monthly contribution institutions should make to the FGD is 0.015% on the monthly average of total deposits.

54.2.RESTRICTED ASSETS

As of December 31, 2018, the ability to freely dispose of the following assets is restricted, as follows:

Banco de Galicia y Buenos Aires S.A.U.

 

 

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Special guarantee accounts have been opened at the Argentine Central Bank as collateral for transactions involving electronic clearing houses, checks for settling debts and other similar transactions as of the indicated dates, which amount to:

 

 

 

 

The account “Equity Investments” includes 1,222,406 non-transferable non-endorsable registered ordinary shares in Electrigal S.A., the transfer of which is subject to approval by the national authorities, according to the terms of the previously executed concession contract.

Banco de Galicia y Buenos Aires S.A.U., in its capacity as sponsoring partner of Garantizar S.G.R.’s Risk Fund, is committed to maintaining the contributions made to the fund for two (2) years.

 

 

 

 

Financial assets were given as collateral as part of these agreements for loans borrowed by Banco Galicia related to first pledges.

Galicia Valores S.A.

 

 

Tarjeta Naranja S.A.

 

 

Galicia Administradora de Fondos S.A.

 

 

Tarjetas del Mar S.A.

 

 

Total restricted assets for the items stated in the subsidiaries mentioned above as of the indicated dates are as follows:

 

 

54.3.Trust Activities

As of December 31, 2018, December 31, 2017 and January 1, 2017, the Group recorded participation certificates and debt securities of financial trusts held in its own portfolio for $6,301,550, $3,374,285 and $1,819,850 respectively.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Trusts have been excluded from consolidation for neither has the Bank control over them nor has it any of the following:

Purpose: In order to guarantee compliance with contractual obligations, the parties to these agreements have agreed to deliver to Banco de Galicia y Buenos Aires S.A.U., as fiduciary property, amounts to be applied according to the following breakdown:

 

 

Purpose: To administer and exercise the fiduciary ownership of the trust assets until the redemption of debt securities and participation certificates:

 

 

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Said endorsement guarantees the secure payment of all obligations arising from the above-mentioned trusts.

Banco de Galicia y Buenos Aires S.A.U., in its capacity as Security Agent, will take custody of the documents regarding the National Treasury’s endorsement guarantees and will be in charge of managing all legal and notarial proceedings with respect to the enforcement thereof.

As of December 31, 2018, December 31, 2017 and January 1, 2017, the balances recorded from these transactions amount to US$1,364,097 and $408, respectively.

As of December 31, 2018, December 31, 2017 and January 1, 2017, the balances recorded from these transactions amount to US$116,500.

All the transactions detailed above are recorded in off-balance sheet items - trust funds.

As of December 31, 2018, December 31, 2017 and January 1, 2017, the Group recorded participation certificates and debt securities of financial trusts held in its own portfolio for $5,042,730, $3,406,706 and $1,866,441 respectively.

54.4. Compliance with the Regulations

54.4.1. Agents– Minimum Liquidity Requirement

Within the framework of Resolution No. 622/13 of the C.N.V., Banco de Galicia y Buenos Aires S.A.U. has been registered, in such agency’s registry, as settlement and clearing agent –comprehensive- No. 22 (ALyC and AN – INTEGRAL), custodial agent of collective investment products corresponding to mutual funds No. 3 (ACPIC FCI), and manager of collective investment products at the registry of financial trustees No. 54.

As of December 31, 2018, Banco de Galicia y Buenos Aires S.A.U.’s Shareholders’ Equity exceeds that required by the C.N.V. to act as agent in the categories in which the Bank has been registered. Such requirement amounts to $32,000 with a minimum liquidity requirement of $16,000, which Banco de Galicia y Buenos Aires S.A.U. paid with Argentine Central Bank’s monetary regulation instruments, which are held in custody at Caja de Valores (Depositor No. 100100) in the amount of $20,410.

Moreover, Galicia Valores S.A. has received the authorization to act as “Settlement and Clearing Agent and Trading Agent – Own”, as established by C.N.V.'s General Resolution No. 622/13. According to the minimum requirements established, the minimum shareholders' equity required to act in this agent's category amounts to $3,500 and the minimum liquidity amounts to $1,750.

As of December 31, 2018, the minimum liquidity is made up of a sight account opened at Banco Galicia in the amount of US$70.

54.4.2. Custodial Agent of Collective Investment Products Corresponding to Mutual Funds

Furthermore, in compliance with Section 7 of Chapter II, Title V of that Resolution, in its capacity as custodial agent of collective investment products corresponding to mutual funds (depository) of the “FIMA ACCIONES”, “FIMA P.B. ACCIONES”, “FIMA RENTA EN PESOS”, “FIMA AHORRO PESOS”, “FIMA RENTA PLUS”, “FIMA PREMIUM”, “FIMA AHORRO PLUS”, “FIMA CAPITAL PLUS”, “FIMA ABIERTO PYMES”, “FIMA MIX I”, “FIMA RENTA DÓLARES I” and “FIMA RENTA DOLARES II” funds, as of December 31, 2018, Banco de Galicia y Buenos Aires S.A.U. holds a total of 9,623,110,829 units under custody for a market value of $60,431,318, which is included in the “Depositors of Securities Held in Custody” account. As of previous fiscal year-end and January 1, 2017, the securities held in custody totaled 10,254,289,765 and 7,777,368,861 units and their market value amounted to $100,358,508 and $68,796,939, respectively.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The balances of the Mutual Funds as of the indicated dates are detailed as follows:

 

 

All the transactions detailed above are recorded in off-balance sheet items - securities held in custody.

The mutual funds detailed above have not been consolidated as the Group is not a controlling company thereof, since the depository role does not imply in this case:

54.4.3. Storage of Documents

Pursuant to General Resolution No. 629 of the C.N.V., Banco de Galicia y Buenos Aires S.A.U. notes that it has supporting documents regarding accounting and management transactions, which are stored at AdeA (C.U.I.T. No. 30-68233570-6), Plant III located at Ruta Provincial 36 km 31.5 No. 6471 (CP 1888) Bosques, Province of Buenos Aires, with legal domicile at Av. Pte. Roque Sáenz Peña 832, 1st. floor, Autonomous City of Buenos Aires.

54.5. Compliance with Minimum Cash Requirements:

As of December 31, 2018, the balances recorded as computable items are as follows:

 

 

(3)Equivalent to $580.

 

54.6. Penalties Imposed on Banco de Galicia y Buenos Aires S.A.U. and Summary Proceedings Commenced by the Argentine Central Bank

Penalties Imposed on Banco de Galicia y Buenos Aires S.A.U. Existing as of December 31, 2018:

U.I.F.’s Summary Proceedings No. 68/09. Penalty notification date: February 25, 2010. Reason for the imposition of the penalty: Alleged omission to report suspicious activities, in possible infringement of Act No. 25246. As a consequence of the aforementioned summary proceedings, Banco de Galicia y Buenos Aires S.A.U., one of its directors and one of its officers were punished with a fine in the amount of $4,483. Status of the proceedings: Division I of the Argentine Federal Court of Appeals in Administrative Matters partially revoked the penalties, releasing

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Eduardo A. Fanciulli from any liability and reducing the fines imposed. The U.I.F., Banco de Galicia y Buenos Aires S.A.U. and Mr. Enrique M. Garda Olaciregui filed federal extraordinary appeals before Argentine Supreme Court (CSJN). Accounting treatment: As of December 31, 2018, a provision for $5,306 is recorded, whereas a provision for $7,357 and $10,134 was recorded as of December 31, 2017 and January 1, 2017, respectively.

Summary Proceedings No. 1544: Penalty notification date: November 9, 2018. Reason for the imposition of the penalty: Alleged breach of the provisions set out in Argentine Central Bank's Communiqué "A" 6242, SINAP 1 - 61. As a consequence of the aforementioned summary proceedings, Banco de Galicia y Buenos Aires S.A.U., three of its directors and certain relevant officers were punished with a fine in the amount of $1,497. Status of the proceedings: The Bank will file an appeal against the penalty with the Argentine Federal Court of Appeals in Administrative Matters of the Autonomous City of Buenos Aires, under the terms of section 42 of Law No. 21526, as amended by Law No. 24144.

54.7.ISSUANCE OF DEBT SECURITIES

The issuance of debt securities is detailed in Notes 28 and 29.

54.8. Restrictions Imposed on the Distribution of Profits

Pursuant to Section 70 of the General Corporations Law, Grupo Financiero Galicia S.A. should transfer 5% of the net income for the year to the Legal Reserve until 20% of the capital stock is reached, plus the balance of the Capital Adjustment account.

With respect to Banco Galicia, the Argentine Central Bank regulations require that 20% of the profits shown in the Income Statement at fiscal year-end, plus (or less), the adjustments made in previous fiscal years and, less, if any, the loss accumulated at previous fiscal year-end, be allocated to the legal reserve.

This proportion applies regardless of the ratio of the Legal Reserve fund to Capital Stock. Should the Legal Reserve be used to absorb losses, earnings shall be distributed only if the value of the Legal Reserve reaches 20% of the Capital Stock plus the Capital Adjustment.

The Argentine Central Bank sets rules for the conditions under which financial institutions can make distributions of profits. According to these rules, profits can be distributed as long as results of operations are positive after deducting not only the Reserves, which may be legally and statutory required, but also the following items from Retained Income: The difference between the carrying amount and the market value of public sector assets and/or debt instruments issued by the Argentine Central Bank not valued at market price, the amounts capitalized for lawsuits related to deposits and any unrecorded adjustments required by the external auditors or the Argentine Central Bank.

Moreover, in order that a financial institution be able to distribute profits, said institution must comply with the capital adequacy rule, i.e. with the calculation of minimum capital requirements and the regulatory capital.

For these purposes, this shall be done by deducting from its assets and Retained Income all the items mentioned in the paragraph above. Moreover, in such calculation, a financial institution shall not be able to compute the temporary reductions that affect minimum capital requirements, computable regulatory capital or its capital adequacy.

Since January 2016, the Argentine Central Bank determined that banks shall meet an additional capital conservation buffer apart from the minimum capital requirement equal to 3.5% of risk-weighted assets. This shall be made up only of Tier 1 Common Capital, net of deductible items. Distribution of profits shall be restricted when the Bank’s computable regulatory capital level and structure is within the range of the capital conservation buffer.

The prior authorization of the Argentine Regulatory Agency of Financial and Foreign Exchange Institutions (SEFyC, as per its initials in Spanish) shall not be required for the distribution of profits, except in the cases where a financial institution is within the capital conservation buffer and to determine distributable profits the Tier 1 common capital range had not been increased by 1 percentage point, net of deductible items. Such restriction was established until March 31, 2020.

Tarjeta Naranja S.A.’s Ordinary and Extraordinary Shareholders’ Meeting held on March 16, 2006 decided to set the maximum limit for the distribution of dividends at 25% of the realized and liquid profits of each fiscal year. This restriction shall remain in force as long as the company’s Shareholders’ Equity is below $300,000.

Pursuant to the Price Supplement of the Class XXXVII Notes, Tarjeta Naranja S.A. has agreed not to distribute dividends that may exceed 50% of the company’s net income. This restriction also applies in the event of any excess over certain indebtedness ratios.

Notwithstanding the aforementioned, profits resulting from the first-time application of IFRS may not be distributed; instead, such profits, if any, will be appropriated to a special reserve recorded under equity which might only be released for capitalization purposes, or otherwise to offset potential losses.

The Group may pay dividends to the extent that it has distributable retained earnings and distributable reserves calculated in accordance with the rules of the Argentine Central Bank described in Note 1.1. Therefore, retained earnings included in the consolidated financial statements may not be wholly distributable.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Shareholders' equity under the rules of the Argentine Central Bank comprise the following captions:

 

Plan for the distribution of profits under the rules of the Argentine Central Bank comprise the following captions:

 

54.9.Capital Management and Corporate Governance Transparency Policy

Grupo Financiero Galicia S.A.

Board of Directors

Grupo Financiero Galicia S.A.’s Board of Directors is the Company's highest management body. It is made up of nine directors and three alternate directors, who must have the necessary knowledge and skills to clearly understand their responsibilities and duties within the corporate governance, and to act with the loyalty and diligence of a good businessman.

As set out in its bylaws, the term of office for both directors and alternate directors is three (3) years; they are partially changed every year and may be reelected indefinitely.

The Company complies with the appropriate standards regarding total number of directors, as well as the number of independent directors. Furthermore, its bylaws provide for the flexibility necessary to adapt the number of directors to the possible changes in the conditions in which the Company carries out its activities, from three (3) to nine (9) directors.

The Board of Directors complies, in every relevant respect, with the recommendations included in the Code on Corporate Governance as Schedule IV to Title IV of the regulations issued by the National Securities Commission (Text amended in 2013).

It also monitors the application of the corporate governance policies provided for by the regulations in force through the Executive Committee, the Audit Committee and the Committee for Information Integrity. Periodically, the Committees provide the Board of Directors with information, and the Board gets to know the decisions of each Committee. What is appropriate is transcribed in the minutes drafted at the Board of Directors' meetings.

Executive Committee

In July 2018, Grupo Financiero Galicia S.A.'s Board of Directors approved the creation of the Executive Committee, along with its governing rules and regulations. It is made up of five directors, and the purpose of its creation is to contribute to the conduction of the Company's ordinary business and the efficient performance of the Board of Directors’ duties.

Audit Committee

The Audit Committee set by Capital Markets Law No. 26831 and the C.N.V.’s regulations is formed by three directors, two of whom are independent, and meets the requirements set out in U.S. Sarbanes-Oxley Act.

Such Committee’s mission is to provide the Board of Directors with assistance in overseeing the financial statements, as well as in the task of controlling Grupo Financiero Galicia and its subsidiaries.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Committee for Information Integrity

The Committee for Information Integrity was created in compliance with the recommendations of U.S. Sarbanes Oxley Act, and is made up of the General Manager, the Administrative and Finance Manager and two supervisors of the Administrative and Finance Division.

Its most important duties are monitoring the Company's internal controls, reviewing the financial statements and other information published, preparing Board of Directors' reports with the activities carried out by the Committee. Its operation has been adapted to local laws and it currently performs important administrative and reporting duties, which are used by the Board of Directors and the Audit Committee, contributing to the transparency of the information provided to markets.

Basic Holding Structure

Grupo Financiero Galicia S.A. is a company whose sole purpose is to conduct financial and investment activities as per Section 31 of the General Corporations Law. That is to say, it is a holding company whose activity involves managing its equity investments, assets and resources.

Within the group of companies in which the Company has an interest, Banco de Galicia y Buenos Aires S.A.U. stands out, which is its main asset and a wholly-owned subsidiary. Banco de Galicia y Buenos Aires S.A.U., as a bank institution, is subject to certain regulatory restrictions imposed by the Argentine Central Bank. Among such restrictions, there is one that limits the equity interest to a maximum of 12.5% of the capital stock in companies that do not perform activities qualified as supplementary.

Therefore, Grupo Financiero Galicia S.A. directly and indirectly holds those equity interests in companies that carry out activities defined as non-supplementary.

Grupo Financiero Galicia S.A. has a reduced structure due to its nature as holding company of a group of financial services. Accordingly, certain typical organizational aspects of large operating companies are not applicable thereto.

To conclude, one should note that Grupo Financiero Galicia S.A. is under the control of a pure holding company, EBA Holding S.A., which has the number of votes necessary to hold the majority of votes at the Shareholders’ Meetings, although it does not have any managerial functions over the former.

Compensation Systems

Directors’ compensation is defined by the General Shareholders’ Meeting and is fixed within the limits established by law and the corporate bylaws.

The Audit Committee expresses its opinion on whether compensation proposals for Directors are reasonable, taking into consideration market standards.

Business Conduct Policy

The Company has consistently shown respect for the rights of its shareholders, reliability and accuracy in the information provided, transparency as to its policies and decisions, and caution with regard to the disclosure of strategic business issues.

Code of Ethics

Grupo Financiero Galicia S.A. has a Code of Ethics formally approved that guides its policies and activities. It considers business objectivity and conflict-of-interests related-aspects, and how the employee should act upon identifying a breach of the Code of Ethics.

Banco de Galicia y Buenos Aires S.A.U.

Banco Galicia’s Board of Directors is the Company's highest management body. As of the date of preparation of these consolidated financial statements, it is made up of seven directors and four alternate directors, who have the necessary knowledge and skills to clearly understand their responsibilities and duties within the corporate governance, and act with the loyalty and diligence of a good businessman.

Banco Galicia complies with the appropriate standards regarding total number of directors, as well as number of independent directors. Furthermore, its bylaws provide for the flexibility necessary to adapt from three (3) to nine (9) directors to the possible changes in the conditions in which the Bank carries out its activities.

The General Shareholders’ Meeting has the power to establish the number of directors, both independent and non-independent ones, and appoint them. Out of the seven directors, one of them is independent. In addition, two of the alternate directors are independent. The independence concept is defined in the regulations set forth by the C.N.V. and the Argentine Central Bank regulations.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

As regards prevention of conflicts of interest, the provisions set forth in the General Corporations Law and the Capital Markets Law are applicable.

As set out in the bylaws, the term of office for both directors and alternate directors is three years; two thirds of them (or a fraction of at least three) are changed every year and may be reelected indefinitely.

The Board of Directors' meeting is held at least once a week and when required by any director. The Board of Directors is responsible for the Bank’s general management and makes all the necessary decisions to such end. The Board of Directors' members also take part, to a greater or lesser extent, in the commissions and committees created. Therefore, they are continuously informed about the Bank’s course of business and become aware of the decisions made by such bodies, which are transcribed into minutes.

Additionally, the Board of Directors receives a monthly report prepared by the General Manager, the purpose of which is to report the material issues and events addressed at the different meetings held between the General Manager and Senior Management. The Board of Directors becomes aware of such reports, as evidenced in the minutes.

In connection with directors’ training and development, the Bank has a program, which is reviewed every nine months, whereby they regularly attend courses and seminars of different kinds and subjects.

According to the activities carried out by the Bank, effective laws and corporate strategies, the following committees have been created to achieve an effective control over all activities performed by the Bank:

- Risk and Capital Allocation Committee

It is in charge of approving and analyzing capital allocation, establishing risk policies and monitoring the Bank’s risk.

- High Credit Committee

This committee’s function is to approve and sign credit ratings and grant transactions related to high-risk groups and customers, i.e., greater than 2.5% of the Bank’s individual Computable Regulatory Capital, loans to financial institutions (local or foreign) and related customers, in which case two thirds of the Board of Directors is required to participate.

- Low Credit Committee

This committee’s function is to approve and sign the credit ratings and grant transactions related to medium-risk groups and customers, equal to amounts greater than 1% of the Bank’s individual Computable Regulatory Capital.

- Asset and Liability Management Committee

It is in charge of analyzing the fundraising and its placement in different assets, the follow-up and control of liquidity, interest-rate and currency mismatches, and management thereof.

- Information Technology Committee

This Committee is in charge of supervising and approving the development plans of new systems and their budgets, as well as supervising these systems’ budget control. It is also responsible for approving the general design of the systems’ structure, the main processes thereof and the systems implemented, as well as monitoring the quality of the Bank’s systems, within the policies established by the Board of Directors.

- Audit Committee

The Audit Committee is responsible for helping the Board of Directors, in performing the control function of the Bank and its controlled companies and the companies in which it owns a stake, in order to fairly ensure the following objectives:

- Committee for the Control and Prevention of Money Laundering and Funding of Terrorist Activities (CPLA/FT, as per its initials in Spanish)

It is in charge of planning, coordinating and ensuring compliance with the policies on anti-money laundering and funding of terrorist activities set and approved by the Board of Directors.

- Committee for Information Integrity

It is in charge of encouraging compliance with the provisions of Sarbanes-Oxley (2002).

F-97

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

- Human Resources and Governance Committee

It is in charge of presenting the succession of the General Manager and Division Managers, analyzing and establishing the General Manager’s and Division Managers’ compensation, and monitoring the performance matrix of Department and Division Managers.

- Performance Reporting Committee

It is in charge of monitoring the performance and results of operations, and evaluating the macro situation.

- Liquidity Crisis Committee

It is in charge of evaluating the situation upon facing a liquidity crisis and deciding the steps to be implemented to tackle it.

- Strategy and New Businesses Committee

It is in charge of analyzing new businesses.

- Compliance Committee

It is in charge of instilling respect for Banco Galicia’s rules, code of conduct and ethics, and mitigating the risk of default, by defining policies and establishing controls and reports in the best interests of the Bank and its employees, shareholders and customers.

- Committee for the Protection of Users of Financial Services

It is responsible for following up on the activities developed by Banco Galicia’s management involved in user protection internal processes to ensure adequate compliance with legal and regulatory standards.

The Bank considers the General Manager and Division Management reporting to the General Manager as Senior Management. These are detailed as follows:

Senior Management’s main duties are as follows:

- Ensure that the Bank’s activities are consistent with the business strategy, the policies approved by the Board of Directors and the risks to be assumed.

- Implement the necessary policies, procedures, processes and controls to manage operations and risks cautiously, meet the strategic goals set by the Board of Directors and ensure that the latter receives material, full and timely information so that it may assess management and analyze whether the responsibilities assigned are effectively fulfilled.

- Monitor the managers from different divisions, in line with the policies and procedures set by the Board of Directors and establish an effective internal control system.

Basic Holding Structure

The Bank’s majority shareholder is Grupo Financiero Galicia S.A., which has full control of its shares and votes. In turn, the Bank holds equity investments in supplementary companies as shareholders of the parent, as well as minority interests in companies whose controlling company is its own shareholders of the parent. From a business point of view, this structure allows the Bank to take advantage of significant synergies that guarantee the loyalty of its customers and additional businesses. All business relationships with these companies, whether permanent or occasional in nature, are fostered under the normal and usual market conditions and this is true when the Bank holds either a majority or minority interest. Grupo Financiero Galicia S.A.'s Board of Directors submits to the Shareholders' Meeting's vote which shall be the Company's vote in its capacity as shareholders of the parent at the Bank's Shareholders' Meeting. The same method of transparency and information as to its controlled companies and the

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

companies it owns a stake in is applied at the Bank’s Shareholders’ Meetings, which are always attended by directors and officers thereof and the Board of Directors always provides detailed information about the Company’s activities.

Business Conduct Policy and/or Code of Ethics

The Bank has a formally approved Code of Ethics that guides its policies and activities. It considers business objectivity and conflict of interest related aspects, and how the employee should act upon identifying a breach of the Code of Ethics, with the involvement of the Conduct Committee.

Information Related to Personnel Economic Incentive Practices

The Human Resources and Governance Committee, composed of two (2) Directors, the General Manager and the Organizational Development and Human Resources Division Manager, is in charge of establishing the compensation policy for Banco Galicia’s personnel.

It is the policy of Banco Galicia to manage the full compensation of its personnel based on the principles of fairness, meritocracy and justice, within the framework of the legal regulations in force.

The aim of this policy is to provide an objective and fair basis, through the design and implementation of tools for the management of the fixed and variable compensation paid to each employee, based on the scope and complexity of each position’s responsibilities, individual performance with regard to compliance thereof, contribution to the Bank’s results and conformity to market values, with the purpose of:

With the purpose of gearing individuals towards the achievement of attainable results that contribute to the global performance of the Bank/Area, and to the increase in motivation for the common attainment of goals, differentiating individual contribution, Banco Galicia has different variable compensation systems:

The significance or impact of each of them is monitored and adjusted yearly pursuant to the strategy approved by the Board of Directors.

The interaction among these three aspects seeks to make incentives related to results and growth consistent with the risk thresholds determined by the Board of Directors. In turn, there is no deferred payment of variable compensation subject to the occurrence of future events or in the long term, taking into consideration that the business environment in the Argentine financial system is characterized by being mainly transactional, with lending and borrowing transactions with a very short seasoning term.

Annual budget and management control – the latter carried out monthly in a general manner and quarterly in a more detailed manner - include different risk ratios, including the ratio between compensation and risks undertaken.

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GRUPO FINANCIERO GALICIA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Variable compensation is only paid in cash. There are no share-based payments. Every change to this policy is submitted to Banco de Galicia y Buenos Aires S.A.’s Human Resources Committee for its consideration.

NOTE 55. SUBSEQUENT EVENTS

Prisma Medios de Pago S.A.

Under the framework of the divestment commitment undertaken by Prisma Medios de Pago S.A. and its shareholders towards the Argentine Commission of Competence Defense, on January 21, 2019, Banco Galicia, along with the other shareholders, accepted an offer made by AI Zenith (Netherlands) B.V. to buy 3,182,444 book-entry common shares, with face value of $1 each and one vote per share, representing 7.7007% of this company's capital stock.

The estimated total price of the transaction amounted to US$106,258, out of which Banco Galicia received US$ 63,073 on February 1, 2019 (date on which the shares were transferred). The price remainder, i.e. US$43,185, will be payable during the next five years: (i) 30%  will be payable in Pesos at UVA rate, plus an annual nominal 15% rate and (ii) 70% will be payable in US Dollars at an annual nominal 10% rate.

Banco Galicia continues to hold 3,057,642 shares in Prisma Medios de Pago S.A., which represent 7.3988% of its capital stock.

 

 

F-100

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE A – BREAKDOWN OF GOVERNMENT AND PRIVATE SECURITIES

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

F-101

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE B – CLASSIFICATION OF LOANS AND OTHER FINANCING BY STATUS AND GUARANTEES RECEIVED

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

F-102

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE B – CLASSIFICATION OF LOANS AND OTHER FINANCING BY STATUS AND GUARANTEES RECEIVED (Continued)

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

 

 

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE C – CONCENTRATION OF LOANS AND OTHER FINANCING

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

 

 

 

F-104

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE D – BREAKDOWN BY TERM OF LOANS AND OTHER FINANCING

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

The following table shows contractual cash flows, including interest and other expenses to be accrued until contractual maturity.

 

 

F-105

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE F – CHANGES IN PROPERTY, PLANT AND EQUIPMENT

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

F-106

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE F – CHANGES IN INVESTMENT PROPERTIES

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

Changes in investment properties recorded in the "Other Non-financial Assets" account are detailed below.

 

 

 

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE G – CHANGES IN INTANGIBLE ASSETS

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

 

 

F-108

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE H – CONCENTRATION OF DEPOSITS

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

 

F-109

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE I – BREAKDOWN OF FINANCIAL LIABILITIES BY REMAINING CONTRACTUAL TERM

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

The following table shows the decline in contractual cash flows, including interest and other expenses to be accrued until undiscounted contractual maturity.

 

 

- Checking Accounts $40,597,351

- Savings Accounts $198,745,046

- Time Deposit $92,624,930

- Other Deposits $2,214,249

- Interest to be Accrued $18,618

F-110

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE J – CHANGES IN PROVISIONS

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

F-111

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE K – CAPITAL STOCK STRUCTURE

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

F-112

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE L – FOREIGN CURRENCY BALANCES

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

F-113

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE N – CREDIT ASSISTANCE TO AFFILIATES

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

F-114

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE N – CREDIT ASSISTANCE TO AFFILIATES (Continued)

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

F-115

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE O – DERIVATIVE FINANCIAL INSTRUMENTS

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

F-116

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE P – CATEGORIES OF FINANCIAL ASSETS AND LIABILITIES

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

F-117

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE P – CATEGORIES OF FINANCIAL ASSETS AND LIABILITIES (Continued)

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

 

F-118

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GRUPO FINANCIERO GALICIA S.A.

 

SCHEDULE Q – INCOME STATEMENT BREAKDOWN

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

 

F-119

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GRUPO FINANCIERO GALICIA S.A.

SCHEDULE Q – INCOME STATEMENT BREAKDOWN (Continued)

FOR THE FISCAL YEAR COMMENCED JANUARY 1, 2018 AND ENDED DECEMBER 31, 2018, PRESENTED IN COMPARATIVE FORMAT

Figures Stated in Thousands of Pesos ($), Except as Otherwise Stated

 

 

 

 

 

 

 

 

 

F-120