Grupo Financiero Galicia(US:GGAL)2020-04-29 17:45PART I Key Information Selected financial data for 2017-2019 shows a net income recovery in 2019, alongside key risks from Argentina's economy and COVID-19 Selected Financial Data Key financial data for 2017-2019, adjusted for hyperinflation, covers income, financial position, and performance ratios - The company's financial statements for fiscal years 2017, 2018, and 2019 are prepared in accordance with IFRS and adjusted for hyperinflation as per IAS 29, using the Consumer Price Index (CPI) as of December 31, 2019151630 Consolidated Statement of Income (IFRS) | | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | | (in millions of Pesos) | | | | Net Income from Interest | 34,830 | 51,324 | 45,956 | | Net Income from Financial Instruments | 72,830 | 26,694 | 13,016 | | Operating Income | 36,858 | 5,191 | 22,456 | | Income (Loss) for the Year Attributable to GFG | 23,708 | (5,332) | 10,451 | | Basic Earnings per Share (in Pesos) | 16.62 | (3.74) | 7.32 | Consolidated Statement of Financial Position (IFRS) | | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | | (in millions of Pesos) | | | | Total Assets | 685,519 | 876,371 | 753,227 | | Loans and Other Financing | 358,559 | 434,900 | 437,430 | | Deposits | 393,735 | 553,946 | 455,909 | | Shareholders' Equity attributable to GFG | 113,942 | 92,492 | 99,260 | Selected Ratios (IFRS) | | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Return on Assets | 3.46% | (0.61)% | 1.39% | | Return on Shareholders' Equity | 20.81% | (5.76)% | 10.53% | | Efficiency ratio | 50.72% | 64.13% | 58.24% | | Shareholders' Equity as a Percentage of Total Assets | 16.62% | 10.55% | 13.18% | | Non-Accrual Instruments as a % of Total Portfolio | 4.63% | 3.51% | 2.20% | Risk Factors The company faces significant risks from Argentina's volatile economy, financial system instability, and operational challenges - The company's operations are significantly dependent on Argentina's macroeconomic and political conditions, including economic instability, high inflation, and government policy changes575960 - Risks to the Argentine financial system include reliance on depositor confidence, low financial intermediation, and significant exposure to public sector debt, with Banco Galicia's public sector exposure at Ps. 110,957 million as of December 31, 2019129133138 - As a holding company, Grupo Galicia's ability to meet financial obligations and pay dividends depends on subsidiary funds, constrained by regulations like the Argentine Central Bank's dividend distribution suspension until June 30, 2020, due to COVID-19150151155 - The company faces significant operational risks, including system failures, fraud, and cybersecurity breaches, with COVID-19 introducing further risks such as higher default rates and business disruptions114118165 Information on the Company Grupo Financiero Galicia, a leading Argentine financial services holding company, details its history, business segments, and regulatory environment History and Development of the Company Grupo Financiero Galicia, incorporated in 1999, has expanded its financial services through strategic acquisitions and capital offerings - Grupo Financiero Galicia S.A. was incorporated on September 14, 1999, as a financial services holding company, with Banco Galicia as its main subsidiary and one of Argentina's largest full-service banks188196 - In 2017, the company completed a global primary follow-on offering, issuing 126.5 million new Class B shares and increasing its share capital to Ps. 1,426,764,597217218 - A 2018 corporate reorganization increased Grupo Financiero Galicia's ownership in Tarjetas Regionales S.A. to 83% by acquiring Banco Galicia's stake215 - In 2019, Banco Galicia sold its 7.7% stake in Prisma Medios de Pago S.A., and Grupo Financiero Galicia created IGAM LLC in the US to provide brokerage services, acquiring Galicia Valores232220223 Capital Expenditures (in millions of Pesos) | Year | Fixed Assets | Licenses & Intangible Assets | Total | | :--- | :--- | :--- | :--- | | 2019 | 3,546 | 4,351 | 7,897 | | 2018 | 3,595 | 2,078 | 5,673 | | 2017 | 4,187 | 828 | 5,015 | Budgeted Capital Expenditures for 2020 (in millions of Pesos) | Purpose | Amount | | :--- | :--- | | Infrastructure (Buildings, Tower, Branches) | 1,539 | | Organizational and IT System Development | 5,219 | | Total | 6,758 | Business Overview Banco Galicia is a leading Argentine private-sector bank, with diversified operations across banking, consumption, and insurance, facing strong competition - Banco Galicia is a leading private-sector bank in Argentina, ranking first in loan portfolio and second in assets and deposits as of December 31, 2019, with an 11.57% market share for private sector loans266 - The bank's operations are segmented into Wholesale Banking, Retail Banking, and Financial Banking, serving diverse customer segments from corporations to individuals267268280 - Tarjeta Naranja is Argentina's largest proprietary brand credit card operator, with approximately 8.5 million cards issued as of December 31, 2019, primarily serving low- and medium-income customers245329 - The company is accelerating digital transformation, reorganizing into agile 'Squads' and 'Tribes', and launched the Naranja X virtual wallet and e-checks, achieving a 75% market share in e-checks318323334 - The Argentine financial system comprised 78 institutions as of December 31, 2019, with the top 10 banks holding 77.8% of private sector deposits, indicating strong competition from domestic and foreign banks343348351 Operating and Financial Review and Prospects The company reported a significant net income recovery in 2019, but faces a challenging 2020 outlook due to macroeconomic volatility and COVID-19 impacts Operating Results Net income significantly recovered in 2019, driven by financial instruments, but 2020 faces challenges from COVID-19 and macroeconomic factors Consolidated Income Statement Summary (in millions of Pesos) | | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net Income from Interest | 34,830 | 51,324 | 45,956 | | Net Fee Income | 28,083 | 32,875 | 32,563 | | Net Income from Financial Instruments | 72,830 | 26,694 | 13,016 | | Loan and Other Receivables Loss Provisions | (22,203) | (25,074) | (11,220) | | Loss on Net Monetary Position | (30,798) | (27,788) | (10,496) | | Net Income (Loss) for the Year | 23,819 | (5,891) | 11,196 | - Net income for FY 2019 was Ps. 23,819 million, a 504% increase from the Ps. 5,891 million net loss in FY 2018, primarily driven by a 173% increase in Net Income from Financial Instruments to Ps. 72,830 million734736808 - The net loss in FY 2018 was mainly due to a 165% increase in 'Loss on net monetary position' (from Ps. 10,496 million to Ps. 27,788 million) and a 123% increase in loan loss provisions738740741 - The outlook for 2020 is challenging due to the COVID-19 pandemic, sovereign debt restructuring, and macroeconomic volatility, anticipating negative impacts on income from lower interest rates, regulatory restrictions on fees, and higher loan loss provisions957963966 Liquidity and Capital Resources GFG's liquidity is solid, primarily funded by deposits, though dividend payments are constrained by regulations and subsidiary performance - As a holding company, GFG's primary cash source is dividends from subsidiaries, mainly Banco Galicia, with payments affected by regulations including a suspension by the Argentine Central Bank until June 30, 2020, due to COVID-19974978 - For FY2019, shareholders approved increasing the discretionary reserve for future dividends and granted the Board the ability to pay up to Ps. 4,000 million in cash dividends, subject to Banco Galicia's capacity979 Consolidated Cash Flows Summary (in millions of Pesos) | | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net Cash (used in)/generated by Operating Activities | (10,569) | 121,928 | (13,810) | | Net Cash (used in)/generated by Investment Activities | (5,218) | (5,517) | (5,955) | | Net Cash (used in)/generated by Financing Activities | (27,130) | 28,395 | 20,605 | | Cash and cash equivalents at end of the year | 232,119 | 347,459 | 202,994 | - Total available cash and cash equivalents decreased by Ps. 115,340 million in 2019 to Ps. 232,119 million, primarily due to net cash outflows from operating activities (Ps. 10,569 million) and financing activities (Ps. 27,130 million)989992 - Banco Galicia's capital management policy ensures prudent capital levels, with its computable capital of Ps. 80,785 million as of December 31, 2019, exceeding the minimum regulatory requirement by 114.50%1018532533 Directors, Senior Management and Employees This section details the Board of Directors, executive management, and employee structure, including compensation and corporate governance practices - The Board of Directors of Grupo Financiero Galicia consists of nine members, with five from the controlling Escasany, Ayerza, and Braun families, and Eduardo J. Escasany serving as Chairman102610411043 - The company has several board committees, including an Audit Committee, Executive Committee, Ethics Committee, Nomination and Compensation Committee, and a Disclosure Committee for Sarbanes-Oxley compliance104510471048 - For fiscal year 2019, total compensation for the Board of Directors was set at Ps. 85.8 million for Grupo Financiero Galicia and Ps. 32.6 million for Banco Galicia11281132 - The Group employed 9,718 people as of December 31, 2019, a decrease from 10,209 in 2018, with approximately 39.5% of Banco Galicia's employees affiliated with the national bank employee union11391140 - The company follows Argentine corporate governance practices, which differ from Nasdaq listing standards in areas such as report distribution and committee composition11331134 Major Shareholders and Related Party Transactions The controlling families hold a majority of voting rights, and related party transactions are conducted on market terms within regulatory limits - The controlling shareholders (Escasany, Ayerza, and Braun families) hold 59.4% of total voting rights as of March 31, 2020, primarily through EBA Holding S.A., which owns 100% of the Class A shares (5 votes per share)11471149 Major Shareholders as of March 31, 2020 | Shareholder | % of Total Shares | % of Total Votes | | :--- | :--- | :--- | | The Bank of New York Mellon (ADS Depositary) | 39.2% | 21.9% | | EBA Holding S.A. | 19.7% | 55.1% | | ANSES | 18.5% | 10.4% | | EBA Holding Shareholders (Directly) | 7.7% | 4.3% | - Transactions with related parties, such as directors and officers, are conducted in the ordinary course of business on market terms, with Banco Galicia's aggregate financial exposure to related parties at Ps. 1,102 million as of December 31, 201911581164 Financial Information This section covers legal proceedings, the company's dividend policy, and the impact of regulatory restrictions on dividend payments - The company and its subsidiaries are involved in various legal proceedings, including tax claims and class actions, for which management believes adequate reserves have been recorded117011731175 - The company's dividend policy is based on realized profits, financial condition, and subsidiary needs, with its ability to pay dividends dependent on distributions from its subsidiaries, principally Banco Galicia118311851187 - In 2019, Grupo Financiero Galicia paid cash dividends of Ps. 2,000 million for FY2018, and for FY2019, the board proposed a potential distribution of up to Ps. 4,000 million from a discretionary reserve, contingent on regulatory approval11891190 - Due to the COVID-19 pandemic, the Argentine Central Bank suspended the ability of financial institutions, including Banco Galicia, to pay cash dividends until June 30, 20201191 The Offer and Listing Grupo Financiero Galicia's shares and ADSs are listed on major exchanges, with its shares being the most traded on BYMA in 2019 - The company's Class B shares are listed on the BYMA under 'GGAL', and its American Depositary Shares (ADSs), each representing ten Class B shares, are listed on the Nasdaq Capital Market under the same symbol1207 - In 2019, Grupo Financiero Galicia's shares were the most traded on the BYMA, accounting for 24.2% of the total trading volume, up from 15.2% in 20181211 - The Argentine securities market is regulated by the Comisión Nacional de Valores (CNV), which oversees public offerings, brokers, and public companies1214 Additional Information This section details the company's corporate structure, share rights, material contracts, and Argentine and U.S. tax implications for shareholders Memorandum and Articles of Association The company's capital structure includes Class A and Class B shares with differing voting rights, and dividend distribution is subject to legal reserves - The company's capital comprises Class A shares (5 votes each) and Class B shares (1 vote each), with Class A shares representing 19.71% of capital stock but 55.11% of voting rights as of December 31, 201912261227 - Shareholders have preemptive rights to subscribe to new share issues proportionally to their holdings, though ADS holders may have restricted ability to exercise these rights12601265 - Dividends can only be paid from realized and liquid retained earnings after allocating 5% of net income to a legal reserve until it reaches 20% of outstanding capital12531254 Taxation Recent Argentine tax reforms have altered corporate income tax rates and dividend withholding, while U.S. holders may qualify for foreign tax credits - Recent Argentine tax reforms (Law No. 27,430 and Law No. 27,541) set the corporate income tax rate at 30% for fiscal years 2018-2021 and introduced a 7% withholding tax on dividends12881291 - Capital gains from the sale of publicly-traded shares or ADSs by non-residents are generally exempt from Argentine income tax, provided the non-resident is not from a non-cooperative jurisdiction12891296 - For U.S. Holders, distributions are generally treated as dividend income, potentially taxed at lower long-term capital gains rates, and Argentine taxes withheld may be eligible for a foreign tax credit13241326 - The company believes it should not be classified as a Passive Foreign Investment Company (PFIC) for the 2019 taxable year, but its future status is not guaranteed1336 Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate and foreign exchange risks through a dedicated Risk Management Division with established policy limits - The company's primary market risks are interest rate risk and foreign exchange rate risk, managed mainly at the Banco Galicia subsidiary level through a dedicated Risk Management Division13481350 - Interest rate risk is managed by setting limits on the potential impact of rate fluctuations on the gross brokerage margin and net present value of assets, with a +/-200 bps change estimated to impact gross brokerage margin by +/- 2.54% and +/- 2.37% respectively, within the 10% limit as of year-end 2019135513581360 - Foreign exchange rate risk is controlled by limiting net asset/liability positions in foreign currency as a percentage of regulatory capital; as of December 31, 2019, Banco Galicia held a net asset position of Ps. 4,929 million (US$82 million), representing 0.6% of regulatory capital, within policy limits13661367 Description of Securities Other Than Equity Securities This section details the fees and charges for ADS holders and the depositary's reimbursement of program-related expenses to the company - The depositary for the ADSs, The Bank of New York Mellon, charges fees to ADS holders for services such as issuance (up to $5.00 per 100 ADSs), cancellation, and cash distributions (up to $0.02 per ADS)14001401 - The depositary reimburses Grupo Financiero Galicia for expenses related to the ADS program, including annual stock exchange listing fees, standard maintenance costs, and investor relations activities1403 - For fiscal year 2019, Grupo Financiero Galicia received a payment of US$283,948 from the depositary to cover program-related expenses1402 PART II Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with no material changes - The company's management, including the CEO and CFO, concluded that as of December 31, 2019, the disclosure controls and procedures were effective in ensuring timely and accurate reporting to the SEC1409 - Management assessed internal control over financial reporting based on the COSO framework and concluded it was effective as of December 31, 2019, a conclusion concurred with by Price Waterhouse & Co. S.R.L14121420 - There were no changes in the company's internal control over financial reporting during the year ended December 31, 2019, that materially affected, or are reasonably likely to materially affect, its internal controls1414 Other Information This section details the Audit Committee's financial expert, adopted codes of ethics and governance, and fees paid to the principal accountant - Mr. Daniel Llambías served as the Audit Committee Financial Expert for the fiscal year ended December 31, 20191415 - The company has adopted a Code of Ethics in accordance with Section 406 of the Sarbanes-Oxley Act and a Code of Corporate Governance Good Practices as required by Argentine regulations1416 Principal Accountant Fees (in thousands of Pesos) | Fee Type | 2019 | 2018 | | :--- | :--- | :--- | | Audit Fees | 81,269 | 68,522 | | Audit Related Fees | 12,300 | 11,097 | | Tax Fees | 18,147 | 16,131 | | All Other Fees | 6,506 | 5,068 | | Total | 118,222 | 100,818 | - All audit and non-audit services provided by the independent registered public accounting firm are pre-approved by the Audit Committee1424 PART III Financial Statements This section presents the audited consolidated financial statements for 2017-2019, with an unqualified opinion and identified critical audit matters - The report includes the consolidated statements of financial position, income, other comprehensive income, changes in shareholders' equity, and cash flows for the three years ended December 31, 2019143514361437 - The independent registered public accounting firm, Price Waterhouse & Co. S.R.L., issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 201914511452 - Critical Audit Matters identified were the valuation of Level 3 financial instruments due to significant management judgment and unobservable inputs, and the estimation of the allowance for loan losses involving judgment regarding expected credit loss models and macroeconomic assumptions145814611464 Exhibits This section lists key corporate documents, including bylaws, the ADS Deposit Agreement, codes of ethics, and CEO/CFO certifications - The report includes key corporate documents as exhibits, such as the company's bylaws and the ADS Deposit Agreement1442 - Certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act are filed as exhibits1442 - The company's Code of Ethics and Code of Corporate Governance Good Practices are also included as exhibits1442