AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON May, 26, 2005
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NUMBER 0-30852
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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. PERON 456
C1038 AAJ-BUENOS AIRES, ARGENTINA
(Address of principal executive offices)
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class B Ordinary Shares, Ps. 1.00 par value, ten shares of which are represented
by American Depositary Shares
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(d)
OF THE ACT:
None
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report:
Class A Ordinary Shares, Ps. 1.00 par value . . . . 281,221,650
Class B Ordinary Shares, Ps. 1.00 par value . . . . 811,185,367
Preferred Shares, Ps.1.00 par value . . . . . . . . 149,000,000
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 which financial statement item the registrant has
elected to follow.
Item 17 [ ] Item 18 [X]
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TABLE OF CONTENTS
Page
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS....................................... 5
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE..................................................... 5
ITEM 3. KEY INFORMATION............................................................................. 5
Selected Financial Data..................................................................... 5
Exchange Rate Information................................................................... 8
Risk Factors................................................................................ 9
ITEM 4. INFORMATION ON THE COMPANY.................................................................. 20
Organization................................................................................ 20
Organizational Structure.................................................................... 20
History..................................................................................... 21
Capital Investments and Divestitures........................................................ 27
Business Overview........................................................................... 28
Competition................................................................................. 40
Sales and Marketing......................................................................... 41
Property.................................................................................... 42
Selected Statistical Information............................................................ 44
Government Regulation....................................................................... 84
Main Regulatory Changes in 2002, 2003 and 2004.............................................. 85
Argentine Banking System and Regulation..................................................... 91
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS................................................ 103
ITEM 5A. OPERATING RESULTS........................................................................... 103
General..................................................................................... 103
Inflation Accounting Adjustments............................................................ 103
Main Developments Since the 2001-2002 Crisis................................................ 104
Currency Composition of Our Balance Sheet................................................... 106
The Argentine Economy in 2004............................................................... 107
The Argentine Financial System in 2004...................................................... 108
Results of Operations for the Fiscal Years Ending December 31, 2004, December 31, 2003 and
December 31, 2002........................................................................... 110
U.S. GAAP and Argentine Banking GAAP Reconciliation......................................... 127
Results by Segments......................................................................... 132
Consolidated Assets......................................................................... 140
Exposure to the Argentine Public Sector..................................................... 142
Off-Balance Sheet Arrangements.............................................................. 143
Securitization of Assets.................................................................... 144
Funding..................................................................................... 146
Contractual Obligations..................................................................... 149
Other Commitments........................................................................... 151
Critical Accounting Policies................................................................ 152
U.S. GAAP - Critical Accounting Policies.................................................... 155
ITEM 5B. LIQUIDITY AND CAPITAL RESOURCES............................................................. 158
Liquidity................................................................................... 158
Capital..................................................................................... 163
Capital Expenditures........................................................................ 164
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.................................................. 165
Our Board of Directors...................................................................... 165
Functions of Our Board of Directors......................................................... 167
Our Supervisory Committee................................................................... 167
Compensation of Directors................................................................... 168
Management of Grupo Galicia................................................................. 169
(i)
TABLE OF CONTENTS
Page
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Board of Directors of Banco Galicia......................................................... 169
Functions of the Board of Directors of Banco Galicia........................................ 171
Banco Galicia's Executive Officers.......................................................... 173
Banco Galicia's Supervisory Committee....................................................... 175
Compensation of Banco Galicia's Directors................................................... 175
Compensation of Banco Galicia's Officers.................................................... 176
Employees................................................................................... 177
Nasdaq Corporate Governance Standards....................................................... 178
Share Ownership............................................................................. 179
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS........................................... 180
Major Shareholders.......................................................................... 180
Related Party Transactions.................................................................. 182
ITEM 8. FINANCIAL INFORMATION....................................................................... 183
Legal Proceedings........................................................................... 183
Dividend Policy and Dividends............................................................... 184
Significant Changes......................................................................... 185
ITEM 9. THE OFFER AND LISTING....................................................................... 186
Shares and ADSs............................................................................. 186
Argentine Securities Market................................................................. 189
Market Regulations.......................................................................... 190
ITEM 10. ADDITIONAL INFORMATION...................................................................... 191
Description of Our Bylaws................................................................... 191
Exchange Controls........................................................................... 198
Taxation.................................................................................... 198
Material Contracts.......................................................................... 204
Documents on Display........................................................................ 204
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................. 205
General..................................................................................... 205
Interest Rate Risk.......................................................................... 206
Foreign Exchange Rate Risk.................................................................. 211
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES...................................... 213
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES............................................. 214
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS................ 214
ITEM 15. CONTROLS AND PROCEDURES..................................................................... 214
ITEM 16. [RESERVED].................................................................................. 216
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT............................................................ 216
ITEM 16B. CODE OF ETHICS.............................................................................. 216
ITEM 16C. PRINCIPAL ACCOUNTANTS' FEES AND SERVICES.................................................... 216
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.................................. 217
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS...................... 217
ITEM 17. FINANCIAL STATEMENTS........................................................................ 218
ITEM 18. FINANCIAL STATEMENTS........................................................................ 218
ITEM 19. EXHIBITS.................................................................................... 218
(ii)
PRESENTATION OF FINANCIAL INFORMATION
Our consolidated financial statements consolidate the accounts of Grupo
Financiero Galicia S.A. and its subsidiaries. Therefore, our consolidated
financial statements include the accounts of:
- Grupo Financiero Galicia S.A., the holding company;
- Sudamericana Holding S.A. and its subsidiaries;
- Galicia Warrants S.A.;
- Net Investments S.A. and its subsidiaries; and
- Banco de Galicia y Buenos Aires S.A., its wholly-owned subsidiary, Banco
Galicia Uruguay S.A ("Galicia Uruguay") and its subsidiaries and other
subsidiaries and affiliated companies required to be consolidated under
Argentine Banking GAAP (collectively, the "Bank" or "Banco Galicia").
In this annual report, references to "we," "our," "us," the "Group" and
"Grupo Galicia" are to Grupo Financiero Galicia S.A. and its consolidated
subsidiaries.
We were formed on September 14, 1999, as a financial services holding
company to hold all of the shares of capital stock of Banco Galicia held by
members of the Escasany, Ayerza and Braun families. As a result, our only
significant asset as of December 31, 1999, was our interest in Banco Galicia. In
July 2000, we conducted an exchange offer in which we offered to exchange shares
of Banco Galicia for shares of Grupo Galicia. As a result of the exchange offer,
our only significant asset was our 93.23% interest in Banco Galicia. As of
December 31, 2003, and December 31, 2004, our interest in Banco Galicia was
93.59% as a result of open-market purchases.
For periods prior to July 1, 2000, the financial statements of Banco
Galicia, as our predecessor, have been presented for fiscal years ended June 30.
From July 1, 2000, the financial statements of Grupo Galicia have been presented
for the six-month fiscal year ended December 31, 2000, and for the fiscal years
ended December 31, 2001, 2002, 2003 and 2004.
Grupo Galicia and Banco Galicia maintain their financial books and records
in Argentine pesos and prepare their financial statements to conform to the
accounting rules of the Argentine Central Bank, which prescribes the generally
accepted accounting principles for all banks in Argentina. This annual report
refers to those accounting principles as "Argentine Banking GAAP." Argentine
Banking GAAP differs in certain relevant respects from generally accepted
accounting principles in Argentina ("Argentine GAAP"). Argentine Banking GAAP
also differs in certain significant respects from generally accepted accounting
principles in the United States ("U.S. GAAP"). See Item 5. "Operating and
Financial Review and Prospects -- Item 5A. Operating Results -- U.S. GAAP and
Argentine Banking GAAP Reconciliation" and note 40 to our consolidated audited
financial statements included in this annual report for a description of the
principal differences between Argentine GAAP and Argentine Banking GAAP and note
41 to our financial statements for reconciliation of the principal differences
between Argentine Banking GAAP and U.S. GAAP for the periods up to December 31,
2004. A reconciliation to U.S. GAAP of Grupo Galicia's net income and total
shareholders' equity is presented for the three fiscal years ending December 31,
2004.
In this annual report, references to "US$," "U.S. dollars," and "dollars"
are to United States dollars and references to "Ps." or "pesos" are to Argentine
pesos. Unless this annual report states otherwise, through December 31, 2001,
the exchange rate used to convert foreign currency amounts into pesos on our
balance sheets and income statements (as well as those of Banco Galicia) was the
exchange rate quoted as of each relevant date or period end by Banco de la
Nacion Argentina ("Banco Nacion"). In the case of dollars, until December 31,
2001, the Banco Nacion quotes for such exchange rates had been Ps. 1.0 per US$
1.00, the peso-dollar parity introduced in 1991 by Law No. 23,128 (the
"Convertibility Law").
On January 7, 2002, Argentina abandoned the fixed peso-dollar parity.
After devaluing the peso and setting the official exchange rate at Ps. 1.4 per
US$ 1.0, on February 11, 2002, the Argentine government allowed the peso to
float. Argentine Central Bank Communique "A" 3671, dated July 25, 2002, required
that its published reference exchange rate be used by banks to value all foreign
currency accounts instead of the exchange rate quoted by Banco Nacion. We began
to use the reference exchange rate quoted by the Argentine Central Bank to value
our foreign currency assets and liabilities in July 2002. Unless stated
otherwise, in this annual report, references to the exchange rate since that
time are to the reference exchange rate published by the Argentine Central Bank.
The exchange rates used in the December 2004, and December 31, 2003,
consolidated financial statements were Ps. 2.9738 per US$ 1.00 and Ps. 2.9330
per US$ 1.00, respectively, as quoted by the Argentine Central Bank. As of May
20, 2005, the exchange rate, as quoted by the Argentine Central Bank, was Ps.
2.8875 per US$ 1.00. Since Argentina has not been servicing its sovereign debt
since the end of 2001, this rate may not accurately reflect the real value of
the peso compared to that of the dollar.
On August 22, 1995, the government of Argentina published Decree No.
316/95, which eliminated the requirement that financial statements be restated
for inflation (beginning with financial statements prepared after September 1,
1995). In compliance with this decree and applicable regulations of the Comision
Nacional de Valores (the National Securities Commission or the "CNV"), Banco
Galicia discontinued adjusting its financial statements for inflation.
Therefore, Banco Galicia's financial statements were not adjusted for inflation
for any fiscal year ended after September 1, 1995, through December 31, 2001.
Since we were formed in 1999, our financial statements have not been adjusted
for inflation for the fiscal years ended December 31, 1999, 2000 and 2001.
Mainly as a result of the abandonment in 2002 of the fixed exchange rate,
Argentina experienced a high rate of inflation. Wholesale prices, as measured by
the wholesale price index (the "WPI") published by the Instituto Nacional de
Estadistica y Censos (National Institute of Statistics and Census or "INDEC"),
increased approximately 118.44% in 2002. In accordance with then applicable
accounting rules, starting January 1, 2002, we began to adjust our financial
statements and those of Banco Galicia for inflation based on changes in the WPI.
On July 17, 2002, the Argentine government published Decree No. 1269/02,
repealing Decree No. 316/95 and reestablishing the policy of restating financial
information to account for inflation for periods beginning on or after January
1, 2002. Consequently, inflation accounting was reintroduced in accordance with
Argentine Central Bank Communique "A" 3702, Resolution No. 415/02 of the CNV and
Resolution No. 240/02 of the Argentine Federation of Professional Councils of
Economic Sciences ("FACPCE"), the body that establishes Argentine GAAP.
Primarily as a result of the stabilization of the WPI during the first
half of 2003, the Argentine government published Decree No. 664/03 and the
Argentine Central Bank issued Communique "A" 3921, dated April 8, 2003, which
eliminated the requirement that financial statements be prepared in constant
currency. These rules became effective for financial periods ending on or after
March 1, 2003. Likewise, on April 8, 2003, the CNV issued Resolution No. 441/03
discontinuing inflation accounting as of March 1, 2003. Under professional
accounting standards, application of that method remained in effect until
September 30, 2003, when the Professional Council of Economic Sciences of the
Autonomous City of Buenos Aires (C.P.C.E.C.A.B.A.) discontinued the recognition
of changes in the purchasing power of currency effective October 1, 2003. From
March 2003 to September 2003, prices fell on average approximately 2%.
Therefore, in this annual report and in the financial statements included
herein as of and for the fiscal year ended December 31, 2004, our figures and
Banco Galicia's figures do not include any inflation accounting effect and our
figures and Banco Galicia's figures as of and for the fiscal year ended December
31, 2003, include the effects of inflation accounting through February 28, 2003.
The WPI increased 0.87% between January 1, 2003 and February 28, 2003. Figures
for periods prior to December 31, 2002, have been restated in constant Argentine
pesos as of February 28, 2003, applying the approximately 120.35% change in the
WPI for the period from January 1, 2002, to February 28, 2003. In addition, for
comparison purposes and unless stated otherwise, we have restated in constant
pesos of February 28, 2003, all other financial data as of and for periods prior
to February 28, 2003, included in this annual report.
Throughout this annual report, "asymmetric pesification" refers to the
compulsory asymmetric conversion in January 2002 of most dollar-denominated
assets and certain liabilities of Argentine financial institutions into
peso-denominated assets and liabilities at different exchange rates. This is
more fully described in Item 4. "Information on the Company -- Main Regulatory
Changes in 2002, 2003 and 2004."
In accordance with Argentine Central Bank rules, the effects of certain
regulatory changes that occurred in 2004 have been recorded under the equity
account "Adjustments to Prior Fiscal Years' Results." As a result of these
regulatory changes, and for comparison purposes, previous fiscal years' figures
in this annual report have been restated, when corresponding, to reflect these
adjustments. The following is a description of the aforementioned regulatory
changes and their impact on our financial condition:
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- On January 30, 2004, through its Communique "A" 4084, the Argentine Central
Bank modified the criteria for the valuation of public sector assets. In
accordance with its Communique "A" 4095, the effect generated by such
modification had to be recorded under the equity account "Adjustments to
Prior Fiscal Years' Results". The most significant changes related to : (i)
the treatment applicable to those assets to be granted as collateral of the
advance to be received by the Bank from the Argentine Central Bank for the
purchase of the bond that banks became entitled to purchase in connection
with the compensation of the negative effects of the asymmetric
pesification, in accordance with Decree No.905/02 (which bond is referred to
herein as the "Hedge Bond"); and (ii) the treatment of past-due and unpaid
public-sector debt instruments. For a description of the Hedge Bond and of
the Argentine Central Bank rules for the valuation of public sector assets,
see Item 4. "Information on the Company -- Main Regulatory Changes in 2002,
2003 and 2004 -- Compensation to Financial Institutions -- For the
Asymmetric Pesification and its Consequences" and Item 4. "Information on
the Company -- Selected Statistical Information -- Government and Corporate
Securities -- Valuation," respectively.
- Based on the provisions of Law No. 25,709, at the close of fiscal year 2003,
in accordance with the rules issued as of that date, the Bank had recorded
an asset for the difference generated by the Argentine government measures
establishing the conversion of bank dollar-denominated assets and
liabilities into peso-denominated assets and liabilities (referred to herein
as "pesification"), which provided for the adjustment of the principal of
certain pesified loans by a coefficient based on the variation of salaries
(the "CVS" coefficient) instead of a coefficient based on the variation of
consumer prices (the "CER" coefficient) which was used to adjust the
principal of all other pesified assets and liabilities. This was known as
the "asymmetric indexation." Law No. 25,796, published in the Boletin
Oficial of the Republic of Argentina (the "Official Gazette") on November
17, 2003, set forth the compensation to financial institutions by the
Argentine Government for the negative effects generated on their financial
condition by the asymmetric indexation. Subsequently, through the issuance
of different rules, the Ministry of Economy and the Argentine Central Bank
further regulated Law No. 25,796, in a way that, in the Bank's opinion, is
contrary to the provisions of Law No. 25,796. Given the lack of definitions
regarding this issue, as of December 31, 2004, the aforementioned asset was
written off against the equity account "Adjustments to Prior Fiscal Years'
Results", in accordance with the criteria settled by Argentine Central
Bank's Communique "A" 4202, and against reserves established for such
purpose for the remaining amount. See Item 4. "Information on the Company --
Main Regulatory Changes in 2002, 2003 and 2004 -- Compensation to Financial
Institutions -- For the Asymmetric Indexation and for Differences Related to
Amparo Claims."
For further information, see note 38 to our financial statements.
As of December 31, 2004, the Bank's Bogar (Secured Bonds issued by the
Fondo Fiduciario para el Desarrollo Provincial (Fiduciary Fund for Provincial
Development or "FFDP") in the provincial governments' debt exchange established
by Decree No. 1579/02) were recorded under "Government Securities" while in
previous years they were recorded under "Loans" (given that in such exchange the
Bank had opted to exchange the Bogar received for Secured Loans). This is a
consequence of the fact that, for the time being, the Bank will not make use of
its chosen option to exchange the Bogar for Secured Loans. For comparative
purposes, throughout this annual report (except as noted) the holdings of Bogar
were reclassified as government securities as of December 31, 2003.
Unless otherwise indicated, we have derived all market share and other
industry information from information published by the Argentine Central Bank.
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 -- Business Overview," Item 5. "Operating and Financial Review and
Prospects -- Item 5A. Operating Results" and Item 5. "Operating and Financial
Review and Prospects -- Item 5B. 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" or "continue" or
similar terminology. Although we believe that the expectations reflected in
these
-3 -
forward-looking statements are reasonable, we do not provide any assurance 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 include but are not
limited to:
- changes in general economic, business, political, legal, social or
other conditions in Argentina or elsewhere in Latin America;
- changes in capital markets in general that may affect policies or
attitudes toward lending to Argentina or Argentine companies;
- our inability to obtain additional debt or equity financing on
attractive terms, which may limit our ability to fund existing
operations and to finance new activities; and
- the other factors discussed under Item 3. "Key Information -- Risk
Factors" in this annual report.
You should not place undue reliance on forward-looking statements, which
speak only as of the date that they were made. Moreover, you should consider
these cautionary statements in connection with any written or oral
forward-looking statements that we may issue in the future. We do not undertake
any obligation to release publicly any revisions to forward-looking statements
after completion of this annual report to reflect later events or circumstances
or to reflect the occurrence of unanticipated events.
-4-
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
SELECTED FINANCIAL DATA
- The following table presents summary historical financial and other
information about us and Banco Galicia as of the dates and for the periods
indicated.
- The financial statements for the fiscal year ended December 31, 2004 do
not include any effect for inflation accounting. The financial statements
for the fiscal year ended December 31, 2003, include the effects of
inflation accounting through February 28, 2003. The financial statements
as of and for the fiscal year ended December 31, 2002, and the financial
data for prior periods have been restated in constant pesos of February
28, 2003.
- The selected consolidated financial information as of December 31,
2004, and 2003, and for the fiscal years ending December 31, 2004, 2003,
and 2002, has been derived from our audited consolidated financial
statements included in this annual report.
- The selected consolidated financial information as of December 31,
2002, 2001 and 2000, and June 30, 2000, and for the six-month period ended
December 31, 2000, and for the fiscal year ended June 30, 2000, has been
derived from our audited consolidated financial statements not included in
this annual report.
- We prepare our financial statements in accordance with Argentine
Banking GAAP, which differs from Argentine GAAP and U.S. GAAP. Our audited
consolidated financial statements contain a description of the principal
differences between Argentine GAAP and Argentine Banking GAAP and a
reconciliation to U.S. GAAP of our shareholders' equity as of December 31,
2004, 2003 and 2002, and our net income for the three years ended December
31, 2004. See notes 40 and 41 to 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.
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BANCO
GRUPO FINANCIERO GALICIA GALICIA
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6 MONTHS FISCAL YEAR
FISCAL YEAR ENDED ENDED ENDED
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DECEMBER 31, DECEMBER 31, JUNE 30,
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2004 2004 2003 2002 2001 2000 2000
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(in millions
of U.S.
dollars,
except
as (in millions of pesos, (in millions of February 28, 2003,
noted)(1) except as noted)(1) constant pesos, except as noted)(1)
CONSOLIDATED INCOME STATEMENT IN
ACCORDANCE WITH ARGENTINE BANKING GAAP
Financial Income........................ US$ 468.0 Ps. 1,391.6 Ps. 1,452.1 Ps.5,757.3 Ps. 3,586.8 Ps. 1,807.3 Ps. 3,303.9
Net Financial Income (2)................ 75.4 224.2 147.3 1,196.9 1,460.7 831.7 1,593.1
Provision for Losses on Loans and Other
Receivables........................... 64.0 190.2 286.4 1,648.6 1,008.5 272.4 549.8
Income before Taxes..................... (22.3) (66.1) (221.6) (2,812.9) 423.7 313.5 507.9
Income Tax.............................. (14.7) (43.8) (0.6) (66.4) (159.1) (115.4) (163.5)
Net Income before the Absorption........ (37.0) (109.9) (222.2) (2.879.3) 264.6 198.1 344.4
Absorption subject to the Approval of the
Annual Shareholders Meeting............. - - - 1,370.0 - - -
Net Income after the Absorption......... (37.0) (109.9) (222.2) (1,509.3) 264.6 198.1 344.4
Adjusted Net Income per Share (in Pesos)
(**)................................... (0.031) (0.093) (0.203) (1.382) 0.242 0.194 0.294
Cash Dividends per Share (in Pesos)..... - - - - - - 0.4
Book Value per Share (in Pesos)......... 0.412 1.224 1.299 1.465 2.841 2.843 2.285
Stock Dividends per Share (in Pesos).... - - - - - - -
AMOUNTS IN ACCORDANCE WITH U.S. GAAP
Net Income (loss)....................... US$ (0.4) Ps. (1.1) Ps. 731.3 Ps. 422.5 Ps.(8,638.4) Ps. 216.6 Ps. 361.4
Adjusted Net Income (loss) per Share
(in Pesos)............................. (0.000) (0.001) 0.669 0.386 (7.907) 0.212 0.309
Book Value (deficit) per Share
(in Pesos)............................. (0.866) (2.574) 4.077 (4.964) (5.390) 2.629 2.281
Financial Income........................ 487.2 1,448.7 2,752.0 2,613.1 3,569.3 1,813.5 3,297.3
Net Financial Income ................... 94.6 281.3 1,249.1 (1,947.3) 1,444.2 837.7 1,586.5
Provision for Losses on Loans and Other
Receivables .......................... 70.6 210.0 274.6 928.8 4,731.0 261.2 514.1
Income Tax.............................. 11.9 35.4 (38.4) 66.5 212.9 102.5 146.0
CONSOLIDATED BALANCE SHEET IN ACCORDANCE
WITH ARGENTINE BANKING GAAP
Cash and Due from Banks................. US$ 332.5 Ps. 988.7 Ps. 826.2 Ps. 576.8 Ps. 1,139.9 Ps. 1,366.4 Ps. 1,378.0
Government Securities, Net.............. 1,855.5 5,518.0 6,407.1 1,786.5 273.3 170.1 906.0
Loans, Net ............................. 2,837.5 8,438.2 7,506.5 10,682.1 20,107.2 20,363.1 20,551.3
Total Assets............................ 7,953.0 23,650.6 22,822.9 23,864.1 27,877.6 36,888.4 35,435.5
Deposits................................ 2,272.1 6,756.9 5,584.0 5,209.4 13,502.8 19,619.2 19,266.2
Other Funds (3)......................... 5,169.9 15,374.2 15,819.5 17,053.9 11,271.3 14,358.8 13,234.0
Total Shareholders' Equity.............. 511.0 1,519.5 1,419.4 1,600.8 3,103.5 2,910.4 2,935.3
Average Total Assets (4)................ 7,642.0 22,725.9 22,530.3 29,500.9 31,967.4 33,430.0 30,767.8
PERCENTAGE OF PERIOD-END BALANCE SHEET
ITEMS
DENOMINATED IN DOLLARS:
Loans, Net of Allowances................ 10.43% 10.43% 9.36% 9.11% 86.34% 79.85% 77.55%
Total Assets............................ 32.92 32.92 36.39 43.20 80.05 75.65 74.20
Deposits................................ 20.89 20.89 29.67 40.08 81.15 70.61 69.43
Total Liabilities....................... 29.57 29.57 36.87 43.98 74.07 79.06 78.56
AMOUNTS IN ACCORDANCE WITH U.S. GAAP
Trading Securities...................... US$ 189.9 Ps. 564.7 Ps. 328.8 Ps. 35.5 Ps. 141.9 Ps. 228.7 Ps. 858.2
Available-for-Sale Securities........... 1,319.2 3,923.1 3,727.9 1,380.6 2,914.3 4,377.4 3,658.8
Total Assets............................ 5,719.0 17,007.3 14,835.2 14,821.9 21,061.8 32,797.3 32,180.9
Total Liabilities....................... 6,793.6 20,203.0 19,288.5 20,244.2 26,949.6 30,105.2 29,509.6
Shareholders' Equity (Deficit).......... (1,074.6) (3,195.7) (4,453.3) (5,422.3) (5,887.8) 2,692.1 2,671.3
-6-
BANCO
GRUPO GALICIA GALICIA
---------------------------------------------------- --------
FISCAL
6 MONTHS YEAR
FISCAL YEAR ENDED ENDED ENDED
---------------------------------------------------- --------
DECEMBER
DECEMBER 31, 31, JUNE 30,
---------------------------------------------------- --------
2004 2003 2002 2001 2000 2000
--------------------------------------------------------------------------------------------------------------------
(in millions of
pesos, except as (in millions of February 28, 2003,
noted)(1) constant pesos, except as noted)(1)
SELECTED RATIOS
RATIOS IN ACCORDANCE WITH ARGENTINE GAAP
PROFITABILITY AND EFFICIENCY
Net Yield on Interest Earning Assets (5)(*).......... 1.02% 0.89% 3.66% 6.54% 5.98% 6.18%
Financial Margin (6)(*).............................. 1.08 0.71 4.44 5.36 5.88 6.07
Return on Average Assets (7)(*)...................... (0.42) (0.95) (6.04) 0.90 1.27 1.12
Return on Average Shareholders' Equity (8)(*)........ (7.32) (14.53) (62.06) 8.67 14.68 12.41
Net Income from Services as a Percentage of
Operating Income (9) 66.06 73.08 24.95 39.22 33.64 32.13
Efficiency ratio (10)................................ 94.46 113.91 61.58 57.00 53.09 57.04
CAPITAL
Shareholders' Equity as a Percentage of Total
Assets.............................................. 6.42% 6.22% 6.71% 11.13% 7.89% 8.28%
Total Liabilities as a Multiple of Shareholders' 14.56x 15.08x 13.91x 7.98x 11.68x 11.07x
Equity..............................................
Total Capital Ratio (11)............................. 25.11% - - 17.18% 15.26% 17.34%
LIQUIDITY
Cash and Due from Banks as a Percentage of Total
Deposits............................................ 14.63% 14.80% 11.07% 8.44% 6.96% 7.15%
Loans, Net as a Percentage of Total Assets........... 35.68 32.89 44.76 72.13 55.21 58.00
CREDIT QUALITY
Past Due Loans (12) as a Percentage of Total
Loans .............................................. 4.97% 11.70% 9.93% 4.96% 3.46% 3.40%
Non-Accrual Loans (13) as a Percentage of Total
Loans .............................................. 7.74 15.04 13.08 6.74 4.04 3.95
Allowance for Loan Losses as a Percentage of
Non-accrual Loans (13) .............................. 90.51 90.61 104.45 73.93 70.38 69.07
Net Charge-Offs (14) as a Percentage of Average
Loans................................................ 3.77% 1.98% 1.89% 2.20% 2.20% 2.80%
RATIOS IN ACCORDANCE WITH U.S. GAAP
Capital
Shareholders' Equity (deficit) as a Percentage of
Total Assets.......................................... (18.79)% (30.02)% (36.58)% (27.96)% 8.21% 8.30%
Total Liabilities as a Multiple of Total
Shareholders' Equity.................................. (6.32) (4.33)x (3.73)x (4.58)x 11.18x 11.05x
Liquidity
Loans, Net as a Percentage of Total Assets........... 43.91% 43.32% 55.03% 61.11% 62.07% 63.79%
Credit Quality
Allowance for Loan Losses as a Percentage of
Non-Accrual Loans..................................... 84.75% 85.98% 101.48% 136.89% 72.99% 73.07%
INFLATION AND EXCHANGE RATE
Inflation (Deflation) (15) (16)...................... 7.84% 2.03% 118.44% (4.30)% (0.55)% 4.51%
Currency Devaluation Rate (16) (%).................. 1.39 (12.79) 236.30 - - -
CER (17)............................................. 5.48 3.66 40.53 - - -
CVS (18)............................................. 5.32 15.85 0.83 - - -
-7-
(*) Annualized for the six-month period ended December 31, 2000.
(**) Before the loss absorption mechanism established by Argentine Central Bank
Communique "A" 3800, net income per share for fiscal year 2002 was Ps.
(2.636).
(1) The exchange rate used to convert the December 31, 2004, amounts into U.S.
dollars was Ps. 2.974 per US$ 1.00. All amounts are stated in millions of
pesos, except inflation, percentages, ratios, multiples and per-share
data.
(2) Net financial income represents mainly income from interest on loans and
other receivables from financial brokerage plus net income from government
and corporate debt securities, including gains and losses, less interest
on deposits and other liabilities from financial intermediation and
monetary loss from financial brokerage. For fiscal years 2002, 2003 and
2004, it also includes the CER adjustment.
(3) Includes mainly liabilities with the Argentine Central Bank, other banks
and international entities.
(4) The average balances of assets and liabilities, including the related
interest receivable and payable are calculated on a daily basis for Banco
Galicia and for Galicia Uruguay and on a monthly basis for us and our
nonbanking subsidiaries as well as for Tarjetas Regionales S.A. (the
regional credit card company in which the Bank holds majority interests).
(5) Net interest earned divided by interest-earning assets. For a description
of net interest earned, see Item 4. "Information on the Company --
Selected Statistical Information -- Interest-Earning Assets -- Net
Yield on Interest-Earning Assets."
(6) Financial margin represents net financial income divided by average
interest-earning assets.
(7) Net income plus minority interest plus unrealized valuation difference as
a percentage of average total assets. Before the loss absorption mechanism
allowed by Argentine Central Bank Communique "A" 3800, this ratio was
(10.68)% for fiscal year 2002.
(8) Net income plus unrealized valuation difference as a percentage of average
shareholders' equity. Before the loss absorption mechanism allowed by
Argentine Central Bank Communique "A" 3800, this ratio was (118.40) % for
fiscal year 2002.
(9) Operating income is defined as net financial income plus net income from
services plus monetary loss from financial intermediation plus the
unrealized valuation difference. Excluding from the calculation the
unrealized valuation difference (in accordance with Argentine Central Bank
Communique "A" 3703), this ratio was 278.90% for fiscal year 2002.
(10) Administrative expenses net of the monetary gain (loss) from operating
expenses as a percentage of operating income as defined above. Excluding
from the calculation the unrealized valuation difference (in accordance
with Argentine Central Bank Communique "A" 3703), this ratio was 688.34%
for fiscal year 2002.
(11) Compliance with the capital adequacy rules of the Argentine Central Bank
was suspended during 2002 and 2003 (including December 31, 2002, and
December 31, 2003). See Item 4."Information on the Company -- Selected
Statistical Information -- Regulatory Capital."
(12) Past-due loans consist of amounts of entire loan principal and interest
receivable for those loans for which either the principal or any interest
payment is 91 days or more past due.
(13) Non-Accrual loans are defined as those loans falling into the following
categories under the Argentine Central Bank's classification system: (a)
consumer: defective fulfillment, difficulty in recovery, uncollectible or
uncollectible for technical reasons and (b) commercial: with problems,
high risk of insolvency, uncollectible or uncollectible for technical
reasons.
(14) Charge-offs plus direct charge-offs minus bad debts recovered.
(15) As measured by changes in the wholesale price index (WPI) in Argentina.
(16) Source: INDEC.
(17) The "CER" is the "Coeficiente de Estabilizacion de Referencia", an
adjustment coefficient based on changes in the consumer price index, which
became effective February 3, 2002. See Item 4. "Information on the Company
-- Main Regulatory Changes in 2002, 2003 and 2004."
(18) The "CVS" is the "Coeficiente de Variacion Salarial", an adjustment
coefficient based on the variation of salaries, which was effective
between October 1, 2002 and March 31, 2004. See Item 4. "Information on
the Company -- Main Regulatory Changes in 2002, 2003 and 2004." The
percentage disclosed for FY 2004 corresponds to the variation between
January 1, 2004 and March 31, 2004.
EXCHANGE RATE INFORMATION
On January 7, 2002, the Argentine Congress enacted Law No. 25,561
(the Public Emergency and Foreign Exchange System Reform Law, the "Public
Emergency Law"), abandoning over 10 years of fixed U.S. dollar - peso parity.
After devaluing the peso and setting the official exchange rate at Ps. 1.4 per
US$ 1.0, on February 11, 2002, the Argentine government allowed the peso to
float. The shortage of dollars and their heightened demand caused the peso to
devalue significantly in the first half of 2002. Since mid 2002, the peso
appreciated versus the dollar. There can be no assurance that the peso will not
depreciate in the future.
-8-
The following table sets forth the annual high, low, average and
period-end exchange rates for U.S. dollars for the periods indicated, expressed
in pesos per dollar and not adjusted for inflation.
------------------------------------------------------------------------
EXCHANGE RATE (1)
------------------------------------------------------------------------
HIGH LOW AVERAGE (2) PERIOD-END
-------------- ----------------- ---------------- ----------------
1999................................... 1.0000 1.0000 1.0000 (3) 1.0000
2000................................... 1.0000 1.0000 1.0000 (3) 1.0000
2001................................... 1.0000 1.0000 1.0000 (3) 1.0000
2002................................... 3.9000 1.0000 3.0724 (3) 3.3630
2003................................... 3.3625 2.7485 2.9491 (3) 2.9330
2004................................... 3.0718 2.8037 2.9415 (3) 2.9738
November 2004 2.9757 2.9343 2.9546 2.9510
December 2004 2.9913 2.9418 2.9709 2.9738
January 2005........................... 2.9718 2.9233 2.9460 2.9253
February 2005.......................... 2.9353 2.8893 2.9153 2.9327
March 2005............................. 2.9522 2.9142 2.9266 2.9233
April 2005............................. 2.9188 2.8823 2.9004 2.9133
May 2005 (through May 20, 2005)........ 2.9040 2.8843 2.8930 2.8875
(1)Until June 2002, asked closing quotations as quoted by Banco Nacion. Since
July 2002, closing reference exchange rate as published by the Argentine
Central Bank.
(2) Daily average of closing quotations, unless otherwise noted.
(3) Based on monthly averages.
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS ANNUAL REPORT. WE ALSO MAY FACE RISKS AND
UNCERTAINTIES THAT ARE NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM
IMMATERIAL, WHICH MAY IMPAIR OUR BUSINESS. IN GENERAL, YOU TAKE MORE RISK WHEN
YOU INVEST IN THE SECURITIES OF ISSUERS IN EMERGING MARKETS SUCH AS ARGENTINA
THAN WHEN YOU INVEST IN THE SECURITIES OF ISSUERS IN THE UNITED STATES AND
CERTAIN OTHER MARKETS.
RISK FACTORS RELATING TO GRUPO GALICIA
WE ARE A HOLDING COMPANY, AND OUR ABILITY TO PAY CASH DIVIDENDS DEPENDS ON THE
PROFITABILITY OF OUR SUBSIDIARIES
We are a holding company, and as such we conduct all of our operations
through our subsidiaries. As a holding company, we expect dividends or other
intercompany transfers of funds from our subsidiaries to be our primary source
of funds to pay our expenses and dividends. Banco Galicia is our most
significant subsidiary. As of December 31, 2004, Banco Galicia accounted for
99.2% of our consolidated assets and 98.9% of our consolidated net loss. While
we do not anticipate conducting operations at our level, any expenses we incur,
in excess of minimum levels, will reduce amounts available to be distributed to
our shareholders. The ability of our subsidiaries to pay dividends and make
other payments to us will depend on their results of operations and financial
condition and may be restricted by, among other things, applicable corporate and
other laws and regulations and agreements of our subsidiaries. In addition, our
ability to pay dividends will be subject to legal and other requirements at our
level.
During 2004, 2003 and 2002 we did not receive any dividends from Banco
Galicia. In addition, Banco Galicia is prohibited from paying any cash dividends
or making any advances, loans or capital contributions to us, its other
affiliates or subsidiaries for so long as amounts are due to the Argentine
Central Bank for financial assistance previously received by Banco Galicia.
Furthermore, Banco Galicia is restricted from paying dividends as under
Argentine Central Bank regulations it must reduce its retained earnings
available to be distributed as cash dividends by the difference between the
market value and the carrying value of the Compensatory and Hedge bonds, after
netting the legal reserve and other reserves established by Banco Galicia's
bylaws. Consequently, our ability to distribute cash dividends to our
shareholders has been, and continues to be, materially and adversely affected.
-9-
Last, the loan agreements entered into by Banco Galicia as part of its
foreign debt restructuring limit its ability to pay dividends on its capital
stock. See Item 8. "Financial Information -- Dividend Policy and Dividends --
Dividend Policy."
WE MAY OPERATE FINANCE-RELATED BUSINESSES THAT HAVE LITTLE OR NO REGULATORY
SUPERVISION
We may operate finance-related businesses outside of Banco Galicia that
are not regulated by the Argentine Central Bank. These businesses will be
subject only to those regulatory limitations that may be applicable to them. We
cannot assure you that we will not enter into businesses that have little or no
regulatory supervision or that entail greater risks than our existing
businesses.
WE ARE SUBJECT TO CORPORATE DISCLOSURE AND ACCOUNTING STANDARDS THAT MAY LIMIT
THE INFORMATION AVAILABLE TO OUR SHAREHOLDERS
A principal objective of the securities laws of the United States,
Argentina and other countries is to promote full and fair disclosure of all
material information of companies issuing securities. However, there may be less
publicly available information about us than is regularly published by or about
listed companies in certain countries with highly developed capital markets,
such as the United States. While we are subject to the periodic reporting
requirements of the Securities Exchange Act of 1934 as amended (the "Exchange
Act"), the periodic disclosure required of non-U.S. issuers under the U.S.
Exchange Act is more limited than the periodic disclosure required of U.S.
issuers. Furthermore, Grupo Galicia is not required to comply with the U.S.
Securities and Exchange Commission ("SEC") proxy rules in connection with
shareholders' meetings.
We maintain our financial books and records in pesos and prepare our
financial statements in conformity with Argentine Banking GAAP, which differs in
certain respects from Argentine GAAP and U.S. GAAP.
See Item 5. "Operating and Financial Review and Prospects -- Item 5A.
Operating Results -- U.S. GAAP and Argentine Banking GAAP Reconciliation" and
note 41 to our consolidated audited financial statements included in this annual
report for a description of the principal differences between Argentine Banking
GAAP and U.S. GAAP.
For a description of the differences between Argentine and Nasdaq
corporate governance requirements, see Item 6. "Directors, Senior Management and
Employees -- Nasdaq Corporate Governance Standards."
OUR SHAREHOLDERS MAY BE SUBJECT TO LIABILITY FOR CERTAIN VOTES OF THEIR
SECURITIES
Shareholders who have a conflict of interest with us and who 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 other third parties, including other
shareholders.
U.S. HOLDERS OF OUR CLASS B SHARES MAY NOT BE ABLE TO EXERCISE PREEMPTIVE AND
ACCRETION RIGHTS
Under Argentine law, holders of our class B shares have preemptive and
accretion rights with respect to those shares (including shares underlying our
ADSs). United States holders of our class B shares may not be able to exercise
those rights unless a registration statement under the Securities Act of 1933 is
effective with respect to those rights or an exemption from the registration
requirements of the Securities Act is available. We are not obligated to file a
registration statement with respect to those rights or the shares related to
those rights. We cannot assure you that we will file such a registration
statement or that an exemption from registration will be available. Unless those
shares are registered or an exemption from registration applies, a United States
holder of class B shares (including those underlying our ADSs) may receive only
the net proceeds from those preemptive rights if those rights can be sold.
-10-
RISK FACTORS RELATING TO ARGENTINA
Substantially all of our operations, property and customers are located in
Argentina. Accordingly, the quality of our loan portfolio and our financial
condition and results of operations depend to a significant extent on
macroeconomic and political conditions prevailing from time to time in
Argentina. In general, you take more risk when you invest in the securities of
issuers in emerging markets such as Argentina than when you invest in the
securities of issuers in the United States and certain other markets.
THE CURRENT GROWTH AND STABILIZATION MAY NOT BE SUSTAINABLE, WHICH COULD
ADVERSELY AFFECT THE ECONOMY, THE FINANCIAL SYSTEM AND OUR PROSPECTS
During 2001 and 2002, Argentina went through a period of great political,
economic and social instability, which led to the early resignation of the
President in office in December 2001, a significant fall in economic activity, a
banking crisis, the default on part of Argentina's sovereign debt, the
devaluation of the Argentine peso in January 2002 and high inflation. In early
2002, the Argentine government undertook a number of far-reaching initiatives
that radically changed the monetary and foreign exchange regime of the country
and the regulatory environment for doing business in Argentina for all sectors
of activity, including the financial sector. The impact of the crisis and these
measures on the Argentine economy was significant and remains uncertain in the
long run.
If the current administration is not capable of implementing economic
policies needed to turn the economic growth Argentina is experiencing into
sustainable development in the long run, or if it is not capable of keeping
inflation under control, there is considerable risk that political and economic
instability will increase. This would likely have a negative impact on the
Argentine economy and on the financial system, including us and Banco Galicia.
In addition, we cannot assure you that the economy will not suffer additional
shocks, especially if political pressure in Argentina inhibits the
implementation of economic policies designed to generate growth and enhance
consumer and investor confidence, while keeping inflation under control.
ARGENTINA'S FAILURE TO REACH AN AGREEMENT WITH THE IMF COULD PREVENT ECONOMIC
GROWTH, WHICH WOULD ADVERSELY AFFECT THE ECONOMY, THE FINANCIAL SYSTEM AND OUR
PROSPECTS
Although Argentina did not default on its debt with multilateral agency
creditors, during most of 2002 and 2003, numerous rounds of negotiations with
the International Monetary Fund (the "IMF") were necessary for Argentina to
reach a medium-term agreement with the IMF and the medium-term refinancing of
its debt with the IMF in 2003.
Conversations between Argentina and the IMF to review the country's
performance and set new performance criteria for the next years were suspended
in the second half of 2004, until the completion of the foreign debt
restructuring. The exchange offer to restructure Argentina's defaulted sovereign
foreign debt closed in February 25, 2005, with a 76% creditor participation, but
settlement of the offer did not commence until May 24, 2005 and is currently
pending due to legal actions raised by creditors that did not participate in the
offer. And, while the IMF has seen the 76% creditor participation as an
important step, it has expressed the view that Argentina should now formulate a
strategy to address the issue of remaining arrears. There are other issues such
as the renegotiation of utility tariffs and the monetary and fiscal policy
targets, among others, upon which the IMF and the Argentine government do not or
may not agree.
Currently Argentina has limited access to the foreign capital markets and
depends on the IMF and other multilateral lending as its main source of foreign
capital. Consequently, if Argentina fails to reach an agreement with the IMF,
the IMF could decrease its lending to Argentina while other multilateral
financial institutions lending is conditioned to the reaching of an agreement
with the former. This would have a negative impact on Argentina's economic
prospects and on our and Banco Galicia's prospects.
In addition, Argentina's economic growth in the long run is dependent,
among others, on it regaining access to the voluntary international capital
markets and to foreign direct investment. In general, Argentina's access to the
voluntary international capital markets and to foreign direct investment are
viewed as dependent on the satisfactory resolution of pending issues with the
IMF. If such issues are not resolved, there is considerable risk that
-11-
Argentina would lack the sources of capital needed to sustain economic growth
and poor economic growth would likely trigger political and economic
instability. This would negatively affect our and Banco Galicia's prospects.
If the inability of the Argentine government and the private sector to
access foreign financing continues, the fiscal situation of the country could be
severely affected, undermining the ability of the government to implement
adequate economic policies (including structural reforms) and preventing the
private sector from reembarking on a positive investment cycle. If economic
growth fails to materialize in the medium and long term, political and economic
volatility are likely to recur. This would most likely negatively and materially
impact the different entities operating in Argentina, including the financial
system, us and Banco Galicia.
INFLATION MAY RISE FROM CURRENT LEVELS AND UNDERMINE THE ECONOMY
In the first four months of 2005 consumer prices increased 4.53% and
wholesale prices increased 3.61%.
In the past, inflation has materially undermined the Argentine economy and
the government's ability to create conditions that would permit economic growth.
In addition, high inflation or high volatility in inflation rates would
negatively and materially affect the business volume of the financial system and
preclude it from resuming financial intermediation activities. This could be
expected in turn to negatively affect the level of economic activity and
employment. High inflation would also undermine Argentina's foreign
competitiveness by diluting the positive effects of the peso devaluation, with
the same negative effects on the level of economic activity and employment. All
these effects would have a negative impact on our business. We cannot assure you
that higher rates of inflation will not negatively affect the Argentine economy
in the future.
ARGENTINA'S ECONOMY AND ITS REAL, FINANCIAL AND SECURITIES MARKET REMAIN
VULNERABLE TO EXTERNAL SHOCKS WHICH COULD HAVE AN ADVERSE EFFECT ON THE
COUNTRY'S ECONOMIC GROWTH AND ON OUR PROSPECTS
Financial and securities markets in Argentina are influenced, to varying
degrees, by economic and market conditions in other emerging market countries.
Although economic conditions vary from country to country, investors' reactions
to the events occurring in one country may substantially affect capital flows
into and securities from issuers in other similar countries, including
Argentina. Lower capital inflows and falling securities prices negatively affect
the real economy through higher interest rates or currency volatility.
In the past, Argentina's economy has been adversely affected by economic
developments in other emerging market countries. Among others, the political and
economic events that occurred in Mexico in 1994 and the collapse of several
Asian economies between 1997 and 1998, to cite two well-known emerging market
downturns of the 1990s, adversely impacted the Argentine economy. These and
similar developments can be expected to affect the Argentine economy in the
future. We cannot assure you that Argentina's economy will not be adversely
impacted by events affecting other emerging markets.
In addition, Argentina may also be affected by economic conditions of
major trade partners, such as Brazil, or countries with developed economies,
such as the United States, that are significant trade partners and/or have
influence over world economic cycles. For instance, if interest rates rise
significantly in developed economies, including the United States, Argentina and
other emerging market economies could find it more difficult and expensive to
borrow capital and refinance existing debt, which would negatively affect their
economic growth. If these countries are also Argentina's trade partners, the
negative effect would be increased, through a decrease in Argentine exports. We
cannot assure you that events affecting other markets will not have an adverse
effect on Argentina's growth.
A DECLINE IN INTERNATIONAL PRICES FOR ARGENTINA'S MAIN COMMODITY EXPORTS COULD
HAVE AN ADVERSE EFFECT ON ARGENTINA'S ECONOMIC GROWTH AND ON OUR PROSPECTS
Argentina's financial recovery from the 2001-2002 crisis has been
significantly assisted by the increase in prices for Argentina's main commodity
exports, such as soy. These high commodity prices have contributed to the
increase in Argentine exports since the third quarter of 2002 and to high
government revenues from taxes on exports which were introduced in 2002. While
still historically at high levels, certain international commodity prices have
-12-
begun to decrease recently. If international commodity prices decrease
significantly, the growth of the Argentine economy could be adversely affected
and government revenues which became highly dependent on taxes on exports after
the 2001-2002 crisis, would decrease. This would have a negative impact on
public finances and the Argentine government's ability to service its debt and
could either generate recessionary or inflationary pressures depending on the
government's reaction. Either of these results would negatively impact our and
Banco Galicia's prospects.
A FURTHER SIGNIFICANT DEVALUATION OF THE PESO WOULD ADVERSELY AFFECT THE
ARGENTINE ECONOMY
Despite the positive effects of the real depreciation of the peso on the
competitiveness of certain sectors of the Argentine economy, it has had
far-reaching negative impacts on the Argentine economy and on businesses, and
individuals' financial condition. The devaluation of the peso has had a negative
impact on the ability of Argentine businesses to honor their foreign debt, has
led to very high inflation in 2002, it strongly reduced real wages, had a
negative impact on businesses whose activity is dependent on the domestic market
demand, such as utilities and the financial industry, and adversely affected the
Argentine government's ability to honor its foreign debt obligations.
A further significant devaluation of the peso would have the same negative
impacts on the Argentine government, businesses and financial institutions
operating in Argentina and individuals, as explained above, and would have a
negative impact on us and on Banco Galicia.
A SIGNIFICANT APPRECIATION OF THE PESO COULD ADVERSELY AFFECT ARGENTINA'S
FOREIGN COMPETITIVENESS AND ITS ECONOMIC GROWTH
During 2003 and 2004, the peso recovered a part of its value versus the
dollar. Among other reasons, this appreciation was the result of reduced
imports, increasing exports and the lack of local demand for dollars resulting
from the Argentine government's default on part of its foreign debt as well as
the default by numerous private-sector companies on their payments to foreign
creditors. The Argentine Central Bank prevented the peso from appreciating
further through the purchase of the foreign exchange market surplus. Such policy
did not translate into high inflation due to a strong demand for pesos from the
public.
The emergence of inflationary pressures in early 2005 would prevent the
Argentine Central Bank from continuing to intervene in the foreign exchange
market. As a result, a significant real appreciation of the peso could take
place, due to the need to control inflation. A significant real appreciation of
the peso would adversely affect Argentina's competitiveness and exports and
reduce the Argentine public sector's revenues by reducing tax collection in real
terms, given the strong reliance of the public sector on taxes on exports. The
government would have to identify other sources of revenues or reduce spending
to close the fiscal gap resulting from decreasing export tax receipts. This
would have a negative impact on economic growth. Alternatively, the government
could turn to printing money, which would result in high inflation. Tax
increases and/or inflation could prompt further recessionary pressures. See " --
Inflation may rise from current levels and undermine the economy."
Therefore, a significant appreciation in the value of the peso could have
significant adverse effects on the Argentine economy and on our financial
condition and results of operations. We cannot assure you that future policies
of the Argentine government will be successful in stabilizing the value of the
peso.
THE FOREIGN EXCHANGE MARKET IS SUBJECT TO CONTROLS AND THE ARGENTINE CENTRAL
BANK COULD IMPLEMENT MORE RESTRICTIVE MEASURES THAT COULD PREVENT CERTAIN
FINANCIAL INSTITUTIONS FROM HONORING THEIR DEBT WITH FOREIGN CREDITORS
On December 3, 2001, most transfers of funds abroad to effect payment of
financial indebtedness began to require the prior authorization of the Argentine
Central Bank. Foreign exchange controls were tightened at the beginning of the
second semester of 2002. The existence of such controls and the prevailing
significant surplus in the country's trade balance (which resulted in greater
availability of foreign currency) contributed to the appreciation of the peso
and to the increased availability of foreign currency. As a result, beginning in
November 2002 and throughout 2003 and 2004, the Argentine Central Bank
progressively eased most of the restrictions imposed on the foreign exchange
market.
13
However, certain restrictions still exist that limit access to the foreign
exchange market by residents and non-residents and their ability to make
transfers of foreign currency abroad. For more information on these
restrictions, see Item 4."Information on the Company -- Main Regulatory Changes
in 2002, 2003, and 2004 -- Foreign Exchange Market."
We cannot assure you that the Argentine Central Bank will continue to ease
restrictions on the foreign exchange market or that it will not implement more
restrictive rules in the future. If the Argentine Central Bank implements or
reinstates more restrictive rules, financial institutions, including the Bank,
may face difficulties in making transfers of U.S. dollars abroad for payment of
their financial obligations.
VOLATILITY OF THE REGULATORY ENVIRONMENT COULD CONTINUE TO BE HIGH AND FUTURE
ARGENTINE GOVERNMENTAL POLICIES COULD AFFECT THE ECONOMY AS A WHOLE AS WELL AS
FINANCIAL INSTITUTIONS AND BANCO GALICIA
The Argentine government has historically exercised significant influence
over the economy, and financial institutions in particular have operated in a
highly regulated environment for extended periods of time. Since December 2001,
the Argentine government has promulgated numerous, far-reaching laws and
regulations affecting the economy in general as well as financial institutions
in particular. Laws and regulations currently governing the economy or the
financial sector may continue to change in the future. We cannot assure you that
future changes in the regulatory environment and government policies will not
adversely affect financial institutions in Argentina, including Banco Galicia,
as well as its business, financial condition or results of operations or its
ability to honor its foreign currency - denominated debt obligations. The lack
of a clear and stable regulatory environment imposes significant limitations on
the operation of the banking system, including Banco Galicia, and creates
uncertainties as to our future financial condition and results of operations.
INVESTING IN ARGENTINA ENTAILS MANY OTHER RISKS
Investing in Argentina also involves the following risks:
- civil unrest, rioting, looting, nationwide protests, widespread
social unrest and strikes;
- expropriation, nationalization and forced renegotiation or
modification of existing contracts;
- taxation policies, including royalty and tax increases and
retroactive tax claims; and
- changes in laws and policies of the United States affecting foreign
trade, taxation and investment.
Such events would have a negative impact on the operations of companies
and financial institutions in Argentina and on the market value of the
securities issued by these companies and financial institutions, including us.
RISK FACTORS RELATING TO THE ARGENTINE FINANCIAL SYSTEM
THE RECOVERY OF THE FINANCIAL SYSTEM IS DEPENDENT UPON THE ABILITY OF FINANCIAL
INSTITUTIONS TO REGAIN THE CONFIDENCE OF DEPOSITORS
The range of measures implemented by the Argentine government in the last
quarter of 2001 and during the first half of 2002 undermined the confidence of
depositors and investors in the Argentine financial system and in all financial
institutions. In addition, the measures taken by the Argentine government to
protect the solvency of the banking system generated significant opposition
among depositors frustrated by losses incurred on their savings.
The recovery of the financial system and the Bank depends in part on the
ability of Argentine financial institutions to regain the confidence of
depositors. Although the financial system as a whole has seen a substantial
recovery in deposits (mostly transactional deposits) since 2002, we cannot
assure you that this trend will continue or that the deposit base of the
Argentine financial system, including the Bank's, will not be affected in the
future by
-14-
adverse economic, social and political events. Such volatility will have a
direct impact on the manner in which financial institutions within the financial
system, including the Bank, conduct their business and on their ability to
operate as financial intermediaries.
RECENT ARGENTINE ECONOMIC POLICIES CREATE UNCERTAINTY AS TO THE FUTURE PROFILE
AND ACTIVITIES OF THE BANKING SYSTEM
Immediately after the 2001 and 2002 crisis, the financial system
practically ceased acting as an intermediary between savings and credit. The
depth of the crisis and the effect of the crisis on depositors' confidence in
the financial system create significant uncertainties as to the likelihood that
the financial system will fully recover its ability to act as an intermediary
between savings and credit in the short or medium term. Despite the fact that
loan origination has resumed in 2004, the period of time necessary for the
Argentine financial system's credit activity to return to its pre-crisis levels
remains uncertain and so remains the period of time it will be limited to mostly
providing a narrow range of commercial banking services.
Even though deposits in the financial system and with the Bank resumed
growth in mid-2002, most of these new deposits are either sight or very
short-term time deposits. The increase in deposits, particularly longer term
time deposits, would have to persist over time to allow financial institutions
to rely on deposits as a source of funding capable of supporting an adequate
level of financial intermediation activity. This would require the public to
regain confidence in the Argentine financial system. At the same time, it would
also require an increase in the demand for credit, which is in turn dependent on
the removal of uncertainty regarding Argentina's economic future. We cannot
assure you that these trends will materialize (or, if they do, that these
developments will occur at the requisite pace) so as to allow financial
intermediation activities to resume and attain the volume necessary to improve
the income generation capacity of Argentine financial institutions, including
the Bank.
Under these circumstances, for an undetermined period of time, the scale
of operations of Argentine-based financial institutions, including the Bank,
their business volume, the amount of their assets and liabilities and their
income generation capacity, even if growing could remain lower than pre-crisis
levels.
FINANCIAL INSTITUTIONS' ASSET QUALITY DETERIORATED SIGNIFICANTLY AFTER THE
2001-2002 ECONOMIC CRISIS, AND THE CURRENT IMPROVEMENT IS HIGHLY DEPENDENT ON
THE OVERALL ARGENTINE ECONOMY'S PERFORMANCE
The capacity of Argentine private-sector debtors to repay their loans,
already impaired by the deep and persistent recession that began in the second
half of 1998, deteriorated significantly in 2001 and in 2002, as a result of the
economic crisis and the virtual paralysis in economic activity in late 2001 and
early 2002. Many private sector companies ceased operations or filed for some
form of bankruptcy or reorganization proceeding. In 2003 and 2004, the private
sector recovered and the quality of bank loan portfolios improved significantly.
This was a result of high GDP growth and a better overall economic environment
together with the restructuring of many private sector companies local or
foreign debt. However, in general, this improvement did not fully offset the
deterioration caused by the crisis in the asset quality of financial
institutions with a significant exposure to Argentine debtors and, also, certain
sectors of activity were more favored by the post-crisis relative prices than
others. We cannot assure you that the current improvement of the quality of the
financial system's private-sector loan portfolio will continue or that the
Argentine private sector has fully recovered from the crisis, while full
recovery and future performance remains highly tied to that of the country.
In addition, currently, as a result of the crisis, certain financial
institutions' assets, as well as those of the Bank, include a substantial
exposure to debt instruments of the Argentine public sector. Argentine
public-sector solvency in the long run is uncertain. Although the Argentine
government is current on the Bonos del Gobierno Nacional due August 3, 2012,
issued by the Republic of Argentina ("Boden 2012") and promissory notes and
bonds secured by tax collections known as prestamos garantizados ("secured
loans") and Bonos Garantizados ("secured bonds" or "Bogar") respectively, held
by banks, including the Bank, we cannot assure you that the Argentine government
will be able to service its internal and external debt over the medium and long
terms.
Currently, to a large extent, the value of a large portion of the assets
held by certain Argentine banks, as well as those banks' income generation
capacity, is dependent on the Argentine public sector's repayment capacity,
which is tied, among others on the continuity of economic growth. In addition,
the quality of the portfolio with the
-15-
private sector is also highly dependent on the continuity of economic growth.
Among others, Argentine economic growth depends on the Argentine government's
ability to establish an economic policy that is successful in promoting
sustainable economic growth in the long run. We cannot assure you that economic
growth will continue.
AN INCREASING NUMBER OF JUDGMENTS AGAINST FINANCIAL INSTITUTIONS, IN CONNECTION
WITH THE "CORRALON", MAY RESULT IN FURTHER DETERIORATION OF FINANCIAL
INSTITUTIONS' DEPOSIT BASE AND LIQUIDITY, INCLUDING THOSE OF THE BANK
As a consequence of measures adopted by the Argentine government in
connection with the pesification of deposits originally denominated in dollars
and the restructuring of bank deposits, since the beginning of 2002, individuals
and legal entities have initiated a significant number of legal actions against
financial institutions, including the Bank, on the basis that these measures
violated constitutional and other rights. These actions ("amparo claims")
resulted in a significant withdrawal of deposits from the financial system and
the Bank. Amparo claims have also resulted in significant losses for financial
institutions, including the Bank, because financial institutions have had to
reimburse restructured deposits (mostly dollar-denominated deposits before
pesification) at the market exchange rate rather than at the Ps. 1.4 per U.S.
dollar exchange rate (plus the CER adjustment and interest accrued) at which
deposits were pesified and booked. These losses have been deferred, but
Argentine Central Bank Communique "A" 3916 established that the deferred asset
must be amortized. The Argentine government has not provided compensation for
these losses and has expressed that it does not intend to do so.
Although restructured deposits have decreased significantly as depositors
have exchanged restructured deposits for government bonds and although the peso
has appreciated in the recent months, we cannot assure you that an increasing
number of judgments against financial institutions, including the Bank, will not
be obtained, leading to additional erosion of the deposit base and imposing a
further demand on the liquidity of financial institutions, including the Bank.
NEW LIMITATIONS TO CREDITORS' RIGHTS IN ARGENTINA AND TO THE ABILITY TO
FORECLOSE ON CERTAIN GUARANTEES AND COLLATERAL MAY ADVERSELY IMPACT FINANCIAL
INSTITUTIONS
In 2002, the Argentine government passed various laws and regulations
limiting the ability of creditors to foreclose on collateral and to exercise
their rights pursuant to guarantees and similar instruments upon the occurrence
of a default by a debtor under a financing agreement. Such limitations have
restricted Argentine creditors, such as the Bank, from initiating collection
actions or lawsuits to recover on defaulted loans. Even if these rules ceased to
be applicable, we cannot assure you that the Argentine government will not pass
new rules and regulations restricting the ability of creditors to enforce their
rights pursuant to debt agreements, guarantees and similar instruments.
RISK FACTORS RELATING TO THE BANK
FOR THE FORESEEABLE FUTURE, THE BANK COULD HAVE LIMITATIONS ON ITS ABILITY TO
MANAGE EFFECTIVELY ITS ASSETS AND LIABILITIES SO AS TO MINIMIZE RISKS RESULTING
FROM MISMATCHES IN TERMS OF CURRENCIES AND YIELDS
In the course of implementing the asymmetric pesification, the Argentine
government modified the yields of the assets and the cost of the liabilities
that were pesified. Fixed maximum and minimum interest rates were established
for pesified assets and liabilities, respectively. In addition, the principal of
those assets and liabilities was tied to either the CER or the CVS, and, in most
cases, maturities were extended. The terms and conditions of peso-denominated
assets with the public sector and certain peso-denominated deposits were also
modified.
The amendments and modifications of the Bank's assets and liabilities
resulting from the Argentine government measures to address the economic crisis
have created mismatches between its assets and liabilities in terms of currency
and yield. Even though the Bank has been successful in the restructuring of its
foreign debt and its debt with the Argentine Central Bank, for the foreseeable
future, it will have limitations on its ability to manage effectively its assets
and liabilities so as to minimize risks resulting from mismatches in terms of
currencies and yields. See Item 5. "Operating and Financial Review and Prospects
-- Item 5A. Operating Results -- Currency Composition of Our Balance Sheet" and
Item 4. "Information on the Company -- Main Regulatory Changes in 2002, 2003 and
2004" in this annual report.
-16-
A MAJORITY OF THE BANK'S ASSETS ARE CONCENTRATED IN ARGENTINE PUBLIC-SECTOR DEBT
INSTRUMENTS MAKING THE BANK'S FUTURE FINANCIAL CONDITION STRONGLY DEPENDENT ON
THE ARGENTINE GOVERNMENT CREDIT QUALITY
As of December 31, 2004, the Bank's exposure to the Argentine public
sector, including the Compensatory and Hedge Bonds (Boden 2012 received or to be
received by the Bank in accordance with applicable regulations as compensation
for the asymmetric pesification) amounted to Ps. 16,790.6 million, representing
71.6% of its total assets. Consequently, the value of the Bank's assets, its
income and cash flow generation capacity and future financial condition are
heavily dependent on the Argentine government's ability to comply with its
payment obligations. In turn, the ability of the Argentine government to comply
with its payment obligations with respect to such public-sector instruments is
dependent on, among other things, its ability to establish an economic policy
that is successful in promoting sustainable economic growth in the long run.
In addition, although there is a trading market for the Boden 2012, the
Bank may be limited in its ability to dispose of many of its public-sector
assets.
ARGENTINE CENTRAL BANK RULES LIMITING THE AMOUNT OF A BANK'S EXPOSURE TO
ARGENTINE PUBLIC-SECTOR DEBT TO A PERCENTAGE OF ITS ASSETS AS OF JANUARY 1,
2006, COULD FORCE THE BANK TO DISPOSE OF CERTAIN OF SUCH INSTRUMENTS AND/OR
SIGNIFICANTLY INCREASE ITS CAPITALIZATION
Argentine Central Bank's Communique "A" 3911, dated March 28, 2003,
established, among others, that a bank's total exposure to Argentine
public-sector debt instruments as of January 1, 2006 must not exceed 40% of its
total assets as of such date. Any excess over the established limit requires an
additional minimum capital requirement for an amount equal to the excess. The
Communique does not specify which assets are included in determining compliance
with the rule.
Certain sections of Communique "A" 3911 and other Argentine Central Bank
regulations take into account the effects of the 2001-2002 crisis on banks
exposure to public-sector assets and therefore exclude certain of these assets
for compliance with different prudential regulatory requirements, in recognition
of the fact that most Argentine public-sector assets held by banks are (i)
either assets acquired prior to the 2001-2002 crisis which have been
restructured or continue to be in payment default; or (ii) assets that have been
recorded by financial institutions as compensation for the negative effects of
certain government measures taken to mitigate the 2001-2002 crisis.
Currently, the Bank's exposure to Argentine public-sector assets exceeds
the maximum percentage established for a bank's total exposure to such risk as
of January 1, 2006, under the general guidance of Communique "A" 3911. Once the
Argentine Central Bank sets specific guidelines for determining compliance with
the rule, it is possible that the Bank's excess over 40% may be even greater and
the Bank could be forced to dispose of certain of its public-sector assets or
significantly increase its capitalization, in order to comply with such rule by
January 1, 2006.
THE BANK HAS RECORDED BODEN 2012 AND ITS RIGHTS TO RECEIVE OR ACQUIRE BODEN 2012
AS ASSETS HAVING A VALUE EQUAL TO THE FACE AMOUNT OF THE BODEN 2012 RECEIVED OR
TO BE RECEIVED AND ACQUIRED, WHICH DOES NOT REFLECT ITS ACTUAL MARKET VALUE
Although, in accordance with Argentine Central Bank accounting rules, the
Bank has recorded the Boden 2012 already received and its right to acquire Boden
2012 in the future as assets having a value equal to 100% of the face value of
such Boden 2012, the market value of these assets is significantly lower. The
Boden 2012 are unsecured debt obligations of the Argentine government, which has
recently restructured a substantial portion of its indebtedness. As of May 20,
2005, the Boden 2012 were not rated and were trading in the secondary market at
a price of approximately US$ 87.18 for every US$ 100 of face value.
THE BODEN 2012 MAY BE SUBJECT TO SUBSEQUENT RENEGOTIATION
The Argentine government completed the offer to restructure most of its
foreign debt on February 25, 2005 with a 76% participation rate from creditors.
We cannot assure you that its financial resources will be sufficient to fulfill
its payment obligations associated with the new debt to be issued as a
consequence of such foreign debt
-17-
restructuring as well as with current outstanding Argentine government debt,
especially in the absence of an agreement with the IMF that contemplates the
refinancing of Argentina's debt with such institution. Therefore, we cannot
assure you that such a situation will not ultimately result in a requirement or
decision by the Argentine government to restructure the Boden 2012 on terms less
favorable than those currently in place.
THE VALUE AT WHICH THE BANK HAS RECORDED DISCOUNT BONDS IN PESOS, WHICH IT
ELECTED TO RECEIVE IN EXCHANGE OF ITS HOLDINGS OF ARGENTINE REPUBLIC EXTERNAL
NOTES, DOES NOT REFLECT THE REDUCTION IN PRINCIPAL ESTABLISHED BY THE TERMS AND
CONDITIONS OF THE ARGENTINE GOVERNMENT'S EXCHANGE OFFER
The Argentine Republic External Notes (the "External Notes") were eligible
for the debt exchange carried out by the Argentine Government to restructure its
defaulted foreign debt, which closed on February 25, 2005. As of December 31,
2004, and as a consequence of the Bank's decision in January 2005, to tender its
holdings of External Notes (US$ 280.5 million of face value), the External Notes
were recorded, in accordance with Argentine Central Bank's valuation rules, for
Ps. 749.7 million. The Bank opted to exchange its External Notes for
Peso-Denominated Discount Bonds and GDP-Linked Units in an offer not subject to
proration. As part of the terms of this exchange option, we will receive new
debt instruments for a principal amount equal to 33.7% of the eligible debt. The
settlement of the exchange offer has been postponed due to an attachment by a
New York court on the old debt tendered by participant creditors at the request
of non-participating creditors. A New York appeals court overruled the
attachment on May 13, 2005 and remanded to the lower court, which removed the
last pending legal obstacle to completion of the deal. The settlement process
commenced on May 24, 2005, the completion of which is pending.
In order to reduce the impact on bank balance sheets of participating in
the exchange offer, the Argentine Central Bank, through Communique "A" 4270,
allowed the aforementioned Peso-denominated Discount Bonds and the GDP-Linked
Units to be recorded at the lowest of : (i) the carrying value in accordance
with the prevailing valuation rules; and (ii) the total future nominal cash
payments up to maturity specified by the terms and conditions of the new
securities. This valuation will be reduced in the amount of the perceived
service payments and accrued interest will not be recognized.
After the close of fiscal year 2004, in accordance with Communique "A"
4270, the Peso-denominated Discount Bonds and the GDP-Linked Units to be
received by the Bank when and if the exchange is settled, have been recorded by
the Bank at their carrying value, substantially the same as of December 31,
2004, which valuation does not reflect the abovementioned 66.3% debt reduction.
The new bonds have not yet been issued and a formal secondary market for these
securities does not currently exist. Trading of the new securities has not been
allowed in the local market since March 2005, but certain trading took place
before that date and in foreign markets, at prices between 90% and 95% of face
value.
THE LACK OF COMPENSATION TO FINANCIAL INSTITUTIONS FOR CERTAIN LOSSES GENERATED
BY THE ARGENTINE GOVERNMENT'S ECONOMIC POLICY HAS BEEN AND WILL CONTINUE TO BE
DETRIMENTAL TO THEIR FINANCIAL CONDITION, INCLUDING THAT OF THE BANK
Certain measures taken by the Argentine government to address the economic
crisis in 2002 resulted in significant losses to the financial system. In
response, the Argentine authorities allowed financial institutions to seek
compensation from the government for some but not all of those losses. To date,
the Argentine government has not recognized claims brought by financial
institutions for losses resulting from amparo claims and has enacted regulations
under Law No. 25,796, which provide compensation for the negative effects
on financial institutions' financial condition arising from the asymmetric
indexation which, in the Bank's opinion, are contrary to such law's provisions.
With respect to the differences generated by the payments by the Bank
pursuant to amparo claims, as of December 31, 2004, the Bank had recorded an
intangible asset amounting to Ps. 451.4 million, net of the amortization
mandated by the Argentine Central Bank, on account of its right to receive
compensation for having had to make payments pursuant to judicial orders
relating to the amparo claims for amounts higher than those provided for by the
pesification decrees. The Argentine government has not provided compensation for
these losses and has expressed that it does not intend to do so. The accumulated
amortization of the difference for amparo claims in 2004 and 2003 totaled Ps.
198.9 million.
-18-
In respect of the compensation for the asymmetric indexation, based on the
provisions of Law No. 25,769, as of December 31, 2003, the Bank had recorded Ps.
102.7 million under "Other Receivables Resulting from Financial Intermediation"
on account of its right to receive compensation from the Argentine government.
Given that (i) the Argentine government enacted regulations under Law No. 25,796
which, in the Bank's opinion, are contrary to such law's provisions; (ii) no
resolution was taken regarding the Bank reiteration in May 2004 of its claim for
compensation made on December 30, 2003; and (iii) the Bank did not participate
in the compensation system as established by the Argentine government, this
asset was written off in 2004.
See Item 4. "Information on the Company -- Main Regulatory Changes in
2002, 2003 and 2004 -- Compensation to Financial Institutions -- For the
Asymmetric Indexation and for Differences Related to Amparo Claims" and Item 4.
"Information on the Company -- Argentine Banking System and Regulation --
Argentine Banking Regulation -- Treatment of Losses in Connection with Amparo
Claims."
We cannot assure you that the Argentine government will provide
compensation to financial institutions, such as the Bank, for any such losses.
The failure of the Argentine government to compensate for these losses has had
and will continue to have a negative effect on our financial condition.
THE COVENANTS UNDER THE BANK'S NEW DEBT AGREEMENTS RESTRICT ITS ABILITY TO TAKE
SOME ACTIONS
The new loan agreements and indenture entered into by the Bank as part of
its foreign debt restructuring, include a number of covenants that, among other
things, will restrict the Bank's ability to:
- pay dividends on stock or purchase its stock or the stock of its
subsidiaries;
- make certain types of investments;
- use the proceeds of the sale of certain assets or the issuance of
debt or equity securities;
- engage in certain transactions with affiliates; and
- engage in non-financial business activities.
Some of these agreements also require the Bank to maintain specified
financial ratios. A breach of any of these covenants or the Bank's inability to
maintain the required ratios could result in a default in respect of the related
indebtedness. In the event of a default, the relevant lenders could elect, among
other options, to declare the indebtedness, together with accrued interest and
other fees, to be immediately due and payable.
FAILURE BY GALICIA URUGUAY TO REPAY DEPOSITS RESTRUCTURED IN 2002 IN ACCORDANCE
WITH THEIR TERMS COULD ADVERSELY AFFECT THE CONFIDENCE OF OUR DEPOSITORS
Since January 2003, Galicia Uruguay has paid all of the installments
contemplated in the deposit restructuring agreement reached with its creditors
in December 2002, and in September 2003 and March 2004, Galicia Uruguay
completed two offers to exchange restructured deposits for cash, new negotiable
obligations it issued and Boden 2012. As a result, the amount of Galicia
Uruguay's consolidated indebtedness to its depositors had declined as of
December 31, 2004, by approximately 60% of the original restructured amount.
A third exchange, that is currently in progress, of restructured deposits
(including those restructured as negotiable obligations) for cash and Boden 2012
has been offered by Galicia Uruguay to its depositors. The transfer of these
Boden 2012 held by the Bank in Argentina to Galicia Uruguay to settle the
exchange is subject to the prior approval of the Argentine Central Bank.
The failure by Galicia Uruguay to honor its remaining restructured
liabilities on a timely basis would likely have a significant negative impact on
the Bank's operations in Argentina, with a loss of reputation, customers and
deposits, given that the two banks share their customer base to a certain
extent. In such an event, our financial condition and results of operations
would likely be materially and adversely affected.
-19-
THE BANK'S FUTURE BUSINESS ACTIVITIES MAY BE SUBSTANTIALLY DIFFERENT THAN THOSE
UNDERTAKEN BY THE BANK HISTORICALLY
As a result of the political and economic crisis in Argentina that began
in late 2001 and the significant adverse effects that such crisis had on the
Bank and other financial institutions operating in Argentina, we cannot assure
you that the Bank will be able to undertake the same type of business activities
in the future or maintain the same level of market activity that it enjoyed in
periods prior to December 2001. Therefore, the Bank's future business
activities, as well as the levels of those business activities, and the Bank's
market share may differ substantially from its business and levels at December
31, 2001, or in pre-crisis periods.
IT MAY BE DIFFICULT FOR THE BANK TO FULLY OVERCOME ALL OF THE RESIDUAL NEGATIVE
EFFECTS OF THE 2001-2002 CRISIS
The current economic situation in Argentina makes it difficult to predict
whether the Bank will be able to increase fee income and loan origination to the
private sector so as to generate sufficient increased financial revenue and
income from services in order for operating results to more than offset its
losses from the valuation of public sector assets in accordance with Argentine
Central Bank rules and the amortization of amparo claims. Demand for fee-related
products and services as well as for credit is increasing in Argentina, together
with the improved situation of the economy and the Argentine private sector, but
the economy as a whole and the relevant markets have not stabilized enough to be
certain that demand will continue to grow or will grow at the necessary pace.
Therefore, we cannot assure you that the Bank will in fact be able to increase
its operating results in the required amount or at the required pace or that
continuing or new events in Argentina will not adversely affect the Argentine
economy so as to call into question the Bank's ability to continue to improve
its financial conditions and results of operations.
ITEM 4. INFORMATION ON THE COMPANY
ORGANIZATION
We were incorporated on September 14, 1999, as a stock corporation (a
"sociedad anonima") under the laws of Argentina. Our domicile is in Buenos
Aires, Argentina. Under our bylaws, our corporate duration is until June 30,
2100. Our duration can be extended by resolution taken at a general
extraordinary shareholders' meeting. Our principal executive offices are located
at Teniente General Juan D. Peron 456, Second Floor, (1038) Buenos Aires,
Argentina. Our telephone number is (54-11) 4343-7528.
Our agent for service of process in the United States is C T Corporation
System, presently located at 111 Eighth Avenue, 13th Floor, New York, New York
10011.
ORGANIZATIONAL STRUCTURE
The following table illustrates our organizational structure as of
December 31, 2004. Percentages indicate the ownership interests held. All of the
companies shown in the chart are incorporated in Argentina, except for:
[-] Galicia Uruguay, incorporated in Uruguay and currently not an operating
financial institution;
[-] Galicia Pension Fund Ltd. and Banco de Galicia (Cayman) Ltd. (in
provisional liquidation) ("Galicia Cayman"), incorporated in the Cayman
Islands and currently in provisional liquidation;
[-] Net Investment BV (Netherlands), incorporated in the Netherlands (in
provisional liquidation); and
[-] Tradecom International, incorporated in the Netherlands (in provisional
liquidation).
Since February 13, 2002, Galicia Uruguay's activities have been suspended
and in June 2004, the Uruguayan authorities resolved to maintain the
authorization to operate granted by the Executive Branch of this country and to
revoke the authorization to operate as a commercial bank granted by the Central
Bank of Uruguay. See " -- Business Overview -- Banco Galicia -- Banco Galicia
Uruguay S.A. and Banco de Galicia (Cayman) Ltd. (in provisional liquidation)."
Equity Interests as of December 31, 2004, Held by (in %)
--------------------------------------------------------------------------------------------
Galicia Cayman
Ltd. (In Tarjetas Sudam. Galicia
Grupo Banco Galicia Provisional Regionales Holding Pension
Galicia Galicia Uruguay Liquidation) S.A. S.A. Fund Ltd.
------------------------------------------------------------------------------------------------------------------------------------
Banco Galicia ....................... 93.59% -- -- -- -- -- --
Galicia Uruguay ..................... -- 100.00% -- -- -- -- --
Galicia Cayman Ltd. .................
(In Provisional Liquidation) ....... -- 34.66 65.34% -- -- -- --
Galicia Pension Fund Ltd. ........... -- -- -- 100.00% -- -- --
Galicia Administradora de
Fondos S.A ......................... -- -- -- -- -- -- 99.99%
Galicia Capital Markets S.A ......... -- 99.99 -- -- -- -- --
Galicia Valores S.A ................. -- 99.99 -- -- -- -- --
Galicia Factoring y Leasing S.A ..... -- 99.98 -- -- -- -- --
Agro Galicia S.A .................... -- 99.00 -- -- -- -- --
Banelco S.A ......................... -- 18.95 -- -- -- -- --
Galicia Inmobiliaria S.A ............ -- 12.50 -- -- -- -- --
Tarjetas Regionales S.A ............. -- 68.22 31.78 -- -- -- --
Tarjeta Naranja S.A ................. -- -- -- -- 80.00% -- --
Tarjetas Cuyanas S.A ................ -- -- -- -- 60.00 -- --
Tarjetas del Mar S.A ................ -- -- -- -- 99.99 -- --
Galicia Warrants S.A ................ 87.5 12.5 -- -- -- -- --
Sudamericana Holding S.A ............ 87.5 12.5 -- -- -- -- --
Galicia Vida Compania de
Seguros S.A ........................ -- -- -- -- -- 99.99% --
Galicia Retiro Compania de
Seguros S.A ........................ -- -- -- -- -- 99.99 --
Instituto de Salta Seguros de
Vida S.A ........................... -- -- -- -- -- 99.99 --
Medigap Salud S.A ................... -- -- -- -- -- 99.99 --
Sudamericana Asesores de
Seguros S.A ........................ -- -- -- -- -- 99.97 --
Galicia Patrimoniales
Compania de Seguros S.A ............ -- -- -- -- -- 99.99 --
Net Investment S.A .................. 87.5 12.5 -- -- -- -- --
B2 Agro S.A ......................... -- -- -- -- -- -- --
Net Investment BV
(Netherlands) in Liquidation ....... -- -- -- -- -- -- --
Tradecom International
(Netherlands) in Liquidation ....... -- 10.48 -- -- -- -- --
Tradecom Argentina S.A .............. -- -- -- -- -- -- --
Tradecom Brasil ..................... -- -- -- -- -- -- --
Privatized Companies ................ -- (1) -- -- -- -- --
Other Subsidiaries .................. -- (2) -- -- -- -- --
------------------------------------- ------ ------ ------ ------ ------ ------ ------
Equity Interests as of December 31, 2004, Held by (in %)
--------------------------------------------------------
Net
Net Investment BV Tradecom Int.
Investment (Netherlands) (Netherlands)
S.A. in Liquidation in Liquidation
-------------------------------------------------------------------------------------
Banco Galicia ....................... -- -- --
Galicia Uruguay ..................... -- -- --
Galicia Cayman Ltd. .................
(In Provisional Liquidation) ....... -- -- --
Galicia Pension Fund Ltd. ........... -- -- --
Galicia Administradora de
Fondos S.A ......................... -- -- --
Galicia Capital Markets S.A ......... -- -- --
Galicia Valores S.A ................. -- -- --
Galicia Factoring y Leasing S.A ..... -- -- --
Agro Galicia S.A .................... -- -- --
Banelco S.A ......................... -- -- --
Galicia Inmobiliaria S.A ............ -- -- --
Tarjetas Regionales S.A ............. -- -- --
Tarjeta Naranja S.A ................. -- -- --
Tarjetas Cuyanas S.A ................ -- -- --
Tarjetas del Mar S.A ................ -- -- --
Galicia Warrants S.A ................ -- -- --
Sudamericana Holding S.A ............ -- -- --
Galicia Vida Compania de
Seguros S.A ........................ -- -- --
Galicia Retiro Compania de
Seguros S.A ........................ -- -- --
Instituto de Salta Seguros de
Vida S.A ........................... -- -- --
Medigap Salud S.A ................... -- -- --
Sudamericana Asesores de
Seguros S.A ........................ -- -- --
Galicia Patrimoniales
Compania de Seguros S.A ............ -- -- --
Net Investment S.A .................. -- -- --
B2 Agro S.A ......................... 99.99% -- --
Net Investment BV
(Netherlands) in Liquidation ....... 100.00 -- --
Tradecom International
(Netherlands) in Liquidation ....... -- 16.19% --
Tradecom Argentina S.A .............. -- -- 99.99%
Tradecom Brasil ..................... 1.78 -- 52.17
Privatized Companies ................ -- -- --
Other Subsidiaries .................. -- -- --
------------------------------------- ------ ------ ------
-20-
(1) Aguas Provinciales de Santa Fe S.A. 12.5%; Inversora Diamante S.A. 12.5%;
Electrigal S.A. 12.5%; Inversora Nihuiles S.A. 12.4991%; Correo Argentino
S.A. 11.77%; Aguas Cordobesas S.A. 10.833%; Aguas Argentines S.A. 8.26%;
A.E.C. S.A. 6.965%.
(2) Coelsa 6.2797%; Alfer S.A. 9.8024%; Corporacion Financiera S.A. 9.09%;
Interbanking S.A. 8.33%; Seguros de Depositos S.A. ("Sedesa") 5.7954%;
Finanban S.A. 6.67%; Argencontrol S.A. 5.766%; Visa 5.0%; Mercado Abierto
Electronico S.A. 1.4851%; AIG-GE Capital Latin American Infrastructure Fund
LP 1.480289902%; Banco Latinoamericano de Exportaciones S.A. 0.10%;
S.W.I.F.T. S.C. 0.02%.
When we refer to our business or when we use the terms "Grupo Galicia" or
the "Group," we mean the businesses of Grupo Galicia (the holding company),
Galicia Warrants S.A., Sudamericana Holding S.A. and its subsidiaries, Net
Investments S.A. and its subsidiaries, and Banco Galicia consolidated with
Galicia Uruguay and its subsidiaries, Tarjetas Regionales S.A. and its
subsidiaries, and the following consolidated subsidiaries: Galicia Valores S.A.
Sociedad de Bolsa, Galicia Capital Markets S.A. and its subsidiaries, Galicia
Factoring y Leasing S.A. and AgroGalicia S.A. (collectively, the "Bank" or
"Banco Galicia").
HISTORY
We were formed as a financial services holding company to hold all of the
shares of capital stock of Banco Galicia held by members of the Escasany, Ayerza
and Braun families. We were formed with an initial nominal capital of 24,000
common shares, 12,516 of which were designated class A shares and 11,484 of
which were designated as class B shares. Following the formation of Grupo
Galicia, the holding companies which held the shares in Banco Galicia on behalf
of the Escasany, Ayerza and Braun families were merged into Grupo Galicia.
Following the merger, we held 46.34% of the outstanding shares of Banco Galicia.
Simultaneously with the merger, we increased our capital 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 Galicia.
On May 16, 2000, we held an extraordinary shareholders' meeting during
which the shareholders unanimously approved a capital increase of up to Ps.
628,704,540 and approved the public offering and listings of our class B shares.
All of the new common shares were designated as class B shares, with a par value
of Ps. 1.00. During this extraordinary shareholders' meeting, all of our
existing shareholders waived their preemptive rights in order to establish the
basis for the exchange offer of our shares for Banco Galicia shares. At the same
shareholders' meeting, the shareholders determined that the exchange ratio for
the exchange offer would be one class B share of Banco Galicia for 2.5 of our
class B shares and one ADS of Banco Galicia for one of our ADSs. We completed
the exchange offer in July 2000 with a capital increase of Ps. 549,407,017. At
the completion of the exchange offer, our only significant asset was our 93.23%
interest in Banco Galicia. By the end of 2004, our interest was 93.59% as a
result of open-market purchases.
On January 2, 2004, we held an extraordinary shareholders' meeting during
which our shareholders approved a capital increase (that would increase our
capital up to Ps.1,241,407,017), through the issuance of up to 149,000,000
preferred shares, each of them mandatorily convertible into one of our class B
shares on the first anniversary date of issuance (or, if earlier, on the
occurrence of a change in control) to be exchanged for up to US$ 100.0 million
of face value of subordinated notes to be issued by the Bank to its creditors in
the restructuring of the foreign debt of its Head Office in Argentina and its
Cayman Branch, or cash from a preemptive and accretion rights offering to our
shareholders. On May 13, 2004, we issued 149,000,000 preferred non-voting
shares, with preference over the ordinary shares in the event of our
liquidation, each with a face value of one peso. The preferred shares were
converted into Class B shares on May 13, 2005. See " -- Restructuring of our
Subsidiaries' Debt -- Banco Galicia -- Restructuring of the Foreign Debt of the
Bank's Head Office in Argentina and its Cayman Branch -- Terms of the Foreign
Debt Restructuring."
We are a holding company whose corporate purpose is exclusively related to
financial services and investment. Under our bylaws, we may not carry out
transactions described in the Financial Entities Law (Ley de Entidades
Financieras). Therefore, it is not our intention to compete with Banco Galicia.
Rather, we seek to broaden and complement Banco Galicia's operations and
businesses through holdings in companies and undertakings whose objectives are
related to financial activities. Consequently, we operate in financial and
related
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activities that Banco Galicia cannot carry out or in which it can only
participate in a limited way or in those activities that would not be profitable
for the Bank due to current regulations.
In September 2000, we acquired 87.5% of the capital stock and voting
rights of Net Investment S.A., a company in which Banco Galicia holds the
remaining 12.5% interest.
In December 2000, we acquired 37.5% Sudamericana Holding S.A., while Banco
Galicia purchased 12.5%.
In August 2001, we acquired 87.5% of the capital stock and voting rights
of Galicia Warrants S.A., a company in which Banco Galicia holds the remaining
12.5% interest.
In September 2001, we made a new investment in the insurance business by
acquiring from Hartford Life International Ltd. (U.S.A.) and Hartford Life Ltd.
(Bermuda) 50% of the capital stock and voting rights of Sudamericana Holding
S.A. As a result of this transaction, we increased our interest in that company
to 87.5%, while the remaining 12.5% continues to belong to Banco Galicia.
In January 2005, we created Galval Agente de Valores S.A. ("Galval"), a
securities broker based in Uruguay, with the purpose of providing trading and
custody services. We own 100% of the capital and voting rights of this
subsidiary which was authorized by the relevant controlling authorities and, as
of the date of this annual report, has not yet performed any kind of activities.
RESTRUCTURING OF OUR SUBSIDIARIES' DEBT
Banco Galicia
As a result of the liquidity crisis experienced by the Argentine financial
system and the Bank in late 2001 and early 2002, the Bank defaulted on its
foreign debt in June 2002, which debt was restructured in May 2004. In 2004, the
Bank also restructured debt with the Argentine Central Bank acquired during the
2001-2002 crisis. The Argentine crisis also affected the Bank's New York Branch
and its subsidiaries Galicia Uruguay and Galicia Cayman (in provisional
liquidation), the debt of which was also restructured between 2002 and 2003.
Approval of the Bank's Foreign Debt Restructuring and Argentine Central
Bank Debt Restructuring
In accordance with Argentine Central Bank Communique "A" 3940, in order
for a bank to be eligible to restructure the financial assistance received from
the Argentine Central Bank during the 2001-2002 crisis into long-term debt under
the terms established by Decree No. 739/03 and No. 1262/03, the Argentine
Central Bank had to approve the terms and conditions of the bank's foreign debt
restructuring proposal before December 5, 2003.
On December 3, 2003, the Argentine Central Bank informed the Bank that its
board of directors had approved the terms and conditions of the proposed
restructuring of the foreign debt of the Bank's Head Office and the Bank's
Cayman Branch.
On February 3, 2004, the Argentine Central Bank informed the Bank that it
had approved the Bank's request to adhere to the regime (established by Decree
No. 739/03 and modified by Decree No. 1262/03) for the repayment of the debt for
liquidity support owed to the Argentine Central Bank, as well as the
amortization schedule for that debt proposed by the Bank. The schedule was based
on the minimum amortization set up by the applicable rules and on the proceeds
of the assets eligible as collateral for such debt pursuant to these rules.
Therefore, the schedule contemplates repayment of the restructured debt in 92
monthly installments beginning in March 2004.
By Resolution No. 152/04, dated May 14, 2004, the Argentine Central Bank
approved the economic terms of the restructuring of the foreign debt of the
Bank's head office in Argentina and its Cayman Branch.
Restructuring of the Foreign Debt of the Bank's Head Office in Argentina
and its Cayman Branch
-22-
On November 25, 2003, the Bank announced that it had reached a nonbinding
agreement in principle with the members of an ad-hoc steering committee
representing the Bank's principal bank and multilateral agency creditors
regarding terms for the proposed restructuring. We refer to these bank and
multilateral agency creditors as "bank creditors" below.
In December 2003, the Bank announced the restructuring terms to its bank
creditors and bondholders. The Bank offered its bank creditors and bondholders
instruments with substantially similar economic terms. The instruments delivered
to the bondholders, however, were issued under an indenture, and the instruments
issued to the bank creditors were issued under various loan facilities that
contain additional covenants not included in the indenture.
On May 18, 2004, the Bank successfully closed the restructuring of US$
1,320.9 million of the foreign debt of its Head Office in Argentina and its
Cayman Branch. This amount represented 98.2% of the foreign debt eligible for
restructuring.
On July 1, 2004 and on January 1, 2005, the Bank made the semiannual
interest payments on the debt instruments issued as a result of the
restructuring of its foreign debt closed in May 2004 and, as of the date hereof,
has fully repaid all of the trade debt restructured.
Terms of the Foreign Debt Restructuring
In the Bank's foreign debt restructuring, the Bank offered its bondholders
and bank creditors the ability to exchange their existing debt for units
comprised of a new long-term debt instrument maturing in 2014 and a new
subordinated debt instrument maturing in 2019 in a par-for-par first step
exchange offer. The bondholders and bank creditors were then given the option to
participate in a second step to the exchange, in which they could receive for
their units:
- cash (at a discount) (the "cash offer");
- Boden 2012 (at a discount) (the "Boden offer");
- new long-term debt instruments (at par); or
- new medium-term debt instruments (at par) and up to 149 million
preferred shares of our preferred shares (or, instead of such
shares, cash, if any, paid to us by existing shareholders electing
to subscribe for our preferred shares in a preemptive rights
offering) (the "equity participation option").
In addition, creditors that agreed to sign firm commitments to the Bank
for new trade facilities in an aggregate principal amount up to US$ 35 million
were permitted to elect to receive new medium-term debt instruments maturing in
2010 (at par) (the "new money option").
Each of the optional second-step offers was subject to proration.
By offering the units, which contained a subordinated component, in the
par-for-par first step exchange offer, the Bank's main objective was to generate
complementary regulatory capital for an extended period. The second step was
intended to satisfy creditors' varying investment preferences.
To make the Bank's foreign debt restructuring possible:
- We approved a capital increase through the issuance of up to 149
million preferred shares, each of them mandatorily convertible into
one of our class B shares on May 13, 2005, the first anniversary
date of issuance (or, if earlier, on the occurrence of a change of
control of Grupo Galicia). As a result of the exercises made by the
existing shareholders in our preemptive rights offering, creditors
opting for the equity participation offer received 87.8 million
preferred shares and US$ 30 million in cash and we received US$ 100
million of subordinated bonds in exchange for those shares and cash.
We issued the 149 million preferred shares on May 13, 2004.
-23-
- Our controlling shareholders assigned part of their preemptive and
accretion rights to a trust established for the benefit of the
Bank's creditors.
- We entered into a registration rights agreement for the benefit of
the holders of our preferred shares in the United States in which we
agreed to (1) file a shelf registration statement with the SEC
covering the resale of those restricted preferred shares within 180
days of the issue date of the preferred shares; (2) use our
reasonable best efforts to cause the shelf registration statement to
become effective no later than June 1, 2005; and (3) use our
reasonable best efforts to keep the shelf registration statement
effective from on or before June 1, 2005, until the date on which
all of the restricted preferred shares have been sold under the
shelf registration statement or September 30, 2005, whichever comes
first.
- We entered into an agreement with the Bank's bank creditors in which
we agreed to maintain certain corporate governance standards and to
provide them with certain financial information and reports on a
quarterly and annual basis.
In addition, in accordance with the terms of the Bank's foreign debt
restructuring, the Bank made a US$ 15.5 million cash payment for interest
accrued until April 30, 2002, and applied US$ 42.4 million not used in the cash
offer to prepay at par (plus capitalized interest) long-term instruments to be
delivered to creditors participating in the restructuring.
Based on the final amounts validly tendered, on May 18, 2004, the Bank:
- paid US$ 13.6 million to creditors participating in the cash offer;
- transferred US$ 36.9 million of nominal value of Boden 2012 to
creditors participating in the Boden offer; and
- issued the following new debt instruments:
- US$ 648.5 million of long-term dollar-denominated debt instruments,
of which US$ 464.8 million were dollar-denominated negotiable
obligations due 2014 issued under the indenture.
- US$ 399.8 million of medium-term dollar-denominated debt
instruments, of which US$ 352.8 million were dollar-denominated
negotiable obligations due 2010 issued under the indenture.
- US$ 230.0 million of subordinated dollar-denominated debt
instruments, of which US$ 218.2 million were dollar-denominated
negotiable obligations due 2019 issued under the indenture.
The Bank also restructured trade debt for a principal amount of US$ 25.3
million in exchange for US$ 26.6 million of new trade debt to be repaid in 12
equal, consecutive monthly installments beginning in June 2004 and ending in May
2005.
In addition, the Bank entered into a new trade facility agreement for US$
35 million with creditors participating in the new money option.
The following table shows certain information on the Bank's debt
restructuring:
PRINCIPAL AMOUNT OF: IN US$ MILLIONS
-------------------- ---------------
a) Old debt to be restructured as of December 31, 2003............................. U.S.$ 1,349.6
b) Old debt to be restructured as of April 27, 2004 (1)............................ 1,344.7(2)
c) Old debt participating in the restructuring as of April 27, 2004 (1)............ 1,320.9
d) New debt, including past due interest capitalized (3) (4)....................... 1,399.6
e) New debt issued (4) (5)......................................................... 1,278.3
f) Old debt not restructured as of May 18, 2004 (6)................................ 22.9(7)
g) Old debt not restructured as of December 31, 2004 12.5
-24-
(1) Expiration date of the exchange offer.
(2) The decrease in the principal amount of debt to be restructured as compared
to December 31, 2003, resulted from the fact that, in accordance with
Argentine law, borrowers that were also holders of certain of the Bank's
debt instruments under restructuring used such holdings to repay past-due
loans granted to them by the Bank.
(3) Interest past due between May 1, 2002, and December 31, 2003, was
capitalized at 4.75% per annum, except for trade debt for a principal amount
of US$ 25.3 million for which interest was capitalized at Libor plus 1%.
Interest past due until April 30, 2002, was paid in cash.
(4) Excludes trade debt.
(5) After having applied US$ 42.4 million not used in the cash offer to prepay
long-term debt instruments included in (d).
(6) Settlement date of the exchange offer.
(7) Between the expiration date and the settlement date, the amount of debt not
restructured decreased by US$ 0.9 million as a result of the repayment by
borrowers that were also holders of debt subject to restructuring of
past-due loans made to them by the Bank by using their holdings of such debt
and, to a lesser extent, as a result of the renegotiation of debt not
restructured under the terms of the restructuring.
For a description of the debt instruments issued in the restructuring, see
Item 5."Operating and Financial Review and Prospects -- Item 5A.Operating
Results -- Contractual Obligations."
Restructuring of the Bank's New York Branch Debt
In mid 2002, the Bank restructured the liabilities of its New York Branch,
which then totaled US$ 328 million. This step was necessary to ensure the
orderly winding down of the affairs of the New York Branch, which was closed on
January 30, 2003. As of the date of this annual report, US$ 116 million in
aggregate principal amount of two negotiable obligations issued by the Bank's
Head Office in Argentina to restructure the New York Branch debt are
outstanding.
Capitalization
As a result of the restructuring of the foreign debt of the Bank's Head
Office in Argentina and its Cayman Branch, the Bank increased its regulatory
capital by US$ 278.9 million. Specifically, this capital increase resulted from:
- the exchange of debt subject to restructuring for cash and Boden
2012 at a discount and the capitalization of interest at a rate
lower than the contractual rate recorded in the Bank's books, which
generated in aggregate a US$ 48.9 million increase in shareholders'
equity; and
- the issuance of US$ 230.0 million of subordinated debt computable as
supplemental capital in accordance with the Argentine Central Bank's
capital adequacy rules.
As a result of the earlier restructuring of the debt of the Bank's New
York Branch in 2002, the Bank had increased its capitalization by US$ 42.6
million by exchanging the old debt for new debt or cash at a discount.
Banco Galicia Uruguay S.A. and Banco de Galicia (Cayman) Ltd.(in provisional
liquidation)
Galicia Uruguay
As of December 31, 2004, Galicia Uruguay was intervened by the Central
Bank of Uruguay and its activities were suspended. The Central Bank of Uruguay
imposed this status in early 2002 as a result of the effects of the Argentine
crisis on Galicia Uruguay, but postponed its effect until May 31, 2004. On June
1, 2004, Galicia Uruguay's license to operate as a domestic commercial bank was
revoked by the Central Bank of Uruguay. However, Galicia Uruguay retained the
authorization to operate that had been granted to it by the Executive Branch of
the Uruguayan government.
On December 23, 2002, Galicia Uruguay restructured its deposits with a
high degree of participation by its depositors, exceeding the legal majority
required under Uruguayan law. The restructuring became binding on all creditors
once approved by a court in Montevideo on that date. The restructuring provided
for an initial cash payment in dollars equivalent to 3% of the credit balance of
each creditor. The remaining balances were to be paid, at the particular
creditor's election, in time deposits or negotiable obligations issued by
Galicia Uruguay, both
-25-
maturing in September 2011, with principal amortization in nine annual
installments in September of each year (each of the first two installments
representing 15% of the remaining balance, with each of the other seven
installments 10% of the balance) at a 2% fixed annual interest rate, payable
annually each September. On June 20, 2002, the Bank offered a pledge of Galicia
Uruguay's commercial loan portfolio as guarantee of payment of the restructured
deposits. As of the date hereof, all scheduled payments have been made.
In the exchange offer that took place between June 17, 2003, and July 24,
2003, Galicia Uruguay received expressions of interest from its customers for an
aggregate amount of US$ 185 million, which reflected customers' choice to
receive Boden 2012 in an aggregate amount of US$ 137 million, together with new
negotiable obligations issued by Galicia Uruguay in an aggregate amount of US$
44 million. The objective of this exchange, and of the following one, was to
reprofile on a voluntary basis the already restructured deposit base, both to
satisfy differing depositors' liquidity-return preferences and to improve the
distribution of cash flows over time.
On August 14, 2003, the Argentine Central Bank approved the terms and
conditions for the restructuring of the Bank's US$ 399.5 million debt with
Galicia Uruguay through its Cayman Branch as well as the transfer to Galicia
Uruguay through the Cayman Branch of cash for US$ 72.1 million and Boden 2012
for a nominal amount of US$ 137 million, corresponding to the first principal
amortization of the Bank's debt with Galicia Uruguay and to interest due as of
August 15, 2003, on such debt. This debt corresponds to deposits made by Galicia
Uruguay in the Cayman Branch and later placed with the Bank by means of credit
lines. The Argentine Central Bank must preapprove payments of principal and
interest. As of December 31, 2004, the Bank's debt with Galicia Uruguay had been
reduced to US$ 68.1 million.
On December 9, 2003, Galicia Uruguay launched a second voluntary exchange
of all restructured deposits and negotiable obligations or certificates issued
by Galicia Uruguay or its subsidiary Galicia Cayman (in provisional liquidation)
to restructure deposits. Consideration offered consisted of a cash payment for
17.5% of the principal amount owed (equivalent to paying in advance the
installment due in September 2004) and Boden 2012 for the remaining balance. The
exchange was limited to an aggregate amount of US$ 300 million. On March 15,
2004, the exchange offer was settled for an aggregate amount of US$ 206 million.
As of December 31, 2004 (and before), the Boden 2012 received or to be
received by the Bank as a result of the Argentine government measures to
compensate financial institutions for the asymmetric pesification were recorded
in the books of the Bank's Head Office in Argentina, including the amounts
corresponding to the compensation for Galicia Uruguay's pesified loans. See " --
Main Regulatory Changes in 2002, 2003 and 2004 -- Compensation to Financial
Institutions."
As of December 31, 2004, Galicia Uruguay's shareholders' equity was
negative in US$ 189.4 million. Galicia Uruguay liabilities include a
subordinated negotiable obligation held by Grupo Galicia for US$ 43 million.
On April 15, 2005, Galicia Uruguay opened a period for the reception of
irrevocable expressions of interest from its creditors to participate in the
offer to exchange their restructured deposits (restructured as time deposits or
negotiable obligations), including interest capitalized through February 3,
2005, for a 14.0% cash payment and Boden 2012 at par for the remaining 86%.
Settlement of the exchange offer is scheduled for June 15, 2005. On April 15,
2005, Galicia Uruguay also opened a period for the reception of expressions of
interest from holders of certificates issued by Galicia Cayman (in provisional
liquidation) as a result of the restructuring of its deposits in 2003 to sell
such certificates. Consideration offered to such holders is similar to that
offered to Galicia Uruguay's creditors. The offer settlement is scheduled for
June 30, 2005. The period for the reception of expressions of interest scheduled
to expire on May, 20, 2005 was postponed, on such date, to May 27, 2005. The
offers have an aggregate limit of US$ 200 million of restructured deposits.
Banco de Galicia (Cayman) Ltd. (in provisional liquidation)
Galicia Uruguay's situation affected its subsidiary Galicia Cayman (in
provisional liquidation). By late May 2003, Galicia Cayman (in provisional
liquidation) together with the provisional liquidators designated by the Cayman
Islands Court, completed a debt restructuring proposal and, with the
authorization of such Court, presented it to all Galicia Cayman (in provisional
liquidation) creditors for their consideration.
-26-
Galicia Cayman (in provisional liquidation) proposed to pay to its class A
creditors an initial cash payment equivalent to 5% of the amount owed for
principal and interest accrued through July 18, 2002, plus a transferable
certificate equivalent to 95% of the amount owed for principal and interest
accrued through July 18, 2002. The certificate amortizes in nine annual
installments (the first two for 15% of principal and the remaining for 10%),
payable each September, and with interest payable at the same date at a 2%
annual interest rate (plus 1% if after the payment of all creditors pursuant to
the proposal and repayment of the subordinated loan, as described below, any
assets remain). Once all class A creditors are paid, the remainder of the assets
of Galicia Cayman (in provisional liquidation) will be applied to the payment of
the claim of its class B creditor, Galicia Pension Fund Ltd. (a subsidiary of
Galicia Cayman) for US$ 2.9 million, which has been subordinated to the payment
of all class A creditors. In addition, Grupo Galicia made a US$ 1.2 million
subordinated loan in favor of Galicia Cayman (in provisional liquidation), which
will accrue interest at an annual rate of 2% and will be repaid once all
creditors of Galicia Cayman (in provisional liquidation) have been paid in
accordance with the restructuring terms. By the vote of 99.7% of creditors,
exceeding the legal majority required, Galicia Cayman's restructuring proposal
was approved in whole on July 10, 2003, and on July 16, 2003, the restructuring
plan became effective and mandatory for all creditors. The initial cash payment
was made on August 8, 2003. All payments provided for by the restructuring plan
were made.
In accordance with the restructuring plan, Galicia Cayman commenced
voluntary liquidation and surrendered its banking license effective December 31,
2002.
CAPITAL INVESTMENTS AND DIVESTITURES
In 2004, we made a capital contribution to Net Investment S.A. for Ps. 0.7
million. In 2003, our capital contributions to Net Investment S.A. amounted to
Ps. 3.6 million and in 2002, they amounted to Ps. 4.2 million. In addition, we
invested Ps. 0.1 million in aggregate in the Bank through open market purchases
of the Bank's common shares.
For 2005, on a non-consolidated basis we budgeted investments amounting to
Ps. 0.2 million to be applied to Net Investment S.A. and to US$ 2.0 million to
be applied to Galval.
BANCO GALICIA
During 2004, the Bank did not make any significant investments or
divestitures and its capital expenditures amounted to Ps. 42.2 million,
distributed as follows:
- Ps. 14.9 million in fixed assets;
- Ps. 9.7 million in construction in progress; and
- Ps. 17.6 million in intangible assets.
During 2003, the Bank did not make any significant investments or
divestitures and its capital expenditures amounted to Ps. 21.2 million,
distributed as follows:
- Ps. 2.6 million in fixed assets;
- Ps. 10.3 million in construction in progress; and
- Ps. 8.3 million in intangible assets.
During 2002, the Bank did not make any significant investments or
divestitures and its capital expenditures totaled Ps. 56.2 million, distributed
as follows:
- Ps. 12.9 million in fixed assets;
- Ps. 23.6 million in construction in progress; and
- Ps. 19.7 million in intangible assets.
-27-
The Bank has budgeted capital expenditures for the fiscal year ended
December 31, 2005, for the following purposes and amounts:
Construction of the new corporate tower Ps. 59.3 million
Hardware, software and system maintenance 37.0 million
Other 3.8 million
----------------
Total Ps.100.1 million
Banco Galicia expects to finance its capital expenditures from the cash
flow derived from operations.
BUSINESS OVERVIEW
BANCO GALICIA'S OPERATIONS
The Bank is principally engaged in commercial banking and provides a wide
variety of banking products and services to large corporations, medium- and
small-sized companies and individuals. Depending on the type of customer, these
services include personal and corporate loans, deposit-taking, credit and debit
cards, residential mortgage loans, fiduciary and custodial services and
electronic banking. The Bank is also involved in other finance-related
businesses, such as investment banking, insurance distribution and asset
management. During 2003, the Bank's lending activity was limited, but in 2004
the Bank increasingly originated new loans to individuals as well as to the
commercial sector.
The Bank provides services through one of the most extensive and
diversified distribution platforms of all private-sector banks in Argentina,
with 223 full-service branches in Argentina, 563 automated teller machines
("ATMs") and 522 self-service terminals as of December 31, 2004, along with
other electronic banking facilities such as phone banking and e-banking. As of
December 31, 2004, our branch network covered all of the Argentine provinces,
except for Tierra del Fuego, and all of the main cities of Argentina.
Retail Banking
Banco Galicia provides a wide range of financial products and services to
individuals, covering both transactions and investments. On the transactions
side, Banco Galicia offers customers checking and savings accounts, credit and
debit cards, foreign exchange brokerage and payroll direct deposit. On the
investments side, its products and services include certificates of deposit,
mutual funds and insurance products. In addition, Banco Galicia provides credit
for the acquisition of consumer goods and housing through personal loans,
residential mortgages, pledge and credit card loans. During 2002 and 2003,
credit provision was not significant.
The Retail Banking Division manages the Bank's business with individuals
and distribution channels. It is made up of the following departments: Retail
Marketing and Quality, Traditional Channels, Alternative Channels, Consumer
Banking, and Private Banking. The latter provides services to the high net-worth
customers. Retail Marketing and Quality is in charge of maintaining and creating
a wide range of financial products and services aimed at meeting the needs of
the Bank's customers, with optimum quality standards. These products and
services are marketed through the Bank's distribution platform, made up of the
branch network (managed by the Traditional Channels Department) and through the
self-service channels (electronic banking and Internet banking, managed by the
Alternative Channels Department). The Consumer Banking Department is responsible
for the consumer finance business the Bank conducts in Argentina's provinces
through the regional credit-card companies. During 2002 and 2003, credit
provision was not significant.
In fiscal years 2003 and 2004, the business strategy was geared towards
increasing financial income and income from services by means of actions such as
cross-selling, up-selling, customer retention and loyalty and attraction of new
customers. Furthermore, in 2004 the Bank strengthened the commitment to be
customer oriented, with the purpose of building mutually-loyal and long-lasting
relationships and to providing the best service possible, in time and through
the most appropriate channel for each customer.
The Retail Banking Division focuses on relationship marketing, mainly on
the enrichment and exploitation of the corporate Data Warehouse and the
Division's Data Mart, which are the pillars on which Retail Banking's
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strategy and tactics are structured, deepening the knowledge and use of
segmentation, micro-segmentation and niche- development techniques. In order to
accompany sales actions, the Retail Banking Division works on behavior patterns,
profiles, predictive models and statistics that nurture its decision-making
process. In addition, the "Customer Value" vision was incorporated, to
supplement the segmentation by socioeconomic variables. The tools used, together
with an increasing experience, enable the Retail Banking Division to carry out
more and better sale campaigns and actions targeting increasingly reduced
groups, but constantly maximizing the response obtained. During 2004, the Bank
launched more than 500 campaigns with offers personalized by customer, to more
than 70% of the Bank's customer base, and sent more than half a million
customized mailings.
Individual Banking
During fiscal year 2004, efforts continued being aimed, as in 2003, at
strengthening relations with customers having investment products. In this way,
the Bank succeeded at increasing its retail-sector deposits by 17.7%, surpassing
the performance of the private-sector deposits in the financial system. During
May and October interest and principal amortization payments on the post-default
Argentine government bonds were made, with the Bank attaining a high level of
reinvestment of released funds.
Regarding the stock of current accounts, the evolution for the year was
positive, even though the reduction of the rates of the credit and debit tax on
bank accounts and other transactions did not take place as expected. Such stock
increased 14% compared to the close of the previous fiscal year. This increase
was mainly due to the cross-selling campaigns aimed at specific groups of
customers. Likewise, the number of savings-accounts showed an 11% increase, and
the average balances per account increased 19%. Beginning in June 2003, the
number of current accounts reversed the decreasing trend present in the early
part of 2003, ending the fiscal year with a reduction of only 1.9% compared to
December 2002. The number of account closings dropped 60%, while sales
progressively recovered.
Regarding personal loans, during fiscal year 2004 the Bank put emphasis on
the granting of loans according to customer behavior, by assigning a credit
amount to all customers having risk products outstanding with the Bank. This
allowed the Bank to improve customer loyalty, increase cross-selling, keep
credit risk limited and achieve a speedy granting of loans, as customers get
loans automatically at the branches. Expectations were fulfilled, with the
monthly average origination reaching an amount that represented a 230% growth.
Due to the excellent performance shown by the portfolio of personal loans, the
Bank decided to extend the offer of such loans to people who are not customers
of the Bank or to those customers that do not have risk products outstanding. In
2003, the credit market showed a slightly increasing demand while the supply of
credit started to recover. Consistent with this trend, the Bank launched new
credit lines aimed at meeting the needs of its existing customer base and also
resumed prequalifying customers for personal loans.
The mortgage loan market did not experience growth due to the fact that,
more than two years after the devaluation of the peso, the increase in real
estate values has been higher than that of salaries, reason for which the
current relationship between the cost of living, salaries and real estate prices
limits the number of people with the capacity to disburse the installments of a
mortgage loan. Faced with a market that presented these characteristics, the
Bank's strategy was to offer the product to those customers who requested it
and, in February 2004, the Bank relaunched mortgage credit lines for the
purchase of a permanent or non-permanent residence, renovations and/ or
expansions.
The transactional credit and debit card business has evolved positively,
in line with the performance of the overall economy and, in particular, the Bank
managed to increase its share in the market and consolidate its leadership.
During the fiscal year, not only the Bank's portfolio of cards managed
experienced a positive increase, but, also, two new products were launched.
During 2003, the Bank maintained its leadership in the credit card business.
As a result of the several actions aimed at increasing credit card use,
purchases made with Visa cards managed by the Bank increased 37% in 2004,
compared to a 24% increase for the financial system as a whole. The purchases
made with American Express cards also experienced a significant increase, thus
purchases made with the credit cards with a nationwide coverage managed by the
Bank were 18.8% higher than in 2003. Moreover, the total number of such credit
cards managed by the Bank increased 42.2%. Due to the increase in purchases and
in the
-29-
number of cards managed, the Bank's credit and debit card business generated
income from services for Ps.112 million. Arrears were significantly low, being
less than 1% for arrears of more than 90 days.
Halfway through fiscal year 2004, the new Visa Mini was launched, an
innovative product mainly aimed at young people. In December, the Felices
Compras (Happy Shopping) card was launched, a prepaid card that can be charged
by phone against a debit or credit card.
The Bank markets Sudamericana's life, life-related and other insurance
products through its own distribution network and also sells property and
casualty insurance from other companies. In 2004 the Bank offered a wide range
of insurance products, thus consolidating its position as an integral provider
of financial services. Income from services derived from the bank-assurance
business amounted to Ps. 27 million, a 22% increase when compared to the
previous fiscal year. During 2003, the Bank continued consolidating its position
as an insurance provider with a wide offering of products and greater functional
integration with insurance companies and achieved improvements in efficiency
ratios as well as in business volume. Income derived from the Bank's insurance
business amounted in 2003 to Ps. 22.0 million.
In January 2004 Galicia Patrimoniales Compania de Seguros S.A., a
subsidiary of Sudamericana Holding, launched to the market Proteccion Hogar
(Home Protection), an insurance product aimed at protecting individual's homes.
In 2004, the Bank managed to successfully market the insurance policies of this
company, and also continued with its alliances with Zurich and Mapfre for the
marketing of automotive insurance products. In this line of business, the Bank's
portfolio experienced a 58% increase during the year.
At the close of fiscal year 2004, the Bank managed approximately 368,000
insurance policies (including credit related ones), 23% higher than in the
previous year. The Bank's branch network continued leading the sale of insurance
products, but non-traditional channels showed significant growth. At the close
of fiscal year 2003, the Bank managed approximately 300,000 insurance policies,
30% higher than at the end of 2002. In 2003, insurance policies not related to
credit operations grew 46% in comparison to the previous year, while
credit-related policies showed a 33% reduction. This decline was the result of
loan prepayments and the slow increase in the Bank's loan portfolio.
During 2004, the Bank continued rendering foreign currency brokerage
services to individuals through its branches. However, the stability of the
exchange rate led customers to place funds in time deposits instead of
purchasing dollars.
Consumer Finance
The Bank pursues the consumer finance business aimed at the lower-income
segment of the population through the operating subsidiaries of Tarjetas
Regionales S.A., a holding company. These companies (the "regional credit-card
companies") issue credit cards in certain regions of Argentina and provide
financing through these credit cards as well as personal loans.
As of December 31, 2004, Banco Galicia held 68.22% of Tarjetas Regionales
while Galicia Cayman (in provisional liquidation) held the remaining 31.78%. At
the same date, the Bank held directly or indirectly (through Tarjetas
Regionales) majority interests in the following regional credit card and
consumer finance companies:
- 80.0% in Tarjeta Naranja S.A., a company operating in central and
southern Argentina. In March 2001, Tarjetas del Sur S.A., a
regional credit card company that operated in the southern part
of Argentina that was directly and indirectly controlled by the
Bank, was merged into Tarjeta Naranja. In January 2004, Tarjeta
Comfiar S.A., a company that operated mostly in the province of
Santa Fe, was also merged into Tarjeta Naranja S.A.
- 60.0% in Tarjetas Cuyanas S.A., a company operating in the
provinces of the Cuyo region.
- 99.99% in Tarjetas del Mar S.A., a company operating in the city
of Mar del Plata and the surrounding area.
-30-
The regional economies of the provinces were the main drivers and also
beneficiaries of the recent growth experienced by Argentina's economy. Thus,
during 2004 and 2003, the external environment for the regional credit-card
companies was favorable, and these companies took advantage of that environment
in terms of commercial dynamism and attraction of new customers. This led to
market share gains and increasing business in their respective areas of
influence. The performance of the regional credit-card companies also showed a
significant improvement as a result of low competition and higher operating
efficiency.
In 2004, the aggregate number of credit card statements issued by the
regional credit-card companies increased by 22% and their loan portfolio, before
allowances for loan losses, charge-offs against such allowances and the
securitization of loan portfolios, grew by 50.8%, both as compared to the
previous year-end. Net operating income of the regional credit-card companies
increased by 31.3% as compared to fiscal year 2003, while expenses grew by
22.6%, to keep up with both the rising business volumes and quality standards.
This was possible due to the use of technology and a continuous improvement in
processes and organization, leading to efficiency gains and economies of scale.
The daily collection efforts made permitted to keep delinquency at minimum
historical levels. In fact, arrears of more than 90 days represented 3.26% of
the aggregate portfolio at year-end, a ratio that is lower than in the previous
years.
The favorable aspects stated herein were reflected in these companies'
results. During fiscal year 2004, the regional credit-card companies obtained,
in aggregate, net income for an amount of Ps. 130.4 million, of which Ps. 105.8
million corresponded to the Bank through Tarjetas Regionales S.A.
As regards funding, it should be mentioned that: (i) these companies
obtained significant bank overdraft facilities and a loan with short- and
medium- term tranches; (ii) they repaid during 2004 (within a term of less than
3 years from issuance and for 100% of the original principal amount) the
dollar-denominated debt securities secured by a trust issued in connection with
the restructuring of dollar-denominated negotiable obligations; and (iii) they
successfully placed two series of negotiable obligations for Ps. 25.5 million
and the notes from four financial trusts, with an aggregate amount of
securitized portfolio of Ps. 121 million. The last two were rated "AAA(arg)" by
Fitch Ratings Argentina and, in all cases, demand widely exceeded the amounts
offered. After the close of fiscal year 2004, Tarjeta Naranja S.A. issued
negotiable obligations for an amount of Ps. 30 million. In summary, these
companies' currently dispose of sources of funds that allow them to keep their
growth pace and develop the expansion projects mentioned below.
Since mid 2004, Tarjeta Naranja S.A. resumed its territorial expansion
project that shall continue during 2005, which contemplates the addition of a
target market with a population of approximately 2 million people.
Traditional Distribution Channels
The size and the wide geographical coverage of the Bank's branch network
contributes to make the Bank's distribution network one of its more important
competitive advantages. These aspects are strengthened by a unified management
system through the use of the Bank's Intranet, state-of-the-art systems' and
communications' technology, a consistent incentive plan and a continuous
follow-up of the quality of service.
As of December 31, 2004, the Bank's branch network in Argentina totaled
223 branches, including the Bank's Head Office. These branches are established
in all of the Argentine provinces with the exception of Tierra del Fuego. In
2004, the branch network was reduced by three branches that were merged with
another three nearby branches.
Fiscal year 2004 was characterized, as was fiscal year 2003, by the Bank's
branch network strong focus on sales activities. To such end, the Bank continued
with the implementation of its "Sales Coaching" program, which was launched in
2003 and the Bank intends to complete in 2005. This program's purpose is to
train branch managers as sale coaches for their staff.
Automated Banking
-31-
The Alternative Channels Department is responsible for managing those
customer service, transactions and sales channels that differ from traditional
branches. Its operations cover both individual and corporate customers and are
mainly carried out through the Customer Contact Center (the Bank's call center),
e-galicia.com (the Bank's Internet banking facility) and "Red Galicia 24" (the
Bank's network of automated teller machines and self-service terminals).
As in prior fiscal years, the use of these channels by the Bank's
customers maintained an upward trend. In December 2004, 74.5% of the
transactions made by customers were carried out through the Bank's alternative
channels, thus showing an 8.9% percentage points improvement in comparison to
the same month of the prior year.
The Customer Contact Center (the "CCC") consists of the following sectors:
Fonobanco (the Bank's phone-banking service), Fonobanco Seguros (the
phone-banking unit specializing in insurance products), Foreign Trade, Galicia
Responde (the CCC unit that receives and answers customer complaints),
Telemarketing, the Investment Center, the Collection Center and the switchboard.
These units also have support areas for ongoing improvement in service quality.
During 2004, the Customer Contact Center handled over 12 million incoming and
outgoing calls. This volume was similar to that recorded during the previous
fiscal year.
e-galicia.com has operating segments for both individuals ("Home Banking")
and companies ("Galicia Office"), enabling its customers to operate as if they
were carrying out their transactions over the telephone, at an automated teller
machine or in a traditional branch. Furthermore, through e-galicia.com, visitors
have access to information about the products and benefits offered by the Bank,
as well as specific sections that advise users on issues of interest to them:
foreign trade, insurance, taxes, up-to-the-minute news on the financial market
and several current topics. Through Home Banking, Banco Galicia's individual
customers can make inquiries and requests and conduct transactions from any
computer with access to the Internet.
Fully in line with the boom of the Internet worldwide, e-galicia.com has
shown an exponential growth since it was launched. The web site receives almost
1.5 million visits monthly and, through Home Banking, 2.3 million inquiries and
transactions are carried out every month. These figures represent almost a 30%
growth compared to the end of 2003. As regards the number of customers
subscribed, the upward trend continued, with a 15% increase compared to December
2003. Among the large variety of transactions available, the payment of taxes
and bills through the direct connection to the web site Pagomiscuentas.com as
well as the transfer of funds to third party accounts continued showing a
sustained growth, with increases of 48% and 25%, respectively, compared to the
previous period.
At the end of 2004, Red Galicia 24 was made up of 1,085 state-of-the-art
technology terminals (563 ATM's and 522 self-service terminals) located
throughout the country in traditional branches as well as in neutral positions
(gas stations and supermarkets), in line with the Bank's strategy to be close to
its customers and provide them with the means to solve their transactional
requirements in a dynamic, simple and safe way 24-hour a day. Red Galicia 24 is
one of the largest electronic banking networks in Argentina. Compared to the
prior fiscal year, the volume of ATM transactions recorded a 12% growth, thus
the market share was 17.17%, slightly higher than in 2003. The self-service
terminals that allow customers to carry out deposits, payments and inquiries on
the Banks' products, showed a slight increase in the volume of transactions
conducted in comparison to that in 2003. In line with these indicators, this
network's productivity improved 14%. During 2003, more than 30 million
transactions were carried out in the Bank's 555 ATMs, while 9 million
transactions were conducted at the Bank's 524 self-service terminals. These
figures show a 7% decrease in comparison with the number of transactions
conducted during 2002, which is in line with the trend in the financial system.
Private Banking
This business unit provides private-banking and advisory services to
medium- and high-net worth individuals and manages collective investment
portfolios. Assets managed by this business unit are made up of both the Bank's
investment products and other alternatives offered by the capital market.
During 2004, total deposits from private banking customers grew
substantially, with this growth being to a large extent the result of the
activities put into practice to attract former customers. In addition, new
investment products were offered such as negotiable obligations and financial
trusts notes. During 2003, this business unit also
-32-
focused its effort on strengthening customer relations and on recovering those
customers who had stopped having contact with the Bank.
Wholesale Banking
The Wholesale Banking Division is in charge of conducting business with
corporate customers, and it encompasses the areas that provide those customers
commercial and investment banking services, as well as capital-markets and
foreign trade services.
Commercial Banking
Banco Galicia provides commercial banking services to all types of
businesses in all economic sectors. With the purpose of attaining an
organization that is functional to the different kinds of customers, service
rendered is divided between the Corporate Banking Department and the
Middle-market Banking Department. Corporate Banking specializes in the large
economic groups of companies, while Middle-market Banking is responsible for
rendering services to all the other companies (medium-large companies and small-
and medium-sized companies, or PYMEs) and those pertaining to the agriculture
and livestock sector. The Wholesale Marketing Department provides support to the
other Departments and is responsible for the development and implementation of
financial and non-financial products and services, as well as the coordination
of distribution channels.
As regards the offer of transactional products and services, in 2004 new
functionalities were developed in connection with collection and payment
products for companies, which involved payments with checks under the Cobranzas
Integradas Galicia (Galicia Integrated Collections) system and access to
information on the collection and automatic debit services, through Galicia
Office. The following products were developed: Infopagos, which improves the
management of payments; and Infomail, an effective tool for the communication
between customer companies and their suppliers. In addition, the campaign
"Bonificaciones en la Mira" ("Focus on rebates") led to an increase in fee
income, while it allowed to optimize the applicable criteria.
During fiscal year 2004, Corporate Banking normalized the relationship
with the companies within its segment, thus increasing financial and
non-financial services and credit assistance above the budgets for such period.
Also, both transactional and time deposits showed a sustained increase, and the
Bank gained a higher share in the treasury business of its customers. The
renegotiation of loans, the implementation of debt restructurings and the
resulting collections exceeded the goals set.
The activities carried out by the different sectors within the
Middle-market Banking Department allowed the Bank to maintain and increase its
market share in these segments, both as regards deposits and non-financial
services. With the purpose of providing services that meet the needs of the
different sectors, the Bank developed new non-financial products and services,
and the current ones were adapted, thus keeping the upward trend of previous
periods. Furthermore, the Bank was able to strengthen the relationship with its
customers through the development and adaptation of the different products and
services pursuant to the particular needs of each company, offering solutions
that would contribute to optimizing their daily operations and improving their
business turnover.
In the small- and medium-sized companies (PYME) and agriculture and
livestock segments, the Bank has maintained its leading position reinforcing it
through particular actions. The "Sume a su empresa los beneficios de Banco
Galicia" ("Add Banco Galicia's Benefits to your Company") campaign positioned
the Bank as one of the main players in the collection and payment services. The
Visa Business card was relaunched with the purpose of increasing income from
segments still not fully exploited, such as the PYME and agriculture and
livestock segments.
The Bank was able to attract significant demand for financing the
incorporation of capital goods through its leasing product. In addition, the
Bank obtained the highest share of the line to finance the purchase of these
goods at a subsidized interest rate granted by the Sepyme (Undersecretaryship of
Small- and Medium-sized Companies and Regional Development of the Ministry of
Economy). Also, the "Vamos a las Pymes" ("Let's Go to the Pymes") campaign was
launched in two phases, allowing for an increase in the placement of product
packages within companies having previously been assessed as qualifying for a
global credit amount.
-33-
Through the "Banco Galicia, siempre junto al campo" ("Banco Galicia,
always with the agriculture and livestock sector") campaign, the Bank offered
the agriculture and livestock segment different medium- and long-term credit
lines for different purposes and the advantageous financing of the Galicia Rural
card. In addition, the special agreements signed with important companies of the
sector, and with one of the most important oil companies in the country, enabled
the Bank to provide its customers special benefits and financing at preferential
interest rates and terms.
During 2003, the Corporate Banking and Middle-market Banking departments
mainly focused on rebuilding relationships with customers and generating income
from services by means of the integral management of the treasury of corporate
customers. Services were adapted to the new business scenario, covering the
transactional needs of customers and providing them with financial solutions to
increase their working capital and thereby improve their business activity. That
was attained in the different segments in which the Bank offers services, thus
strengthening the relationship-banking model applied by the Bank.
Within the corporate segment, a highly competitive product was developed:
Cobranzas Integradas Galicia (Galicia Integrated Collections), which is aimed at
meeting the needs of companies that have a substantial volume of invoices and
allowing companies, among other things, to identify their customers.
Furthermore, in view of the importance that transactions in dollars started to
have and with the purpose of reinforcing the Bank's service offering, special
current accounts and collections and transfers in dollars were added to the
product menu. Banco Galicia was the first bank to offer collection in dollars
for customers' integral treasury management. In addition, the Bank continued
adding improvements to its payment and collection systems, seeking to migrate
the highest possible number of customers to this channel and to optimize such
services. These improvements were mainly reflected in more and better
information through electronic channels. Another outstanding event was the
addition of Tradecom's advantages to the electronic services offering.
Credit activities resumed in 2003, initially through 90-day loans, mainly
by means of the purchase of checks to date and deferred checks, which are highly
liquid documents. In mid-2003, financial loans in pesos and prefinancing of
exports in dollars were added, both with a 180-day term. With the improvement in
the Bank's liquidity position, the terms for peso-denominated loans were
extended to two and three years.
Galicia Office
Galicia Office is e-galicia.com's exclusive section for corporations.
Through Galicia Office, companies may, at no cost, review the statements
of all their bank products (such as accounts, loans, investments and receivables
from Visa and Galicia Rural transactions). They may also access a range of
information about their entire portfolio of checks and checks returned, request
and confirm checkbooks, make transfers between their accounts and to those of
third parties within or outside the Bank, make investments, inquire about their
foreign trade transactions, pay their employees' salaries safely, renew their
digital signature online and pay their suppliers.
Inquiries and transactions made through Galicia Office, the e-banking
channel for corporate customers, increased again during 2004. In addition,
improvements and new features were added, such as the following: Transferencias
Multiples (Multiple transfers), Visualizacion del servicio de recaudaciones
(Visualization of the collection service), Sistema de alarmas por e-mail y a
telefonia celular (Notification system through e-mail and to the cell phone),
Informes Comerciales Decidir (Decidir commercial reports), Minipuesto Red de
Campo (Red de Campo mini-stall), Liquidacion de Ordenes de Pago (Settlement of
payment orders) and Permisos de Embarque (Shipping permits), among others.
Galicia Office expanded significantly during 2003, both in terms of number
of customers and volume of transactions. During fiscal year 2003, new
functionalities were added to the service, which contributed to higher-quality
service and higher customer satisfaction levels. Likewise, marketing campaigns
were conducted for customers who use the Bank's direct deposit system in order
to migrate such customers to the "e-model," thus optimizing time and costs, as
well as offering them a more dynamic and safe service. During 2003, the number
of customers increased 22% over the previous fiscal year. The level of
transactions increased 256%, with more than 210,000 transactions conducted.
-34-
Investment Banking
The Investment Banking and Capital Markets departments provide advisory
and structured finance services to corporations, institutions and governments,
both national and provincial.
Within the Bank's streamlining of operations started in 2002, the
investment banking and capital market activities of the subsidiary Galicia
Capital Markets S.A. ("GCM"), in which the Bank has a 99.99% interest, were
incorporated to the Bank during fiscal year 2004. Therefore, GCM ceased
rendering services during that year. As of December 31, 2004, GCM's
shareholders' equity was negative by Ps. 8.3 million, and the Bank had
established a liability reserve for such amount. Currently, the Investment
Banking Department and the Capital Markets Department are responsible for
providing theses services. These departments' goal is to contribute to the
attainment of the long-term strategic goals of their customers and the Bank,
through the integral development of complex financial products and services.
During 2004, these departments worked with the Bank's Wholesale and Retail
Banking divisions and with Galicia Uruguay in the renegotiation of past due
portfolios, and provided customers with investment banking services in the areas
of mergers and acquisitions, swaps, debt restructuring, investment projects and
securitization. Approximately a dozen loan agreements with companies - mainly
from the utility sector - were renegotiated for more than US$ 130 million and,
in addition, recoveries were generated from collections, swaps and sales of
assets. Also, these departments worked with the Bank in the sale of a portfolio
of off-balance sheet loans, a process that was completed at the end of the year.
During 2003, the environment for this type of activity was complex and
characterized by the restriction, for both the Argentine private and public
sectors, of access to mid- and long-term financing. Therefore, in 2003, activity
was limited to the development of products such as trusts, which were expected
to have an increasing presence in the financial market, the provision of advice
for the restructuring of the Bank's commercial loan portfolio and, to a lesser
extent, on mergers and acquisitions.
Regarding the advice provided to the Bank on its funding strategy, and
having the Bank already recovered satisfactory liquidity levels, in 2004 and in
2003, efforts were directed to the restructuring of the Bank's foreign debt.
During these years, advise was also provided to Galicia Uruguay on the exchange
offers made by this subsidiary to its customers.
As of December 31, 2004, the portfolio of industrial investments acquired
by the Bank as a result of its participation in the privatization process that
took place during the 1990s amounted, after valuation reserves, to Ps. 66.4
million. The largest investments were an 8.26% interest in Aguas Argentinas S.A.
with a Ps. 23.4 million net book value, and interests, both of 12.5%, in
Inversora Nihuiles S.A. and Inversora Diamante S.A. (two holding companies in
the electricity generation business) with a net book value of Ps. 15.7 million
and Ps. 12.9 million, respectively.
Foreign Trade
During 2004, foreign trade activities continued experiencing the sustained
release of the foreign exchange regulations that began in late 2002 and
continued in 2003. These changes made trading transactions easier for exporters
and importers, diminished their operating burden and that of banks, and
increased trade and working capital financing alternatives.
Within this environment, in 2004, the Bank recorded a 75.0% increase in
the annual volume of foreign trade transactions in comparison with the previous
fiscal year, reaching US$ 2,506 million, which represented 4.41% of Argentina's
foreign trade during 2004. Such share was much higher than the one achieved in
the previous fiscal year, which was 3.17%. In 2003 the increase in the annual
volume of foreign-trade transactions was 29.2% (to US$ 1,351 million) over the
2002 level.
This positive result in 2004 was due to the strengthening of the Bank's
already strong positioning (that the Bank reached in 2003) and to the
enhancement of its customer base, through the strategy of providing customers
-35-
with assistance, collaboration and advice in all the regions in Argentina.
Likewise, the information technology tools developed in prior fiscal years were
improved with new functionalities, making them more versatile, easing companies'
transactions and contributing to their efficiency. These tools clearly
differentiated the Bank from its competitors.
Galicia Factoring y Leasing S.A. ended its ninth fiscal year in 2004. The
company maintained the international factoring offering and recorded a volume of
transactions more than three times greater than in fiscal year 2003. This
company's activities supplement the Bank's service offering and, in this way,
customers can access all the alternatives necessary for conducting their foreign
trade business. In 2003, the company adapted its international factoring
services to the new regulations and incorporated forfaiting (a method of trade
financing that allows exporters to obtain cash and eliminate risk by selling
their medium-term receivables on a "without recourse" basis).
International
The International Division is responsible for managing commercial
relations with correspondent banks, international credit agencies and
international mutual funds. During 2004, the Foreign Trade department ceased
reporting to the International Division (starting to report to the Wholesale
Banking Division), and the International Division started to report to the Board
of Directors.
Since 2002 and until the first half of 2004, this unit's activities mainly
concentrated on its participation in the implementation of the Bank's
capitalization and liquidity plan, especially relating to the Bank's foreign
debt restructuring process and the winding down of its operating units abroad.
See " -- History -- Restructuring of Our Subsidiaries' Debt -- Banco Galicia."
During the second half of 2004, this sector's activities focused on
resuming international relations with the purpose of reestablishing foreign
financing sources for the development of the Bank's business. As a result of the
successful foreign-debt restructuring and due to the Bank's good image in the
international markets, a gradual increase in commercial credit lines from our
correspondent banks and from international credit agencies was shown.
Treasury Division
The Treasury Division began to report to the Bank's Board of Directors in
2003.
The Treasury Division is responsible for the management of the Bank's
treasury operations and its proprietary liquidity, foreign exchange and
securities positions and participates in the management of market, liquidity,
interest-rate and currency risks. To this end, it develops the necessary data
and strategies to keep such risks within the limits established by the Bank's
Board of Directors. Similarly, it is responsible for the administration of
third-party assets, mainly the FIMA mutual fund portfolios. The Treasury
Division provides services to corporations, financial institutions, mutual
funds, pension/retirement funds and insurance companies. Intermediation services
in various markets are carried out by the Bank, sometimes in its capacity as
agent of the Mercado Abierto Electronico, the Argentine over-the-counter market
(the "MAE"), and through Galicia Valores S.A., a brokerage firm 99.99%-owned by
the Bank that operates on the BASE.
Banco Galicia offers brokerage services through its branch network. All
equity brokerage activities are conducted by Galicia Valores, which provides
equity securities trading and custodial services to Banco Galicia customers.
Galicia Valores is a shareholder of the Buenos Aires Stock Market, affiliated
with the BASE, and therefore effects transactions as either principal or agent
on that exchange. Galicia Valores does not make investment decisions for its
customers.
Financial Operations
During 2004, the upward trend showed by the domestic capital market in
2003 continued. On the one hand, beginning in 2003, a positive change was
evidenced in the corporate sector's situation due to the sustained growth in
economic activity and to the progressive completion of the debt restructuring of
many of this sector's companies. On
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the other hand, in 2004 a sharp contraction in sovereign risk was recorded in
the domestic bond market, mainly due to reduced risk aversion and a high
liquidity level in the international market.
In the domestic monetary market, due to the high liquidity level, interest
rates showed a downward trend, resulting in a renewed interest on short-term
debt instruments issued by the Argentine Central Bank. As a result, the issuance
of Lebac maintained the importance gained during 2003, with the net issuance of
peso-denominated Lebac amounting to Ps. 5,275 million in 2004, a figure that
includes CER-adjusted Lebac, which had an increasing participation throughout
the year. On the contrary, dollar-denominated Lebac greatly reduced their
participation as a means of sterilizing the Argentine Central Bank monetary
supply, which was reflected in the US$ 81 million reduction in the stock of
these instruments when compared to the end of 2003. Similarly, funds placed by
financial institutions in reverse repo agreements with the Argentine Central
Bank reached Ps. 5,500 million, reflecting banks excess liquidity.
Volumes traded in the domestic securities market continued increasing
significantly during 2004. The volume of government securities traded on the MAE
reached a total of US$ 35,485 million, compared with US$ 19,949 million in 2003,
representing a 77.9% increase. Total volume traded by the Bank was 81% higher,
thus reaching US$ 340 million in 2004. In the stock market, total volume traded
during 2004 was Ps. 49,366 million, to which Galicia Valores S.A. contributed
with a total of Ps. 1,312 million. Therefore, the Bank's market share increased
to 2.65% in 2004 from 1.6% in 2003. As regards the foreign exchange market, in
2004 the Bank significantly increased the volume traded with corporate and
institutional customers, focusing especially on transactions related to foreign
trade, managing to duplicate the volume traded compared to 2003. In the
wholesale market, the Bank's foreign exchange activity through the MAE amounted
to US$ 1,799 million, ranking as one of the ten leading private-sector banks.
Asset Management
This business unit is responsible for managing third-party funds, mainly
the FIMA mutual funds, for which the Bank acts as distributor and custodian.
Galicia Administradora de Fondos S.A. is the fund manager for the FIMA mutual
funds. These funds are invested in different assets, such as government
securities, shares or bank deposits, depending on the risk profile of each
mutual fund.
After the difficult climate created for investors by the economic and
financial crisis of 2001 and 2002 interest in these products returned in 2003
with a focus on time-deposit funds ("money market" funds), which were mainly
requested by corporations and institutional investors. To a lesser extent,
investors who wished to take advantage of the low price of Argentine equities
and fixed-income securities invested in this types of funds. Both equities and
bonds performed well in 2003, with the BASE, as measured by the Merval Index,
rising 104% and bonds, as measured by the performance of the Fima Renta Dolares
(the FIMA dollar fixed-income fund), climbing 20%.
Investor interest in this kind of products continued growing in 2004,
mainly in time-deposit funds, and to a lesser extent, in equity and fixed-income
funds. This resulted in an increase of the amounts under management by Galicia
Administradora de Fondos which grew 35% in 2004, from Ps. 170 million as of
December 31, 2003 to Ps. 230 million as of December 31, 2004. The fund that grew
most was the FIMA Premium fund (a time-deposit fund), with a 60% increase in
assets under management. Among the reasons that boosted this growth are the good
performance showed by this fund - which was the fund with the highest return
among others of the same category - , the upgrading of the rating granted by
Fitch Ratings Argentina and the attraction of new institutional investors.
Internet
The Bank carries out its Internet businesses primarily through Net
Investment S.A. Banco Galicia's stake in the company is 12.5%, while the
remaining 87.5% is held by Grupo Galicia. See " -- Net Investment S.A."
SUDAMERICANA HOLDING S.A.
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Sudamericana Holding S.A. ("Sudamericana") is a group of life, retirement
and property insurance companies. We own an 87.5% stake in Sudamericana. Banco
Galicia holds the remaining 12.5%.
This investment represents another step forward in our plan to consolidate
our leadership as a financial service provider, thus supplementing those
businesses that Banco Galicia may only conduct to a limited extent in line with
prevailing regulations.
Total premiums written in 2004 by the life, retirement and property
insurance companies controlled by Sudamericana amounted to Ps. 41.1 million. As
of December 31, 2004, Sudamericana's subsidiaries had more than 1,400,000
insured, taking into account all the insurance sectors in which it conducts its
business.
Within a more favorable context for the insurance industry, the focus was
placed on taking advantage of the higher demand for insurance policies in order
to significantly increase sales. As a result of such effort, the volume of
premiums in 2004 was 35.8% higher than that of the previous year, with an
important improvement in distribution through the Bank. With respect to
products, a new version of personal accident insurance was launched, which
product was marketed through Banco Galicia. At the end of the year, a
homeowners' insurance specially designed to be distributed through Tarjetas
Regionales was being implemented.
In 2004, periodic revisions of the portfolio of group policies were
carried out, in order to increase revenue from those with potential, renew high
profitability policies, and surrender non-profitable policies. In addition, with
the purpose of improving customer retention, in particular those policies sold
through the Bank, an analysis of the most frequent reasons for the cancellation
of policies was carried out, thus establishing an action plan targeting the
different problems identified. Also, a fidelity program was implemented for
retirement and life insurance customers, and, in order to improve service
standards, a customer satisfaction survey was initiated.
During 2004, Sudamericana transferred most of its obligations in
connection with pension-linked life insurance (vida previsional) policies, to
two life insurance companies related to pension fund managers (administradoras
de fondos de jubilacion y pension, AFJPs) and entered into cut-off agreements
with the reinsurers of such obligations. Having transferred policies accounting
for approximately 95% of its pension-linked life insurance (vida previsional)
liabilities, Sudamericana practically ended its participation in a business that
was residual to it, and which had low profitability and high operating burden
and regulatory risk.
On April 29, 2005, Sudamericana sold to Swiss Medical S.A. and SMG
Investment S.A 100% of its interest in Instituto de Salta Compania de Seguros de
Vida S.A., for a total price of Ps. 6.8 million.
Sudamericana's business plan for the short-term aims at increasing
revenue, which along with efficiency improvements, are expected to allow for
better profitability. The main goals are: (i) to increase revenue maintaining
the sales volume achieved in 2004 but improving the average premium and policy
length, focusing on Banco Galicia, Tarjetas Regionales and external producers as
the main distribution channels, and aiming at the middle income market segment;
(ii) to strengthen differentiation through quality advisory services, both in
the sale and post-sale stages, in order to establish long-term relationships
with insureds; (iii) to limit losses from claims, through a strict underwriting
and settlement of claims; and (iv) to increase productivity, controlling expense
levels, making processes more efficient and improving systems.
NET INVESTMENT S.A.
We carry out our Internet businesses through Net Investment S.A., a
holding company dedicated to investing in and developing businesses related with
technology, communications, the Internet, connectivity, and contents. The
objective of Net Investment is to create value for its shareholders, investing
in projects in which the business model is based on positive cash flows and
profits. Our stake in the company is 87.5%, while the remaining 12.5% is held by
Banco Galicia.
During fiscal year 2004, Net Investment received irrevocable contributions
exclusively from us for Ps. 683,000. Banco Galicia could not make the
contributions corresponding to its interest because the Argentine Central Bank
has imposed restrictions on the Bank's ability to provide financial assistance
to affiliated companies.
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Grupo Galicia decided not to capitalize the irrevocable contributions made until
Banco Galicia is able to make the contributions corresponding to its interest in
the company. Funds received by Net Investment S.A. were used to the pay for
operating expenses and to make the contributions required by "Grupo Tradecom"
(see the paragraph below) and the controlled company B2Agro S.A.
Net Investment S.A., through its subsidiary Net Investment B.V., held a
stake in Tradecom International N.V. (currently in liquidation) ("Grupo
Tradecom"), a holding company based in the Netherlands that conducted its
business activities through its subsidiaries Tradecom Brasil S.A. and Tradecom
Argentina S.A. These companies provide B2B e-commerce support services and
virtual markets for transactions between companies and suppliers. Due to the
high cost of maintaining a Dutch company, the shareholders of "Grupo Tradecom"
decided to dissolve and liquidate Tradecom International N.V. and reorganize the
holding in Tradecom Brasil S.A. In November 2004, Net Investment S.A. decided to
dissolve and liquidate Net Investment B.V. (currently in liquidation) in order
to hold a direct interest in Tradecom Brasil. In addition, an agreement for the
capitalization of Tradecom Brasil S.A. was reached in which new capital
contributions that, for Banco Galicia and Net Investment as a group, were set at
US$ 505,000. Once the aforementioned reorganizations and Tradecom Brasil S.A.'s
capitalization is finalized, the joint interest of Banco Galicia and Net
Investment S.A. will be 13.30 % of Tradecom Brasil S.A. Net Investment S.A. made
all of the contributions that corresponded to it as well as those corresponding
to Banco Galicia, as the latter could not comply with this requirement at the
time due to the restrictions imposed by the Argentine Central Bank. Grupo
Galicia and Banco Galicia signed a Purchase Option Agreement of up to 100% of
the US$ 505,000 contribution made to Tradecom Brasil S.A., which grants Banco
Galicia the opportunity to exercise the purchase option within 60 months. This
contribution was deemed necessary due to the convenience of continuing to
participate in a business where the increasing interest of companies for the use
of e-procurement tools is significant, and in order to comply with the primary
purpose of participating in activities that contribute to the comprehensive
business of Banco Galicia and Grupo Galicia.
In 2004, Tradecom Argentina S.A. received from its controlling company,
Tradecom International N.V., US$ 140,000 on account of irrevocable
contributions. Activities carried out during 2004 were aimed at the
consolidation of the projects that had commenced in late 2003, such as the
implementation of the e-procurement tools in the company Clariant in Mexico and
Venezuela, and of the project developed in Gestion Compartida, a company that
consolidates Grupo Clarin's total purchases. In addition, Tradecom Argentina
rendered the reverse auction services to the Panama Channel. Furthermore, and
together with Banco Galicia, the product "Galicia Compras" (Galicia Purchases)
was launched, a new business channel of Banco Galicia through which companies
can sell, buy and finance all of the indirect goods and services they need
through the e-commerce tool provided by Tradecom Argentina. Other products that
were consolidated are reverse auctions, which are used by companies such as
Peugeot Argentina, were the "Current Account Viewer" and the "Payment to
Suppliers Viewer".
During fiscal year 2004, Tradecom Brasil restructured its costs,
renegotiating the main contracts with its suppliers and reducing personnel
expenses. In addition, it increased its revenue by 16% in comparison to the
previous fiscal year. For 2005, it is expected that such revenue will continue
to increase based on the offering of new services and the expansion of the
customer base.
During 2004, contributions for Ps. 395,000 were made to B2agro S.A. in
order to keep the company's financial budget balanced. The scarce use of
Internet technology by agriculture and livestock producers prevented the
generation of sufficient cash flow to cover the company's operating expenses.
For this reason, B2agro S.A's Board of Directors decided to streamline the
company's operations to a minimum level. For fiscal year 2005, the company will
analyze the business viability and the feasibility of starting new projects
related to the agriculture and livestock sector.
GALICIA WARRANTS S.A.
We own 87.5% of Galicia Warrants and the remaining 12.5% stake is owned by
Banco Galicia. Founded in 1993, Galicia Warrants is a leading company in the
deposit certificates and warrants issuance market, in which it conducts
transactions since 1994, supporting both medium- and large-size companies
through the custody of goods stocks. Galicia Warrants' main objective is to
enable its customers access to credit and financing guaranteed by the property
kept in custody and evidenced by the corresponding certificates issued by
Galicia Warrants. Galicia
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Warrants owns premises at San Salvador, Province of Entre Rios, for the
conditioning and storage of 40,000 tons of paddy rice, which since it began
operations in 1998, has provided high quality services.
In 2002, the warrants business was affected by the lack of credit and a
pronounced drop in the demand from sectors that traditionally used its products.
The general recovery in economic activity that started in 2003 and consolidated
in 2004, was to a large extent based on the production increase of
export-related sectors. To that regard, the agriculture and livestock sector had
an outstanding performance, favored by high commodity prices. At the same time,
the financial sector started to respond to credit demand as a consequence of the
increase in its deposit base, the agreements reached with its creditors, and a
greater predictability of the Argentine government's macroeconomic policy.
Within this context, Galicia Warrants increased its activity level, mainly in
the agro-industry and commodity sectors, with an improvement in the use of
resources, which allowed it to improve its results of operations, while
maintaining a selected customer base.
At the end of 2004, the company had total assets for Ps. 6.8 million, with
total liabilities for Ps. 1.9 million and a shareholders' equity of Ps. 4.9
million. Galicia Warrants changed the closing date of its fiscal year, to
December 31, in order to make it coincide with our fiscal year. In the irregular
8-month fiscal year ended December 31, 2004, deposit certificates were issued
for a total amount of US$ 30.1 million, which implied income for Ps. 2.2 million
and profits for Ps. 441,000.
The sustained growth of Argentina's real economy and of its financial
system will be determining factors for the success of Galicia Warrants. In the
present context Galicia Warrants is expected to increase its activity level.
COMPETITION
In general terms, the competitive business environment in Argentina is
still being influenced by the effects of the devaluation together with the
measures adopted by the Argentine government since 2002. Changes and new
regulatory frameworks are expected, especially in the financial industry and in
some privatized utilities companies.
Due to our financial holding structure, competition is not felt directly
at our level but rather at the level of our operating subsidiaries. We face
strong competition in most of the areas in which we are active.
BANKING
Banco Galicia faces significant competition in all of its principal areas
of operation.
The Bank faces competition from the large universal foreign banks
operating in Argentina, from Argentine national and provincial government-owned
banks private-sector domestic banks and to a lesser extent from cooperative
banks, as well as from nonbank financial institutions. Competition from
public-sector banks has decreased from the immediate post-crisis period as the
public that initially turned to them as a safe harbor during the crisis has
begun to exit those banks in search of better service. Competition is expected
to increase from certain domestically owned private-sector banks, which prior to
the crisis operated in merchant or private banking and that after the crisis
acquired the retail operations of banks that left the business as a result of
the crisis.
The estimated deposit market share of private sector deposits in current
accounts, savings accounts and time deposits (excluding restructured deposits)
of the Bank (in the Argentine financial system only) based on daily information
published by the Argentine Central Bank increased to 7.50% as of December 31,
2004, compared to 5.80% as of December 31, 2003, and 4.94% as of December 31,
2002. Prior to the crisis, the Bank's deposit market share was approximately
10%.
The Bank is currently increasing its deposit market share and is one of
the leading banks in Argentina and the largest domestically owned private-sector
bank. As of December 31, 2004, measured by its deposits in Argentina only, the
Bank was ranked sixth in the whole financial system and third among
private-sector banks (including foreign banks). These positions remained
unchanged from the close of the prior fiscal year.
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For information on the Argentine banking system, see " -- Argentine
Banking System and Regulation -- Argentine Banking System."
REGIONAL CREDIT-CARD COMPANIES
No official data is available about the consumer finance market of the
different regions of the interior of Argentina in which the regional credit-card
companies operate. However, the 2001-2002 economic crisis significantly affected
these companies' competitors, with many of them having ceased operations.
Therefore, in general, competition is currently very low for these companies and
much lower than in the pre-crisis period.
INSURANCE INDUSTRY
After the collapse suffered by the Argentine economy in 2002, the
insurance industry managed to stabilize and grow. Total insurance premiums
written in 2004 showed a favorable trend, increasing 17.0% with respect to the
previous twelve months and reaching, pursuant to official figures, Ps. 12,350
million. Expectations are that, during 2005, the insurance industry's
expansionary cycle will continue.
The growth shown during most of 2004 was mainly driven by the following
sectors: auto insurance, labor- risk insurance, group life insurance and
pension-linked life insurance (vida previsional). The positive impact of life
annuities during the second half of 2004 was noticeable.
In 2004, the property insurance sector's volume of premiums was
approximately Ps. 8,294 million. Auto insurance represented 48% of this total,
followed by labor-risk insurance (17%) and fire and homeowners insurance (14%).
Even though auto insurance is the most important segment in terms of volume of
premiums written, the other two segments showed significant growth rates.
In the same period, total premiums written by the individuals' insurance
sector was approximately Ps. 3,988 million. Life annuities represented 41% of
such total, followed by non-pension-linked life insurance (37%), pension-linked
life insurance (16%), and voluntary retirement plans (6%). Life annuities
experienced an additional boost due to a regulatory change that allowed all
persons retired due to disability the possibility of choosing a final annuity
instead of the temporary benefits provided by pension fund managers (AFJPs) or
labor-risk insurance companies (ARTs).
During 2004, the life insurance business continued being mainly focused on
protection. The demand for products including capitalization, which had been
predominant during the second half of the 90's and the beginning of 2000, was
still very weak.
Expectations are that the industry will continue to concentrate through
new mergers and acquisitions, although to a lesser extent than in 2004.
SALES AND MARKETING
Banco Galicia's distribution capabilities are the principal marketing
channel. Banco Galicia operates one of the most extensive and diversified
distribution networks among private-sector banks in Argentina.
While continuing with its long-term objective to consolidate its
leadership in the Argentine financial system, the Bank reduced its distribution
platform during 2002 as a result of the crisis and did not expand it in 2003 and
2004. Despite the reduction, the Bank's distribution network continues to be one
of the largest and most flexible distribution platforms in the country and the
Bank has kept a nationwide coverage.
The Bank markets all of its financial products and services to high-,
medium- and medium-low-income individuals, including insurance and FIMA family
of mutual funds, through its branch network. Within the branches, the sales
force is specialized by segment. The Bank's sales policy encourages tellers to
perform sales functions too. Wealthy individuals who are private banking
customers are served by specialized officers through a special network of
service centers and a head office facility. The Bank's distribution channel for
the lower-income
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segment of the population is the network of offices of the regional credit card
companies. Until mid-2002, the Bank also served this segment through the
"Galicia Ahora" network, which was merged into the branch network in that year.
Commercial banking services to large corporations (including medium to
large companies) and banks are provided in a centralized manner. Branch officers
are responsible for the Bank's relationship with middle-market and small
businesses and most of the agriculture/livestock sector customers. Credit risk
is managed in a centralized manner.
All of the Bank's individual and corporate customers have access to the
Bank's electronic distribution channels, including the ATM network, a
multifunction call center and an e-banking website. The Bank's call center also
performs telemarketing and credit recovery functions.
Special mobile sales forces are maintained to market various products and
services to individuals and employees of client corporations.
The Bank uses a data warehouse, to perform segmentation and profitability
analyses, estimate performance patterns and cross-selling indices and forecast
client response based on historical information and data-mining. The Bank has a
customer oriented service approach and a segmented marketing approach. In the
late 1990s, the data warehouse capabilities began to be used to design marketing
campaigns focused on specific segments of the Bank's customer base. In addition,
in the late 90s the Bank began to focus its marketing strategy on the
development of long-term relationships with customers based on its knowledge of
those customers. As part of this client-oriented strategy, the Bank began to
implement customer relationship management ("CRM") technology to support
continuous improvement of its relationship with customers. The Bank continues
with this strategy.
In 2002, the economic crisis and the measures taken by the Argentine
government to deal with the crisis had a strong negative impact on financial
institutions' relations with their customers. After the first half of 2002, the
Bank implemented several initiatives to retain and recover customers by focusing
on quality of service and on those attributes of a bank that were most valued by
customers according to surveys. In addition, the Bank worked to continue
offering its customers transactional banking services and to provide concrete
benefits originating from the use of these services. The Bank's media presence
remained low until September 2002, when a promotional campaign with strong
advertising was launched.
In 2003 and 2004, the Bank implemented several programs aimed at improving
customer focus among Bank team members and Banco Galicia's image and "top of
mind" (immediate brand recollection) improved significantly, boosted by highly
successful advertising campaigns and by increased advertising and publicity
expenses. The customer satisfaction surveys for the last quarter of 2003 and
2004 showed a significant upturn in customers satisfaction rates, which regained
the pre-crisis levels. The development of constant promotional and loyalty
campaigns that highlighted the targeted attributes of the Bank's brand, the
Bank's focus on customer relationships, the increase in its overall business
activity and the resumption of credit granting contributed to the rebuilding of
the Bank's relations with its customers. The Bank has a leadership position in
the individual market and in the commercial banking business and a leadership
position in the middle-market and agribusiness sectors.
PROPERTY
We own 150 square meters of office space at Tte. Gral. Juan D. Peron 456,
2nd floor, Buenos Aires, Argentina, which houses our management, accounting,
administrative and investor relations functions.
We also own a building containing eight units, equivalent to 1,618.48
square meters, located at Maipu 241, Buenos Aires. Currently, we lease six of
these units to the Bank, equivalent to 1,218.63 square meters, for Ps. 13,260
per month, and hold one unit vacant for storage. The remaining unit is occupied
by Galicia Vida Compania de Seguros S.A.
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Galicia Retiro Compania de Seguros S.A. and Galicia Vida Compania de
Seguros S.A. own one unit each, equivalent to 728.48 and 914.89 square meters,
respectively, of the building already mentioned located at Maipu 241, Buenos
Aires, Argentina.
Net Investment owns 44.80 square meters at Tte. Gral. Juan D. Peron 456,
2nd floor, Buenos Aires, Argentina, where its administrative activities are
conducted.
Galicia Warrants owns four units which house its administrative
activities, equivalent to 118.15 square meters at Tte. Gral Juan D. Peron 456,
6th floor, Buenos Aires, Argentina. Additionally, the company owns a 47.917
square meters warehouse with a storage capacity of 40.000 tons of rice located
at Ruta Nacional No. 18, Km 209, San Salvador, Entre Rios, Republica Argentina.
In addition, Galicia Warrants rents warehouse space at Alto Verde, Chicligasta,
and at Alsina 3450, San Miguel de Tucuman, both in the Province of Tucuman,
which consist of 2,000 and 6,000 square meters, respectively, and office space
at San Martin 784, San Miguel de Tucuman, which consists of 85 square meters.
BANCO GALICIA
Banco Galicia's principal executive offices consist of approximately
17,270 square meters at Tte. Gral. Juan D. Peron 407, Buenos Aires. In addition,
Banco Galicia owns approximately 7,340 square meters at Florida 361, Buenos
Aires, and rents approximately 9,325 square meters of space at Tte. Gral. Juan
D. Peron 525, Buenos Aires and approximately 3,630 square meters of space at San
Martin 178/200, Buenos Aires. All spaces serve as annexes to the Bank's
principal executive offices.
In 1994, Banco Galicia purchased the building located at Reconquista
188/200, Buenos Aires and, between 1992 and 2000, it purchased the building
located at Tte. Gral. Juan D. Peron 444, Buenos Aires. In these locations,
construction commenced of a new corporate tower. The Bank plans to centralize a
significant portion of its offices that are currently in the vicinity in this
new corporate tower. The new corporate tower will consist of approximately
42,000 square meters. The works are expected to finalize in August 2006 and the
estimated remaining investment is US$ 32.0 million.
As of December 31, 2004, Banco Galicia's branch network consisted of 223
branches in Argentina, 137 of which were owned and 83 of which were rented by
Banco Galicia. The Argentine branches were located in 22 of Argentina's 23
provinces.
As of December 31, 2004, Galicia Uruguay owned two buildings: its head
office and the former Punta del Este branch. The head office of Galicia Uruguay
is located at Luis Alberto Herrera 1248, 21st and 22nd floors, Edificio World
Trade Center, Montevideo, Uruguay, and consists of approximately 880 square
meters. Galicia Uruguay also rents a warehouse in Montevideo, where it stores
documents. Galicia Cayman (in provisional liquidation) and the Cayman Branch are
located in the Cayman Islands and The Bank of Nova Scotia Trust Co. acts as its
registered office.
Tarjeta Naranja S.A. owns two buildings at Sucre 152 and Sucre 154,
Cordoba, Argentina, which house part of its management and administrative
functions. These buildings contain approximately 1,390 square meters. It also
owns a third building at Sucre 541, which is under remodeling in order to house
new office space. This building consists of approximately 1,800 square meters.
In addition, Tarjeta Naranja owns two buildings at San Jeronimo 2348 and San
Jeronimo 2350, Santa Fe, Argentina. One of them serves as administrative offices
and the other as a sales office. These buildings contain approximately 1,475
square meters. Tarjeta Naranja rents office space at Sucre 145/151 and La Rioja
375, Cordoba, which, in aggregate is approximately 3,670 square meters. These
locations serve as annexes to its principal executive offices. It also rents
warehouse space at Humberto 1(degree) 2165, Cordoba, which consists of
approximately 1,115 square meters, at La Rioja 364, Cordoba, which is
approximately 350 square meters and serves as a printing center for credit-card
statements, and at Los Andes 197, Cordoba, which is approximately 1,765 square
meters. As of December 31, 2004, Tarjeta Naranja operated 77 sales points
located in 20 of the 23 Argentine provinces, 75 of which were rented by the
company. This figure includes the branches that previously comprised Tarjeta
Comfiar's branch network.
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Tarjetas Cuyanas S.A's principal executive offices are rented. They
consist of approximately 1,160 square meters of space at Belgrano 1415, Mendoza,
Argentina. It also rents warehouse space at Olascoaga 348, San Jose, Mendoza,
Argentina, and at Godoy Cruz 382, Mendoza, Argentina, which consist of
approximately 580 and 200 square meters, respectively. As of December 31, 2004,
its distribution network consisted of 12 sales points located in the provinces
of Mendoza, San Juan and San Luis. All of them were rented.
Tarjetas del Mar S.A.'s principal executive offices are located at Luro
3001, Mar del Plata, Argentina. They contain approximately 240 square meters of
space. As of December 31, 2004, its distribution network consisted of three
sales points located in the province of Buenos Aires. Both the head office and
the branches were rented.
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, which are maintained under
accounting methods established by the Argentine Central Bank under Argentine
Banking GAAP, and do not reflect adjustments necessary to reflect the
information in accordance with U.S. GAAP. We have expressed all amounts in
millions of pesos, except percentages, ratios, multiples and per-share data.
Unless otherwise stated, in this section the exchange rate used to convert
foreign currency amounts into pesos was the exchange rate as of each relevant
date or period end that Banco Nacion or the Argentine Central Bank quoted. In
the case of dollars, until December 31, 2001, the Banco Nacion quotes for such
exchange rates were Ps. 1.0 per US$ 1.0. The exchange rate used for the
preparation of the financial statements as of December 31, 2002 and December 31,
2003, was Ps. 3.3630 per US$ 1.0 and Ps. 2.9330 per US$ 1.0 respectively. For
the preparation of the financial statements as of December 31, 2004 the exchange
rate used was Ps. 2.9738 per US$ 1.0. See Item 3. "Key Information -- Exchange
Rate Information," Item 3. "Key Information -- Risk Factors," and " -- Main
Regulatory Changes in 2002, 2003 and 2004."
The dollar-denominated assets and liabilities reflect balances held by the
Bank's Argentine operations, Galicia Uruguay, the former New York Branch and the
Cayman Branch and the nonbank affiliated companies required to be consolidated.
Until the suspension of its activities, as a result of the crisis, the Bank's
foreign branches or subsidiaries operated mainly in dollars.
In 2002, Argentina experienced a high rate of inflation. The WPI increased
approximately 118.44% between January 1, 2002 and December 31, 2002. Between
January 1, 2003 and February 28, 2003, the WPI increased 0.87%. Between January
1, 2002 and February 28, 2003, the WPI increased 120.35%. In accordance with the
then applicable accounting rules, starting January 1, 2002, our financial
statements and those of the Bank began to be adjusted for inflation.
Subsequently, as a result of the stabilization of the WPI during the first half
of 2003, the requirement that financial statements be prepared in constant
currency was eliminated for financial periods ending on or after March 1, 2003.
Accordingly, information included in this section as of and for the fiscal
year ended December 31, 2004 does not include any effect of inflation accounting
and information included in this section as of and for the fiscal year ended
December 31, 2003 includes the effects of inflation accounting through February
28, 2003, with the WPI increasing 0.87% between January 1, 2003 and February 28,
2003, while the information for periods prior to February 28, 2003 has been
restated in constant pesos as of February 28, 2003 applying the approximately
120.35% change in the WPI for the period from January 1, 2002 to February 28,
2003.
High rates of inflation affect the comparability of financial performance
on a period-to-period basis. Although inflation accounting improves the
comparability of the financial information, it does not eliminate or correct
many of the distortions created by inflation that will affect period-to-period
comparisons of financial information.
-44-
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 receivable and payable, are
calculated on a daily basis for Banco Galicia and Galicia Uruguay. The average
balances of interest-earning assets and interest bearing liabilities are
calculated on a monthly basis for Tarjetas Regionales S.A. and the regional
credit card companies in which it holds majority interests and for Grupo Galicia
and its nonbanking subsidiaries.
Average balances have been separated between those denominated in pesos
and those denominated in dollars. The nominal interest rate is the amount of
interest earned or paid during the period divided by the related average
balance.
Net gains/losses on government securities and related differences in
market quotations are included in interest earned. Banco Galicia manages its
trading activities in government securities as an integral part of its business.
Banco Galicia does not distinguish between interest income and market gains or
losses on its government securities portfolio. The non-accrual loans balance is
included in the average loan balance calculation.
For fiscal year 2002, the average nominal interest rates were converted to
real rates using the following formula:
1 + N(p) (1 + N(d)) (1 + D)
R(p) = --------- - 1 R(d) = ------------------ - 1
1 + I 1 + I
Where:
R(p) = real average rate for peso-denominated assets and liabilities
for the period;
R(d) = real average rate for foreign currency-denominated assets and
liabilities for the period;
N(p) = nominal average rate for peso-denominated assets and
liabilities for the period;
N(d) = nominal average rate for foreign currency-denominated assets
and liabilities for the period;
D = devaluation rate of the peso to the dollar for the period; and
I = inflation rate in Argentina for the period (based on the
variation of CER).
The real interest rate can be negative for a portfolio of peso-denominated
loans when the inflation rate for the period is higher than the average nominal
rate of the loan portfolio for the same period. A similar effect could occur for
a portfolio of foreign currency-denominated loans when the inflation rate for
the period is higher than the sum of the devaluation rate for the period and the
corresponding average nominal rate of the portfolio.
The formula for the average real rate for foreign currency-denominated
assets and liabilities (Rd) reflects a gain or loss in purchasing power caused
by the difference between the devaluation rate of the Argentine peso and the
inflation rate in Argentina during the period.
The following example illustrates the calculation of the real interest
rate for a U.S. dollar asset bearing a nominal annual interest rate of 10% (Nd =
0.10), assuming a 5% annual devaluation rate (D = 0.05) and a 12% annual
inflation rate (I = 0.12):
(1 + 0.10) (1 + 0.05)
R(d) = --------------------- - 1 = 3.125% per year
1 + 0.12
In the example, since the inflation rate was higher than the devaluation
rate, the real rate is lower than the nominal rate in dollars. If, for example,
the annual devaluation rate were 15%, using the same numbers, the real rate in
Argentine pesos would be 12.9%, which is higher than the nominal rate in
dollars. Using the same numbers, if the annual inflation rate were greater than
15.5%, the real rate would be negative.
-45-
\
The following table shows Grupo Galicia's consolidated average balances,
interest earned or paid and nominal interest rates for interest-earning assets
and interest-bearing liabilities for the fiscal year ended December 31, 2004.
GRUPO GALICIA, FISCAL YEAR ENDED DECEMBER 31, 2004 (*)
--------------------------------------------------------------
PESOS DOLLARS
----------------------------- -------------------------------
INTEREST VERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------ ---------- --------- --------
(in millions of pesos, except rates)
ASSETS
Government Securities............... Ps.1,226.7 Ps. 78.5 .6.40 Ps.2,012.0 Ps. (87.8) (4.36)
Loans...............................
Private Sector................... 3,213.9 490.9 15.27 907.3 44.1 4.86
Public Sector.................... 7,016.7 564.6 8.05 - - -
----------- -------- ----- ---------- -------- ------
Total Loans......................... 10,230.6 1,055.5 10.32 907.3 44.1 4.86
Other(1)............................ 1,385.8 92.5 6.67 4,973.0 73.3 1.47
----------- -------- ----- ---------- -------- ------
TOTAL INTEREST-EARNING ASSETS....... 12,843.1 1,226.5 9.55% 7,892.3 29.6 0.38%
Cash and Gold....................... 290.2 - - 150.0 - -
Equity in Other Companies........... 339.2 - - 88.5 - -
Other Assets........................ 2,142.9 - - 104.0 - -
Allowances.......................... (840.2) - - (284.1) - -
----------- -------- ----- ---------- -------- ------
TOTAL ASSETS........................ PS.14,775.2 - - PS.7,950.7 - -
LIABILITIES AND EQUITY
Deposits
Current Accounts................. 364.5 4.8 1.32% 69.5 - -
Saving Accounts.................. 767.1 4.2 0.55 267.4 - -
Time Deposits.................... 2,228.9 116.3 5.22 1,088.6 Ps. 18.2 1.67%
----------- -------- ----- ---------- -------- ------
TOTAL INTEREST-BEARING DEPOSITS 3,360.5 125.3 3.73 1,425.5 18.2 1.28
Argentine Central Bank.............. 8,165.6 698.9 8.56 - - -
Other Financial Entities............ 168.2 47.9 28.48 815.4 66.8 8.19
Debt Securities..................... 10.7 - - 3,179.9 27.6 0.87
Other .............................. 95.7 7.9 8.25 1,072.5 52.5 4.90
----------- -------- ----- ---------- -------- ------
TOTAL INTEREST-BEARING LIABILITIES.. 11,800.7 880.0 7.46% 6,493.3 165.1 2.54%
Demand deposits..................... 1,038.2 - - 34.0 - -
Other Liabilities................... 1,197.4 - - 558.2 - -
Minority Interests.................. 103.2 - - - - -
Shareholders' Equity................ 1,500.9 - - - - -
----------- -------- ----- ---------- -------- ------
TOTAL LIABILITIES AND EQUITY........ PS.15,640.4 - - PS.7,085.5 - -
SPREAD AND NET YIELD
Interest Rate Spread................ 2.09% (2.16)%
Cost of Funds Supporting
Interest-Earning Assets........... 6.85 2.09
Net Yield on Interest-Earning
Assets.............................. 2.70 (1.72)
=========== ======== ===== ========== ======== ======
GRUPO GALICIA, FISCAL YEAR ENDED DECEMBER 31, 2004 (*)
------------------------------------------------------
TOTAL
---------------------------------------
INTEREST AVERAGE
AVERAGE EARNED/ YIELD/
BALANCE PAID RATE
------------ -------- -------
(in millions of pesos, except rates)
ASSETS
Government Securities............... Ps. 3,238.7 Ps. (9.3) .(0.29)
Loans...............................
Private Sector................... 4,121.2 535.0 12.98
Public Sector.................... 7,016.7 564.6 8.05
------------ -------- ------
Total Loans......................... 11,137.9 1,099.6 9.87
Other(1)............................ 6,358.8 165.8 2.61
------------ -------- ------
TOTAL INTEREST-EARNING ASSETS....... 20,735.4 1,256.1 6.06%
Cash and Gold....................... 440.2 - -
Equity in Other Companies........... 427.7 - -
Other Assets........................ 2,246.9 - -
Allowances.......................... (1,124.3) - -
------------ -------- ------
TOTAL ASSETS........................ PS. 22,725.9 - -
LIABILITIES AND EQUITY
Deposits
Current Accounts................. 434.0 4.8 1.11%
Saving Accounts.................. 1,034.5 4.2 0.41
Time Deposits.................... 3,317.5 134.5 4.05
------------ -------- ------
TOTAL INTEREST-BEARING DEPOSITS 4,786.0 143.5 3.00
Argentine Central Bank.............. 8,165.6 698.9 8.56
Other Financial Entities............ 983.6 114.7 11.66
Debt Securities..................... 3,190.6 27.6 0.87
Other .............................. 1,168.2 60.4 5.17
------------ -------- ------
TOTAL INTEREST-BEARING LIABILITIES.. 18,294.0 1,045.1 5.71%
Demand deposits..................... 1,072.2 - -
Other Liabilities................... 1,755.6 - -
Minority Interests.................. 103.2 - -
Shareholders' Equity................ 1,500.9 - -
------------ -------- ------
TOTAL LIABILITIES AND EQUITY........ PS. 22,725.9 - -
SPREAD AND NET YIELD
Interest Rate Spread................ 0.35%
Cost of Funds Supporting
Interest-Earning Assets........... 5.04
Net Yield on Interest-Earning
Assets.............................. 1.02
============ ======== ======
(*) Rates include the CER adjustment.
(1) Includes the amounts corresponding to the Compensatory Bond and the Hedge
Bond to be received, among others.
-46-
The following table shows Grupo Galicia's consolidated average
balances, interest earned or paid and nominal interest rates for
interest-earning assets and interest-bearing liabilities for the fiscal year
ended December 31, 2003. In the table below, the Bank's holdings of Bogar were
not reclassified as government securities, being included under "Loans- Public
Sector" in pesos.
GRUPO GALICIA, FISCAL YEAR ENDED DECEMBER 31, 2003 (*)
----------------------------------------------------------------------------------------
PESOS DOLLARS
-------------------------------------------- ----------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
------------ -------- ------- ----------- -------- -------
(in millions of pesos, except rates)
ASSETS
Government Securities.................. Ps. 250.5 Ps. 23.3 9.30% Ps. 1,832.3 Ps. 48.2 2.63%
Loans
Private Sector...................... 2,981.0 705.6 23.67 986.2 89.2 9.04
Public Sector....................... 7,589.5 342.6 4.51 - - -
------------ -------- ----- ----------- -------- -------
Total Loans............................ 10,570.5 1,048.2 9.92 986.2 89.2 9.04
Other(1)............................... 1,309.3 61.1 4.67 5,776.3 64.4 1.11
------------ -------- ----- ----------- -------- -------
TOTAL INTEREST-EARNING ASSETS.......... 12,130.3 1,132.6 9.34% 8,594.8 201.8 2.35%
Cash and Gold.......................... 207.0 - - 135.5 - -
Equity in Other Companies.............. 462.1 - - 140.4 - -
Other Assets........................... 2,275.1 - - 128.2 - -
Allowances............................. (1,291.7) - - (251.4) - -
------------ -------- ----- ----------- -------- -------
TOTAL ASSETS........................... PS. 13,782.8 - - PS. 8,747.5 - -
LIABILITIES AND EQUITY
Deposits
Current Accounts.................... Ps. 185.1 Ps. 3.0 1.62% Ps. 30.5 - -
Saving Accounts..................... 434.6 3.4 0.78 178.5 - -
Time Deposits....................... 2,185.4 230.6 10.55 1,422.9 Ps. 26.8 1.88%
------------ -------- ----- ----------- -------- -------
TOTAL INTEREST-BEARING DEPOSITS 2,805.1 237.0 8.45 1,631.9 26.8 1.64
Argentine Central Bank................. 8,062.0 473.1 5.87 0.7 - -
Other Financial Entities............... 174.4 69.9 40.08 1,900.0 121.0 6.37
Debt Securities........................ - - - 2,710.5 154.2 5.69
Other ................................. 45.7 9.6 21.01 1,307.4 58.4 4.47
------------ -------- ----- ----------- -------- -------
TOTAL INTEREST-BEARING LIABILITIES..... 11,087.2 789.6 7.12% 7,550.5 360.4 4.77%
Demand deposits........................ 700.6 - - 72.2 - -
Other Liabilities...................... 939.4 - - 561.5 - -
Minority Interests..................... 89.5 - - 0.0 - -
Shareholders' Equity................... 1,529.4 - - - - -
------------ -------- ----- ----------- -------- -------
TOTAL LIABILITIES AND EQUITY........... PS. 14,346.1 - - PS. 8,184.2 - -
SPREAD AND NET YIELD
Interest Rate Spread................... 2.22% (2.42)%
Cost of Funds Supporting
Interest-Earning Assets.............. 6.51 4.19
Net Yield on Interest-Earning Assets... 2.83 (1.85)
============ ======== ===== =========== ======== =======
GRUPO GALICIA, FISCAL YEAR ENDED DECEMBER 31, 2003 (*)
------------------------------------------------------
TOTAL
---------------------------------------------
INTEREST AVERAGE
AVERAGE EARNED/ YIELD/
BALANCE PAID RATE
------------ -------- -------
(in millions of pesos, except rates)
ASSETS
Government Securities.................. Ps. 2,082.8 Ps. 71.5 3.43%
Loans
Private Sector...................... 3,967.2 794.8 20.03
Public Sector....................... 7,589.5 342.6 4.51
------------ ------- ------
Total Loans............................ 11,556.7 1,137.4 9.84
Other(1)............................... 7,085.6 125.5 1.77
------------ ------- ------
TOTAL INTEREST-EARNING ASSETS.......... 20,725.1 1,334.4 6.44%
Cash and Gold.......................... 342.5 - -
Equity in Other Companies 602.5 - -
Other Assets........................... 2,403.3 - -
Allowances............................. (1,543.1) - -
------------ ------- ------
TOTAL ASSETS........................... PS. 22,530.3 - -
LIABILITIES AND EQUITY
Deposits
Current Accounts.................... Ps. 215.6 Ps. 3.0 1.39%
Saving Accounts..................... 613.1 3.4 0.55
Time Deposits....................... 3,608.3 257.4 7.13
------------ ------- ------
TOTAL INTEREST-BEARING DEPOSITS 4,437.0 263.8 5.95
Argentine Central Bank................. 8,062.7 473.1 5.87
Other Financial Entities............... 2,074.4 190.9 9.20
Debt Securities........................ 2,710.5 154.2 5.69
Other ................................. 1,353.1 68.0 5.03
------------ ------- ------
TOTAL INTEREST-BEARING LIABILITIES..... 18,637.7 1,150.0 6.17%
Demand deposits........................ 772.8 - -
Other Liabilities...................... 1,500.9 - -
Minority Interests..................... 89.5 - -
Shareholders' Equity................... 1,529.4 - -
------------ ------- ------
TOTAL LIABILITIES AND EQUITY PS. 22,530.3 - -
SPREAD AND NET YIELD
Interest Rate Spread................... 0.27%
Cost of Funds Supporting
Interest-Earning Assets.............. 5.55
Net Yield on Interest-Earning Assets... 0.89
============ ======= ======
(*) Rates include the CER adjustment.
(1) Includes the amounts corresponding to the Compensatory Bond and the Hedge
Bond to be received, among others.
-47-
The following tables show Grupo Galicia's consolidated average balances,
interest earned or paid and nominal and real interest rates for interest-earning
assets and interest-bearing liabilities for the fiscal year ended December 31,
2002.
GRUPO GALICIA, FISCAL YEAR ENDED DECEMBER 31, 2002 (*)
---------------------------------------------------------------------------------------------
PESOS DOLLARS
-------------------------------------------- -------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- --------- ------- ------------ -------- ------
(in millions of February 28, 2003, constant pesos, except rates)
ASSETS
Government Securities............. Ps. 575.4 Ps. 213.7 37.14% Ps. 1,680.2 Ps. 84.9 5.05%
Loans
Private Sector................. 4,959.9 1,345.1 27.12 1,989.6 102.1 5.13
Public Sector.................. 8,312.9 2,956.9 35.57 - - -
----------- --------- ----- ------------ -------- -----
Total Loans....................... 13,272.8 4,302.0 32.41 1,989.6 102.1 5.13
Other(1).......................... 1,338.9 448.8 33.52 8,096.6 161.6 2.00
----------- --------- ----- ------------ -------- -----
TOTAL INTEREST-EARNING ASSETS..... 15,187.1 4,964.5 32.69% 11,766.4 348.6 2.96%
Cash and Gold..................... 226.6 - - 190.7 - -
Equity in Other Companies......... 538.5 - - 253.0 - -
Other Assets...................... 2,090.7 - - 670.0 - -
Allowances........................ (1,281.3) - - (140.8) - -
----------- --------- ----- ------------ -------- -----
TOTAL ASSETS...................... Ps.16,761.6 - - Ps. 12,739.3 - -
LIABILITIES AND EQUITY
Deposits
Current Accounts............... Ps. 161.7 Ps. 17.1 10.58% Ps. 32.9 Ps. 0.4 1.22%
Saving Accounts................ 1,000.3 6.6 0.66 451.5 2.5 0.55
Time Deposits.................. 2,917.4 1,214.1 41.62 3,454.1 120.6 3.49
----------- --------- ----- ------------ -------- -----
TOTAL INTEREST-BEARING DEPOSITS 4,079.4 1,237.8 30.34 3,938.5 123.5 3.14
Argentine Central Bank............ 7,144.1 2,237.7 31.32 3.5 0.1 2.86
Other Financial Entities.......... 198.8 29.8 14.99 2,579.9 216.1 8.38
Debt Securities................... 16.3 2.4 14.72 2,552.2 149.2 5.85
Other ............................ 769.9 200.8 26.08 1,613.7 128.6 7.97
----------- --------- ----- ------------ -------- -----
TOTAL INTEREST-BEARING LIABILITIES 12,208.5 3,708.5 30.38% 10,687.8 617.5 5.78%
Demand deposits................... 622.9 - - 232.0 - -
Other Liabilities................. 2,455.7 - - 714.7 - -
Minority Interests................ 147.4 - - 0.0 - -
Shareholders' Equity.............. 2,431.9 - - - - -
----------- --------- ----- ------------ -------- -----
TOTAL LIABILITIES AND EQUITY...... Ps.17,866.4 - - Ps. 11,634.5 - -
SPREAD AND NET YIELD
Interest Rate Spread.............. 2.31% (2.82)%
Cost of Funds Supporting
Interest-Earning Assets......... 24.42 5.25
Net Yield on Interest-Earning
Assets.......................... 8.27 (2.29)
=========== ========= ===== ============ ======== =====
GRUPO GALICIA, FISCAL YEAR ENDED DECEMBER 31, 2002 (*)
------------------------------------------------------
TOTAL
--------------------------------------------
INTEREST AVERAGE
AVERAGE EARNED/ YIELD/
BALANCE PAID RATE
------------ --------- -------
(in millions of February 28, 2003, constant pesos, except rates)
ASSETS
Government Securities............. Ps. 2,255.6 Ps. 298.6 13.24%
Loans
Private Sector................. 6,949.5 1,447.2 20.82
Public Sector.................. 8,312.9 2,956.9 35.57
------------ --------- -----
Total Loans....................... 15,262.4 4,404.1 28.86
Other(1).......................... 9,435.5 610.4 6.47
------------ --------- -----
TOTAL INTEREST-EARNING ASSETS..... 26,953.5 5,313.1 19.71%
Cash and Gold..................... 417.3 - -
Equity in Other Companies......... 791.5 - -
Other Assets...................... 2,760.7 - -
Allowances........................ (1,422.1) - -
------------ --------- -----
TOTAL ASSETS...................... Ps. 29,500.9 - -
LIABILITIES AND EQUITY
Deposits
Current Accounts............... Ps. 194.6 Ps. 17.5 8.99%
Saving Accounts................ 1,451.8 9.1 0.63
Time Deposits.................. 6,371.5 1,334.7 20.95
------------ --------- -----
TOTAL INTEREST-BEARING DEPOSITS 8,017.9 1,361.3 16.98
Argentine Central Bank............ 7,147.6 2,237.8 31.31
Other Financial Entities 2,778.7 245.9 8.85
Debt Securities................... 2,568.5 151.6 5.90
Other ............................ 2,383.6 329.4 13.82
------------ --------- -----
TOTAL INTEREST-BEARING LIABILITIES 22,896.3 4,326.0 18.89%
Demand deposits................... 854.9 - -
Other Liabilities................. 3,170.4 - -
Minority Interests................ 147.4 - -
Shareholders' Equity.............. 2,431.9 - -
------------ --------- -----
TOTAL LIABILITIES AND EQUITY Ps. 29,500.9 - -
SPREAD AND NET YIELD
Interest Rate Spread.............. 0.82%
Cost of Funds Supporting
Interest-Earning Assets......... 16.05
Net Yield on Interest-Earning
Assets.......................... 3.66
============ ========= =====
(*) Rates include the CER adjustment.
(1) Includes the amounts corresponding to the Compensatory Bond and the Hedge
Bond to be received, among others.
-48-
GRUPO GALICIA, FISCAL YEAR ENDED DECEMBER 31, 2002 (*)
------------------------------------------------------------------------------------
PESOS DOLLARS
------------------------------------- ------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ REAL/ AVERAGE EARNED/ REAL/
BALANCE PAID RATE BALANCE PAID RATE
------------ --------- ------- ------------ -------- -------
(in millions of February 28, 2003, constant pesos, except rates)
ASSETS
Government Securities.............. Ps. 575.4 Ps. 213.7 (37.22)% Ps. 1,680.2 Ps. 84.9 61.74%
Loans
Private Sector.................. 4,959.9 1,345.1 (41.81) 1,989.6 102.1 61.85
Public Sector................... 8,312.9 2,956.9 (37.94) 0.0 0.0 0.00
------------ --------- ------- ------------ -------- -------
Total Loans........................ 13,272.8 4,302.0 (39.38) 1,989.6 102.1 61.85
Other(1)........................... 1,338.9 448.8 (38.88) 8,096.6 161.6 57.03
------------ --------- ------- ------------ -------- -------
TOTAL INTEREST-EARNING ASSETS...... 15,187.1 4,964.5 (39.26)% 11,766.4 348.6 58.52%
Cash and Gold...................... 226.6 - - 190.7 - -
Equity in Other Companies.......... 538.5 - - 253.0 - -
Other Assets....................... 2,090.7 - - 670.0 - -
Allowances......................... (1,281.3) - - (140.8) - -
------------ --------- ------- ------------ -------- -------
TOTAL ASSETS....................... Ps. 16,761.6 - - Ps. 12,739.3 - -
LIABILITIES AND EQUITY
Deposits
Current Accounts................ Ps. 161.7 Ps. 17.1 (49.36)% Ps. 32.9 Ps. 0.4 55.83%
Saving Accounts................. 1,000.3 6.6 (53.92) 451.5 2.5 54.82
Time Deposits................... 2,917.4 1,214.1 (35.17) 3,454.1 120.6 59.33
------------ --------- ------- ------------ -------- -------
TOTAL INTEREST-BEARING DEPOSITS.... 4,079.4 1,237.8 (40.33) 3,938.5 123.5 58.78
Argentine Central Bank............. 7,144.1 2,237.7 (39.88) 3.5 0.1 58.05
Other Financial Entities........... 198.8 29.8 (47.37) 2,579.9 216.1 66.85
Debt Securities.................... 16.3 2.4 (47.54) 2,552.2 149.2 62.96
Other ............................. 769.9 200.8 (42.27) 1,613.7 128.6 66.23
------------ --------- ------- ------------ -------- -------
TOTAL INTEREST-BEARING
LIABILITIES...................... 12,208.5 3,708.5 (40.32)% 10,687.8 617.5 62.85%
Demand deposits.................... 622.9 - - 232.0 - -
Other Liabilities.................. 2,455.7 - - 714.7 - -
Minority Interests................. 147.4 - - - - -
Shareholders' Equity............... 2,431.9 - - - - -
------------ --------- ------- ------------ -------- -------
TOTAL LIABILITIES AND EQUITY....... Ps. 17,866.4 - - Ps. 11,634.5 - -
SPREAD AND NET YIELD
Interest Rate Spread............... 1.06% (4.33)%
Cost of Funds Supporting
Interest-Earning Assets.......... (43.04) 62.03
Net Yield on Interest-Earning
Assets........................... (50.44) 50.43
============ ========= ======= ============ ======== =======
GRUPO GALICIA, FISCAL YEAR ENDED DECEMBER 31, 2002 (*)
------------------------------------------------------
TOTAL
-----------------------------------
INTEREST AVERAGE
AVERAGE EARNED/ REAL/
BALANCE PAID RATE
----------- --------- -------
(in millions of February 28, 2003, constant pesos, except rates)
ASSETS
Government Securities.............. Ps. 2,255.6 Ps. 298.6 36.49%
Loans
Private Sector.................. 6,949.5 1,447.2 (12.13)
Public Sector................... 8,312.9 2,956.9 (37.94)
----------- --------- -------
Total Loans........................ 15,262.4 4,404.1 (26.18)
Other(1)........................... 9,435.5 610.4 43.42
----------- --------- -------
TOTAL INTEREST-EARNING ASSETS...... 26,953.5 5,313.1 3.43%
Cash and Gold...................... 417.3 - -
Equity in Other Companies.......... 791.5 - -
Other Assets....................... 2,760.7 - -
Allowances......................... (1,422.1) - -
----------- --------- -------
TOTAL ASSETS....................... Ps.29,500.9 - -
LIABILITIES AND EQUITY
Deposits
Current Accounts................ Ps. 194.6 Ps. 17.5 (31.57)%
Saving Accounts................. 1,451.8 9.1 (20.11)
Time Deposits................... 6,371.5 1,334.7 16.06
----------- --------- -------
TOTAL INTEREST-BEARING DEPOSITS.... 8,017.9 1,361.3 8.35
Argentine Central Bank............. 7,147.6 2,237.8 (39.83)
Other Financial Entities........... 2,778.7 245.9 58.68
Debt Securities.................... 2,568.5 151.6 62.26
Other ............................. 2,383.6 329.4 31.19
----------- --------- -------
TOTAL INTEREST-BEARING
LIABILITIES...................... 22,896.3 4,326.0 7.84%
Demand deposits.................... 854.9 - -
Other Liabilities.................. 3,170.4 - -
Minority Interests................. 147.4 - -
Shareholders' Equity............... 2,431.9 - -
----------- --------- -------
TOTAL LIABILITIES AND EQUITY....... Ps.29,500.9 - -
SPREAD AND NET YIELD
Interest Rate Spread............... (4.41)%
Cost of Funds Supporting
Interest-Earning Assets.......... 2.83
Net Yield on Interest-Earning
Assets........................... (6.41)
=========== ========= =======
(*) Rates include the CER adjustment.
(1) Includes the amounts corresponding to the Compensatory Bond and the Hedge
Bond to be received, among others.
CHANGES IN NET INTEREST INCOME--VOLUME AND RATE ANALYSIS
The following table allocates, by currency, changes in Grupo Galicia's
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 nominal interest rates for (i) the fiscal year ended
December 31, 2004 compared with the fiscal year ended December 31, 2003; and
(ii) the fiscal year ended December 31, 2003, compared with the fiscal year
ended December 31, 2002. Differences related to rate or volume are allocated
proportionally to the rate variance and the volume variance, respectively.
-49-
FISCAL YEAR 2004/ FISCAL YEAR 2003, FISCAL YEAR 2003/ FISCAL YEAR 2002,
INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE TO
TO CHANGES IN CHANGES IN
------------------------------------ ---------------------------------------
VOLUME RATE NET CHANGE VOLUME RATE NET CHANGE
--------- ----------- ---------- ---------- ------------ -----------
(in millions of pesos)
INTEREST EARNING ASSETS
Government securities
Pesos.......................... Ps. 60.0 Ps. (4.8) Ps. 55.2 Ps. (81.8) Ps. (108.6) Ps. (190.4)
Dollars........................ 5.2 (141.2) (136.0) 8.5 (45.2) (36.7)
--------- ----------- ---------- ---------- ------------ -----------
Total ............................... 65.2 (146.0) (80.8) (73.3) (153.8) (227.1)
Loans
Private Sector
Pesos.......................... 60.7 (275.4) (214.7) (484.9) (154.6) (639.5)
Dollars........................ (6.7) (38.4) (45.1) 25.2 (38.1) (12.9)
--------- ----------- ---------- ---------- ------------ -----------
Total ............................... 54.0 (313.8) (259.8) (459.7) (192.7) (652.4)
Public Sector
Pesos.......................... (23.7) 245.7 222.0 (236.9) (2,377.4) (2,614.3)
Dollars........................ - - - - - -
--------- ----------- ---------- ---------- ------------ -----------
Total ............................... (23.7) 245.7 222.0 (236.9) (2,377.4) (2,614.3)
Other
Pesos.......................... 3.8 27.6 31.4 (9.7) (378.0) (387.7)
Dollars........................ (6.8) 15.7 8.9 (38.2) (59.0) (97.2)
--------- ----------- ---------- ---------- ------------ -----------
Total ............................... (3.0) 43.3 40.3 (47.9) (437.0) (484.9)
TOTAL INTEREST-EARNING ASSETS
Pesos.......................... 100.8 (6.9) 93.9 (813.3) (3,018.6) (3831.9)
Dollars........................ (8.3) (163.9) (172.2) (4.5) (142.3) (146.8)
--------- ----------- ---------- ---------- ------------ -----------
TOTAL ............................... Ps. 92.5 Ps. (170.8) Ps. (78.3) Ps. (817.8) Ps. (3,160.9) Ps.(3,978.7)
--------- ----------- ---------- ---------- ------------ -----------
INTEREST BEARING LIABILITIES
Demand Account
Pesos.......................... 2.3 (0.5) 1.8 2.9 (17.0) (14.1)
Dollars........................ - - - - (0.4) (0.4)
--------- ----------- ---------- ---------- ------------ -----------
Total ............................... 2.3 (0.5) 1.8 2.9 (17.4) (14.5)
Saving Account
Pesos.......................... 1.4 (0.6) 0.8 (4.8) 1.6 (3.2)
Dollars........................ - - - (0.9) (1.6) (2.5)
--------- ----------- ---------- ---------- ------------ -----------
Total ............................... 1.4 (0.6) 0.8 (5.7) - (5.7)
Time Deposits
Pesos.......................... 4.7 (119.0) (114.3) (247.4) (736.1) (983.5)
Dollars........................ (5.8) (2.8) (8.6) (52.6) (41.2) (93.8)
--------- ----------- ---------- ---------- ------------ -----------
Total ............................... (1.1) (121.8) (122.9) (300.0) (777.3) (1077.3)
With the Argentine Central Bank
Pesos.......................... 6.2 219.6 225.8 331.4 (2096.0) (1764.6)
Dollars........................ - - - - (0.1) (0.1)
--------- ----------- ---------- ---------- ------------ -----------
Total ............................... 6.2 219.6 225.8 331.4 (2096.1) (1764.7)
With Other Financial Entities
Pesos.......................... (2.4) (19.6) (22.0) (3.2) 43.3 40.1
Dollars........................ (108.8) 54.6 (54.2) (49.8) (45.3) (95.1)
--------- ----------- ---------- ---------- ------------ -----------
Total ............................... (111.2) 35.0 (76.2) (53.0) (2.0) (55.0)
Negotiable Obligations
Pesos.......................... - - - (0.3) (2.1) (2.4)
Dollars........................ 33.9 (160.5) (126.6) 8.1 (3.1) 5.0
--------- ----------- ---------- ---------- ------------ -----------
Total ............................... 33.9 (160.5) (126.6) 7.8 (5.2) 2.6
Other liabilities
Pesos.......................... 6.4 (8.1) (1.7) (158.4) (32.8) (191.2)
Dollars........................ (12.6) 6.7 (5.9) (21.2) (49.0) (70.2)
--------- ----------- ---------- ---------- ------------ -----------
Total ............................... (6.2) (1.4) (7.6) (179.6) (81.8) (261.4)
TOTAL INTEREST BEARING LIABILITIES
Pesos.......................... 18.6 71.8 90.4 (79.8) (2839.1) (2918.9)
Dollars........................ (93.3) (102.0) (195.3) (116.4) (140.7) (257.1)
--------- ----------- ---------- ---------- ------------ -----------
TOTAL ............................... Ps. (74.7) Ps. (30.2) Ps. (104.9) Ps. (196.2) Ps. (2979.8) Ps. (3176.0)
--------- ----------- ---------- ---------- ------------ -----------
In the table above, the Bank's holdings of Bogar were not reclassified as
government securities in 2003, being included under "Loans- Public Sector" in
pesos.
-50-
INTEREST-EARNING ASSETS -- NET YIELD ON INTEREST-EARNING ASSETS
The following table analyzes, by currency of denomination, the levels of
Grupo Galicia's and Banco Galicia's average interest-earning assets and net
interest earned, and illustrates the net yields and spreads obtained, for each
of the periods indicated.
GRUPO GALICIA
-------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------------
2004 2003 2002
------------ ------------ ------------
TOTAL AVERAGE INTEREST-EARNING ASSETS
Pesos......................................... Ps. 12,843.1 Ps. 12,130.3 Ps. 15,187.1
Dollars....................................... 7,892.3 8,594.8 11,766.4
------------ ------------ ------------
TOTAL............................................. 20,735.4 20,725.1 26,953.5
NET INTEREST EARNED (1)
Pesos......................................... 346.5 343.0 1,256.0
Dollars....................................... (135.5) (158.6) (268.9)
------------ ------------ ------------
TOTAL............................................. 211.0 184.4 987.1
NET YIELD ON INTEREST-EARNING ASSETS (2) (%)
Pesos......................................... 2.70 2.83 8.27
Dollars....................................... (1.72) (1.85) (2.29)
------------ ------------ ------------
WEIGHTED-AVERAGE YIELD............................ 1.02 0.89 3.66
INTEREST SPREAD, NOMINAL BASIS (3) (%)
Pesos......................................... 2.09 2.22 2.31
Dollars....................................... (2.16) (2.42) (2.82)
------------ ------------ ------------
WEIGHTED-AVERAGE YIELD............................ 0.35 0.27 0.82
NET YIELD ON INTEREST-EARNING ASSETS, REAL BASIS
(4) (%)
Pesos......................................... - - (50.44)
Dollars....................................... - - 50.43
------------ ------------ ------------
WEIGHTED-AVERAGE YIELD............................ - - (6.41)
INTEREST SPREAD, REAL BASIS (4) (%)
Pesos......................................... - - 1.06
Dollars....................................... - - (4.33)
------------ ------------ ------------
WEIGHTED-AVERAGE YIELD............................ - - (4.41)
------------ ------------ ------------
CREDIT RELATED FEES INCLUDED IN NET INTEREST
EARNED
Pesos....................................... 20.7 15.7 41.7
Dollars..................................... - - 0.4
TOTAL............................................. 20.7 15.7 42.1
============= ============ ============
(1) Net interest earned corresponds to the Group's net financial income plus:
- Credit related fees (included in "Income from Services - In
Relation to Lending Transactions" in the Income Statement)
- Contributions to the deposit insurance system, and contributions
and taxes on financial income included in the income statement
line "Financial Expenses - Other," minus:
- Net income from corporate securities included under "Financial
Income/Expenses- Interest Income and Holdings Gains/Losses from
Government and Corporate Securities," in the income statement, and
- Differences in quotation of gold and foreign currency and premiums
on foreign currency transactions, included in "Financial
Income/Expenses - Other," in the income statement.
(2) Net interest earned, divided by average interest-earning assets.
(3) Interest spread, nominal basis is the difference between the average
nominal interest rate on interest-earning assets and the average nominal
interest rate on interest-bearing deposits.
(4) Net interest margin and interest spread, presented on a real basis, when
compared with the corresponding information presented on a nominal basis,
reflect the gain or loss in purchasing power of the dollar caused by the
difference between the pesos fluctuation and inflation in Argentina for
each period.
-51-
GOVERNMENT AND CORPORATE SECURITIES
The following table shows Grupo Galicia's holdings of government and
corporate securities at the balance sheet dates, and the breakdown of the
portfolio in accordance with the Argentine Central Bank classification system
and by the securities' currency of denomination. As of December 31, 2003, and
December 31, 2002, the Bank's holdings of government and corporate securities
were identical to its net position as the Bank did not enter into any forward
purchases or sales and no spot transactions pending settlement were outstanding
as of those dates.
GRUPO GALICIA,
----------------------------
AS OF DECEMBER 31,
----------------------------
2004 2003
----------- -----------
GOVERNMENT SECURITIES (in millions of pesos)
Pesos
Trading........................................................... Ps. 5.7 Ps. 3.9
Investments....................................................... - -
Available for Sale................................................ - -
Issued by the Argentine Central Bank.............................. 508.5 309.2
Unlisted Securities............................................... 3,621.7 3,622.4
----------- -----------
Total Government Securities in Pesos.................................. Ps. 4,135.9 Ps. 3,935.5
Dollars(1)
Trading........................................................... Ps. 31.1 Ps. 14.5
Investments....................................................... 601.3 1,610.0
Unlisted Securities .............................................. 749.7 847.1
----------- -----------
TOTAL GOVERNMENT SECURITIES IN DOLLARS................................ Ps. 1,382.1 Ps. 2,471.6
----------- -----------
TOTAL GOVERNMENT SECURITIES........................................... Ps. 5,518.0 Ps. 6,407.1
CORPORATE EQUITY SECURITIES (QUOTED)
Pesos............................................................. - -
Dollars........................................................... - -
----------- -----------
TOTAL CORPORATE EQUITY SECURITIES .................................... - -
----------- -----------
TOTAL GOVERNMENT AND CORPORATE EQUITY SECURITIES ..................... Ps. 5,518.0 Ps. 6,407.1
MUTUAL FUNDS.......................................................... - -
CORPORATE DEBT SECURITIES
Pesos............................................................. Ps. 0.8 Ps. 0.2
Dollars........................................................... 15.3 1.0
----------- -----------
TOTAL CORPORATE DEBT SECURITIES....................................... Ps. 16.1 Ps. 1.2
----------- -----------
TOTAL GOVERNMENT AND CORPORATE SECURITIES ............................ Ps. 5,534.1 Ps. 6,408.3
=========== ===========
As of December 31, 2004, the Group's portfolio of government securities
amounted to Ps. 5,518.0 million. Of such total, Ps. 5,497.5 million corresponded
to the Bank, Ps.17.6 million to Sudamericana Holding S.A., Ps.2.2 million to
Grupo Galicia on a non-consolidated basis, and the remaining Ps.0.7 million to
Galicia Warrants. The Bank's total mainly comprised: (i) under "In pesos-
Unlisted Securities, "peso-denominated Bogar for Ps.3,540.3 million and
peso-denominated Fiscal Credit Certificates for Ps.78.2 million; (ii) under "In
pesos - Issued by the Argentine Central Bank," peso-denominated Lebac for Ps.
496.5 million; (iii) under "In dollars- Unlisted Securities," dollar-denominated
External Notes for Ps. 749.7 million; and (iv) under "In dollars-Investments,"
Boden 2012 for Ps. 601.3 million (held for investment in the Argentine Central
Bank classification system), all of them recorded by the Bank in Argentina and,
except the Lebac, all of them issued by the Argentine Government.
As of December 31, 2004 and based on quoted market prices:
- The market value of the Boden 2012 recorded as government securities
was Ps.496.9 million. This amount represents the Boden 2012
corresponding to the Compensatory Bond actually received by the
Bank, net of the amounts transferred to Galicia Uruguay and used by
the latter to settle the exchange offer made to its depositors in
early 2004, the amounts used to settle the restructuring of the
Bank's foreign debt completed in May 2004 and the amounts used to
enter into repurchase agreements (the latter are recorded under
"Other Receivables from Financial Brokerage as explained below).
- The total amount of Boden 2012 recorded in the Bank's books was Ps.
5,708.4 million. In addition to the Boden 2012 recorded as
government securities, this total comprises (recorded under "Other
-52-
Receivables for Financial Intermediation") the Boden 2012 receivable
corresponding to the Compensatory Bond and the Boden 2012 to be
acquired corresponding to the Hedge Bond, both representing
compensation for the asymmetric pesification it is entitled to in
accordance Argentine government regulations, for Ps. 4,732.3
million, and forward purchases of Boden 2012 in connection with
repurchase agreements, for Ps. 374.8 million. Of the Bank's total
position of Boden 2012, Ps. 5,489.1 million represent principal. The
market value of such Boden 2012 principal amount, as of December 31,
2004, was Ps.4,574.7 million. It should be noted that 32.5% of such
Boden 2012 will be granted as collateral of the advance from the
Argentine Central Bank to purchase the Hedge Bond. Computing such
Boden 2012 at par, the difference between the book value of the
Bank's Boden 2012 not to be granted as collateral and their market
value decreases to Ps. 617.7 million.
- The market value of the Bogar was Ps.2,831.7 million. It should be
noted that all of the Bank's Bogar have either been granted as
collateral of the financial assistance from the Argentine Central
Bank or will be granted as collateral of the advance to be granted
by the Argentine Central Bank to purchase the Hedge Bond.
- The Bank's holdings of Lebac were marked to market.
- There was no market for the External Notes, which were tendered to
the exchange offered by the Argentine government to restructure its
defaulted foreign debt in January 2005. See Item 3."Key Information
-- Risk Factors -- Risk Factors Relating to the Bank -- The value at
which the Bank has recorded Discount Bonds in pesos, which it
elected to receive in exchange of its holdings of Argentine Republic
External Notes, does not reflect the reduction in principal
established by the terms and conditions of the Argentine
government's exchange offer."
After the close of fiscal year 2004, on March 21, 2005, the Bank decided
to accept the amount of Boden 2012 corresponding to the Compensatory and the
Hedge Bonds determined by the Argentine Central Bank, this being the first of a
series of steps that will conclude in the receipt by the Bank of the agreed
amount of Boden 2012 corresponding to the Compensatory Bond, and in the
Argentine Central Bank actually granting the advance to purchase the Boden 2012
corresponding to the Hedge Bond and the Bank actually granting certain assets as
collateral of such advance. The Bank has the option set in Decree No. 905/02 to
either purchase the Hedge Bond with public sector assets granted as collateral
of such advance or netting the assets granted as collateral of such advance
against such liability. See "Main Regulatory Changes in 2002, 2003 and 2004 --
Compensation to Financial Institutions -- For the Asymmetric Pesification and
its Consequences."
As of December 31, 2004, the Bogar were recorded under "Government
Securities" while in previous periods they were recorded under "Loans". This is
a consequence of the fact that, for the time being, the Bank will not make use
of its chosen option to exchange the Bogar for Secured Loans. For comparative
purposes, the holdings of Bogar were reclassified as government securities also
as of December 31, 2003.
As of December 31, 2003, the Group's portfolio of government securities
amounted to Ps. 6,407.1 million. Of such total, Ps. 6,401.8 million corresponded
to the Bank and the remaining Ps. 6.5 million to Sudamericana Holding S.A. The
Bank's total mainly comprised (i) peso-denominated Lebac for Ps. 309.2 million
(under "In pesos- Trading"), (ii) peso-denominated Bogar for Ps. 3,539.6 million
and peso-denominated Fiscal Credit Certificates (under "In pesos- Unlisted
Securities) for Ps. 78.6 million, and (iii) dollar-denominated External Notes
for Ps. 840.2 million and Boden 2012 for Ps. 1,610.0 million (under "In
dollars-Investments," held for investment in the Argentine Central Bank
classification system). All of them were recorded by the Bank in Argentina.
The Ps. 889.1 million decrease in the Group's holdings of government
securities in 2004 from the Ps. 6,407.1 million as of December 31, 2003 was
mainly due to: (i) the transfer to Galicia Uruguay of U$S 170.0 million of face
value of Boden 2012, equivalent to Ps. 505.5 million, as partial repayment of
the Bank's debt with such subsidiary, which bonds were used by Galicia Uruguay
to settle the exchange offer made to its depositors; (ii) the use of U$S 37.0
million of face value of Boden 2012, equivalent to Ps. 110.0 million, to settle
the Boden offer in the restructuring of the Bank's foreign debt completed in May
2004; (iii) the use of U$S 125.0 million of face value of Boden 2012, equivalent
to Ps. 371.7 million in connection with repurchase agreements; and (iv) the Ps.
90.5 million decrease in the valuation of the Bank's holdings of External Notes
in accordance with Argentine Central
-53-
Bank's Communique "A" 4084 (See " -- Valuation" below). These decreases were
partially offset by the increase in the Bank's holdings of Lebac in the amount
of Ps. 199.3 million.
Valuation
In accordance with Argentine Central Bank rules, quoted government
securities held-for-trading purposes are carried at their Argentine closing
market quotation less estimated selling costs.
Beginning on March 1, 2000, quoted government securities classified as
investments began to be carried at their acquisition cost increased at the end
of each service period by the corresponding coupon rate.
Through its Communique "A" 3278, the Argentine Central Bank established
that effective June 1, 2001, quoted government securities in investment accounts
had to be valued at their acquisition cost increased by accruing their internal
rate of return over the period elapsed since the date of inclusion of the
securities in the investment account category. This was also applicable to the
securities incorporated in investment accounts prior to June 1, 2001. In this
case, the acquisition cost was established as their book value as of May 31,
2001, resulting from the previous valuation rules. The change in valuation rules
was not meant to be retroactive nor should it generate any accounting
adjustments. For government securities previously included in trading accounts,
the cost value is their closing market value as of the day before their transfer
to an investment account. In accordance with Argentine Central Bank rules, the
carrying value of investment-account securities must be reduced at each month
end for the positive difference between their book value and their market value
increased by 20%.
For the securities received by financial institutions as compensation for
the effects of the asymmetric pesification under the provisions of Decrees No.
905/02 and No. 2167/02 carried at their face value (in the Bank's case, Boden
2012), the reduction mentioned in the preceding paragraph for the difference
between book value and market value increased by 20.0% is not applicable.
However, on October 29, 2002, Argentine Central Bank Communique "A" 3785
restricted the distribution of cash dividends by establishing that banks should
adjust their earnings to be distributed as cash dividends with the difference
between the market value and the carrying value of these bonds.
Argentine Central Bank Communique "A" 3857, dated January 7, 2003,
established that financial institutions could record as investments, only those
securities incorporated to their balance sheets through December 31, 2002. After
that date, the value of any securities (except the Compensatory and the Hedge
Bonds received and to be received according to applicable compensation rules or
other compensation to be received) incorporated into a bank's position will be
marked-to-market.
In accordance with Argentine Central Bank accounting rules, the Bank
recorded the Boden 2012 already received and its right to acquire Boden 2012 in
the future as assets having equal value to 100% of the face value of such Boden
2012. The estimated market value of these assets is significantly lower. As of
May 20, 2005, the Boden 2012 were trading at approximately 87.18% of par value.
See Item 3. "Key Information -- Risk Factors -- Risk Factors Relating to the
Bank -- The Bank has recorded Boden 2012 and its rights to receive or acquire
future Boden 2012 as assets having a value equal to the face amount of the Boden
2012 received or to be received and acquired, which does not reflect its actual
market value," and Item 3. "Key Information -- Risk Factors -- Risk Factors
Relating to the Bank -- The Boden 2012 may be subject to subsequent
renegotiation."
As of December 31, 2004, the External Notes and the Tax Credit
Certificates were subject to a payment default. The Tax Credit Certificates can
be used for tax payments.
By means of Communique "A" 3911, dated March 28, 2003, the Argentine
Central Bank established a new method for the valuation of secured loans (Decree
No. 1387/01), government securities not subject to capital requirements to cover
market risks (unlisted government securities), secured promissory notes or bonds
(Bogar) issued by the FFDP (Decree No. 1579/02), and other loans to the
non-financial public sector, except for, among others, government securities
accounted in investment accounts, the Compensatory and the Hedge Bonds and
securities issued by the Argentine Central Bank (Lebac).
-54-
Beginning with the financial statements for March 2003, included assets
had to be valued at the lowest between their face and their present values. In
order to determine the present value, the Argentine Central Bank established a
discount rate that increased gradually over time. Its initial value was 3.0% per
annum, to be applied until December 2003, thereafter, increasing gradually
(every six months or annually) in accordance with a pre-determined schedule. The
face value is the balance of each instrument according to its contractual terms.
The difference between the present and face values (the lowest of both), and the
book value must be reflected in an asset regularizing account, in case of a
positive difference, or be charged to income in case the difference is negative.
Subsequently, Communique "A" 4084, dated January 30, 2004, introduced
certain changes to the provisions set forth by Communique "A" 3911:
- It excluded from valuation at present value those public-sector assets
granted as collateral of advances from the Argentine Central Bank to
purchase Boden (both for banks' customers and held by banks) set forth in
sections 10, 11 and 12 of Decree No. 905/02. These assets may be recorded
at the value determined by the Argentine Central Bank for their use as
collateral;
- It established the valuation method for past-due and unpaid public-sector
assets. In this case, in order to calculate the present value thereof, the
cash flow of the Bogar must be used; except if these assets are applied to
the payment of taxes; and
- It provided for the reversal of interest accrued on past-due and unpaid
public-sector assets included in the exchange offer to restructure
Argentina's sovereign debt after December 31, 2001, if applicable.
In addition, Communique "A" 4095, dated February 10, 2004, provided that
adjustments resulting from the application of Communique "A" 4084 should be
recorded as adjustments to prior fiscal years' results.
By means of Communique "A" 4163, published on July 2, 2004, the Argentine
Central Bank modified the schedule of discount rates applicable to determine the
present value of the cash flows of public-sector assets. The main changes
introduced were the following: (i) the reduction in discount rates, mainly in
2005; (ii) the monthly increase in the applicable discount rates, which under
the previous regulation (Communique "A" 3911) increased at the beginning of
semi-annual or annual periods, depending on the year; and (iii) the postponement
of the date for the application of the "average market rate" as discount rate,
from January 2008 to June 2008. The applicable discount rates are shown in the
following table:
JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPT. OCTOBER NOV. DEC.
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
2003 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00
2004 3.25 3.25 3.25 3.25 3.25 3.25 3.29 3.33 3.37 3.41 3.46 3.50
2005 3.54 3.58 3.62 3.66 3.71 3.75 3.79 3.83 3.87 3.91 3.96 4.00
2006 4.08 4.15 4.23 4.31 4.39 4.47 4.56 4.64 4.73 4.82 4.91 5.00
5%+ 5%+ 5%+ 5%+ 5%+ 5%+ 5%+ 5%+ 5%+ 5%+ 5%+ 5%+
2007 0.04xTMC 0.08xTMC 0.13xTMC 0.17xTMC 0.21xTMC 0.25xTMC 0.29xTMC 0.33xTMC 0.38xTMC 0.42xTMC 0.46xTMC 0.50xTMC
5%+ 5%+ 5%+ 5%+ 5%+
2008 0.58xTMC 0.66xTMC 0.75xTMC 0.83xTMC 0.92xTMC TM (as from June 2008)
Where:
TM = average market rate informed by the Argentine Central Bank based
on the internal rates of return of National Government
securities with similar "modified duration".
TMC = average market rate corrected = TM - 5%.
Bogar granted as collateral of the financial assistance from the Argentine
Central Bank were valued pursuant to the guidelines established by Communique
"A" 3911 and complementary rules, i.e., at their present value calculated by
using the increasing discount rate established by this rule; and Bogar to be
granted as collateral of the advance to be received from the Argentine Central
Bank for the purchase of the Hedge Bond were recorded at the value admitted by
the Argentine Central Bank for assets used as collateral.
With respect to the External Notes, on January 14, 2005, the Argentine
government launched an exchange offer to restructure Argentina's defaulted
foreign debt, including such External Notes. The exchange offer expired on
February 25.
-55-
As a result, as of December 31, 2004, the External Notes were valued at
the present value of the cash flow of the Bogar and past due interest accrued on
such Notes after December 31, 2001, was reversed, as specified in section 1 v)
and section 5 of Communique "A" 4084. This valuation resulted in a Ps. 106
million reduction in the balance of the "Government Securities" account in 2004,
partially compensated by the increase in the exchange rate. As of December 31,
2003, the External Notes were held for investment and carried at their face
value.
During January 2005, the Bank opted to exchange its External Notes for
"Peso-Denominated Discount Bonds" and "GDP-Linked Units", in an offer not
subject to proration, the terms and conditions of which were established by
Decree No. 1735/04. In accordance with this Decree, this option will result
in the receipt of new debt instruments for a principal amount equal to 33.7% of
the eligible debt, the latter being equal to the non-amortized principal amount
as of December 31, 2001, plus unpaid past-due interest up to that date.
In order to reduce the impact on bank balance sheets of participating in
the exchange offer, the Argentine Central Bank, through Communique "A" 4270,
allowed the aforementioned "Peso-denominated Discount Bonds" and the "GDP-Linked
Units" to be recorded at the lowest of : (i) the carrying value in accordance
with the prevailing valuation rules (Communiques "A" 4084 and complementary
ones); and (ii) the total future nominal cash payments up to maturity specified
by the terms and conditions of the new securities. This valuation will be
reduced in the amount of the perceived service payments and accrued interest
will not be recognized.
Before Communique "A" 3911 became effective, unquoted government
securities were carried at the lower of cost or net realizable value plus any
applicable contractual adjustments for movements in price indices, or at their
technical values, which are government-published schedules of value that
increase over the term of the security.
We also own, manage and trade a portfolio of corporate securities.
Unquoted corporate debt securities are carried at the residual value plus
accrued interest. Quoted corporate debt and equity securities are considered as
held for trading and, therefore, are carried at market value.
Remaining Maturity and Weighted-Average Yield
The following table analyzes the remaining maturity and weighted-average
yield of Grupo Galicia's holdings of investment and trading government and
corporate securities as of December 31, 2004. The Group's investment and trading
portfolio yields do not contain any tax equivalency adjustments.
MATURITY YIELD
-------------------------------------------------------------------------------------------------
MATURING AFTER 1 MATURING AFTER 5
PAST MATURING YEAR BUT WITHIN 5 YEARS BUT WITHIN MATURING
DUE/CALLABLE WITHIN 1 YEAR YEARS 10 YEARS AFTER 10 YEARS
--------------------- ----------------- ------------------- -------------------- ----------------
TOTAL BOOK BOOK BOOK BOOK BOOK
VALUE BOOK VALUE VALUE YIELD(1) VALUE YIELD(1) VALUE YIELD(1) VALUE YIELD(1)
---------- ---------- ----------------- ------------------- -------------------- ----------------
(in millions of pesos)
GOVERNMENT SECURITIES
HELD FOR TRADING AND BROKERAGE
PURPOSES (CARRIED AT MARKET
VALUE)
Pesos........................ Ps. 5.7 Ps. 5.4 Ps. 0.1 2.7% Ps. 0.2 2.7% - - - -
Dollars 31.1 - 4.2 7.7% 14.9 9.1% 12.0 9.2% - -
HELD FOR INVESTMENT (CARRIED
AT AMORTIZED COST)
Pesos........................ - - - - - - - - - -
Dollars...................... 601.3 - 75.2 9.0% 300.6 9.0% 225.5 9.0% - -
INSTRUMENT ISSUED BY ARGENTINE
CENTRAL BANK
Pesos........................ 508.5 - 498.5 5.4% 10.0 - - - - -
Dollars...................... - - - - - - - - - -
UNLISTED SECURITIES
Pesos........................ 3,621.7 - 186.0 2.5% 718.4 2.7% 1,394.0 2.7% 1,323.3 2.7%
Dollars...................... 749.7 749.7 - - - - - - - -
TOTAL GOVERNMENT SECURITIES.... Ps.5,518.0 Ps. 755.1 Ps.764.0 5.1% Ps.1,044.1 4.6% Ps.1,631.5 3.6% 1,323.3 -
-56-
MATURITY YIELD
---------------------------------------------------------------------------------------------------
MATURING AFTER 1 MATURING AFTER 5
PAST MATURING YEAR BUT WITHIN 5 YEARS BUT WITHIN MATURING
DUE/CALLABLE WITHIN 1 YEAR YEARS 10 YEARS AFTER 10 YEARS
--------------------- ------------------ -------------------- -------------------- ------------------
TOTAL BOOK BOOK BOOK BOOK BOOK
VALUE BOOK VALUE VALUE YIELD(1) VALUE YIELD(1) VALUE YIELD(1) VALUE YIELD(1)
---------- ---------- -------- -------- ----------- -------- ---------- -------- --------- --------
CORPORATE DEBT SECURITIES... 16.1 - - - 0.8 8.2% 15.3 3.0% - -
MUTUAL FUNDS................ - - - - - -
TOTAL PORTFOLIO............. Ps.5,534.1 Ps. 755.1 Ps.764.0 5.1% Ps.1,044.9 4.6% Ps.1,646.8 3.6% Ps.1,323.3 -
(1) Effective yield based on December 31, 2004 quoted market values.
Government Securities - Net Position
The following table shows Grupo Galicia's net position in government and
corporate securities at the balance sheet date, and the breakdown of the
portfolio in accordance with the Argentine Central Bank classification system
and by the securities' currency of denomination. The net position is defined as
holdings plus forward purchases and spot purchases pending settlement, minus
forward sales and spot sales pending settlement. As of December 31, 2004, the
Group's position in government securities amounted to Ps. 5,838.3 million, and
the difference between the Group's holdings of government securities and its net
position was mainly due to the forward purchases of Boden 2012 in connection
with repurchase agreements, for Ps. 374.8 million, and to the forward sales of
Lebac, in connection with reverse repurchase agreements, for Ps. 56.1 million.
GRUPO GALICIA, AS OF DECEMBER 31, 2004
-----------------------------------------------------------------
SPOT SPOT
FORWARD FORWARD PURCHASES SALES NET
HOLDING PURCHASES SALES TO BE SETTLED TO BE SETTLED POSITION
------- --------- ------- ------------- ------------- --------
GOVERNMENT SECURITIES
Held for investment purposes
Pesos.................................... - - - - - -
Dollar................................... 601.3 374.8 - - - 976.1
Held for trading purposes
Pesos.................................... 5.7 1.5 - 0.6 0.6 7.2
Dollar................................... 31.1 - - 0.6 0.6 31.1
Unlisted Securities
Pesos.................................... 3,621.7 - - - - 3,621.7
Dollar................................... 749.7 - - - - 749.7
Instrument issued by Argentine Central Bank
Pesos.................................... 508.5 - 56.1 - - 452.4
Dollar................................... - - - - - -
------- -------- ------ -------- -------- --------
TOTAL GOVERNMENT SECURITIES................. 5,518.0 376.3 56.1 1.2 1.2 5,838.2
------- -------- ------ -------- -------- --------
Corporate Equity Securities (Quoted)........ 16.1 - - - - 16.1
------- -------- ------ -------- -------- --------
TOTAL GOVERNMENT AND CORPORATE SECURITIES... 5,534.1 376.3 56.1 1.2 1.2 5,854.3
------- -------- ------ -------- -------- --------
LOAN PORTFOLIO
The following table analyzes Banco Galicia's loan portfolio by type of
loan and total loans with guarantees. Total loans reflect the Bank's loan
portfolio including past due principal amounts.
AS OF JUNE
AS OF DECEMBER 31, 30,
---------------------------------------------------------- ------------
2004 2003 2002 2001 2000 2000
---------- ---------- ---------- ---------- ---------- ------------
(in millions of pesos) (in millions of February 28, 2003, constant pesos)
Principal and Interest
Non-Financial Public Sector.................... Ps.4,513.7 Ps.4,277.7 Ps.7,634.7 Ps.8,669.7 Ps.5,762.7 Ps.5,516.8
Local Financial Sector......................... 150.5 194.7 134.8 190.8 1,121.4 795.9
-57-
AS OF JUNE
AS OF DECEMBER 31, 30,
------------------------------------------------------------------ -----------
2004 2003 2002 2001 2000 2000
----------- ----------- ------------ ------------ ------------ -----------
(in millions of pesos) (in millions of February 28, 2003, constant pesos)
Non-Financial Private Sector and Residents
Abroad (1)
Advances.................................... 199.8 219.1 227.0 811.1 968.0 1,742.7
Notes....................................... 1,099.2 1,280.1 1,544.3 3,888.9 4,948.6 5,408.8
Mortgage Loans.............................. 623.9 719.6 864.0 3,298.2 3,504.6 2,991.9
Pledge Loans................................ 92.9 54.6 191.5 841.8 875.9 858.5
Personal Loans.............................. 58.2 55.2 120.0 583.4 812.0 728.0
Credit-Cards Loans.......................... 1,105.4 818.8 585.0 1,875.3 1,667.1 1,445.0
Placements in Correspondent Banks........... 379.2 172.4 158.3 377.5 770.6 1,229.5
Other Loans................................. 393.9 325.7 251.4 196.0 271.6 178.7
Accrued Interest, Adjustment and Quotation
Differences
Receivable................................ 414.4 523.1 608.5 392.1 353.5 313.6
Documented Interest......................... (5.3) (2.5) (10.8) (55.1) (96.9) (81.3)
---------- ---------- ----------- ----------- ----------- -----------
TOTAL ......................................... 9,025.8 8,638.5 12,308.7 21,069.7 20,959.1 21,128.1
Allowance for Loan Losses...................... (632.6) (1,177.3) (1,681.8) (1,050.3) (596.0) (576.9)
---------- ---------- ----------- ----------- ----------- -----------
TOTAL LOANS.................................... Ps.8,393.2 Ps.7,461.2 Ps.10,626.9 Ps.20,019.4 Ps.20,363.1 Ps.20,551.2
---------- ---------- ----------- ----------- ----------- -----------
Secured Loans
With Preferred Guarantees (2) (3)........... Ps.1,190.0 Ps.1,228.8 Ps. 9,280.5 Ps.13,389.8 Ps. 8,677.9 Ps. 9,128.3
Other Guarantees (3)........................ 5,235.8 5,163.0 523.0 1,689.8 2,192.4 2,008.5
---------- ---------- ----------- ----------- ----------- -----------
TOTAL SECURED LOANS............................ Ps.6,425.8 Ps.6,391.8 Ps.9,803.5 Ps.15,079.6 Ps.10,870.3 Ps.11,136.8
---------- ---------- ----------- ----------- ----------- -----------
(1) Categories of above loans include:
- Advances: short-term obligations drawn on by customers through
overdrafts.
- Notes: endorsed promissory notes, negotiable obligations and other
promises to pay signed by one borrower or group of borrowers and
factored loans.
- Mortgage loans: loans granted to purchase or improve real estate and
collateralized by such real estate and commercial loans secured by a
real estate mortgage.
- Pledge loans: loans secured by collateral (such as cars or
machinery) other than real estate, where such collateral is an
integral part of the loan documents.
- Personal loans: loans to individuals.
- Credit Cards Loans: loans granted through credit cards to credit
card holders.
- Placements in correspondent banks: short-term loans to other banks
and short-term loans from Banco Galicia Uruguay S.A. to major
international banks outside of Uruguay.
- Other loans: loans not included in other categories.
- Documented interest-discount on notes and bills.
(2) Preferred guarantees include mortgages on real estate property or
pledges on movable property, such as cars or machinery, where the Bank has
the priority right, endorsements of the Federal Office of the Secretary of
Finance, pledges of Argentine Government securities, or gold or cash
collateral.
(3) Pursuant to Argentine Central Bank Communique A 3918, beginning in
April 2003, tax revenues shared by the national government and the
provinces ceased to be considered Preferred Guarantees
As of December 31, 2004, and since 2002, loans to the non-financial public
sector have represented the Bank's most important loan portfolio.
As of December 31, 2004, the portfolio of loans to the non-financial
public sector, valued pursuant to Argentine Central Bank Communique "A" 3911,
amounted to Ps. 4,513.7 million (principal amount, adjustment and interests),
and represented secured loans restructured pursuant to Decree No. 1387/01.
As of December 31, 2004 and December 31, 2003, all of the secured loans
were current.
In November 2001, through Decree No. 1387/03, the Argentine
government offered to swap voluntarily debt instruments (bonds and loans) held
by local investors representing an exposure to the Argentine national and
provincial governments for secured loans. The Bank decided to swap all of its
eligible portfolio of government securities and loans made to the national and
provincial public sectors in exchange for secured loans. The swap of debt
instruments originally representing an exposure to the national public sector
was completed on November 6,
-58-
2001. Beginning in November 2001, the Bank recorded the secured loans to the
Argentine national government and those loans to the Argentine provinces
tendered in the exchange (which swap was not completed until 2003) in accordance
with the terms and conditions of the new secured loans. This swap reduced the
yields of public-sector debt instruments and extended their maturity but did not
modify their currency of denomination.
The swap of eligible debt instruments originally representing an exposure
to the provinces was not completed until late 2003.
After the Argentine currency devaluated in January 2002, Decree No. 471/02
enacted on March 13, 2002, established that obligations denominated in U.S.
dollars of the national, provincial and municipal public sectors outstanding as
of February 3, 2002 would be converted into pesos at the exchange rate of Ps.
1.4 per U.S. dollar and would be adjusted by the CER. Moreover, said Decree
established that public sector's obligations would bear a fixed annual interest
rate ranging from 3.0% to 5.5% depending on their average life.
For secured loans representing in origin an exposure to the provinces and
other Argentine provincial government debt, Decree No. 1579/02 dated
August 28, 2002, introduced an additional restructuring. The restructuring
consisted of a voluntary exchange of Argentine provincial government debt for
bonds (Bogar) or loans (promissory notes), issued by the FFDP and secured by the
Argentine national government's tax receipts shared with the Argentine
provinces, with a 16-year term, a 2% fixed annual interest rate and amortization
in 156 monthly and consecutive installments beginning on March 4, 2005. This
Decree included as eligible for tender in the exchange the financial assistance
provided to Argentine provincial governments through loans to the FFDP, a
portfolio that was not eligible under the provisions of Decree No. 1387/01.
The Bank tendered in the exchange under Decree No. 1579/02 all of its
portfolio of loans to Argentine provincial governments and pursuant to the
option provided by section 3, subsection k of the Decree, opted to exchange all
of the Bogar to be received in the exchange for promissory notes. Despite such
election, in 2003 the Bank received Bogar and recorded them as loans. Given
that, for the time being, the Bank will not make use of this option, the Bogar
were recorded as government securities as of December 31, 2004 and, for
comparison purposes, as of December 31, 2003, the Bogar were reclassified and
recorded as government securities. As of December 31, 2002, the Bogar were
recorded under loans.
As of December 31, 2004, loans to the financial public sector amounted to
Ps. 123.7 million, loans to the financial domestic sector amounted to Ps. 26.8
million, and the remaining Ps. 4,361.6 million corresponded to gross loans (plus
adjustments and accrued interest) to the non-financial private sector. Net loans
to the private sector amounted to Ps. 3,729.0 million.
Gross loans to the private sector grew 4.7% during fiscal year 2004. The
type of loans to the private sector that grew most were credit card loans. The
increase in placements with correspondent banks as of December 31, 2004, was due
to the temporary placement of liquidity in such banks, in view of payments on
debt instruments due on January 1, 2005. It should be noted that during 2004,
Ps. 242.0 million of commercial loans from Galicia Uruguay's portfolio were
sold, Ps. 121.1 million of credit card loans granted by the regional credit-card
companies were securitized and Ps. 41.5 million of personal loans granted by the
Bank's Argentine operation that were securitized in January 2005, had been
transferred to "Other Receivables from Financial Brokerage" as of December 31,
2004. The Bank's gross loan portfolio to the private sector, before charge offs
(not related to the aforementioned portfolio sale) and before portfolio
securitization and sale, increased 24.2% in 2004.
The nominal and relative decrease of the portfolio of loans to the private
sector in 2002 and 2003, as compared to pre-crisis periods, is related to their
pesification at the Ps. 1.0 per U.S. dollar parity, to the exceptions provided
for by the regulations in connection with the applicability of the adjustment by
the CER and to their adjustment mostly by the CVS, beginning in September 2003
only. The decrease also reflects payments and prepayments made by private-sector
debtors, while certain secured loans begin to amortize in 2005. In addition,
this decrease reflects the fact that most loans to the private sector were not
adjusted by an index (until 2003) while the previous periods figures were
restated by using the WPI variation. See "Presentation of Financial
Information". Similarly, the decrease in the private sector portfolio was also
the consequence of the securitization or sale of part of the Bank's loan
portfolio in the first half of 2002 in order to restore the Bank's liquidity
within the framework of the capitalization and liquidity plan implemented by the
Bank.
-59-
During 2003, the only type of loan to the private sector that showed an
increase was credit-card lending, which increase was mainly the result of an
increase in the loan portfolio of the regional credit card companies.
Loans by Type of Borrower
The following table shows the breakdown of Banco Galicia's total loan
portfolio, by type of borrower at December 31, 2004, 2003, and 2002.
AS OF DECEMBER 31,
---------------------------------------------------------------------------------------
2004 2003 2002
-------------------------- -------------------------- ---------------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
----------- ---------- ----------- ---------- ------------ ----------
(in millions of February
(in millions of pesos) 28, 2003, constant pesos)
Corporate................. Ps. 1,271.9 14.09% Ps. 1,820.4 21.07% Ps. 2,130.8 17.31%
Middle-Market Companies... 1,195.2 13.24 850.3 9.84 890.1 7.23
COMMERCIAL LOANS........... 2,467.1 27.33 2,670.7 30.91 3,020.9 24.54
Individuals................ 1,512.6 16.76 1,324.7 15.33 1,297.7 10.54
Financial Sector (1)....... 532.4 5.90 357.4 4.14 172.0 1.40
Non-Financial Public
Sector.................... 4,513.7 50.01 4,277.7 49.52 7,634.7 62.03
Other Loans................ - - 8.0 0.10 183.4 1.49
----------- ------ ----------- ------ ------------ ------
TOTAL (2).................. Ps. 9,025.8 100.00% Ps. 8,638.5 100.00% Ps. 12,308.7 100.00%
----------- ------ ----------- ------ ------------ ------
(1) Includes local and international financial sector. Financial Sector loans
are primarily composed of interbank loans (call money loans), overnight
deposit at international money center banks and loans to provincial banks.
(2) Before the allowance for loan losses.
Loans by Economic Activity
The following table sets forth at the dates indicated an analysis of Banco
Galicia's loan portfolio according to the borrowers' main economic activity.
Figures include principal and interest.
AS OF DECEMBER 31,
---------------------------------------------------------------------------------------
2004 2003 2002
-------------------------- -------------------------- ---------------------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
----------- ---------- ----------- ---------- ------------ ----------
(in millions of February
28, 2003, constant
pesos, except
(in millions of pesos, except percentages) percentages)
Financial Sector......................... Ps. 532.4 5.90% Ps. 357.4 4.14% Ps. 172.0 1.40%
Services
Non-Financial Public Sector............ 4,513.7 50.01 4,277.7 49.52 7,634.7 62.03
Comunic., Transportation Health
and Others 339.0 3.76 320.2 3.71 334.1 2.71
Electricity, Gas, Water Supply
and Sewage Services................... 134.3 1.49 239.0 2.77 235.8 1.92
Other Financial Services............... 46.9 0.52 362.2 4.19 548.5 4.45
----------- ------ ----------- ------ ------------ ------
Total................................ 5,033.9 55.78 5,199.1 60.19 8,753.1 71.11
Primary Products
Agriculture and Livestock.............. 518.6 5.75 389.6 4.51 464.5 3.77
Fishing, Forestry and Mining........... 69.3 0.77 93.0 1.08 91.1 0.74
----------- ------ ----------- ------ ------------ ------
Total................................. 587.9 6.52 482.6 5.59 555.6 4.51
Consumer................................. 1,435.4 15.90 1,258.5 14.57 1,106.4 8.99
Retail Trade............................. 287.7 3.19 278.5 3.22 276.4 2.25
Wholesale Trade.......................... 97.5 1.08 67.7 0.78 67.6 0.55
Construction............................. 372.8 4.13 404.2 4.68 513.0 4.17
Manufacturing
Foodstuffs............................. 233.9 2.59 166.7 1.93 205.0 1.66
-60-
Transportation Materials............... 41.2 0.46 18.6 0.22 27.9 0.23
Chemicals and Oil...................... 124.6 1.38 109.5 1.27 110.6 0.90
Manufacturing Industries............... 229.7 2.54 235.0 2.71 391.9 3.18
----------- ------ ----------- ------ ------------ ------
Total................................. 629.4 6.97 529.8 6.13 735.4 5.97
Other Loans (1).......................... 48.8 0.53 60.7 0.70 129.2 1.05
----------- ------ ----------- ------ ------------ ------
TOTAL (2).............................. Ps. 9,025.8 100.00% Ps. 8,638.5 100.00% Ps. 12,308.7 100.00%
----------- ------ ----------- ------ ------------ ------
(1) "Other loans" is an Argentine Central Bank classification that primarily
includes loans in judicial proceedings.
(2) Before the allowance for loan losses.
In the table above, those loans identified as consumer loans are
classified as consumer loans for purposes of the Argentine Central Bank
classification and provisioning system. All of the other loans represent
commercial loans for the purpose of the Argentine Central Bank's classification
and provisioning system. See " -- Argentine Central Bank's Loan Classification
and Loan Loss Provisions."
Maturity Composition of the Loan Portfolio
The following table sets forth an analysis by type of loan and time
remaining to maturity of Banco Galicia's loan portfolio before deducting the
allowance for loan losses as of December 31, 2004.
AFTER 1 AFTER 6 AFTER 3
MONTH BUT MONTHS BUT AFTER 1 YEAR YEARS BUT TOTAL AT
WITHIN 1 WITHIN 6 WITHIN 12 BUT WITHIN 3 WITHIN 5 AFTER 5 DECEMBER
MONTH MONTHS MONTHS YEARS YEARS YEARS 31, 2004
----------- --------- ---------- ------------ ----------- ----------- -----------
(in millions of pesos)
Non-Financial Public Sector (1)........ Ps. 0.4 Ps. 16.1 Ps. 4.8 Ps. 98.9 Ps. 2,309.3 Ps. 2,084.2 Ps. 4,513.7
Financial Sector (1)................... 117.1 5.6 6.7 21.1 - - 150.5
Private Sector and Residents Abroad.... 2,677.2 305.1 250.9 552.8 294.0 281.6 4,361.6
- Advances.......................... 161.0 37.9 0.5 0.4 - - 199.8
- Promissory Notes.................. 370.6 193.5 96.1 170.8 140.8 127.4 1,099.2
- Mortgage Loans.................... 59.8 45.3 63.7 172.3 134.7 148.1 623.9
- Pledge Loans...................... 9.6 8.9 14.7 46.1 10.3 3.3 92.9
- Personal Loans.................... 6.4 17.6 12.8 20.8 0.6 - 58.2
- Credit-Card Loans................. 1,105.4 - - - - - 1,105.4
- Other Loans....................... 555.3 1.9 63.1 142.4 7.6 2.8 773.1
- Accrued Interest and Quotation
Differences Receivable (1)...... 414.4 - - - - - 414.4
- (Documented Interest)............. (5.3) - - - - - (5.3)
Allowance for Loan Losses (2).......... (632.6) - - - - - (632.6)
----------- --------- --------- --------- ----------- ----------- -----------
TOTAL LOANS, NET....................... Ps. 2,162.1 Ps. 326.8 Ps. 262.4 Ps. 672.8 Ps. 2,603.3 Ps. 2,365.8 Ps. 8,393.2
=========== ========= ========= ========= =========== =========== ===========
(1) Interest and the CER adjustment were assigned to the first month.
(2) Allowances were assigned to the first month as well as past due loans and
loans in judicial proceedings.
In the table above, consumer loans as classified by the Argentine Central
Bank consist of personal loans, credit card loans, as well as certain portions
of advances, mortgage loans and pledge loans.
Interest Rate Sensitivity of Outstanding Loans as of December 31, 2004
The following table presents the interest rate sensitivity of Banco
Galicia's outstanding loans as of December 31, 2004.
-61-
(IN MILLIONS OF PESOS) AS A % OF TOTAL LOANS
---------------------- ---------------------
Variable Rate (1)(2)
Pesos................................ 5,242.2 74.73%
Dollars.............................. 389.0 5.54%
------- -----
Total................................... 5,631.2 80.27%
Fixed Rate (2)(3)
Pesos................................ 812.7 11.59%
Dollars.............................. 571.3 8.14%
------- -----
TOTAL................................... 1,384.0 19.73%
Past Due Loans
Pesos................................ 389.5 5.55%
Dollars.............................. 13.1 0.19%
------- -----
TOTAL................................... 402.6 5.74%
------- -----
(1) Includes overdraft loans.
(2) Includes past due loans and excludes interest receivable, differences in
quotations and the CER adjustment.
(3) Includes short-term and long-term loans whose rates are determined at the
beginning of the loans' life.
CREDIT REVIEW PROCESS
Credit risk is the potential for financial loss resulting from the failure
of a borrower to honor its financial contractual obligations. Credit risk at
Grupo Galicia arises mainly from Banco Galicia's lending activities and from the
fact that, in the normal course of its business, the Bank is a party to certain
financial transactions with off-balance sheet risk, mainly commitments to extend
credit and guarantees granted. See also Item 5. "Operating and Financial Review
and Prospects--Item 5A. Operating Results--Off-Balance Sheet Arrangements."
The Bank's credit approval and credit risk analysis is a centralized
process based on the concept of "opposition of interests." This is achieved
through the existing division between the credit and the origination functions
both in the retail and the wholesale businesses, thus enabling the Bank to
achieve an ongoing and efficient control of asset quality, a proactive
management of problem loans, aggressive write-offs of uncollectible loans, and
an adequate loan loss provisioning. The process also includes credit-quality
monitoring by borrower, as well as monitoring of problem loans and related
losses. The process facilitates early detection of situations that could entail
some degree of portfolio impairment and provides appropriate protection of the
Bank's assets.
In order to promote active credit granting and facilitate credit
authorizations, the Credit Division was created during fiscal year 2004,
reporting directly to the Board of Directors. Likewise, to consolidate all
aspects of credit management into a single unit, the Retail Credit Department
and the Corporate Recovery Department, which used to form part of the Retail and
Wholesale Banking Divisions, respectively, became part of the Credit Division.
The Credit Division is in charge of defining, subject to the approval of
the Board of Directors, the Bank's credit risk policies and procedures, the
continuous assessment of credit risk and the development of credit assessment
models applied to risk products. It is also responsible for loan approval,
classification of the loan portfolio and recovery of past due loans.
The Credit Division is made up of the Corporate Credit Department in
charge of approving, supervising, classifying and provisioning the corporate and
financial institutions' loan portfolio, the Corporate Recovery Department in
charge of the follow-up and recovery of the past due commercial portfolio, and
the Retail Credit Department in charge of approving consumer loans as well as
following up and recovering past due consumer loans.
The Internal Audit Division is in charge of overseeing the classification
of the loan portfolio, in accordance with the regulations established by the
Argentine Central Bank.
Retail Portfolio
In the case of loans to individuals, the Bank assesses applications for
different types of loans including credit-card loans, current account loans and
personal loans with or without guarantees. Origination of mortgage loans was
discontinued during 2002, due to the prevailing economic situation. New mortgage
loans were launched in late 2003 but origination has been limited.
-62-
Applications for these products are assessed through computerized
credit-scoring systems that take into account different variables to determine
the customer's profile and repayment capacity. Analysis of the information
required from applicants and the credit approval or refusal decision is made in
a centralized manner. Applicants previous credit performance, both at Banco
Galicia or in the financial system as a whole, is verified through the
information provided by Organizacion Veraz S.A., a company that provides credit
information services.
The Retail Credit Department is responsible for approving loans to
customers for amounts up to Ps. 1 million. Loans exceeding such amount have to
be approved by the Board of Directors Committee. The Retail Credit Department
also defines and approves credit policies for the retail banking business,
together with the originating sectors. On the other hand, the Retail Credit
Department monitors the classification of the loan portfolio pursuant to the
Argentine Central Bank regulations and the Bank's internal policies. Accordingly
to the rules in force, classification of the retail loan portfolio is based on
the borrower's performance.
With respect to the recovery of past-due loans, the Retail Credit
Department manages individual past-due loans from the early stages until the
portfolio returns to a normal status or the recovery procedures are abandoned
for loans deemed uncollectible. Recovery procedures throughout Argentina are
carried out either directly or through third parties.
When a consumer loan is more than three days past due, recovery procedures
are undertaken through the Collection Center (a specialized area of the Bank's
Customer Contact Center), or through letters or visits to the borrower's
residence. A follow-up system that performs automated telephone calls is also
used for loans in early stages of delinquency. For a better coverage of the
locations in the provinces, the Retail Credit Department also coordinates
actions with the Bank's branch network staff. When these early procedures are
exhausted, recovery of these loans is turned to collection agencies hired by the
Bank to handle recovery through litigation or out-of-court proceedings. The
Retail Credit Department oversees the performance of these agencies.
Banco Galicia does not classify, nor does it provide for recovery
procedures of certain small balance loans, including credit card balances from
membership fees and other administrative costs charged to customers on
unsolicited credit cards, small residual balances from lending operations where
the cost of recovery and legal costs are prohibitive. These small balance loans
are charged-off directly to the income statement.
Commercial Portfolio
Prior to the approval of a loan, Banco Galicia's analysis involves the
evaluation and assessment of the corporate borrower and its financial status.
For credits above certain amounts, Banco Galicia makes a standard analysis of
each credit line and of each corporate borrower. For credits below certain
amounts, Banco Galicia uses automated risk evaluation systems that provide
financial and non-financial information on the borrower.
The Bank's information systems provide both financial and non-financial
data about customers. They can also perform automated risk evaluations and
financial-statements projections and have the capacity to generate automatic
warnings when certain situations are verified that may indicate an increase in
risk.
Banco Galicia bases the risk assessment on the following factors:
Qualitative analysis............. assessment of the quality of the corporate
borrower by the line officer to which the
account has been assigned on the basis of
personal knowledge.
Economic and financial risk...... quantitative analysis of the corporate
borrower's financial statements.
Economic sector risk............. measurement of the general risk of the sector
in which the corporate borrower operates
(based on statistical information gathered
from internal and external sources).
-63-
The primary responsibility of the Corporate Credit Department is to
approve loans to corporate customers with a credit limit not exceeding Ps 1.0
million, ensuring the overall objective of maintaining high credit-quality
standards and complying with the Bank's policies and procedures. Prior to
presentations to the credit committees of corporate borrowers whose credit limit
exceeds Ps 1.0 million, the Corporate Credit Department prepares analyses and
reports that assess the credit risk involved. Moreover, this Department
classifies the performing and non-performing commercial portfolios in accordance
with the regulations set by the Argentine Central Bank and with the Bank's own
internal policies. It also coordinates the Credit Division's relations with the
Argentine Central Bank, the independent auditors, and the rating agencies.
Moreover, it reviews all of the corporate customers whose total credit exceeds
Ps. 200,000 in accordance with a review schedule determined by the level of
credit risk.
The Corporate Recovery Department is responsible for monitoring and
controlling past-due commercial portfolios and for recovery of the entire
commercial portfolio. It establishes procedures, acts proactively, and designs
action plans on a case-by-case basis to recover any amounts that exceed the
credit limits that are assigned to the different corporate customers. The
Corporate Recovery Department also oversees recovery of problem loans in the
corporate portfolio, managing them efficiently and working to regularize the
status of those customers that are most attractive to the Bank. Furthermore,
this department manages problem loans for which recovery is being settled
through litigation or out of court agreements. The Corporate Recovery Department
also manages and oversees lawsuits carried out in various jurisdictions by
outside law firms hired to handle these matters.
The Corporate Banking and Middle-Market Banking departments are
responsible for the business relations with the Bank's corporate customers in
connection with both the management of the various lines of business and credit
origination.
The Corporate Restructuring Department that had been created in 2002 to
restructure the debt of certain customers within the large corporations sector,
was dissolved in 2004. This decision was taken upon the Bank's restructuring
during 2004 of a substantial portion of the portfolio managed by the Corporate
Restructuring Department.
All credit extensions must be approved by an officer of the Credit
Division. Approval of commercial credits is structured based on the credit limit
assigned to each customer, as follows:
- Under Ps. 1.0 million: credit extensions are proposed by the business
officers and must be approved by officers of the Corporate Credit
Department in accordance with pre-established credit authority levels.
- More than Ps. 1.0 million and up to Ps. 3.5 million: credit extensions
must be approved by the Senior Credit Committee, composed of at least: (i)
an officer from the Credit Division; and (ii) an officer from the
Wholesale Banking Division.
- More than Ps. 3.5 million: credit extensions must be approved by the
Credit Committee of the Bank's Board of Directors, with the participation
of : (i) one or more directors; (ii) the manager of the Credit Division;
and (iii) the manager of the Wholesale Banking Division. The assistance of
the managers of the business departments of such Division depends on
whether the account subject to approval by said committee corresponds to
any such departments in charge of the accounts.
The Bank's information systems provide both financial and non-financial
data about customers. They can also perform automated risk evaluations and
financial-statements projections and have the capacity to generate automatic
warnings about situations that may indicate an increase in risk.
Policy for Requiring Collateral
The credit review process of Banco Galicia is unaffected by the collateral
underlying the loan. The Bank's credit review process and the Argentine Central
Bank's loan classification system is based on a borrower's capacity to repay or
on the past due status of the loan rather than on the structure of the loan.
However, once a loan is classified, the level of the reserve that should be made
against the loan is determined by whether the loan is secured or unsecured.
-64-
Although the procedures for assessing a borrower's credit worthiness are
unaffected by the collateral of the loan, Banco Galicia performs additional
procedures to review the existence and valuation of the collateral on all major
loans on an annual basis. For nonperforming commercial loans, this review is
performed every six months. Banco Galicia reviews the existence and valuation of
collateral on consumer loans on a sample basis.
ARGENTINE CENTRAL BANK'S LOAN CLASSIFICATION AND LOAN LOSS PROVISIONS
General
Although the aggregate amount of credit operations conducted with
companies, individuals or economic groups by the Bank, measured for each one of
those customers, is limited by Argentine Central Bank rules, pursuant to
Communique "A" 2140 and subsequent ones, the Bank applies significantly stricter
parameters.
Independently of its internal policies and procedures designed to minimize
credit risk, the Bank complies with the applicable regulations of the Argentine
Central Bank, which are summarized below.
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" in this section) to private-sector borrowers.
The Argentine Central Bank's loan classification system is a bifurcated
system, that 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 are based on delinquency aging. For the purposes of the Argentine
Central Bank, consumer loans are defined as residential mortgage loans, personal
loans, pledge loans, credit-card loans and other types of installment credits to
individuals. All other loans are considered as commercial loans. In addition, as
permitted by the Argentine Central Bank, the Bank classifies as consumer loans
all commercial loans that are for an amount less than Ps. 200,000 for purposes
of applying the Argentine Central Bank's provisioning requirements (through its
Communique "A" 4310 dated March 6, 2005, the Argentine Central Bank increased
this amount to Ps. 500,000, effective May 2005). As a result, the Bank
classifies such loans based on the delinquency aging system rather than on the
borrower's ability to repay.
The principal criterion for the classification of loans in the commercial
portfolio is each borrower's ability to repay, as measured principally by such
borrower's future cash flow. In this loan classification system, all customers
in an economic group (all corporate and financial entities, both domestic and
foreign, which are controlled, directly or indirectly, by a customer) are
considered as one borrower. For example, if one or more loans in a group of
loans to an economic group becomes classified, all loans to that group are
reclassified in the most severe classification. Banks may opt to apply the
consumer loan classification criteria to commercial loans of up to Ps. 200,000.
If a customer has both commercial and consumer loans, consumer loans will be
added to commercial loans to determine eligibility for classification in the
consumer portfolio. Loans backed with preferred guarantees are considered at
50.0% of their face value.
Pursuant to Communique "A" 3918 from the Argentine Central Bank, between
March 31, 2003 and December 31, 2003, customers with a total debt in the whole
financial system of up to Ps. 5 million have been classified in the same manner
as consumer loans. In order to determine the arrear, this rule established that
one day past due was to be computed for each three days the loan had been past
due in the period between December 1, 2001 and March 31, 2003. This treatment
was also applied to the portfolio of commercial loans of up to Ps. 200,000
which, under the previous rules, was already automatically classified.
In applying the Argentine Central Bank's classification to commercial
loans, banks must assess the following factors: management and operating history
of the borrower, present and projected financial situation of the borrower based
on the review of the borrower's financial statements, borrower's payment history
and ability to service debt, capability of the borrower's internal information
and control systems to provide accurate and timely financial information, as
well as the general risk of the sector in which the borrower operates and the
borrower's
-65-
relative position within that sector. In this analysis, special consideration
must be provided to the assessment of the customer's exposure to currency risk,
taking into account the customer's income and debt in foreign currency.
Argentine Central Bank rules establish that periodic evaluations of the
commercial portfolio must be performed by an evaluation team independent from
banks' loan origination sectors. The Credit Division is responsible for these
evaluations, being independent from the business units that originate loans.
The evaluation must be carried out on each borrower with outstanding
credit equal to or exceeding the lesser of Ps. 1.0 million or 1% of a bank's
Adjusted Shareholders' Equity, but in any case covering 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. A review must be conducted every calendar
quarter when credit exposure to that borrower is equal to or in excess of 5% of
the Banks' Adjusted Shareholders' Equity on the last day of the month prior to
the review, or every six months when exposure equals or exceeds the lesser of
Ps. 1.0 million or 1% of the Bank's Adjusted Shareholders' Equity on the last
day of the month prior to review. In any case, at least 50% of the Bank's
commercial portfolio must be reviewed by the end of each six months, and all
other borrowers in the Bank's commercial portfolio must be reviewed during the
Bank's fiscal year, so that that the entire commercial portfolio is reviewed
every fiscal year.
Reviews must be reevaluated and documented in a borrower's file upon a
negative change in objective criteria such as an increase in days past due,
filing for bankruptcy or protection from creditors, or a judicial proceeding
initiated against a borrower. In addition, a reevaluation is triggered when,
based on information made available by the Argentine Central Bank, any other
financial institution holding at least 10.0% of a borrower's total outstanding
credit downgrades its classification of that borrower, or when an independent
rating agency downgrades the rating it grants to a borrower's debt securities.
The Argentine Central Bank allows only one level of discrepancy between
the classification that the Bank assigns and the lowest classification assigned
by at least two other banks whose combined credit to the borrower represents
40.0% or more of the total credit of the borrower within the financial system,
considering all banks. If a bank's classification differs by more than one level
from the lowest classification, it must immediately downgrade its classification
of the borrower to the same classification, or within one classification level.
This mandatory reclassification was discontinued for commercial debtors
(including those with debts of up to Ps. 200,000 treated as consumer loans for
the purposes of classification) pursuant to the provisions of the Argentine
Central Bank's Communique "A" 3918 issued on April 4, 2003, for the period
between March 31, and December 31, 2003. However, said mandatory
reclassification started to be effective as from 2004, pursuant to the
provisions set forth by Communique "A" 4070.
Argentine Central Bank Communique "A" 3418, issued on January 3, 2002,
also allowed for increased flexibility of the rules for classification of
borrowers for December 2001 and January 2002, by temporarily extending the
late-payment period admitted for borrowers in categories 1 and 2 by 31
additional days, both for the commercial and consumer portfolios. On February 7,
2002, through its Communique "A" 3463, the Argentine Central Bank further
extended the late-payment periods established by Communique "A" 3418 by 31
additional days. Subsequently, no additional extension was provided.
With the purpose to facilitate customers access to credit after the
2001-2002 crisis, the Argentine Central Bank resolved, mainly through
Communiques "A" 4070 and "A" 4254, dated January 9, and December 2, 2004,
respectively, to make some modifications that aimed at making the effects of
said crisis neutral on the customers' classification. The most important
modifications made were as follows:
- the possibility to classify as normal, at the financial institutions'
option, those customers having reached a restructuring agreement, without
repayment percentages being required, when customers have enough cash
flows to repay the new debt (this modification will be effective until
December 2005).
- the reduction in the requirements for loan amortization necessary to
improve the customer's classification.
-66-
- the possibility to provide customers with new financial assistance and
classify as normal customers classified in a non-accrual status in the
financial system, thereby restricting this financing assistance to
pre-established percentages according to the worst situation a customer
registers in the financial system.
Loan Classification
The following tables set forth the Argentine Central Bank's six loan
classifications corresponding to levels of risk. Banco Galicia's total exposure
to a private sector customer must be classified in the riskiest classification
that corresponds to any part of such exposure.
Loan Classification Description
------------------- -----------
(a) COMMERCIAL PORTFOLIO
1. Normal..................................... Borrower can easily service all financial obligations; shows
strong cash flow, liquid current financial situation,
adequate financial structure, punctual payment record,
capable management, timely and precise available information
and satisfactory internal controls. Borrower is determined
to be in the top 50.0% of an industry that is performing
well and has a good outlook.
2. With Special Follow-Up..................... Cash flow analysis indicates debt can be serviced, with the
possibility that if not closely observed, future payment
capacity could be impaired.
This category is divided into two subcategories:
(2.a). Under observation;
(2.b). Under negotiation or under agreements to refinance.
3. With Problems.............................. Cash flow analysis evidences problems in normal servicing of
existing debt, such that if the problems are not solved,
they may result in some loss.
4. High Risk of Insolvency.................... Cash flow analysis demonstrates that full repayment of the
borrower's obligations is highly improbable.
5. Uncollectible.............................. Debts in this category are considered total losses. Although
these assets could have a possibility of recovery under
certain future circumstances, lack of collectibility is
evident as of the date of analysis. Includes loans to
insolvent or bankrupt borrowers.
6. Uncollectible due to Technical Reasons..... Loans to borrowers indicated by the Argentine Central Bank
to be in arrears to any liquidated or bankrupt financial
entity. Also includes loans to foreign banks and other
financial institutions which are not:
(i) classified as "normal,"
(ii) subject to the supervision of the Argentine Central
Bank or other similar authority of the country of origin,
and
(iii) classified as "investment grade" by any of the rating
agencies admitted to the Argentine Central Bank pursuant to
Communique "A" 2729.
-67-
(b) CONSUMER PORTFOLIO
1. Normal Performance......................... Current Loans and Loans that are up to 31 days past due on
principal and/or interest, including loans that are current.
2. Inadequate Performance..................... Debt payment is occasionally delinquent, with arrears from
32 to 90 days.
3. Deficient Performance...................... Debt is in arrears at least 91 days and up to 180 days.
4. Difficult Collection....................... Judicial proceedings demanding payment have been initiated
against the borrower, or the borrower is delinquent with
arrears greater than 180 days and up to one year past due.
5. Uncollectible.............................. Loans to insolvent or bankrupt borrowers, or borrowers
subject to judicial proceedings, with little or no
possibility of collection, or in arrears in excess of one
year.
6. Uncollectible due to Technical Reasons..... Loans to borrowers who fall within the conditions described
above under Commercial Portfolio--Uncollectible due to
Technical Reasons.
Loan Loss Provision Requirements
Allocated Provisions
The minimum loan loss provisions required by the Argentine Central Bank
relate to the above loan classification and are described in the following
table, where the percentages are applicable to the borrower's total credit
outstanding, including contingencies.
WITH
SELF- WITH WITHOUT
LIQUIDATING OTHER PREFERRED
PREFERRED PREFERRED GUARANTEES
LOAN CLASSIFICATION GUARANTEES GUARANTEES OR SECURITY
------------------- ----------- ---------- -----------
"With Special Follow Up" and "Inadequate Performance"
"Inadequate Performance - Under Observation"................... 1.0% 3.0% 5.0%
"Inadequate Performance - Under Negotiation or Agreement to 1.0 6.0 12.0
Refinance".....................................................
"With Problems" and "Deficient Performance".................... 1.0 12.0 25.0
"High Risk of Insolvency" and "Difficult Collection"........... 1.0 25.0 50.0
"Uncollectible"................................................ 1.0 50.0 100.0
"Uncollectible Due to Technical Reasons"....................... 100.0% 100.0% 100.0%
Banks are required to cease the accrual of interest or to establish
provisions of 100.0% of the interest accrued on loans to borrowers classified as
"with problems," "deficient performance" or under higher risk categories.
Pursuant to Argentine Central Bank regulation, these minimum provisions
are not required for interbank financial transactions of less than thirty days,
or loans to Argentine provincial governments or to financial institutions
majority-owned by the Argentine national, provincial or city governments with
governmental guarantees.
General Provisions
In addition to the specific loan loss allowances described above, the
Argentine Central Bank established in November 1992 a mandatory general
allowance requirement of 1.0% for all loans in its "normal" and "normal
-68-
performance" categories. This general allowance is not required for interbank
financial transactions of less than thirty days, or loans to the non-financial
public sector or to financial institutions majority-owned by the Argentine
national, provincial or city governments with governmental guarantees. This
general allowance is determined based on the Bank's judgment of the entire loan
portfolio risk at each reporting period.
As of December 31, 2004, the Bank maintained a general loan loss allowance
of Ps. 191.0 million, which exceeded by Ps. 161.8 million the 1.0% general
allowance minimum requirement for the "normal" and "normal performance" loan
portfolio established by the Argentine Central Bank's rules. The decrease over
the 2003 level was due to the charge offs made during the year and to the
improvement of the loan portfolio quality, related to a large extent to the
progress in the restructuring of commercial loans. The excess over the minimum
requirement continued to be maintained in connection with commercial loans under
a restructuring process, which restructuring had not been completed.
As of December 31, 2003, the Bank maintained a general loan loss allowance
of Ps. 313.6 million, which exceeded by Ps. 293.0 million the 1.0% general
allowance minimum requirement for the "normal" and "normal performance" loan
portfolio. The excess over the minimum requirement, which represented only 38%
of that reported as of December 31, 2002, was maintained in connection with
commercial loans under a restructuring process, which restructuring had not been
completed.
As of December 31, 2002, Banco Galicia maintained a general loan loss
allowance of Ps. 822.3 million, which exceeded by Ps. 787.0 million the 1.0%
general allowance minimum requirement for the "normal" and "normal performance"
loan portfolio. The excess over the minimum requirement reflected the judgment
that the consequences of the Argentine economic and political crisis of late
2001 and 2002 on the loan portfolio had not unfolded completely as of the
balance sheet date and that the risk that loans that were impaired had not been
identified as impaired as of the balance sheet date was still high. In addition,
as the restructuring process in the Bank's commercial portfolio began only in
the second half of the 2002, uncertainty about the outcome of the process was
still high.
CLASSIFICATION OF THE LOAN PORTFOLIO BASED ON ARGENTINE CENTRAL BANK REGULATIONS
The following tables set forth the amounts of Banco Galicia's loans past
due and the amounts not yet due of the loan portfolio, applying the Argentine
Central Bank's loan classification criteria in effect at the dates indicated
below.
For December 31, 2001, the Bank applied the 30-day flexibility for the
classification of borrowers in categories 1 and 2 which was allowed by Argentine
Central Bank Communique "A" 3418, only to the classification of the Bank's
portfolio that is automatically classified according to the delinquency aging
system (consumer loans and all commercial loans that are for an amount of less
than Ps. 200,000). Commercial loans continued to be classified according to the
borrower's ability to repay. As a consequence, the classification of consumer
loans in the categories 1, 2, and 3 of the classification of the loan portfolio
as of December 31, 2001 followed a different criterion than in previous periods.
On December 31, 2002, the prior criterion was again applicable.
As of December 31, 2004, loans classified as category "2.b" pursuant to
the Argentine Central Bank's classification, which correspond to loans under a
restructuring process but that do not constitute nonperforming portfolios,
amounted to Ps. 125.6 million, with a 40.9% decrease from Ps. 212.6 million as
of December 31, 2003. The amount at the end of 2003 was 54.3% lower than the Ps.
464.8 million recorded at the close of fiscal year 2002. In the case of the
Bank, this portfolio consists of commercial loans only.
AS OF DECEMBER 31, 2004
----------------------------------------------------------------
AMOUNTS NOT YET DUE(1) AMOUNTS PAST DUE TOTAL LOANS
---------------------- ---------------- -------------------
(in millions of pesos, except percentages)
LOAN PORTFOLIO CLASSIFICATION
Normal and Normal Performance....................... Ps. 7,764.4 90.53% - - Ps. 7,764.4 86.02%
With Special Follow-up and Inadequate Performance... 562.5 6.56 - - 562.5 6.23
With Problems and Deficient Performance............. 197.1 2.30 Ps. 251.7 56.06% 448.8 4.97
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AS OF DECEMBER 31, 2004
----------------------------------------------------------------
AMOUNTS NOT YET DUE(1) AMOUNTS PAST DUE TOTAL LOANS
---------------------- ---------------- -------------------
(in millions of pesos, except percentages)
High Risk of Insolvency and Difficult Collection.... 52.8 0.61 105.8 23.56 158.6 1.76
Uncollectible....................................... - - 85.5 19.04 85.5 0.95
Uncollectible Due to Technical Reasons.............. - - 6.0 1.34 6.0 0.07
------------ ------ --------- ------ ---------- ------
TOTAL............................................... Ps. 8,576.8 100.00% Ps. 449.0 100.00% Ps.9,025.8 100.00%
------------ ------ --------- ------ ---------- ------
AS OF DECEMBER 31, 2003
----------------------------------------------------------------
AMOUNTS NOT YET DUE(1) AMOUNTS PAST DUE TOTAL LOANS
---------------------- ---------------- -------------------
(in millions of pesos, except percentages)
LOAN PORTFOLIO CLASSIFICATION
Normal and Normal Performance....................... Ps. 6,531.3 85.63% - - Ps.6,531.3 75.61%
With Special Follow-up and Inadequate Performance... 807.9 10.59 - - 807.9 9.35
With Problems and Deficient Performance............. 237.9 3.12 Ps. 426.5 42.19% 664.4 7.69
High Risk of Insolvency and Difficult Collection.... 50.4 0.66 245.4 24.27 295.8 3.42
Uncollectible....................................... - - 324.9 32.14 324.9 3.76
Uncollectible Due to Technical Reasons.............. - - 14.2 1.40 14.2 0.17
------------ ------ ---------- ------ ---------- ------
TOTAL............................................... Ps. 7,627.5 100.00% Ps.1,011.0 100.00% Ps.8,638.5 100.00%
------------ ------ ---------- ------ ---------- ------
AS OF DECEMBER 31, 2002
----------------------------------------------------------------
AMOUNTS NOT YET DUE(1) AMOUNTS PAST DUE TOTAL LOANS
---------------------- ---------------- -------------------
(in millions of February 28, 2003, constant pesos, except
percentages)
LOAN PORTFOLIO CLASSIFICATION
Normal and Normal Performance....................... Ps. 9,758.0 88.02% - - Ps. 9,758.0 79.28%
With Special Follow-up and Inadequate Performance... 940.5 8.48 - - 940.5 7.64
With Problems and Deficient Performance............. 321.5 2.90 556.3 45.50% 877.8 7.13
High Risk of Insolvency and Difficult Collection.... 66.1 0.60 453.4 37.09 519.5 4.22
Uncollectible....................................... - - 198.2 16.21 198.2 1.61
Uncollectible Due to Technical Reasons.............. - - 14.7 1.20 14.7 0.12
------------ ------ ---------- ------ ----------- ------
TOTAL............................................... Ps. 11,086.1 100.00% Ps.1,222.6 100.00% Ps.12,308.7 100.00%
------------ ------ ---------- ------ ----------- ------
AS OF DECEMBER 31, 2001
----------------------------------------------------------------
AMOUNTS NOT YET DUE(1) AMOUNTS PAST DUE TOTAL LOANS
---------------------- ---------------- -------------------
(in millions of February 28, 2003, constant pesos, except
percentages)
LOAN PORTFOLIO CLASSIFICATION
Normal and Normal Performance....................... Ps. 19,287.1 96.32% - - Ps.19,287.1 91.54%
With Special Follow-up and Inadequate Performance... 362.0 1.81 - - 362.0 1.72
With Problems and Deficient Performance............. 198.9 0.99 Ps. 157.4 15.05% 356.3 1.69
High Risk of Insolvency and Difficult Collection.... 175.8 0.88 624.7 59.73 800.5 3.80
Uncollectible....................................... - - 217.5 20.79 217.5 1.03
Uncollectible Due to Technical Reasons.............. - - 46.3 4.43 46.3 0.22
------------ ------ ---------- ------ ----------- ------
TOTAL............................................... Ps. 20,023.8 100.00% Ps.1,045.9 100.00% Ps.21,069.7 100.00%
------------ ------ ---------- ------ ----------- ------
AS OF DECEMBER 31, 2000
----------------------------------------------------------------
AMOUNTS NOT YET DUE(1) AMOUNTS PAST DUE TOTAL LOANS
---------------------- ---------------- -------------------
(in millions of February 28, 2003, constant pesos, except
percentages)
LOAN PORTFOLIO CLASSIFICATION
Normal and Normal Performance....................... Ps. 19,776.5 97.74% - - Ps.19,776.5 94.36%
With Special Follow-up and Inadequate Performance... 335.8 1.66 - - 335.8 1.60
With Problems and Deficient Performance............. 64.8 0.32 Ps. 104.5 14.41% 169.3 0.81
High Risk of Insolvency and Difficult Collection.... 56.6 0.28 400.4 55.19 457.0 2.18
Uncollectible....................................... - - 216.8 29.88 216.8 1.03
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AS OF DECEMBER 31, 2000
----------------------------------------------------------------
AMOUNTS NOT YET DUE(1) AMOUNTS PAST DUE TOTAL LOANS
---------------------- ---------------- -------------------
(in millions of February 28, 2003, constant pesos, except
percentages)
Uncollectible Due to Technical Reasons.............. - - 3.7 0.52 3.7 0.02
------------ ------ --------- ------ ----------- ------
TOTAL............................................... Ps. 20,233.7 100.00% Ps. 725.4 100.00% Ps.20,959.1 100.00%
------------ ------ --------- ------ ----------- ------
AS OF JUNE 30, 2000
----------------------------------------------------------------
AMOUNTS NOT YET DUE(1) AMOUNTS PAST DUE TOTAL LOANS
---------------------- ---------------- -------------------
(in millions of February 28, 2003, constant pesos, except
percentages)
LOAN PORTFOLIO CLASSIFICATION
Normal and Normal Performance....................... Ps. 19,938.1 97.69% - - Ps.19,938.1 94.37%
With Special Follow-up and Inadequate Performance... 354.8 1.74 - - 354.8 1.68
With Problems and Deficient Performance............. 70.1 0.34 Ps. 89.0 12.38% 159.1 0.75
High Risk of Insolvency and Difficult Collection.... 46.1 0.23 399.3 55.54 445.4 2.11
Uncollectible....................................... - - 229.6 31.93 229.6 1.09
Uncollectible Due to Technical Reasons.............. - - 1.1 0.15 1.1 -
------------ ------ --------- ------ ----------- ------
TOTAL............................................... Ps. 20,409.1 100.00% Ps. 719.0 100.00% Ps.21,128.1 100.00%
------------ ------ --------- ------ ----------- ------
(1) Amounts not yet due represent the portion of a loan that has not yet become
due, such as the future installments of a consumer loan.
ANALYSIS OF AMOUNTS PAST DUE AND NON-ACCRUAL LOANS
The table on the following page analyzes amounts past due 90 days or more
in Banco Galicia's loan portfolio, by type of loan and by type of guarantee at
the dates indicated, as well as the Bank's non-accrual loan portfolio, by type
of guarantee, the Bank's allowance for loan losses and its main asset quality
ratios at the dates indicated.
-71-
AS OF JUNE
AS OF DECEMBER 31, 30,
-------------------------------------------------------------- ------------
2004 2003 2002 2001 2000 2000
----------- ----------- ------------ ------------ ------------ ------------
(in millions of pesos, (in millions of February 28, 2003, constant pesos,
except ratios) except ratios)
TOTAL LOANS(1)......................................... Ps. 9,025.8 Ps. 8,638.5 Ps. 12,308.7 Ps. 21,069.7 Ps. 20,959.1 Ps. 21,128.1
NON-ACCRUAL LOANS(2)
With Preferred Guarantees............................ 383.7 496.5 610.8 578.4 366.9 383.8
With Other Guarantees................................ 67.4 275.8 282.9 198.5 35.5 65.9
Without Guarantees................................... 247.8 527.0 716.5 643.7 444.4 385.5
----------- ----------- ------------ ------------ ------------
TOTAL NON-ACCRUAL LOANS(2)............................. Ps. 698.9 Ps. 1,299.3 Ps. 1,610.2 Ps. 1,420.6 Ps. 846.8 Ps. 835.2
PAST DUE LOAN PORTFOLIO
Non-Financial Public Sector........................... - - - - - -
Local Financial Sector................................ - - - - - -
Non-Financial Private Sector and Residents Abroad
Advances............................................. 29.9 93.9 64.9 79.8 59.9 73.6
Notes................................................ 253.1 528.2 741.0 307.6 112.4 137.7
Mortgage Loans....................................... 115.1 211.7 217.2 313.6 202.8 189.7
Pledge Loans......................................... 4.2 28.3 35.7 74.0 78.5 90.3
Personal Loans....................................... 4.2 110.2 58.6 94.5 82.6 76.2
Credit-Card Loans.................................... 24.9 30.6 100.4 174.5 171.4 150.3
Placements with Correspondent Banks.................. - - - - - -
Other Loans.......................................... 17.6 8.1 4.8 1.9 17.8 1.2
----------- ----------- ------------ ------------ ------------
TOTAL PAST DUE LOANS................................... Ps. 449.0 Ps. 1,011.0 Ps. 1,222.6 Ps. 1,045.9 Ps. 725.4 Ps. 719.0
Past Due Loans
With Preferred Guarantees............................ 308.0 415.7 449.3 388.3 288.2 308.7
With Other Guarantees................................ 11.4 235.6 172.5 76.1 32.8 63.3
Without Guarantees................................... 129.6 359.7 600.8 581.5 404.4 347.0
----------- ----------- ------------ ------------ ------------
TOTAL PAST DUE LOANS................................... Ps. 449.0 Ps. 1,011.0 Ps. 1,222.6 Ps. 1,045.9 Ps. 725.4 Ps. 719.0
ALLOWANCE FOR LOAN LOSSES.............................. Ps. 632.6 Ps. 1,177.3 Ps. 1,681.8 Ps. 1,050.3 Ps. 596.0 Ps. 576.9
RATIOS (%)
As a % of Total Loans:
- Total Past Due Loans ............................... 4.97 11.70 9.93 4.96 3.46 3.40
- Past Due Loans with Preferred Guarantees............ 3.40 4.81 3.65 1.84 1.38 1.46
- Past Due Loans with Other Guarantees................ 0.13 2.73 1.40 0.36 0.16 0.30
- Past Due Unsecured Amounts.......................... 1.44 4.16 4.88 2.76 1.92 1.64
- Non-Accrual Loans(2)................................ 7.74 15.04 13.08 6.74 4.04 3.95
- Non-Accrual Loans(2) (Excluding Interbank Loans) 8.10 15.35 13.25 6.87 4.33 4.23
Allowance for Loan Losses as a % of:
- Total Loans......................................... 7.01 13.63 13.66 4.98 2.84 2.73
- Total Loans Excluding Interbank Loans............... 7.33 13.91 13.84 5.08 3.04 2.92
- Total Non-Accrual Loans(2).......................... 90.51 90.61 104.45 73.93 70.38 69.07
Non-Accrual Loans with Guarantees as a Percentage
of Non-Accrual Loans(2).............................. 64.54 59.44 55.50 54.69 47.52 53.84
Non-Accrual Loans as a Percentage of Total Past Due
Loans.................................................. 155.66 128.52 131.70 135.83 116.74 116.16
=========== =========== ============ ============ ============ ============
(1) Before the allowance for loan losses.
(2) Non-Accrual loans are defined as those loans in the categories of: (a)
consumer portfolio: defective fulfillment, difficulty in recovery, uncollectible
and uncollectible due to technical reasons; (b) commercial portfolio: with
problems, high risk of insolvency, uncollectible and uncollectible due to
technical reasons.
-72-
As a result of the Argentine economic situation in 2002 and of the
measures taken by the Argentine government that modified the terms and
conditions of the Bank's private-sector loan portfolio, substantially all of the
Bank's loan portfolio underwent a restructuring process beginning in 2002.
Significant progress was made in this process during 2003 and 2004, but it had
not been completed as of December 31, 2004, and continues as of the date of this
annual report. See " -- Main Regulatory Changes in 2002, 2003 and 2004 -- Loans
to the Private Sector and Asymmetric Indexation."
Under Argentine Central Bank rules, banks are required to cease the
accrual of interest or to establish provisions of 100.0% of the interest accrued
on all loans pertaining to the non-accrual loan portfolio, that is, all loans to
borrowers in the categories of:
- in the consumer portfolio: defective fulfillment, difficulty in recovery,
uncollectible and uncollectible due to technical reasons.
- in the commercial portfolio: with problems, high risk of insolvency,
uncollectible and uncollectible due to technical reasons.
DECEMBER 31,
--------------------------------------
2004 2003 2002 2001 2000 (1)
---- ---- ---- ---- --------
Interest Income that would have been recorded on non-accrual
loans on which the accrual of interest was discontinued 32.5 39.9 40.4 119.6 24.4
Recoveries of interest on loans classified as non-accrual
on which the accrual of interest had been discontinued(2) 1.6 2.0 2.0 6.0 1.3
----------------------------------------------------------------------------
(1) Six months ended December 31, 2000, annualized.
(2) Recorded under "Miscellaneous Income."
In 2004 and 2003, the improvement in the overall Argentine economy, the
progress made by the Bank in the restructuring of its commercial portfolio and
the significant charge offs made generated an improvement in the quality of the
Bank's loan portfolio. This improvement is evidenced by the changes in the
private-sector loan portfolio quality: at the close of fiscal years 2004 and
2003, the Bank's non-accrual private-sector loan portfolio represented 16.02%
and 31.19%, respectively, of its total portfolio of loans to the private sector,
as compared to 35.47% at the end of 2002. It should be noted that as of December
31, 2003, the non-accrual portfolio as a percentage of total loans was 15.04%,
compared to 13.08% at the close of fiscal year 2002. This increase was due to
the reclassification of Bogar as government securities for 2003, while at the
end of 2002 they were recorded under loans (see -- "Government and Corporate
Securities"). If such reclassification is not considered, the Bank's non-accrual
to total loans ratio as of December 31, 2003, was 10.73% substantially lower
than the 13.08% ratio at the end of 2002.
Despite the credit quality improvement experienced in 2004 and 2003, the
level of the Bank's non-accrual loans remains high, reflecting the impact of the
crisis on the Argentine private sector.
The quality of the Bank's loan portfolio deteriorated significantly in
2001 as a result of the significant worsening throughout 2001 of Argentina's
overall economic situation, which turned into an unprecedented political and
economic crisis at the end of 2001, which disrupted Argentina's financial system
and real economy. The quality of the Bank's loan portfolio had been
deteriorating since 2000 as a result of the recession that Argentina was
undergoing at the time which had begun in the second half of 1998. In 2002 the
severe economic crisis had as a direct consequence an additional significant
deterioration of the Bank's loan portfolio quality as compared to that of prior
fiscal years.
Coverage of the Bank's non-accrual portfolio with allowances reached
90.51% and 90.61% at the end of fiscal years 2004 and 2003, and allowances as a
percentage of total loans amounted to 7.01% and 13.63%, respectively. This high
coverage was due to the significant allowances set up in 2002, when the Bank
made a substantial effort to increase its allowances for loan losses and the
coverage of the non-accrual loan portfolio with allowances for loan losses as a
result of the crisis.
-73-
Coverage with allowances for loan losses of the non-accrual loan portfolio
plus loans classified as category "2.b" pursuant to the Argentine Central Bank's
classification (amounting to Ps. 125.6 million and 212.6 million as of December
31, 2004 and December 31, 2003) was 76.73% and 77.87% at the end of fiscal years
2004 and 2003, respectively.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The following table presents an analysis of the allowance for loan losses
at the dates indicated. Certain loans are charged off directly to the income
statement and, therefore, are not reflected in the allowance.
SIX MONTHS FISCAL YEAR
FISCAL YEAR ENDED ENDED ENDED
-------------------------------------------------------------------- ------------
DECEMBER 31, JUNE 30,
-------------------------------------------------------------------- ------------
2004 2003 2002 2001 2000 2000
------------- ------------- ------------- ------------- ------------- ------------
(in millions of pesos, (in millions of February 28, 2003, constant pesos,
except ratios) except ratios)
TOTAL LOANS, AVERAGE(1)........................ Ps. 11,137.9 Ps. 11,556.7 Ps. 15,262.4 Ps. 20,002.3 Ps. 19,676.5 Ps. 18,252.7
ALLOWANCE FOR LOAN LOSSES AT BEGINNING OF
PERIOD(4) 1,177.3 1,681.8 1,050.3 596.0 576.9 591.2
Changes in the Allowance for Loan Losses
during the period(4)
Provisions Charged to Income.................. 179.3 217.1 1,599.5 922.0 253.8 530.6
Prior Allowances Reversed..................... (210.3) (402.1) - (2.0) (2.9) (3.5)
Charge-Offs(A)................................ (521.3) (267.3) (305.7) (465.7) (231.8) (541.4)
Inflation and Foreign Exchange
Effect and Other Adjustments................. 7.6 (52.2) (662.3) - - -
------------ ------------ ------------ ------------ ------------ ------------
ALLOWANCE FOR LOAN LOSSES AT END OF PERIOD..... Ps. 632.6 Ps. 1,177.3 Ps. 1,681.8 Ps. 1,050.3 Ps. 596.0 Ps. 576.9
Charge to the Income Statement during the
Period
Provisions Charged to Income(4)............... 179.3 217.1 1,599.5 922.0 253.8 530.6
Direct Charge-Offs, Net of Recoveries(B)...... (101.6) (38.6) (17.2) (25.8) (15.6) (29.6)
Recoveries of Provisions...................... (210.3) (402.1) - (2.0) (2.9) (3.5)
------------ ------------ ------------ ------------ ------------ ------------
NET CHARGE (BENEFIT) TO THE INCOME STATEMENT... Ps. (132.6) Ps. (223.6) Ps. 1,582.3 Ps. 894.2 Ps. 235.3 Ps. 497.5
RATIOS (%)
Charge-Offs (A+B) to Average Loans(2)......... 3.77% 1.98% 1.89% 2.20% 2.20% 2.80%
Net Charge to the Income Statement to Average
Loans(3)..................................... (1.19) (1.93) 10.37 4.47 2.39 2.73
------------ ------------ ------------ ------------ ------------ ------------
(1) Before the allowance for loan losses.
(2) Charge-offs plus direct charge-offs minus bad debts recovered.
(3) Income statement charges consist of net provisions plus net direct
charge-offs (direct charge-offs minus bad debts recovered)
(4) Includes quotation difference for Galicia Uruguay and Cayman Branch.
The lower loan loss allowance reported at the end of fiscal year 2004 as
compared to the prior fiscal year mainly reflects the credit quality improvement
that accompanied the improved overall Argentine economic environment and the
significant charge offs made during the year. It also reflects the progress made
by the Bank in the restructuring of its loan portfolio. The lower loan loss
allowance reported at the close of fiscal year 2003, as compared to the prior
fiscal year, mainly reflects the reduced overall risk faced by the Bank's loan
portfolio after completion of several debt restructurings. See " -- Argentine
Central Bank's Loan Classification and Loan Loss Provisions -- Loan Loss
Provision Requirements -- General Provisions" above.
The increase in the allowance for loan losses as of December 31, 2002,
when compared to December 31, 2001 and the increases in the year ended December
31, 2001, and the six-month period ended December 31, 2000, when compared to the
prior fiscal years reflect the continuous worsening of the economic conditions
in Argentina between late 1998 and 2002, which caused a general deterioration of
credit quality, higher levels of nonperforming loans and higher charge-offs
across the entire loan portfolio.
The increase in the years ended December 31, 2002 and 2001 can also be
attributed to the increase in the unallocated reserve as of each year end. For
an explanation of the increase in the Bank's general unallocated
-74-
allowance, see " -- Argentine Central Bank's Loan Classification and Loan Loss
Provisions -- Loan Loss Provision Requirements -- General Provisions" above.
In 2004 and 2003, the net effect on the income statement (provisions and
direct charges related to the loan portfolio net of loan loss provisions
reversed and loan recoveries) was a benefit of Ps. 132.6 million and Ps. 223.6
million, respectively, representing 1.19% and 1.93% of the average loan balance
for the fiscal year, respectively. In 2004, this gain was the consequence of the
Ps. 210.3 million reversal of loan loss provisions, and of loan recoveries for
Ps. 110.1 million, which include Ps. 39.5 million from the sale of a portfolio
of off-balance sheet loans. In 2003, this gain was mainly the consequence of the
Ps. 402.1 million reversal of allowances. The net charge to the income statement
as a percentage of average loans was 10.37% in fiscal year 2002, 4.47% during
fiscal year 2001 and 2.39% during the six months ended December 31, 2000. This
reflects the fact that the Bank assigned an increased portion of its income,
both to non-accrual portfolio charge offs and to provide for a higher coverage
of such portfolio with allowances, when the quality of such portfolio
deteriorated.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The following table presents the allocation of Banco Galicia's allowance
for loan losses among the various loan categories and shows such allowances as a
percentage of Banco Galicia's total loan portfolio before deducting the
allowance for loan losses, in each case for the periods indicated. The table
also shows each loan category as a percentage of Banco Galicia's total loan
portfolio before deducting the allowance for loan losses at the dates indicated.
AS OF DECEMBER 31,
--------------------------------------------------------------------------------------
2004 2003 2002
-------------------------- ----------------------------- -----------------------------
% OF LOAN % OF LOAN % OF LOAN
AMOUNT LOANS CATEGORY % AMOUNT LOANS CATEGORY % AMOUNT LOANS CATEGORY %
--------- ----- ---------- ----------- ------ ---------- ----------- ----- ----------
(in millions of February 28,
2003, constant pesos,
(in millions of pesos, except percentages) except percentages)
Non-Financial Public Sector........... - - 50.01% - - 49.51% - - 62.03%
Local Financial Sector................ - - 1.67 - - 2.25 - - 1.09
Non-Financial Private Sector and
Residents Abroad
Advances............................ Ps. 22.7 0.25% 2.21 Ps. 78.8 0.91% 2.54 Ps. 40.1 0.33% 1.84
Notes............................... 270.9 3.00 12.18 441.9 5.12 14.82 569.0 4.62 12.55
Mortgage Loans...................... 97.6 1.08 6.91 142.6 1.65 8.33 122.1 0.99 7.02
Pledge Loans........................ 3.5 0.04 1.03 22.7 0.27 0.63 24.3 0.20 1.56
Personal Loans...................... 4.0 0.04 0.64 157.6 1.82 0.64 48.4 0.39 0.97
Credit-Card Loans................... 10.8 0.12 12.25 14.5 0.17 9.48 55.6 0.45 4.75
Placements in Correspondent Banks - - 4.20 - - 2.00 - - 1.29
Other .............................. 32.1 0.36 8.90 5.6 0.06 9.80 - - 6.90
Unallocated (1)....................... 191.0 2.12 - 313.6 3.63 - 822.3 6.68 -
--------- ---- ------ ----------- ----- ------ ----------- ----- ------
TOTAL................................. Ps. 632.6 7.01% 100.00% Ps. 1,177.3 13.63% 100.00% Ps. 1,681.8 13.66% 100.00%
--------- ---- ------ ----------- ----- ------ ----------- ----- ------
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------------------------------- --------------------------
2001 2000 2000
---------------------------- -------------------------- --------------------------
% OF LOAN % OF LOAN % OF LOAN
AMOUNT LOANS CATEGORY % AMOUNT LOANS CATEGORY % AMOUNT LOANS CATEGORY %
----------- ----- ---------- --------- ----- ---------- --------- ----- ----------
(in millions of February 28, 2003, constant pesos, except percentages)
Non-Financial Public Sector..... ..... - - 41.15% - - 27.49% - - 26.11%
Local Financial Sector.......... ..... - - 0.91 - - 5.35 - - 3.77
Non-Financial Private Sector and
Residents Abroad
Advances............................ Ps. 46.1 0.22% 3.85 Ps. 35.9 0.17% 4.62 Ps. 40.1 0.19% 8.25
Notes............................... 219.2 1.04 18.46 76.7 0.37 23.61 82.9 0.39 25.60
Mortgage Loans...................... 154.5 0.73 15.65 100.3 0.48 16.72 89.9 0.43 14.16
-75-
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------------------------------- --------------------------
2001 2000 2000
---------------------------- -------------------------- --------------------------
% OF LOAN % OF LOAN % OF LOAN
AMOUNT LOANS CATEGORY % AMOUNT LOANS CATEGORY % AMOUNT LOANS CATEGORY %
----------- ----- ---------- --------- ----- ---------- --------- ----- ----------
(in millions of February 28, 2003, constant pesos, except percentages)
Pledge Loans........................ 33.5 0.16 4.00 37.2 0.18 4.18 39.0 0.19 4.06
Personal Loans...................... 64.8 0.31 2.77 58.0 0.28 3.87 51.6 0.24 3.45
Credit-Card Loans................... 83.7 0.40 8.90 84.8 0.40 7.95 86.8 0.41 6.84
Placements in Correspondent Banks... - - 1.79 - - 3.68 - - 5.82
Other .............................. 3.7 0.02 2.52 10.7 0.05 2.53 11.2 0.05 1.94
Unallocated (1)....................... 444.8 2.10 - 192.4 0.91 - 175.4 0.83 -
----------- ---- ------ --------- ---- ------ --------- ---- ------
TOTAL................................. Ps. 1,050.3 4.98% 100.00% Ps. 596.0 2.84% 100.00% Ps. 576.9 2.73% 100.00%
=========== ==== ====== ========= ==== ====== ========= ==== ======
(1) The unallocated reserve consists of the allowances established on the
portfolio classified in the "normal" and "normal performance" categories and
includes additional reserves in excess of Argentine Central Bank minimum
requirements.
CHARGE-OFFS
The following table sets forth the allocation of the main charge-offs made
by Banco Galicia during the years ended December 31, 2004, 2003 and 2002.
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 31,
------------------------------------------
2004 2003 2002
--------- --------- ------------------
(in millions of
February 28, 2003,
(in millions of pesos) constant pesos)
CHARGE-OFFS BY TYPE
Advances................................................. Ps. 20.0 Ps. 31.3 Ps. 48.6
Notes
Promissory Notes ..................................... 331.3 65.0 14.9
Discounted and Purchased Bills........................ - - -
Documentary Credits...................................
Mortgage Loans........................................... 60.5 34.4 18.5
Pledge Loans............................................. 20.4 18.8 19.1
Personal Loans........................................... 12.5 36.9 33.7
Credit-Card Loans
Banco Galicia......................................... 5.5 27.9 22.1
Regional Credit-Card Companies........................ 9.3 52.9 89.3
Other Loans ............................................. 61.8 0.1 5.7
Adjustment and Restatement............................... - - 31.5
--------- --------- ---------
TOTAL.................................................... Ps. 521.3 Ps. 267.3 Ps. 283.4 (*)
========= ========= =========
(*) Does not include Ps. 22.3 million corresponding to Banco Galicia Uruguay
S.A.
During fiscal year 2004, the overall level of charge offs increased from
the level reported for the prior fiscal year, to Ps. 521.3 million, as a result
of the decision to charge off all loans to customers with loans under a
restructuring process in which negotiations had reached a stagnating point or no
agreement was deemed possible.
During fiscal year 2003, the overall level of charge offs decreased from
the level reported for the prior fiscal year, mainly as a result of the
significant decrease in charge-offs related to loans granted by the regional
credit-card companies, which mainly comprise loans to the client segment that
was first affected by the crisis, and therefore this portfolio had experienced
significant charge offs in the prior years. This was partially offset by higher
charge offs on mortgage loans and promissory notes, reflecting the impact of the
2001-2002 crisis on the credit quality of businesses, including large
corporations.
-76-
The overall level of charge offs for the year ended December 31, 2002,
reflects the negative effects on the Bank's loan portfolio quality of the
outbreak of the crisis in late 2001 and of the crisis environment prevailing
during 2002. It also reflects the effects of the Argentine government measures
aimed at restructuring private-sector loan portfolios.
FOREIGN OUTSTANDINGS
Cross-border or foreign outstandings for a particular country are defined
as the sum of all claims on third parties domiciled in that country and comprise
loans (including accrued interest), acceptances, interest-bearing deposits with
other banks, other interest-bearing investments and any other monetary assets
that are denominated in dollars or other nonlocal currency.
As of December 31, 2004, we had the following foreign outstandings
representing 0.75% or more of our total assets:
- a Ps. 394.4 million claim against a United Kingdom financial institution
(1.67% of our total assets), corresponding to the right to receive Boden 2012
in connection with agreements to repurchase such bonds entered into with such
bank; and
- Ps. 196.4 million of placements with United States financial institutions
(0.83% of our total assets), of which Ps. 157.4 million represented an
overnight placement and the remaining amount several short-term placements.
There were no other foreign outstandings representing 0.75% or more of our
total assets as of December 31, 2004.
At the end of fiscal year 2003, we did not have any foreign outstandings
that represented 0.75% or more of our total assets. At the end of fiscal year
2002, we had foreign outstandings amounting to Ps. 206.3 million with United
States banks and other financial institutions, representing 0.86% of our total
assets. There were no other foreign outstandings representing 0.75% or more of
our total assets.
COMPOSITION OF DEPOSITS
The following table sets out the composition of Grupo Galicia's deposits
as of December 31, 2004, 2003, and 2002. Grupo Galicia's deposits mainly
represent Banco Galicia's deposits.
GRUPO GALICIA
-----------------------------------------------------
AS OF DECEMBER 31,
-----------------------------------------------------
2004 2003 2002
------------ ------------------ -----------
(in millions of
(in millions February 28, 2003,
of pesos) constant pesos)
Current Accounts and Other Demand Deposits................ Ps. 1,210.3 Ps. 917.5 Ps. 615.2
Savings Accounts (1)...................................... 1,639.5 1,080.2 679.0
Time Deposits............................................. 3,527.6 2,838.4 2,423.1
Restructured Deposits (2) ................................ 107.3 381.9 948.4
Other Deposits............................................ 191.0 168.7 166.3
Plus: Interest Payable and Differences in Quotations(3).. 81.2 197.3 377.3
----------- ----------- -----------
TOTAL DEPOSITS............................................ Ps. 6,756.9 Ps. 5,584.0 Ps. 5,209.3
----------- ----------- -----------
(1) Includes remunerated current accounts.
(2) CEDROS, plus restructured deposits under judicial proceedings plus, in 2003
and 2002, restructured deposits exchanged for government bonds in the Canje II,
which had not been delivered to customers as of December 31, 2003 and 2002.
(3) Includes the CER adjustment.
In 2004, the Group's consolidated deposits increased 21.0%, mainly as a
result of a Ps. 852.1 million increase in deposits in current and savings
accounts and a Ps. 689.2 million increase in time deposits. Both increases were
due to private sector deposits raised by the Bank's Argentine operation. The
increase in time deposits was due
-77-
to the return of the Bank to the local institutional market after it received a
rating of "BBB-" by Standard&Poors in its local ratings scale, following the
completion of the restructuring of the Bank's foreign debt. This increase is net
of the repayment of Galicia Uruguay restructured deposits (both due to the
payment by Galicia Uruguay of the installment scheduled in the restructuring
agreement reached in December 2002 and to the participation of depositors in the
exchange offered by Galicia Uruguay at the beginning of 2004). As of December
31, 2004, time deposits include Ps. 511.3 million of CER adjusted time deposits.
The repayment by the Bank in Argentina of restructured deposits caused the
amount of these deposits to decrease during 2004.
In 2003, the Group's consolidated deposits increased 7.2% as a result of
the increase of private sector deposits in current accounts, savings accounts
and time deposits (excluding restructured deposits) raised by the Bank in
Argentina. This increase was to a large extent due to the Argentine government
measures aimed at "freeing" restructured deposits and exchanging them for
government bonds. See " -- Main Regulatory Changes in 2002, 2003 and 2004 --
Deposits." The consequent increase in consolidated time deposits, substantially
all occurring in short-term peso-denominated time deposits, was partially offset
by the payment by Galicia Uruguay of the first installment of the restructuring
schedule agreed with the depositors in December 31, 2002. In addition, the
following factors contributed to offset the increase in total deposits: (i) the
decrease of the exchange rate during 2003; and (ii) the fact that restructured
deposits continued to decrease as a result of their amortization in accordance
with the schedule established by the Argentine government, the payments made by
the Bank as a consequence of amparo claims, and to the above mentioned measures
to eliminate the restructured deposits.
Restructured deposits in Argentina as of December 31, 2004 amounted to Ps.
107.3 million, showing a 71.9% decrease from the Ps. 381.9 million as of
December 31, 2003, which were 59.7% lower than Ps. 948.4 million as of December
31, 2002. Consequently, these deposits represented only 1.6% of total deposits
as of the close of fiscal year 2004.
For more information, see Item 5. "Operating and Financial Review and
Prospects -- Item 5A. Operating Results -- Funding."
The following table provides a breakdown of the Group's consolidated
deposits as of December 31, 2004, by contractual maturity date and currency of
denomination. The contractual maturity of CEDROs was set by the Argentine
government's regulations in 2002, when deposits were restructured.
PESO-DENOMINATED DOLLAR-DENOMINATED TOTAL
-------------------- ------------------------ ---------------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
----------- ------- ----------- ------ ----------- -----
(in millions of pesos)
Current Accounts and Demand Deposits................ 1,210.3 23.0 - - 1,210.3 18.1
Savings Accounts.................................... 1,280.3 24.3 359.2 25.6 1,639.5 24.6
Time Deposits....................................... 2,585.0 49.1 942.6 67.0 3,527.6 52.8
Maturing within 30 Days........................ 372.6 7.1 73.2 5.2 445.8 6.7
Maturing after 31 Days but within 59 Days...... 710.2 13.5 86.9 6.2 797.1 11.9
Maturing after 60 Days but within 89 Days...... Ps. 445.2 8.5% Ps. 42.3 3.0% Ps. 487.5 7.3%
Maturing after 90 Days but within 179 Days..... 386.7 7.3 41.9 3.0 428.6 6.4
Maturing after 180 Days but within 365 Days.... 658.2 12.5 16.0 1.1 674.2 10.1
Maturing after 365 Days........................ 12.1 0.2 682.3 48.5 694.4 10.4
Restructured Deposits (includes CEDROs)............. 107.3 2.0 - - 107.3 1.6
Other Deposits...................................... 86.6 1.6 104.4 7.4 191.0 2.9
Maturing within 30 Days........................ 86.1 1.6 103.5 7.3 189.6 2.9
Maturing after 31 Days but within 59 Days...... - - - - - -
Maturing after 60 Days but within 89 Days...... - - - - - -
Maturing after 90 Days but within 179 Days..... - - - - - -
Maturing after 180 Days but within 365 Days.... - - - - - -
Maturing after 365 Days........................ 0.5 - 0.9 0.1 1.4 -
----------- ----- ----------- ----- ----------- -----
TOTAL DEPOSITS (1).................................. Ps. 5,269.5 100.0% Ps. 1,406.2 100.0% Ps. 6,675.7 100.0%
=========== ===== =========== ===== =========== =====
-78-
The preceding table shows that the categories with the highest
concentration of maturities per original term are those within the following
segments: (i) "after 31 days but within 59 days -- pesos and dollars", amounting
to 11.9% of the total, which corresponds to peso-denominated time deposits; (ii)
"after 180 days but within 365 days -- pesos", amounting to 10.1% of the total,
which mainly corresponds to time deposits adjusted by CER; and (iii) "after 365
days -- dollars", amounting to 10.4% of the total, which corresponds to the
Galicia Uruguay's time deposits resulting from the restructuring of its
deposits.
Dollar-denominated deposits, for Ps. 1,406.0 million, represent 21.0% of
total deposits, of which 57.8% (Ps. 812.3 million) corresponded to Galicia
Uruguay (consolidated).
Through Communique "A" 4032 effective as of November 1, 2003, the
Argentine Central Bank reestablished at 30 days the minimum term for time
deposits, while the minimum term for CER-adjusted time deposits was 90 days.
After the close of the fiscal year, Communique "A" 4331, dated April 4, 2005,
extended such minimum term to 365 days. The average maturity of our time
deposits in Argentina both peso- and dollar-denominated (excluding restructured
deposits) was approximately 60 days as of December 31, 2004. The average
maturity of our CER adjusted time deposits as of December 31, 2004, was
approximately 210 days.
The schedule established by the Argentine government for the reimbursement
of CEDROs originally denominated in pesos began in March 2002 and expired in
November 2004. The schedule established for the reimbursement of CEDROs
originally denominated in U.S. dollars began in January 2003 and expires in
August 2005.
The following table provides information about the maturity of the Group's
outstanding time deposits exceeding Ps. 100,000, according to whether they were
made at domestic or foreign branches as of December 31, 2004.
DOMESTIC OFFICES FOREIGN OFFICES
---------------- ---------------
(in millions of pesos)
Time Deposits
Within 30 Days.......................................... Ps. 211.6 -
After 31 Days but within 59 Days........................ 532.9 -
After 60 Days but within 89 Days........................ 201.5 -
After 90 Days but within 179 Days....................... 238.1 -
After 180 Days but within 365 Days...................... 558.9 -
After 365 Days.......................................... 8.9 595.5
----------- ---------
TOTAL TIME DEPOSITS......................................... Ps. 1,751.9 Ps. 595.5
RESTRUCTURED DEPOSITS (INCLUDES CEDROs)..................... PS. 29.6 -
Other Deposits
After 365 Days.......................................... - Ps. 0.8
----------- ---------
TOTAL OTHER DEPOSITS........................................ - Ps. 0.8
----------- ---------
TOTAL DEPOSITS (1) ......................................... Ps. 1,781.5 Ps. 596.3
=========== =========
(1) Only principal. Excludes the CER adjustment.
-79-
RETURN ON EQUITY AND ASSETS
The following table presents certain selected financial information and
ratios for Grupo Galicia for the periods indicated.
GRUPO GALICIA
-----------------------------------------------
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 31,
-----------------------------------------------
2004 2003 2002
------------ ---------- -------------------
(in millions of
February 28, 2003,
(in millions of pesos, constant pesos,
except percentages) except percentages)
Net Income................................................. Ps. (109.9) Ps. (222.2) Ps. (1,509.3)
Average Total Assets....................................... 22,725.9 22,530.3 29,500.9
Average Shareholders' Equity............................... 1,500.9 1,529.4 2,431.9
Shareholders' Equity at End of the Period.................. 1,519.5 1,419.4 1,600.8
Nat Income as a Percentage of:
Average Total Assets (1)................................ (0.42)% (0.95)% (6.04)%
Average Shareholders' Equity (2)........................ (7.32) (14.53) (62.06)
Declared Cash Dividends ................................... - - -
Dividend Payout Ratio...................................... - - -
Average Shareholders' Equity as a Percentage of Average
Total Assets ............................................ 6.60% 6.79 8.24%
Shareholders' Equity at the End of the Period as a
Percentage of Average Total Assets....................... 6.69 6.30 5.43
========== ========== ============
(1) Before the absorption allowed by Argentine Central Bank Communique "A" 3800,
for fiscal year 2002 this ratio was (10.68) %.
(2) Before the absorption allowed by Argentine Central Bank Communique "A" 3800,
for fiscal year 2002 this ratio was (118.40) %.
SHORT-TERM BORROWINGS
Grupo Galicia's short-term borrowings represent mainly Banco Galicia's
short-term borrowings.
Short-term borrowings include all of the Bank's borrowings (including
repos and debt securities or negotiable obligations) with a contractual maturity
of less than one year, owed to the Argentine Central Bank, foreign and domestic
financial institutions and negotiable obligations holders.
AS OF DECEMBER 31,
----------------------------------------------------
2004 2003 2002
---------------------- ------------- -----------
(in millions of February 28,
(in millions of pesos) 2003, constant pesos)
SHORT-TERM BORROWINGS
Argentine Central Bank................................... Ps. 1.0 Ps. 0.8 Ps. 4,831.2
Other Banks and International Entities (1)
Lines of Credit from Domestic Banks.................. 115.2 25.1 48.0
Lines of Credit from Foreign Banks................... - 1,231.8 1,548.8
Debt Securities (1) ..................................... 13.4 9.5 129.2
--------- ----------- -----------
TOTAL.................................................... Ps. 129.6 Ps. 1,267.2 Ps. 6,557.2
========= =========== ===========
(1) For 2003 and 2002, includes short term borrowings under restructuring.
Banco Galicia's short-term borrowings totaled Ps. 129.6 million as of
December 31, 2004, compared to Ps. 1,267.2 million as of December 31, 2003 and
Ps. 6,557.2 million as of December 31, 2002. The amount for 2004 does not
include the repurchase agreements entered into in 2004 with Boden 2012 with a
contractual maturity of one year but with the option for the creditor to renew
for one year more.
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The decrease in short-term borrowings in 2004 was the result of the
restructuring, in May 2004, of the foreign debt of the Bank's Head Office in
Argentina and that of its Cayman Branch into long-term debt. Foreign debt under
restructuring as of December 31, 2003 and 2002, with a contractual maturity of
less than one year, was included under short-term borrowings.
The decrease in short term borrowings in 2003 is mainly due to the fact
that, as of December 31, 2003, the financial assistance owed to the Argentine
Central Bank was recorded as a long term liability, while as of December 31,
2002, it was recorded as a 30-day revolving facility. On November 27, 2003,
through its Resolution No. 1, the Financial System's Restructuring Unit
authorized the Argentine Central Bank to restructure such financial assistance
in accordance with: (i) the provisions of Decree No. 739/03 and Decree
No. 1262/03 and (ii) the repayment schedule presented by the Bank to the
Argentine Central Bank. On February 3, 2004, the Argentine Central Bank approved
such schedule, which contemplates repayment in 92 monthly installments beginning
in March 2004, inclusively. As of December 31, 2002, Ps. 4,831.2 million
corresponding to such assistance were included as short term borrowings. See
Item 5. "Operating and Financial Review and Prospects -- Item 5A. Operating
Results -- Funding."
In addition short term borrowings decreased in 2003 due to: (i) the
decrease of the balance of lines with foreign banks, mainly as a result of the
appreciation of the peso, and (ii) the decrease of the balance of negotiable
obligations as a result of the progress made by the regional credit card
companies in the restructuring of its short-term negotiable obligations, past
due as of December 31, 2002, into long term liabilities.
The following table shows for the significant short-term borrowings of
Grupo Galicia for the fiscal years ended December 31, 2004, 2003 and 2002:
- the weighted-average interest rate at year end,
- the maximum balance recorded at the monthly closing dates of the periods,
- the average balances for each period, and
- the weighted-average interest rate for the periods.
GRUPO GALICIA, AS OF DECEMBER 31,
-----------------------------------------------------
2004 2003 2002
---------------------- --------- -------------
(in millions of February 28,
(in millions of pesos) 2003, constant pesos)
ARGENTINE CENTRAL BANK
Weighted-average interest rate at end of period......... 7.00% 9.00% 4.38%
Maximum balance recorded at the monthly closing dates... 1.0 0.8 4,831.2
Average balances for each period........................ 0.9 0.3 4,297.8
Weighted-average interest rate for the period........... 7.00% 9.00% 29.09%
LINES OF CREDIT FROM DOMESTIC BANKS
Weighted-average interest rate at end of period......... 5.19% 6.82% 6.48%
Maximum balance recorded at the monthly closing dates... 185.6 43.4 144.3
Average balances for each period........................ 104.2 35.4 73.1
Weighted-average interest rate for the period .......... 4.99% 6.88% 9.86%
LINES OF CREDIT FROM FOREIGN BANKS
Weighted average interest rate at end of period ........ - 7.10% 6.20%
Maximum balance recorded at the monthly closing dates... 1,231.6 1,344.4 1,877.6
Average balances for each period ....................... 456.1 1,239.0 1,443.2
Weighted average interest rate for the period .......... 7.10% 7.10% 6.12%
REPOS WITH DOMESTIC BANKS
Weighted-average interest rate at end of period ........ - - -
Maximum balance recorded at the monthly closing dates... 150.1 - 1,056.8
Average balances for each period ....................... 37.9 - 330.9
Weighted-average interest rate for the period .......... 2.77% - 33.42%
REPOS WITH FOREIGN BANKS
Weighted-average interest rate at end of period ........ - - -
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Maximum balance recorded at the monthly closing dates... - - -
Average balances for each period ....................... - - -
Weighted-average interest rate for the period .......... - - -
NEGOTIABLE OBLIGATIONS
Weighted-average interest rate at end of period ........ 8.00% 16.05% 16.18%
Maximum balance recorded at the monthly closing dates... 13.4 128.0 238.7
Average balances for each period ....................... 11.5 50.9 182.7
Weighted-average interest rate for the period........... 8.00% 16.05% 16.19%
---- ----- -----
REGULATORY CAPITAL
The capital adequacy of Grupo Galicia is not under the supervision of the
Argentine Central Bank. Grupo Galicia has a minimum capital requirement
established by the Corporations' Law (Ley de Sociedades Comerciales) of Ps.
0.012 million.
Due to the significant changes suffered during 2002 by the financial
system's operations, which significantly affected the variables to determine the
minimum capital requirements, through its Communiques "A" 3599 and "A" 3604
dated May 3 and 9, 2002, respectively, the Argentine Central Bank suspended the
submission of capital adequacy information by financial institutions. On June 2,
2003 and July 25, 2003, through its Communiques "A" 3959 and "A" 3986,
respectively, the Argentine Central Bank laid down new capital adequacy rules
and established that compliance with such rules by financial institutions would
be required beginning on January 1, 2004. The Bank was in compliance with the
Argentine Central Bank's new capital adequacy requirements during 2004, both
before and after the increase in its regulatory capital resulting from the
restructuring of the foreign debt of its head office in Argentina and of its
Cayman Branch. For more information on this restructuring see "History --
Restructuring of Our Subsidiaries' Debt -- Banco Galicia -- Restructuring of the
Foreign Debt of the Bank's Head Office in Argentina and its Cayman Branch."
The current and the previous capital adequacy rules established by the
Argentine Central Bank are based on the methodology of the Basel Committee on
Banking Supervision of the Bank for International Settlements. Banks have to
comply with capital requirements both on an unconsolidated basis and on a
consolidated basis with its significant subsidiaries. Banco Galicia's
significant subsidiaries are Galicia Uruguay and the regional credit-card
companies that Banco Galicia indirectly controls.
The main changes introduced by the new rule, as compared to the former one
were:
- Setting an 8.0% minimum capital requirement on risk-weighted assets
consistent with the international standard set forth by the Basle Committee,
which is lower than the former requirement but is applied to the
public-sector exposure as well as to private-sector assets, while the former
requirement was applicable to private-sector assets only.
- Establishing a risk-weighting for public-sector assets was established of
100%, the same applicable to loans to the private sector.
- Discontinuing the requirement of increasing capital as a function of loans'
interest rates;
- Introducing capital requirements to cover market and interest-rate risks that
incorporated the US dollar as well as the CER adjustment, which the prior
rule did not consider;
- Discontinuing the increase or decrease of the capital requirement depending
on the rating granted to each institution by the Financial Superintendency
was discontinued;
Communique "A" 3986 established that, beginning in January 2004, two
coefficients known as "Alfa 1" and "Alfa 2" should be applied in order to
temporarily reduce the minimum capital requirement to cover credit risk and the
minimum capital requirement to cover interest-rate risk, respectively. "Alfa 1"
is applied to government securities held in investment accounts, loans granted
to the non-financial public sector until May 31, 2003, government securities in
connection with the asymmetric pesification (sections 28 and 29 of Decree No.
905/02), and debt instruments issued by the FFDP (Decree No. 1579/02). For year
2004, "Alfa 1" was established at 0.05 and "Alfa 2" was established at 0.20.
"Alfa 1" will increase progressively on an annual basis until reaching 1.00 on
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January 1, 2009, and "Alfa 2" will increase in the same manner as explained
before until reaching 1.00 on January 1, 2007, as shown in the table below.
JANUARY 1ST/ DECEMBER 31ST ALFA 1 ALFA 2
-------------------------- ------ ------
2004 0.05 0.20
2005 0.15 0.40
2006 0.30 0.70
2007 0.50 1.00
2008 0.75 -
2009 1.00 -
---- ---- ----
For more information on Argentine Central Bank's minimum capital
requirement rules, see " -- Regulatory Capital."
The table below shows Banco Galicia's capital requirement and computable
capital for the dates indicated. The information is consolidated with
significant subsidiaries, with the regional credit-card companies.
AS OF DECEMBER 31,
-------------------------------------------------------------------
2004 2003(*) 2002(*)
--------------- ----------- ----------------------------------
(in millions of pesos, except (in millions of February 28, 2003,
percentages) constant pesos, except percentages)
SHAREHOLDERS' EQUITY......................................... Ps. 1,198.2 Ps. 1,306.8 Ps. 1,511.3
ARGENTINE CENTRAL BANK MINIMUM CAPITAL REQUIREMENTS
Allocated to Financial Assets ............................. 329.9 - -
Allocated to Fixed Assets, intangible and unquoted equity
investments ................................................. 142.0 - -
Allocated to Market Risk................................... 62.6 - -
Allocated to Interest-Rate Risk............................ 20.2 - -
Lending to the Non-Financial Public Sector................. 58.6 - -
Government Securities in Investment Accounts............... - - -
----------- ----------- -----------
MINIMUM CAPITAL REQUIRED BY THE ARGENTINE CENTRAL BANK (A).. Ps. 613.3 - -
CAPITAL CALCULATED UNDER ARGENTINE BANKING GAAP
Core Capital................................................ 1,339.9 - -
Supplemental Capital........................................ 580.8 - -
Deductions
Investments in Financial Entities.......................... (1.5) - -
Organization Expenses...................................... (71.6) - -
Goodwill Recorded from June 30, 1997....................... (111.7) - -
Real Estate Properties for Banco Galicia's Own Use and
Miscellaneous, for which no title deed has been made ... (4.0) - -
Other...................................................... (5.9) - -
----------- ----------- -----------
Total....................................................... (194.7) - -
Additional Capital - Market Variation....................... 20.5
----------- ----------- -----------
CAPITAL CALCULATED UNDER ARGENTINE BANKING GAAP.............. Ps. 1,746.5 - -
EXCESS CAPITAL
Excess over required Capital (B)-(A)....................... Ps. 1,133.2 - -
Excess over Required Capital as a % of Required Capital ... 184.77% - -
Total Capital Ratio.......................................... 25.11 - -
----------- ----------- -----------
(*) Through its Communiques "A" 3599 and "A" 3604 dated May 3 and 9, 2002,
respectively, the Argentine Central Bank suspended the submission of this
information.
As of December 31, 2004 the Bank's computable capital amounted to Ps.
1,746.5 million, which exceeded by Ps. 1,133.2 million the minimum capital
requirement in accordance with Argentine Central Bank's regulations effective as
of that date. The core capital mainly corresponds to the Bank's shareholders'
equity at the beginning of the fiscal year and the supplemental capital includes
the fiscal year's losses and the subordinated negotiable obligations issued as a
result of the restructuring of the Bank's foreign debt and that of its Cayman
Branch. Pursuant to the Argentine Central Bank regulations on this respect,
subordinated debt computable as supplemental capital is limited to 50% of core
capital and supplemental capital cannot exceed the latter.
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For more information regarding Banco Galicia's capital, see Item 5.
"Operating and Financial Review and Prospects -- Item 5B. Liquidity and Capital
Resources -- Capital."
GOVERNMENT REGULATION
As a financial services holding company, Grupo Galicia does not have a
specific institution controlling its activities as a holding entity.
Nevertheless, its subsidiaries have different regulatory entities regulating
their activities.
In the case of Banco Galicia, the Argentine Central Bank is the regulatory
entity. For a description of the main regulatory changes introduced by the
Argentine government affecting financial institutions' activities and Argentine
banking regulations, see " -- Main Regulatory Changes in 2002, 2003 and 2004"
and " -- Argentine Banking System and Regulation -- Argentine Banking
Regulation" below.
With respect to the insurance business, Sudamericana Holding S.A.'s
insurance subsidiaries are regulated by the National Insurance Superintendency
and Laws No. 17,418, No. 20,091 and No. 22,400. The insurance companies held by
Sudamericana Holding S.A. are Galicia Vida Compania de Seguros S.A., Galicia
Retiro Compania de Seguros S.A., Galicia Patrimoniales S.A. and Instituto de
Salta Compania de Seguros de Vida S.A. Sudamericana Holding S.A. also holds
Medigap Salud S.A. and Sudamericana Asesores de Seguros S.A., both of which are
regulated by the Corporations' Law. Sudamericana Asesores de Seguros S.A. is
also regulated by the National Insurance Superintendency through Law No. 22,400.
Net Investment S.A., our Internet incubator, and its controlled companies
are regulated by the Corporations' Law and do not have a specific regulating
agency.
Galicia Warrants is regulated by National Law No. 9,643.
MINIMUM CAPITAL REQUIREMENTS OF INSURANCE COMPANIES
We and the companies we control are regulated by the Corporations Law. In
section No. 186, the Corporations Law establishes that the capital of a
corporation (a "sociedad anonima") cannot be less than Ps. 12,000 (twelve
thousand pesos). In addition to this law, the Bank must also comply with the
regulations set forth by the Argentine Central Bank.
The insurance companies controlled by Sudamericana Holding S.A. must meet
the minimum capital requirements set by General Resolution No. 25,804 of the
National Insurance Superintendency. The abovementioned resolution requires
insurance companies to maintain a minimum capital level equivalent to the
highest of the amounts calculated as follows:
a) By line of insurance: This method establishes a fixed amount by line of
insurance. For life insurance companies, it is Ps. 750,000, rising to Ps. 3
million for companies that offer pension-linked life insurance. For annuity
providers that do not offer life annuities or annuities covering disability
and other work-related risks, the requirement is Ps. 2 million. For property
insurance companies, the requirement is Ps. 5 million, excluding the auto
insurance line of business.
b) By premiums and additional fees: To use this method, the company must
calculate the sum of the premiums written and additional fees earned in the
last 12 months. Of the total, the company must calculate 18% of any result
up to Ps. 5 million, and 16% of any result over Ps. 5 million. Finally, it
must add the resulting figures and adjust the total by the ratio of net paid
claims to gross paid claims for the last 36 months. This ratio must be at
least 50%.
c) By claims: To use this method, the company must calculate the sum of gross
claims paid during the 36 months prior to the end of the period under
analysis. To that amount, it must add the difference between the balance of
unpaid claims as of the end of the period under analysis and the balance of
unpaid claims as of the 36th month prior to the end of the period under
analysis. The resulting figure must be divided by three. Then the company
must calculate 26% of any result up to Ps. 3.5 million, and 23% of any
result over Ps. 3.5 million. The resulting figure must be adjusted by the
ratio of net paid claims to gross paid claims for the last 36 months. This
ratio must be at least 50%.
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d) For life insurance companies that offer policies with an investment
component, the figures obtained in b) and c) must be increased by an amount
equal to 4% of the technical reserves. The latter total must be adjusted by
the ratio of net claims reserves to gross claims reserves (at least 85%),
plus 0.03% of at-risk capital adjusted by the ratio of net claims reserves
to gross claims reserves (at least 50%).
The minimum required capital must then be compared to computable capital,
defined as shareholder's equity less noncomputable assets. Noncomputable assets
consist mainly of deferred charges, pending capital contributions, and excess
investments in authorized instruments. As of September 30, 2004, the computable
capital of the companies held by Sudamericana Holding S.A. exceeded the minimum
requirement of Ps. 11.9 million by Ps. 23.9 million.
MAIN REGULATORY CHANGES IN 2002, 2003 AND 2004
GENERAL
In order to deal with the 2001 and 2002 crisis, on January 7, 2002,
Congress enacted the Public Emergency Law (No. 25,561). The main measures taken
by the Argentine government through the enactment of such Law and a series of
decrees, included the following:
- ratifying the suspension of payments of Argentina's sovereign debt
except for debt with the multilateral credit agencies;
- repealing the articles of the Convertibility Law that had established
in 1991 the fixed one-to-one peso-dollar parity, devaluing the peso and
subsequently allowing the peso to float, which resulted in an increase
in such parity of approximately 240.0% during 2002;
- tightening foreign-exchange controls and restrictions to transfers
abroad, which began to be loosened at the end of 2002;
- ratifying and tightening the restrictions to cash withdrawals from bank
deposits established in December 2001 (the "corralito"), which
restrictions were lifted in December 2002;
- establishing a compulsory "asymmetric" conversion of certain
dollar-denominated assets and liabilities into peso-denominated assets
and liabilities at different exchange rates (the asymmetric
pesification), as follows:
- private sector debt (individual and corporate dollar-denominated
debt) with financial institutions, and other creditors, was
converted into peso-denominated debt at a one-to-one exchange rate;
- dollar-denominated public sector debt instruments in financial
institutions' portfolios, both national and provincial, were
converted into peso-denominated instruments at an exchange rate of
Ps. 1.4 per US$ 1.0; and
- dollar-denominated bank deposits were converted into
peso-denominated bank deposits at an exchange rate of Ps. 1.4 per
US$ 1.0, while public-sector, bank and corporate debt governed by
foreign law remained dollar-denominated;.
- modifying the yields of assets and the cost of liabilities pesified at
the Ps. 1.4 per US$ 1.0 exchange rate, establishing fixed maximum and
minimum interest rates, respectively, and establishing the adjustment
of the principal of those assets and liabilities by the variation of
indexes based on the variation of prices or salaries;
- restructuring bank peso-denominated time deposits and dollar-
denominated deposits, above certain amounts, and establishing a
repayment schedule ending in 2003 and 2005 depending on whether the
deposit was originally peso or dollar-denominated (this restructuring
was known as the "corralon");
- establishing a series of voluntary swaps of deposits in the "corralito"
or of restructured deposits for government bonds, as a response to the
inability of the financial system to return deposits in accordance with
their original terms and conditions. Through Decree No. 739/03 of
April 1, 2003, the lifting of the "corralon" was established;
- amending the charter of the Argentine Central Bank; and
-85-
- allocating Argentine government bonds to financial institutions in
compensation for the losses that would otherwise arise from the
asymmetric pesification. As of the date of this annual report, the
Argentine government and the Argentine Central Bank have provided a
series of rules to determine the amount of compensation in connection
with the asymmetric pesification to which each financial institution is
entitled. However, certain situations remain that have not been
contemplated by such rules, such as the provision of compensation for
the difference between the amounts paid by banks to reimburse
restructured deposits, as a result of judicial actions from depositors
(amparo claims), and the amounts established by the regulations.
In 2004, as in the previous year, the period of effectiveness of the
Public Emergency Law was extended again, until December 2005.
Some of these measures are described in more detail below and under " --
Argentine Banking System and Regulation -- Argentine Banking Regulation."
FOREIGN EXCHANGE MARKET
In late 2001 and early 2002 restrictions were imposed on access to the
Argentine foreign exchange market and on capital movements, which were tightened
by mid 2002. The Public Emergency Law granted the Executive Branch the power to
set the exchange rate between the peso and foreign currencies and to regulate
the local foreign exchange market.
In order to prevent the appreciation of the peso that took place
principally in the fourth quarter of 2002, mainly through its Communiques "A"
3826, "A" 3843, "A" 3845, and "A" 3866, the Argentine Central Bank began to ease
some of these restrictions. In May 2003, mainly through Communique "A" 3944,
effective May 6, 2003, and during 2004, mainly through Communiques "A" 4086 and
"A" 4087, the Argentine Central Bank further enhanced access to the local
foreign exchange market.
On June 30, 2003, Decree No. 285/03, regulated by Argentine Central Bank
Communique "A" 3972, established effective July 1, 2003, a system for the
registration of funds entering into Argentina and a 180-day restriction on the
remittance of such registered funds abroad. This restriction does not apply to
foreign trade transactions or to foreign direct investment.
In addition, the main restrictions prevailing in the local foreign
exchange market that would affect us or the holders of our securities are as
follows:
- Access to the local foreign exchange market is allowed in order to
repay interest and principal on foreign debt of a financial nature, by
the financial and non-financial private sectors but such debt can only
be repaid after 180 days have elapsed from the moment the transaction
was liquidated in the local foreign exchange market.
- Anticipated payment of principal on such debt by the financial and
non-financial private sectors is allowed if made within a certain
period from maturity and after 180 days from the moment the transaction
was liquidated in the local foreign exchange market.
- Transfers of funds abroad by financial institutions with outstanding
indebtedness for financial assistance with the Argentine Central Bank,
such as the Bank, is subject to the prior authorization of the
Argentine Central Bank. Such prior authorization does not apply to
payments in connection with the foreign debt of the Bank's Head Office
and Cayman Branch, given that such restructuring was approved by the
Argentine Central Bank.
- Access to the foreign exchange local market for the transfer of profits
and dividends is allowed when corresponding to audited and closed
balance sheets.
- Access to the local foreign exchange market by non-residents (both
individuals and legal entities) to transfer funds abroad is allowed:
-86-
- with no limit in the case of proceedings from the principal
amortization of Argentine government securities, recoveries from local
bankruptcies and certain other specific cases.
- with a US$ 2.0 million monthly limit in the case of the aggregate
proceedings from the sale of: (i) direct investments in the private
non-financial sector in Argentina or the final disposition of such
investments; and (ii) the sale of portfolio investments made with
foreign exchange having entered the local foreign exchange market no
less than 180 days before. However, access to the local foreign
exchange market for the reason mentioned in (i) for a monthly amount
exceeding US$ 500,000 or for the reasons mentioned in (i) and (ii) for
an aggregate monthly amount exceeding US$ 2.0 million, requires the
prior authorization of the Argentine Central Bank.
- with a US$ 5,000 monthly limit in the cases not contemplated above,
unless authorization of the Argentine Central Bank is obtained.
- Access to the local foreign exchange market by residents (both individuals
and legal entities) to make foreign real estate, direct or portfolio
investments or buy foreign exchange or traveler checks is allowed but
limited to US$ 2.0 million per month, with such limit increased in certain
cases.
LOANS TO THE PRIVATE SECTOR AND ASYMMETRIC INDEXATION
Pursuant to Decree No. 214/02 dated February 3, 2002, as amended, loans to
the private sector were pesified at the Ps. 1 per dollar parity. These loans'
principal was to be adjusted by the CER. A maximum interest rate was to be
applied. The adjustment by the CER coefficient would be retroactively applied
beginning 180 days as from February 4, 2002. Subsequently, most of the loans to
individuals were excluded from this adjustment, which was replaced by the
adjustment by the CVS. Decrees No. 762/2002 and No. 1242/2002, dated May 7, 2002
and July 15, 2002, respectively, Law No. 25,713 dated November 28, 2002, as
ruled by Decree No. 44/03 dated January 26, 2003, and Law No. 25,796, published
in the Official Gazette on November 17, 2003, provided for the following
measures, among others:
- certain types of loans originally agreed in U.S. dollars and then pesified
were excluded from the application of the CER (i.e.: certain loans secured
by residential mortgages on property representing the borrower's sole
family residence agreed upon for up to US$ 250,000; personal loans
originally agreed up to Ps. 12,000 or US$ 12,000 or the equivalent amount
in foreign currency; and iii) personal loans secured by a pledge
originally agreed up to Ps. 30,000 or US$ 30,000 or the equivalent amount
in foreign currency.
- the adjustment by the CVS would be applicable from October 1, 2002, up to
March 31, 2004. The Bank began to apply the adjustment by the CVS to the
principal of eligible loans on November 2003.
- loans to be adjusted by the CER would bear an interest rate ranging from
3.5% to 8%, depending on the type of debtor, the existence of collateral
and the type of loan. Loans to be adjusted by the CVS would bear an
interest rate that would be the lowest between the loan's contractual rate
and the following maximum interest rates: 12.38% for mortgage loans,
16.41% for loans secured by a pledge and 25.48% for personal loans.
- those debtors with obligations not included in the above-mentioned
exceptions and with a total indebtedness in the financial system, as of
February 3, 2002, of up to Ps. 400,000, would be able to capitalize the
CER adjustment accrued up to September 30, 2002, and to restructure such
loans and the accumulated CER amounts.
On July 25, 2003, the Argentine Central Bank authorized, through its
Communique "A" 3987, financial institutions to grant loans to be adjusted by the
CER.
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During most of 2002, several regulations were in force that restricted
creditors' ability to exercise their rights, including foreclosure proceedings
on mortgages and pledges, all preliminary measures, such as attachments and
preliminary injunctions on those goods and/or facilities owned by debtors. The
suspension of foreclosure proceedings was extended several times through
regulations or by means of banks' voluntary commitment to not bring foreclosure
actions against debtors until the National Congress had the opportunity to
consider a new project of law in such respect.
Through Law No. 25,798 enacted on November 6, 2003, the Mortgage
Refinancing Regime (Sistema de Refinanciacion Hipotecaria) was created in order
to refinance nonperforming loans secured by real property constituting the
debtor's sole family residence. The Bank decided not to participate in this
mortgage refinancing regime. During fiscal year 2004, the Bank informed the
Argentine Central Bank, by means of a note, of its decision not to participate
in the aforementioned system.
DEPOSITS
On December 3, 2001, Decree No. 1570/01 established the restrictions to
depositors' ability to make cash withdrawals from bank accounts known as the
"corralito." The "corralito" did not prevent transfers of deposits among banks.
A banking holiday was imposed between December 21, 2001 until January 10, 2002.
On January 10, 2002, Resolution No. 6/02 of the Ministry of Economy
established the first restructuring of time deposits in pesos and of most
deposits originally denominated in U.S. dollars, above certain amounts.
Restructured deposits were known as deposits in the "corralon" and were not
allowed to be transferred among banks. After Resolution No. 6/02, the
"corralito" referred to the restrictions applicable to transactional deposits
only.
On February 3, 2002, Decree No. 214/02 established the mandatory
conversion of all deposits in U.S. dollars or other foreign currencies in the
Argentine financial system into pesos at the exchange rate of Ps. 1.4 per US$ 1.
0. Decree No. 214/02 also allowed for the entire withdrawal of salaries and
pensions in cash and other exceptions.
The "corralito" and the "corralon" were meant to shield banks from massive
withdrawal of deposits. However, the financial system's deposit levels continued
to diminish. One of the reasons for this, that became increasingly important
beginning March 2002, was the increase in the number of successful amparo claims
obtained by depositors requiring banks to release deposits. In order to restrict
fund outflows from the financial system, Law No. 25,587 was passed on April 25,
2002, that required banks to release deposits only when amparo claims had been
issued pursuant to final non-appealable judicial decisions. Enforcement of this
Law limited bank losses of deposits due to amparo claims, but did not eliminate
them.
In an attempt to solve the problem that the "corralito" and "the corralon"
represented, on various occasions, the Executive Branch proposed voluntary
exchanges of deposits (known as "Canje I" and "Canje II") for new Argentine
government bonds (Peso-denominated Boden 2007 and two dollar-denominated bonds:
Boden 2005 and Boden 2012). Restructured deposits for which no option had been
exercised (known as "Cedros") were registered with a "Notarial Record of
Restructured Deposits" kept by Caja de Valores S.A. (the Argentine equivalent of
The Depositary Trust Company in the U.S) ("Caja de Valores") and are listed
negotiable securities that may be negotiated on self-regulated markets in
Argentina.
Given the favorable trend shown during the second half of 2002 by the
financial system's deposit base, through its Resolution No. 668/02 and effective
December 2, 2002, the Ministry of Economy eliminated the restrictions still in
force on the amounts that depositors were allowed to withdraw in cash from
transactional deposit accounts. These measures meant the lifting of the
"corralito."
On March 5, 2003, the Argentine Supreme Court (the "Supreme Court") ruled
on the lawsuit of the Province of San Luis against the Argentine government,
seeking reimbursement, in dollars or in pesos for an amount equivalent to the
dollar amount at the free exchange rate, of a pesified dollar-denominated
deposit that the Province of San Luis holds at Banco Nacion. In its ruling, the
Supreme Court declared art. 2 of Decree No. 214/02 unconstitutional (the article
that had pesified the dollar-denominated deposits outstanding in the Argentine
financial system) and ordered Banco Nacion to reimburse the Province of San
Luis' deposit in dollars or in pesos for an
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amount equivalent to the dollar amount at the free exchange rate. In its ruling,
the Supreme Court established a 60-day term for the parties to convene or
determine the manner and the terms of the reimbursement of the deposit. The
parties did not reach an agreement within the established period.
Continuing with the progressive release of restructured deposits, on April
1, 2003, the Argentine government allowed holders of such deposits to request
from financial institutions and the Argentine government the reimbursement of
their deposits on conditions (a mix of cash and dollar-denominated Boden 2013)
that varied depending on the amount of the deposit and its original currency of
denomination. The process to eliminate the "corralon" was completed in August
2003.
On October 26, 2004, the Supreme Court ruled on the case entitled "Bustos,
Alberto et al v. National State, on legal action requesting protection of
constitutional guarantees", admitting the declaration of national emergency
established by Law No. 25,561 and the constitutionality of Section 2 of Decree
214/02, and overruling the decision that had ordered the repayment of a US
dollar-denominated deposit to a group of depositors. Notwithstanding the fact
that under Argentine law the Supreme Court rulings are not mandatory for lower
courts, this ruling is expected to set a precedent in similar cases to be heard
by those courts.
COMPENSATION TO FINANCIAL INSTITUTIONS
For the Asymmetric Pesification and its Consequences
Mainly through Decrees No. 214/02, No. 320/02, No. 410/02, No. 471/02, No.
704/02, No. 905/02 and No. 992/02 and complementary ones, as amended, and
Argentine Central Bank Communiques "A" 3467, 3507, 3561 and 3648 and
complementary ones, as amended, a significant portion of financial institutions'
assets and liabilities denominated in foreign currency, which formed part of
their net asset position in foreign currency were mandatorily converted into
pesos at different exchange rates.
Decree No. 214/02 provided for the compensation, through the issuance by
the Argentine government of bonds to be delivered to financial institutions
(peso-denominated Boden 2007 and dollar-denominated Boden 2012), of:
- the losses caused by the mandatory conversion into pesos of a
significant portion of their liabilities at the Ps. 1.4 per US$ 1.0
exchange rate, greater than the Ps. 1.0 per US$ 1.0 exchange rate
established for the conversion into pesos of a significant portion of
its dollar-denominated assets. This would be achieved through the
issuance and delivery of a peso-denominated compensatory bond maturing
in 2007 (Boden 2007).
- the currency mismatch existing in financial institutions' balance
sheets after the compulsory pesification of certain portions of their
assets and liabilities. This would be achieved through the conversion
of the peso-denominated compensatory bond into a dollar-denominated
compensatory bond and, if necessary, through the purchase by financial
institutions of a dollar-denominated hedge bond. For this, the
Argentine government established the issuance of a dollar-denominated
bond bearing Libor and maturing in 2012 (Boden 2012).
Among other measures, Decree No. 905/02 replaced the provisions of Decree
No. 494/02 in connection with the methodology for calculating the compensation
to be received by financial institutions, limiting the compensation to which a
financial institution was entitled only to the imbalances generated by the
Argentine government's pesification measures in the balance sheet of such
financial institution's head office and branches located in Argentina as of
December 31, 2001, and to the imbalances exclusively generated by the
pesification of their foreign branches' and subsidiaries' investments in secured
loans. Decree No. 2167/02 subsequently incorporated into the compensation scope
those assets and liabilities subject to Argentine Law and recorded in foreign
branches and subsidiaries that were pesified by Decree No. 214/02 and
complementary ones. The assets of subsidiaries with complementary activity
remained excluded.
Argentine Central Bank Communiques "A" 3805 and "A" 3825 regulated Decree
No. 2167/02 and established that no later than December 23, 2002, financial
institutions had to inform the Argentine Central Bank of
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the amounts of compensation to which they were entitled under the new rules. The
Argentine Central Bank had to confirm the amounts after its review.
Pursuant to Decree No. 905/02, the Bank was given the option to purchase
the Hedge Bond using certain public sector assets, as described below, or the
proceeds of an advance to be granted for this purpose by the Argentine Central
Bank. If the Hedge Bond is purchased through an advance from the Argentine
Central Bank, pursuant to article 15 of Decree No. 905/02 such advance has to be
collateralized by the following assets in the following priority: (i) secured
loans (representing in origin an exposure to the Argentine government),
beginning with those with the shorter average life; (ii) Bogar or secured loans
representing in origin an exposure to the provinces, beginning with those with
the shorter average life; and (iii) other assets with the public sector at the
criteria of the Ministry of Economy and the Argentine Central Bank. If a bank
does not have the required assets, it must give as collateral loans to the
private sector classified in the first two categories of the Argentine Central
Bank loan classification, beginning with mortgage loans, or if necessary such
bank's shareholders shall pledge their shares in such bank. The value of the
collateral required must be equal to 100.0% of the amount of the borrowings. No
assets have been given as collateral by the Bank as of the date of this annual
report because the compensation bonds have not been received in full by the Bank
yet. In addition, article 17 of Decree No. 905/02 established that such
borrowings from the Argentine Central Bank to purchase the Hedge Bond may be
repaid with the assets pledged as collateral thereto at any time following : (i)
a default by the Argentine government on the new debt issued pursuant to Decree
No. 1387/01 (secured loans and Bogar), and (ii) the date on which the Argentine
government shall have completed the restructuring of its foreign debt.
Resolution No. 6/04 of the Ministry of Economy, as regulated by Argentine
Central Bank Communiques "A" 4122 and "A" 4130, issued on March 26 and April 26,
2004, respectively, established certain changes to the methodology for the
calculation of the compensation for the asymmetric pesification.
In December 2002, the Bank originally calculated that it was entitled to
US$ 2,254.0 million of face value of Boden 2012 as compensation for the
asymmetric pesification. Within the process of determination of the compensation
amount, the Argentine Central Bank made certain observations by which it would
modify the final amount of such compensation. The Bank accepted and recognized
some of the adjustments and examined and discussed the remaining observations.
The total amount of Boden 2012 received and to be received or acquired as
compensation for the asymmetric pesification was recorded in accordance with the
accepted adjustments and the calculation made by the Bank. Nevertheless, the
Bank established additional provisions for other contingencies in order to fully
cover all of the amount that remained under discussion. As of December 31, 2004,
the Bank had recorded an aggregate amount of Compensatory and Hedge Bonds of US$
2,189.8 million of face value of Boden 2012, which amount was subject to
discussion with the Argentine Central Bank and to its approval. In March 2005,
the Bank's Board of Directors accepted the calculation of the Compensatory and
the Hedge Bonds made by the Argentine Central Bank, given that it had
established, on the basis of a thorough analysis, the convenience of agreeing on
the final compensation figures with the Argentine Central Bank. Therefore, in
March 2005, the Bank accepted to receive US$ 2,178.0 million of face value of
Boden 2012, comprised of US$ 906.3 million of Boden 2012 corresponding to the
Compensatory Bond (of which US$ 236.9 million were pending receipt) and US$
1,271.7 million of Boden 2012 corresponding to the Hedge Bond (pending receipt
in full), and renounced to continuing any legal or administrative action to
modify the above mentioned amounts or engaging in new actions for such purpose.
For the Asymmetric Indexation and for Differences Related to Amparo Claims
Financial institutions have requested to the Argentine government that
they be compensated for the losses generated to them by: (i) the reimbursement
of deposits pursuant to amparo claims at the free market exchange rate, which
was greater than that established by the Argentine government for the conversion
into pesos of financial institutions' assets and liabilities; and (ii) the
adjustment for inflation of included assets and liabilities by using different
coefficients, the CER or the CVS (the asymmetric indexation).
Law No. 25,796, published in the Official Gazette on November 17, 2003,
set forth the compensation to financial institutions by the Argentine government
for the negative effects of the asymmetric indexation. To that end, this law
allowed the Argentine government to issue peso-denominated Boden 2013 for up to
Ps. 2,800 million.
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Subsequently, through the issuance of different rules, the Ministry of
Economy and the Argentine Central Bank further regulated Law No. 25,796, in a
way that, in the Bank's opinion, is contrary to the provisions of Law No.
25,796. On May 6, 2004, the Bank presented a letter to the Executive Branch, the
Ministry of Economy and the Argentine Central Bank maintaining the claim for
compensation that it had made on December 30, 2003. On May 18, 2004, the date of
expiration of the period established by such rules for financial institutions to
opt for their participation in the compensation regime laid down by such rules,
the Bank did not request to participate in such compensation regime and made a
new presentation before the Ministry of Economy and the Argentine Central Bank,
restating its right to be compensated for the negative effects of the asymmetric
indexation and formally challenging the new rules. Based on the provisions of
Law No. 25,709, as of December 31, 2003, the Bank had recorded Ps. 102.7 million
under "Other Receivables Resulting from Financial Intermediation" on account of
its right to receive compensation from the Argentine government for the
asymmetric indexation. As of December 31, 2004, in view of the lack of
resolution on this issue, the above mentioned asset has been written off. The
Bank maintains its claims, on which no resolution has been issued so far.
With respect to the differences generated by the payments made by the Bank
pursuant to amparo claims, the Bank recorded an intangible asset, the amount of
which as of December 31, 2004, was Ps. 451.4 million, net of the amortization
mandated by the Argentine Central Bank (of Ps. 121.0 million in 2004 and 77.9
million in 2003),on account of its right to receive compensation for having had
to make payments pursuant to judicial orders for amounts higher than those
provided for by the pesification decrees. See " -- Argentine Banking System and
Regulation -- Argentine Banking Regulation -- Treatment of Losses in Connection
with Amparo Claims." As of the date of this annual report, the Argentine
government has not provided compensation for these losses and has expressed that
it does not intend to do so.
INFLATION ACCOUNTING
The Banks' financial statements have been restated for inflation for
periods ended in 2002 and up to February 28, 2003. For a description of the
applicable regulations, see "Presentation of Financial Information" at the
beginning of this annual report.
ARGENTINE BANKING SYSTEM AND REGULATION
ARGENTINE BANKING SYSTEM
As of December 31, 2004, the Argentine financial system consisted of 90
financial institutions, of which 72 were banks and 18 were financial non-bank
institutions (including finance companies, credit unions, savings and loan
associations). Of the 72 banks, 13 were Argentine national and provincial
government-owned or related banks. Of the 59 private-sector banks:
- 32 were private-sector domestically-owned banks (i.e., sociedades
anonimas);
- 25 were foreign-owned banks (i.e., local branches or subsidiaries of
foreign banks); and
- 2 were cooperative banks (bancos cooperativos limitados), also
domestically-owned.
As of that date, the largest private-sector banks, in terms of total
deposits, were: BBVA Banco Frances, Banco Rio Santander, Banco Galicia, Banco
Macro, BankBoston, HSBC Bank and Citibank. Except for Banco Galicia and Banco
Macro, all were foreign-owned banks. According to information published by the
Argentine Central Bank as of December 31, 2004, private-sector banks accounted
for 53.4% of total deposits and approximately 69.3% of total net loans in the
Argentine financial system. Argentine financial industry regulations do not
raise any entry or exit barriers, nor do they make any differentiation between
locally or foreign-owned institutions. Cooperative banks are active principally
in consumer banking, with a special emphasis on the lower end of the market. As
of December 31, 2004, financial entities (other than banks) accounted for
approximately 0.2% of deposits and 1.3% of net loans in the Argentine financial
system.
As of December 31, 2004, the largest Argentine national and provincial
government-owned or related banks, in terms of total deposits, were Banco Nacion
and Banco de la Provincia de Buenos Aires. Under the provisions of the Financial
Institutions' Law, public banks have comparable rights and obligations as
private banks,
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except that public banks handle public revenues and promote regional development
and certain public banks have preferential tax treatment. The bylaws of some
Argentine government-owned banks provide that the governments that own them
(national and provincial) guarantee their commitments. Under current law, Banco
de la Provincia de Buenos Aires is not subject to taxes, levies or assessments
that the Argentine government may impose. According to information published by
the Argentine Central Bank, as of December 31, 2004, government-owned banks and
banks in which the Argentine government (national, provincial and municipal) had
an ownership interest accounted for 46.4% of deposits and 29.4% of loans in the
Argentine financial system.
Consolidation has been a dominant theme in the Argentine banking sector
since the 1990's, with the total number of financial institutions declining from
214 in 1991 to 90 at December 31, 2004, with the ten largest banks holding 74.9%
of the system's deposits as of December 31, 2004, and the ten largest private
banks holding 38.8% of the system's deposits as of the same date. We expect
consolidation in the Argentine financial system to continue.
During the decade of the 1990s, foreign banks significantly increased
their presence in the Argentine financial system. Since the last quarter of
1996, control of many of the largest Argentine private-sector domestically-owned
commercial banks has been transferred to foreign banks, which ended up
controlling the largest private sector financial institutions except the Bank.
This foreign presence grew both in the universal bank sector and among financial
institutions specializing in specific products or markets. Currently, this
situation has not changed despite the fact that the number of foreign banks
decreased by 13 through December 2004 as compared with the number at the end of
2001, and that foreign banks' share of total deposits has decreased since the
2001-2002 crisis while the share of domestic private-sector banks has increased.
In this period, certain foreign banks operating in Argentina experienced losses
in their Argentine operations. It is still unclear at the moment which foreign
institutions will remain in the country.
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 under the
Financial Institutions' Law which places the supervision and control of the
Argentine banking system in the hands of the Argentine Central Bank, which is an
autonomous institution. The Argentine Central Bank has vested the
Superintendencia de Entidades Financieras y Cambiarias (Superintendency of
Financial and Exchange Institutions, the "Financial Superintendency") with most
of the Argentine Central Bank's supervisory powers. In this section, unless the
context otherwise requires, references to the Argentine Central Bank shall be
understood as references to the Argentine Central Bank acting through the
Financial Superintendency. The Financial Institutions' Law provides the
Argentine Central Bank with broad access to the accounting systems, books,
correspondence, and other documents of banking institutions. The Argentine
Central Bank regulates the supply of credit and monitors the liquidity of, and
generally supervises the operation of, the Argentine banking system. The
Argentine Central Bank enforces the Financial Institutions' Law and grants
authorization for banks to operate in Argentina. The Financial Institutions' Law
confers numerous powers to the Argentine Central Bank, including the ability to
grant and revoke bank licenses, to authorize the establishment of branches
outside Argentina, to approve bank mergers, capital increases and certain
transfers of stock, to fix minimum capital, liquidity and solvency requirements
and lending limits, to grant certain credit facilities to financial institutions
in cases of temporary liquidity problems and to promulgate other regulations
that further the intent of the Financial Institutions' Law.
Current regulations place the operations of local and foreign owned banks
on equal regulatory grounds.
The Public Emergency Law sanctioned on February 6, 2002 introduced
substantial amendments to the Argentine Central Bank's charter which, among
others, released certain restrictions on its ability to act as a lender of last
resort, allowed the Argentine Central Bank to make advances to the Argentine
government for up to 10.0% of the cash funds obtained during the preceding 12
months (which before could only be effected by purchasing at
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market prices negotiable securities issued by the National Treasury) and
released the restriction whereby up to one third of the freely available
international reserves could be composed of government securities considered at
market values.
The Financial Institutions Law and the Argentine Central Bank charter were
recently amended by Law No. 25,780, published in the Official Gazette on
September 8, 2003. The main provisions established by such law are the
following: (i) authorization was given to the Argentine Central Bank to make
temporary loans to the Argentine government for up to 12.0% of the monetary
base, and to make loans for an amount of up to 10.0% of the total annual amount
raised by the Argentine government in cash during the last 12 months, both of
which shall be reimbursed within 12 months from the relevant date of
disbursement. Such temporary loans cannot not exceed 12.0% of the monetary base,
except those destined exclusively to the payment of outstanding obligations to
multilateral agencies; (ii) indemnity for Argentine Central Bank officers was
provided for, by stating that the "opportunity, merits or convenience" of
certain of their decisions (mostly related to the liquidation and restructuring
of financial institutions) must be reviewed by the courts only when such
decisions have been clearly made in an unreasonable and arbitrary manner; (iii)
authorization was given to the Argentine Central Bank to exclude assets and
liabilities of financial institutions with liquidity and solvency problems and
establish the rules for their valuation, and assign the transfer of excluded
assets and liabilities to other financial entities, or transfer assets to
financial trusts (see " -- Financial Institutions with Economic Difficulties");
(iv) amendment in the degree of payment preferences in favor of creditors (see "
-- Priority Rights of Depositors"); and (v) authorization was given to the
Argentine Central Bank to disburse rediscounts (short term loans for liquidity
support) to financial institutions with liquidity or solvency problems, during
the term of the Public Emergency Law.
Supervision
As supervisor 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 that include balance
sheets and income statements, information relating to reserve funds, use of
deposits, portfolio quality (including details on debtors and any loan loss
provisions established) and other pertinent information, allow the Argentine
Central Bank to monitor financial institutions' financial condition and business
practices.
The Argentine Central Bank carries out formal inspections from time to
time of all banking institutions for purposes of monitoring compliance by banks
with legal and regulatory requirements. If the Argentine Central Bank rules are
breached, it may impose various sanctions depending on the gravity of the
violation. These sanctions range from calling attention to the infraction to the
imposition of fines or even the revocation of the financial institution's
operating license. Moreover, noncompliance 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 in business.
Financial institutions have been subject to the supervision of the
Argentine Central Bank on a consolidated basis since 1994. The Argentine Central
Bank requires financial entities (i) to consolidate their quarterly and annual
financial statements with all corporate and financial entities in its economic
group; and (ii) to prepare consolidated semiannual financial statements for its
economic group, unless the company or financial entity controlling the economic
group is required to prepare audited consolidated financial statements in the
country in which it is incorporated. Information set out in " -- Limitations on
Types of Business," " -- Capital Adequacy Requirements," " -- Lending Limits,"
and " -- Loan Classification System and Loan Loss Provisions" below, relating 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).
Due to the significant impact of the crisis that unfolded in Argentina
since December 2001, in 2002, the Argentine Central Bank suspended the
requirement of submission of certain information or changed or postponed the
filing dates prescribed by the information regime to which financial
institutions were subject. In particular, see the " -- Capital Adequacy
Requirements" section below.
Financial System's Restructuring Unit ("Unidad de Reestructuracion del
Sistema Financiero" or "URSF")
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Decree No. 1262/03 of April 1, 2003, created the Financial System's
Restructuring Unit, comprised of three members appointed by the Ministry of
Economy and three members appointed by the Argentine Central Bank to decide on
the strategy to be followed and the measures to be taken in order to restructure
the Argentine financial system, including the conditions under which financial
institutions will repay the financial assistance granted by the Argentine
Central Bank. See " -- Financial Assistance from the Argentine Central Bank --
Financial Assistance for Liquidity Support Granted Before April 1, 2003."
Examination by the Argentine Central Bank
The Argentine Central Bank began to rate financial institutions based on
the "CAMEL" quality rating system in 1994. The system is based on weighting the
creditworthiness, compliance with the Financial Institutions' Law,
administrative order and general operating solvency of a financial institution.
Each letter of the CAMEL system corresponds to the following areas of the
operations of each bank being rated: "C" represents capital, "A" represents
assets, "M" represents management, "E" represents earnings, and "L" represents
liquidity. Each factor is evaluated and rated on a scale from 1 to 5, 1 being
the highest rating an entity can receive. By combining the individual factors
that are under evaluation, a combined index can be obtained that represents the
final rating for the financial institution.
The last examination of Banco Galicia was based on information as of
September 30, 2000 and the rating obtained, informed to the Bank on October 15,
2001, was the highest among financial institutions, as had occurred in the
previous years.
On October 6, 2003, the Argentine Central Bank issued Communique "A" 4027
requiring financial institutions to provide information regarding their business
plan and their projections. This information had to be filed with the Argentine
Central Bank on or prior to October 31, 2003, and the Argentine Central Bank has
required updates.
BASIC System
The Argentine Central Bank established a control system ("BASIC") which
requires all financial entities to comply with a set of procedures concerning
the operations of such financial entities with the purpose of allowing the
public access to a greater level of information and safety with respect to their
holdings in the Argentine financial system. Each letter of the BASIC system
corresponds to one of the following procedures:
- B ("Bonos" or Bonds). On an annual basis, all financial institutions in
Argentina were required to engage in certain debt issuing transactions
in order to expose them to scrutiny and analysis by third parties with
high standards. The Bank was always in compliance with this
requirement, which was repealed through Argentine Central Bank
Communique "A" 3498, effective March 1, 2002.
- A ("Auditoria" or Audit). The Argentine Central Bank requires a set of
audit procedures that include: (a) the creation of a registry of
auditors; (b) the implementation of strict accounting procedures to be
complied with by auditors; (c) the payment of a performance guarantee
by those auditors to induce their compliance with the procedures, and
(d) the creation of a department within the Argentine Central Bank
liable for verifying that the procedures are followed. The purpose of
this requirement is to assure accurate disclosures by the financial
institutions to both the Financial Superintendency and the public.
- S ("Supervision" or Supervision). The Argentine Central Bank has the
right to inspect financial institutions from time to time.
- I ("Informacion" or Information). Financial institutions are required
to file on a monthly basis certain daily, weekly, monthly and quarterly
statistical information.
- C ("Calificacion" or Rating). The Argentine Central Bank established a
system requiring periodic credit evaluation by internationally
recognized rating agencies, which was suspended by Communique "A" 3601
in May 2002.
Legal Reserve
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The Argentine Central Bank requires that each year banks allocate to a
legal reserve a percentage of net income set by the Argentine Central Bank,
which is currently 20.0%. Such reserve can only be used during periods in which
a bank has incurred losses and has exhausted all allowances and other
provisions. Dividends may not be paid if the legal reserve has been impaired.
Limitations on Types of Business and Computable Capital
As provided by the Financial Institutions' Law, commercial banks are
authorized to conduct all activities and operations that are not specifically
prohibited by law or by regulations of the Argentine Central Bank. Some of the
activities which are permitted include the ability to make and receive loans, to
receive deposits from the public in both local and foreign currency, to
guarantee customers' debts, to acquire, place or negotiate stock or debt
securities in the Argentine OTC Market, subject to the approval of the CNV, to
conduct transactions in foreign currency, to act as fiduciary and to issue
credit cards.
Banks are not permitted to own commercial, industrial, agricultural and
other types of businesses, except with prior authorization from the Argentine
Central Bank. Under Argentine Central Bank regulations, the aggregate amount of
equity investments of a commercial bank (including participations in domestic
mutual funds called fondos comunes de inversion) may not exceed 50.0% of such
bank's Adjusted Shareholders' Equity or Computable Regulatory Capital (as
defined below). In addition, investments in:
- unlisted equity shares excluding (a) stock of companies which
provide services complementary to the services offered by the bank,
and (b) certain stock participations which are necessary in order to
obtain the rendering of public services, if any,
- listed stock and participations in mutual funds which are not
included in order to determine the capital requirements related to
market risk; and
- listed stock that does not have a "largely publicly available"
market price (when daily quotes of relevant transactions are
available, which quotes would not be significantly affected by the
disposition of the bank's holdings of such stock)
may not exceed, in the aggregate, 15.0% of a bank's Adjusted Shareholders'
Equity.
"Adjusted Shareholders' Equity" or "Computable Regulatory Capital" is
defined under the Argentine Central Bank's regulations as: i) the core capital,
which includes permanent capital, non-equity contributions, net worth
adjustments, surplus reserves and retained earnings; ii) the supplementary
capital, which may not exceed the core capital, consisting of retained earnings
(50% of profits and 100% of losses) without an audit opinion (those
corresponding to the last fiscal year can be included only when they have been
audited), 50% of the reserves on the loan portfolio classified as "normal"
(general reserves), and subordinated debt, not exceeding 50% of core capital,
with a maturity of at least 5 years. In addition, the following items must be
deducted from the calculated capital defined above: (i) sight deposits with
foreign banks abroad not rated as investment grade; (ii) securities not
deposited with the authorized custodian; (iii) sovereign bonds issued by a
foreign government with a rating lower than that assigned to the Argentine
sovereign bonds; (iv) share holdings in other financial institutions; (v) real
estate not yet registered; (vi) goodwill; (vii) research and development
expenses; (viii) provisioning deficiencies as determined by the Financial
Superintendency.
Nevertheless, for purposes of calculating the limits described both above
and in " -- Lending Limits," it is not necessary to deduct the capital assigned
to offshore branches from a bank's shareholders' equity.
Under Argentine Central Bank regulations, financial institutions are
typically precluded from engaging directly in insurance activities and from
holding an equity interest in excess of 12.5% of the outstanding capital of a
company that does not provide services complementary to those provided by
financial institutions or which exceeds specified percentages of the respective
financial institution's Adjusted Shareholders' Equity as described above. The
Argentine Central Bank determines which services are complementary to the
services provided by financial institutions.
Through Communique "A" 3918 the Argentine Central Bank established that
beginning on April 1, 2003 and until December 31, 2003, financial institutions
will be allowed to receive in payment of credits granted shares or
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equity participations in the capital of a company that engages in activities
other than complementary activities, not exceeding 20.0% of the capital stock or
of voting rights, subject to certain conditions.
Treatment of Losses in Connection with Amparo Claims
Through Communique "A" 3916 dated April 3, 2003, the Argentine Central
Bank provided 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 U.S. dollar deposits reimbursed, at the exchange rate of Ps. 1.4 per US$
1.0 (adjusted by the CER plus interests accrued up to the payment date). In
addition, it established that the corresponding amount shall be amortized in 60
monthly equal and consecutive installments as from April 2003. As of December
31, 2004, the Bank had recorded an intangible asset of Ps. 451.4 million and
amortizations amounted to Ps.121.0 million during 2004.
The Bank has reserved its right to file any legal actions, at suitable
times, in view of the negative effect caused on its financial condition by the
reimbursement of originally dollar-denominated deposits, pursuant to legal
orders or final judgments, either in dollars or in pesos for the equivalent
amount at the market exchange rate, since compensation of this effect was not
included into the calculation of the compensation to financial institutions. The
method of recording a deferred loss set forth by the Argentine Central Bank in
the above-mentioned Communique does not affect the legitimacy of such rights.
Legal Reserve Requirements for Liquidity Purposes
Beginning in March 2002, after the liquidity crisis of late 2001 and early
2002, the Argentine Central Bank progressively introduced the minimum reserve
requirements system that is currently in force.
In March 2002, the Argentine Central Bank introduced the "minimum cash
requirements". These are established as a percentage of the balances of the
different type of bank deposits and for time deposits balances (including
deposits restructured as Cedros) the percentage varies with the remaining
maturity. The Argentine Central Bank modifies from time to time the percentages
of the minimum cash requirements depending on monetary policy considerations.
Between May 2002 and November 2003 a "fund placement requirement" was in force.
Compliance with the latter was accomplished through holdings of certain assets.
In case a bank did not have the necessary assets, the minimum fund placement
requirements turned into greater minimum cash requirements. In November 2003,
the minimum fund placement requirements were discontinued.
Compliance with the minimum cash requirements must be accomplished with
cash in bank vaults and bank deposits at the Argentine Central Bank (including
the balances of escrow accounts held by banks at the Argentine Central Bank in
favor of clearing houses), in the same currency as the deposit that originates
it. Compliance with the minimum cash requirements was and continues to be
determined in averages, for monthly periods. The Argentine Central Bank can
modify from time to time this practice, depending on monetary policy
considerations.
Through Communique "A" 3528 of March 25, 2002, the Argentine Central Bank
established that the amount of dollar-denominated deposits that are not applied
to certain dollar-denominated assets (foreign trade financing, notes and
certificates of financial trusts which underlying asset are foreign trade loans,
interbank loans and Lebac) will constitute a greater cash minimum requirement in
pesos.
At the close of fiscal year 2004, the percentages of minimum cash
requirements applicable in accordance with Argentine Central Bank rules were as
follows:
In Pesos In Dollars
-------- ----------
Demand deposits:
- Current accounts (only in pesos) 18%
- Savings accounts 18% 30%
Time deposits and CEDROs (by remaining maturity):
- up to 29 days 18% 35%
- from 30 to 59 days 14% 28%
- 60 to 89 days 10% 20%
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- 90 to 179 days 5% 10%
- 180 to 365 days 3% 6%
- more than 365 days 0% 0%
After the close of the fiscal year, Communique "A" 4276 dated January 9,
2005, amended as of January 1, 2005, the minimum cash requirements for
peso-denominated deposits, as follows:
Current accounts and savings accounts 16%
Time deposits and CEDROs (by remaining maturity):
- up to 29 days 16%
- from 30 to 59 days 13%
- 60 to 89 days 9%
- 90 to 179 days 4%
- 180 to 365 days 2%
- more than 365 days 0%
The Bank was in compliance with its legal reserve requirements as of
December 31, 2004.
Capital Adequacy Requirements
See -- "Selected Statistical Information -- Regulatory Capital."
Lending Limits
The aggregate amount of equity participation and credit, including
guarantees granted (together referred herein as "credit" or "financial
assistance"), a bank can grant to any credit customer at any time is based on
the bank's Adjusted Shareholders' Equity on the last day of the immediately
preceding month and on the customer's net worth.
i) Limits that refer to the borrowers' capital: as a general rule,
financial assistance to a customer cannot exceed 100% of such customer's
capital. This limit may be raised up to 300% with the approval of the
financial institution's board of directors and if additional credit does
not exceed 2.5% of a bank's Adjusted Shareholders' Equity.
For forward transactions, different percentages are considered, depending
on the transaction's characteristics.
Until June 2005, new loans can be granted (up to a global limit of 15% of
a bank's Adjusted Shareholders' Equity) exceeding the 300% limit of the
customer's capital. Such additional credit to a customer cannot exceed
2.5% of the net worth of a bank's Adjusted Shareholders' Equity.
ii) Limits that refer to the Adjusted Shareholders' Equity of financial
institutions: the limits to the financial assistance a bank can provide
are (as a percentage of a bank's Adjusted Shareholders' Equity):
WITHOUT COLLATERAL WITH COLLATERAL
------------------ ---------------
Non-related Customers 15% 25%
Domestic Financial Institutions (*) 25% 25%
Foreign Financial Institutions (Investment grade) 25% 25%
Foreign Financial Institutions (Other) 5% 5%
Reciprocal Guarantee Entities authorized by the
Argentine - 25%
Central Bank (**)
Public sector (***):
i) National 50% 50%
Ii) City of Buenos Aires and Provinces (each) 10% 10%
Iii) Municipalities (each) 3% 3%
(*) For bankers' banks, the limit is 100%.
(**) Law 24,467: associations of companies authorized by the Argentine Central
Bank to guarantee a loan. In case one of
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the companies fails to pay, the others will take responsibility.
(***)Excess over the new limits set in March 2003 will not be computed if
arising from loans granted before March 2003, if determined or increased
by the reception of bonds or promissory notes as compensation for the
asymmetric pesification, or if arising from the rolling over of
preexisting loans.
Communique "A" 3911 issued on March 28, 2003, established the applicable
limits above to a financial institution's new exposure to the Argentine public
sector (granted after April 1, 2003). These limits exclude the exposure
outstanding as of March 31, 2003, the government securities received as
compensation in accordance with Decree No. 905/02 or those to be received
pursuant to other regulations, and the roll over of principal payments. Total
exposure to the public sector, described in items (i), (ii) and (iii) in the
table above, must not exceed 75.0%. In addition, according to this Communique,
beginning January 1, 2006, a bank's total financial assistance, without any
exemption, to all the public sector must not exceed 40.0% of a bank's total
assets as of the end of the previous month. Any excess over this limit will
require an equal increase in the minimum capital requirement of the bank.
The limits on equity interests in other companies are the following:
LIMIT ON A BANK'S ADJUSTED LIMIT ON A COMPANY'S NET
SHAREHOLDERS EQUITY WORTH
-------------------------- ------------------------
Companies with
non-complementary activities (*) 12.5% (***)
Companies with complementary
activities (*) 100%
Total shares 50%
Unlisted shares (**) 15%
(*) See previous table.
(**) Includes shares that do not quote frequently and therefore are not subject
capital requirements to cover market risk.
(***) Until December 2004 shares or equity interests could be taken in payment
of credits, up to 20% of the firm's capital, without exceeding 20% of the votes.
They have to be sold within one year so as to reach the regulatory limit for
holdings.
Financial assistance is also limited in order to prevent portfolio
concentration. To that end the aggregate of all financial assistance that, taken
alone, exceeds 10% of a bank's Adjusted Shareholders' Equity, must not exceed:
three times and five times a bank's Adjusted Shareholders' Equity, excluding and
including, respectively, the financial assistance to local banks. For a bankers'
bank the latter limit is 10 times.
Financial assistance exceeding 2.5% of a bank's Adjusted Shareholders'
Equity, except interbank credit, must be approved by a bank's board of
directors.
The Argentine Central Bank regulates loans to a bank's "related parties,"
defined as a bank's affiliates and related individuals. For purposes of these
lending limits, "affiliate" means 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. "Related individuals" means a
bank's directors, senior management, syndics and such persons' direct relatives.
The Argentine Central Bank limits the amount banks can lend to their
related parties depending on the rating granted to each bank by the Financial
Superintendency. Banks rated 4 or 5 are forbidden to lend to their related
parties. Banks ranked between 1 and 3 cannot extend financial assistance to
their related parties in an amount which exceeds, together with any equity
participation held by the bank in its affiliates, 5.0% of such bank's Adjusted
Shareholders' Equity. However, a bank may grant additional financial assistance
to such related parties up to an amount equal to 10.0% of such bank's Adjusted
Shareholders' Equity: (i) if the affiliate provides complementary services
(defined as services in connection with stock brokerage, issuance of credit or
debit or similar cards, financial intermediation in leasing and factoring
transactions) (ii) in the case of temporary acquisition of shareholdings in
companies to facilitate their development in order to sell such holdings
afterwards, (iii) if the affiliate is a local financial institution rated other
than 1 or 2 by the Argentine Central Bank, or (iv) if such additional financial
assistance is secured with certain liquid assets, including public or private
debt securities. If the affiliate is a financial institution rated 1, the amount
of financial assistance can reach 100.0% of a bank's Adjusted Shareholders'
Equity. If the receiving affiliate financial institution is rated 2, the amount
of financial assistance can
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reach 10.0% without limitations and an additional 90.0% should the term for the
loans and other credit facilities not exceed 180 days.
In addition, the aggregate amount of a bank's equity participation in, and
nonexempt financial assistance to, its related parties may not exceed 20.0% of
such bank's Adjusted Shareholders' Equity.
In addition, with respect to related persons who are individuals, the
total amount of loans to those related persons cannot exceed Ps. 50,000, which
must be used exclusively for personal or family purposes. Failure to properly
observe these requirements can result in an increase of the minimum capital
requirements for credit risk in an amount equal to 100.0% of the daily excess
amounts over the requirements beginning on the month when the excess amounts
appear and continuing while the excess amounts remain.
Notwithstanding the limitations described above, the aggregate amount of
nonexempt financial assistance (including equity participations) independently
of whether customers qualify as related parties or not of a bank as to which
such assistance and participation exceeds 10.0% of such bank's Adjusted
Shareholders' Equity, may not exceed three times the bank's Adjusted
Shareholders' Equity excluding financial assistance to domestic financial
institutions, or five times the bank's Adjusted Shareholders' Equity including
financial assistance to domestic financial institutions.
The Bank has historically complied with such rules. On February 11, 2002,
through its Resolution No. 81/02, the board of directors of the Argentine
Central Bank prohibited the Bank from granting any further financing to related
parties.
Loan Classification System and Loan Loss Provisions
For a description of the Argentine Central Bank's loan classification
system and the Argentine Central Bank's minimum loan provision requirements, see
" -- Selected Statistical Information -- Argentine Central Bank's Loan
Classification and Loan Loss Provisions."
Valuation of Public Sector Assets
For a description of the rules governing the valuation of public sector
assets, see " -- Selected Statistical Information -- Government and Corporate
Securities" and " -- Selected Statistical Information -- Loan Portfolio."
Financial Assistance from the Argentine Central Bank
Financial Assistance Granted for Liquidity Support Beginning March 10,
2003
Communique "A" 3901, issued on March 19, 2003, established an automatic
mechanism to regulate the provision by the Argentine Central Bank to financial
institutions of assistance for liquidity support. This mechanism does not apply
to the financial assistance granted for such reasons during the 2001-2002
crisis.
Financial Assistance for Liquidity Support Granted Before April 1, 2003
Through Decree No. 739/03, dated April 1, 2003, the Argentine government
established a voluntary procedure for the restructuring of the financial
assistance granted by the Argentine Central Bank to financial institutions
during the 2001-2002 crisis. The basic purpose was to harmonize the cash flows
of those financial institutions that are simultaneously debtors (for having
received financial assistance from the Argentine Central Bank) and creditors
(for their holdings of debt instruments) of the public sector.
Section 9 of this Decree established that balances due must be amortized
in pesos, with the proceeds of the assets provided as collateral for the
financial assistance received, but without exceeding 70 monthly installments.
Argentine Central Bank Communique "A" 3941 established a minimum cumulative
amortization schedule and a monthly repayment of not less than 0.90% of the
adjusted balance. Mandatory accelerated repayment is
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contemplated when the interest rate earned by the assets granted as collateral
exceeds 3.5% per annum. Voluntary prepayment was also made available.
Decree No. 739/03 also established that financial assistance subject to
this repayment system must be secured by the Argentine government's secured
loans issued under Decree No. 1646/01 and, in the absence of the latter, secured
loans or Bogar (issued under the provisions of Decree No. 1579/02) or bonds
issued under the provisions of Decrees No. 905/02, 1836/02 and 739/03. Pursuant
to Argentine Central Bank Communique "A" 3941, all instruments to be delivered
as collateral must be adjustable by the CER. These securities are to be kept
with no decrease until the restructuring of the Argentine government's foreign
debt is concluded under Decree No. 1387/01 or December 31, 2004, whichever
occurs first (except for prepayments, in which case the securities are to be
returned on a pro rata basis in the inverse order of their granting).
Argentine Central Bank Communique "A" 3941 established that all
amortization and interest payments must be automatically withdrawn from the
accounts financial institutions hold with the Argentine Central Bank.
In accordance with Argentine Central Bank Communique "A" 3940, for a bank
to be eligible to restructure the financial assistance for liquidity support
provided to it by the Argentine Central Bank, under the terms of Decrees No.
739/03 and No. 1262/03, such bank was required to have received the approval of
the Argentine Central Bank to the terms and conditions for the restructuring of
its foreign debt before December 5, 2003.
Decree No. 1262/03, dated May 26, 2003, provided that the Argentine
Central Bank could modify the above mentioned repayment conditions, when the
URSF established so, if: (i) the average life of the assets granted as
collateral of the financial assistance received exceeds 70 months, and (ii) the
financial institution falls under the provisions of articles 34 and 35 bis of
the Financial Institutions Law and has adopted a reorganization plan approved by
the URSF. In this case, repayment will occur in the same number of installments
as that of the assets granted as collateral of the financial assistance
received, with a maximum number of 120 monthly installments and a monthly
amortization of not less than 0.4% of the outstanding balance.
On November 28, 2003, the URSF informed the Bank that through its
Resolution No. 1 dated November 27, 2003, it had authorized the Argentine
Central Bank to extend the maturity of the Banks' debt for liquidity support
with said entity, within the provisions of Decree No. 739/03, in accordance with
the repayment schedule submitted by the Bank to the Argentine Central Bank and
under the terms of Decree No. 1262/03.
By means of a letter dated February 3, 2004, the Argentine Central Bank
informed the Bank that it had approved the Bank's request to adhere to the
restructuring of the debt owed to said entity under the provisions of Decrees
No. 739/03 and 1262/03, and that it had authorized such debt's amortization
schedule submitted by the Bank, which was the result of the minimum amortization
defined by the applicable regulations and of the cash flows of the assets
eligible as collateral pursuant to such regulations. Consequently, this schedule
establishes the debt repayment in 92 monthly installments as from March 2004,
when the first installment was paid.
Foreign Currency Position
Through Communique "A" 3889, the Argentine Central Bank limited financial
institutions' foreign currency exposure based on such institution's "Global
Foreign Currency Net Position" (assets and liabilities from financial brokerage
and securities denominated in foreign currencies). Beginning May 1, 2003, the
absolute value of the "Global Foreign Currency Net Position" could not exceed
30.0% of a bank's computable capital or Adjusted Shareholders' Equity as of the
end of the previous month. In the case of short positions, the limit was set at
the lower of 30.0% of computable capital or liquid shareholders' equity. For
those financial institutions that expected not to be able to comply with such
limits, a period for the presentation of a compliance plan was provided that
expired on May 15, 2003. On that date, the Bank notified the Argentine Central
Bank of an excess in its global foreign currency position and proposed a
compliance plan, a response with respect to which is still pending.
Through Communique "A" 4135, issued on May 5, 2004, the Argentine Central
Bank established an additional limit which was to be observed by financial
institutions beginning on July 1, 2004. The limit was to be established for
balances of demand accounts and assets and liabilities usually traded in
institutional markets with a
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significant volume of transactions or maturing within 180 days. The percentage
not to be exceeded has not been determined as of the date hereof.
Deposit Insurance System
In 1995, Argentine Law No. 24,485 and Decree No. 540/95, as amended by
Decree No. 1292/96 and Decree No. 1127/98, created a 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 Garantia de los
Depositos ("FGD") which is administered by 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
authorized as such by the Argentine Central Bank which participate in the fund.
The Argentine Central Bank establishes the extent of participation by each
institution proportionally to the resources contributed by each such institution
to the FGD (Communique "A" 2337). Banks' contribution to the FGD is monthly and
mandatory and it currently amounts to 0.015% of the daily average of a financial
institution's deposits (both pesos and foreign currency denominated).
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. 30,000. Deposits made after July 1, 1995 with an interest rate
200 basis points above the interest rate quoted by Banco Nacion for deposits
with equivalent maturities are not covered by this system. This guarantee shall
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 sum of the mandatory deposit guarantee insurance according to the
consolidation of the financial system and any other elements that it may deem
appropriate.
Decree No. 1292/96, enhanced Sedesa's functions to allow it to provide
equity capital or make loans to Argentine financial entities experiencing
difficulties and to institutions which buy such Argentine financial entities or
buy the deposits of such Argentine financial entities. As a result of such
decree, Sedesa has the flexibility to intervene in the restructuring of a
financial entity experiencing difficulties prior to bankruptcy.
Priority Rights of Depositors
According to section 49 e) of the Financial Institutions Law, as amended
by Law No. 25,780 dated September 8, 2003, in case of judicial liquidation or
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 rank over all other
creditors, with the exception of the following: (i) credits secured by a
mortgage or pledge, (ii) rediscounts and overdrafts granted 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 granted by the
Banking Liquidity Fund created by Decree No. 32 of December 26, 2001, secured by
a mortgage and pledge and (iv) certain labor credits, including accrued
interests until its total cancellation. Pursuant to section 16 of Law No. 25,780
during the term of emergency set forth under the Public Emergency Law No. 25,561
the Argentine Central Bank can grant rediscounts and overdrafts to financial
entities with liquidity and solvency problems, included those entities under a
restructuring process as contemplated in section 35bis of the Financial
Institutions Law.
The holders of the following deposits are entitled to the general
preferential right established by the Financial Institutions Law (following this
order of preference),
- deposits of individuals or legal entities up to Ps. 50,000 or the
equivalent thereof in foreign currency, enjoying this preference only one
person per deposit. For the determination of this preference, all deposits
of the same person registered by the entity shall be computed;
- deposits in excess of Ps. 50,000 or the equivalent thereof in foreign
currency, referred to above;
- liabilities originated on commercial credit lines granted to the financial
entity, which are directly in connection with international trade.
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According to the Financial Institutions Law, 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 procedures that the Argentine Central Bank will
establish in the future.
In addition, under section 53 of the Financial Institutions Law, the
Argentine Central Bank has an absolute priority over all other creditors of the
entity except as provided by the Financial Institutions Law.
Financial Institutions with Economic Difficulties
The Financial Institutions Law establishes that financial institutions,
including commercial banks such as the Bank, which evidence a cash reserve
deficiency, have not abided by certain technical standards, have not maintained
minimum net worth standards, or which solvency or liquidity is deemed to be
impaired by the Argentine Central Bank must submit a restructuring plan (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 which arise from
such noncompliance.
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 Financial
Superintendency within the Argentine Central Bank, 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 entity if its liquidity
or solvency has been adversely affected. Notice of this decision must be given
to the board of directors of the Argentine Central Bank. In case at the end of
such suspension period the Financial Superintendency considers it is necessary
to renew it, it 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: (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 Financial Institutions' Law, 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 (1) taking steps to reduce,
increase or sell the financial institution's capital; (2) 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; (3) exclusion and
transfer of assets and liabilities; (4) constituting trusts with part or all the
financial institution's assets (5) granting of temporary exemptions to comply
with technical regulations and/or pay charges and fines arising from such
defective compliance; or (6) appointing a bankruptcy trustee and removing
statutory authorities.
Furthermore, it is provided that, those acts which are authorized,
commissioned or decided by the Argentine Central Bank under section 35bis of the
Financial Institutions' Law, involving the transfer of assets and liabilities,
or which complement it, or are necessary to execute the restructuring of a
financial institution, as well as those related to the reduction, increase and
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 such
exclusion.
Dissolution and Liquidation of Financial Institutions
The Argentine Central Bank must be notified of any decision to dissolve a
financial institution pursuant to the Financial Institutions' Law. 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 or an
appointed,
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independent liquidator). This determination is based on whether or not
sufficient assurances exist which indicate that such corporate authorities are
able to carry out the liquidation properly.
Pursuant to the Financial Institutions' Law, 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 entity's condition since
the original authorization was granted,
the Argentine Central Bank may decide to revoke a bank's license to operate as a
financial institution. In this case, the law allows judicial or extrajudicial
liquidation as in the case of voluntary liquidation described in the preceding
paragraph.
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 entity until 60 days have elapsed since the revocation of the
license.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
ITEM 5A. OPERATING RESULTS
GENERAL
Substantially all of our operations and customers are located in
Argentina, and therefore we have been materially affected by the 2001-2002
economic crisis in Argentina. As a result, the Bank was forced to restructure
its foreign debt and its income generation capacity was reduced during such
period and subsequently. Given the continued instability and regulatory and
economic changes that have affected Argentina, the accounting information set
forth in this annual report may not be fully indicative of our anticipated
results of operations or business prospects after the dates indicated.
The following discussion and analysis is intended to help understand and
assess the significant changes and trends in our historical results and
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 in this annual report.
INFLATION ACCOUNTING ADJUSTMENTS
As a result of the adoption of various regulations since 2002, in addition
to adjusting our financial statements for inflation until February 28, 2003,
using the variation of the WPI, as described in "Presentation of Financial
Information" at the beginning of this annual report, we have also been required
to adjust the principal of certain of our assets and liabilities according to
changes in certain indexes. The following table shows the rate of inflation, as
measured by the WPI and the consumer price index (the "CPI"), and the evolution
of the indexes (the CER and the CVS) used to adjust the principal of certain of
our assets and liabilities, for the periods indicated.
FOR THE 12-MONTH PERIOD ENDED DECEMBER 31,
-------------------------------------------
2004 2003 2002
---------- --------- ----------
Inflation (1)
Wholesale Price Index............... 7.84% 2.03% 118.44%
Consumer Price Index................ 6,10% 3.66% 40.95%
Adjustment Indexes
CER................................. 5.48% 3.66% 40.53%
CVS (through March 31, 2004)....... 5.32% 15.85% 0.83%
(1) Source: INDEC.
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In the first four months of 2005, the WPI increased 3.61% and the CPI
increased 4.53%. Over the same period, the CER increased 4.57%. The CVS was
discontinued on April 1, 2004, having increased 5.32% in the first quarter of
2004.
MAIN DEVELOPMENTS SINCE THE 2001-2002 CRISIS
During 2001 and 2002, Argentina went through a period of great political,
economic and social instability, which led to a significant fall in economic
activity, a banking crisis, the default on part of Argentina's foreign debt, the
devaluation of the Argentine peso in January 2002 and high inflation. In early
2002, the Argentine government undertook a number of far-reaching initiatives
that radically changed the monetary and foreign exchange regime of the country
and the regulatory environment for doing business in Argentina for all sectors
of activity, including the financial sector. The negative impact of the crisis
and these measures on the Argentine economy and on the Bank was significant. See
Item 4."Information on the Company -- Main Regulatory Changes in 2002, 2003 and
2004" and " -- Results of Operations for the Fiscal Years Ending December 31,
2004, December 31, 2003 and December 31, 2004."
The following are the main changes in our assets that resulted from the
2001-2002 crisis and the Argentine government's measures to deal with such
crisis:
- In late 2001, we tendered most of our predominantly
dollar-denominated Argentine national government debt instruments,
which were mainly held by the Bank, into the exchange to restructure
such instruments for secured loans, under the provisions of Decree
No. 1387/01, which secured loans were subsequently pesified in
2002). As a result, as of December 31, 2004, we held Ps. 4,558.9
million of secured loans. See Item 4. "Information on the Company --
Selected Statistical Information -- Loan Portfolio" and Item 4.
"Information on the Company -- Main Regulatory Changes in 2002, 2003
and 2004."
- All of our portfolio of dollar-denominated loans to the Argentine
provincial loans, which were mainly held by the Bank, were
restructured into Bogar, a process that began in late 2001 and ended
in mid 2003, including such loan portfolio pesification in 2002,
under the provisions of Decree No. 1579/02. As a result, as of
December 31, 2003, we held Ps. 3,543.5 million of Bogar. See Item 4.
"Information on the Company -- Selected Statistical Information --
Loan Portfolio," Item 4. "Information on the Company -- Selected
Statistical Information -- Government and Corporate Securities" and
Item 4. "Information on the Company -- Main Regulatory Changes in
2002, 2003 and 2004."
- The Bank became entitled to receive and acquire Boden 2012 as
compensation for the negative effects of the asymmetric
pesification. As a result, the total amount of Boden 2012 recorded
in our books as of December 31, 2004, net of Boden 2012 already
used, was Ps. 5,708.4 million. In March 2005, the Bank agreed with
the Argentine Central Bank the amount to be settled by the
government as compensation for the asymmetric pesification. We did
not have any impact in our results since the amounts in dispute were
fully reserved as of December 31, 2004. See Item 4. "Information on
the Company -- Selected Statistical Information -- Government and
Corporate Securities" and Item 4. "Information on the Company --
Main Regulatory Changes in 2002, 2003 and 2004 -- Compensation to
Financial Institutions."
- In January 2005, the Bank tendered to the restructuring of the
Argentine sovereign debt, which is pending settlement, External
Notes and opted to receive Peso-denominated Discount Bonds. We
recorded External Notes for Ps. 749.7 million as of December 31,
2004. See Item 4. "Information on the Company -- Selected
Statistical Information -- Government and Corporate Securities."
- In addition, the Bank restructured most of its portfolio of
commercial loans, after loans to the private sector were pesified,
as explained under Item 4. "Information on the Company -- Main
Regulatory Changes in 2002, 2003 and 2004 -- Loans." This process
began in 2002 and advanced significantly in 2003 and 2004.
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- As a result of having reimbursed deposits, pursuant to amparo
claims, for amounts greater than those specified by the Argentine
government's pesification rules, the Bank incurred in losses that
have not been compensated by the Argentine government and recorded
an asset for its right to receive such compensation, which net of
accumulated amortization amounted to Ps. 451.4 million as of
December 31, 2004. See Item 3."Key Information -- Risk Factors --
Risk Factors Relating to the Bank -- The lack of compensation to
financial institutions for certain losses generated by the Argentine
Government's economic policy has been and will continue to be
detrimental to their financial condition, including that of the
Bank."
Beginning in May 2002, we implemented a capitalization and liquidity plan
in order to restore the Bank's liquidity and financial condition which had been
affected by the crisis. To date all of the measures of the plan have been
implemented. In 2003 and 2004, our financial condition and level of activity
improved along with an improved overall economic situation in Argentina and as a
result of the implementation of such capitalization and liquidity plan.
Among others, as part of the capitalization and liquidity plan:
- In 2002, the Bank streamlined its operational structure and reduced
its administrative expenses in order to adapt to the new economic
and regulatory context that resulted from the 2001-2002 crisis.
Subsequently a strict cost-control policy was applied. In 2004, the
expansion of the Bank's business led to an increase in our
administrative expenses consistent with such expansion. See " --
Results of Operations for the Fiscal Years Ending December 31, 2004,
December 31, 2003 and December 31, 2002."
- In mid 2002, the Bank restructured the liabilities of its New York
Branch, which then totaled US$ 328 million, prior to the orderly
winding down of its affairs which concluded in January 2003. As of
the date of this annual report, US$ 116 million in aggregate
principal amount of two negotiable obligations issued by the Bank's
Head Office in Argentina to restructure the New York Branch debt are
outstanding. See Item 4. "Information on the Company -- History --
Restructuring of Our Subsidiaries' Debt -- Banco Galicia --
Restructuring of the Bank's New York Branch Debt."
- During 2002 and 2003, deposits at Galicia Uruguay and Galicia Cayman
(in provisional liquidation) amounting in aggregate to US$ 1.1
billion were restructured, Such debt had decreased by approximately
60% as of December 31, 2003, as a result of payments and exchange
offers. See Item 4. "Information on the Company -- History --
Restructuring of Our Subsidiaries' Debt -- Banco Galicia Uruguay
S.A. and Banco de Galicia (Cayman) Ltd. (in provisional
liquidation)."
- The Bank's representative offices in Sao Paulo and London, as well
as the Bank's securities business incorporated in the United
Kingdom, Galicia y Buenos Aires Securities (UK) Ltd., were closed on
September 30, 2002.
- On November 25, 2003, the Bank launched the exchange offer to
restructure US$ 1,476 million in principal and past due capitalized
interest of foreign debt of its Head Office in Argentina and its
Cayman Branch. This restructuring was successfully concluded on May
18, 2004, marking the last of the measures set out in the Bank's
capitalization and liquidity plan. See Item 4. "Information on the
Company -- History -- Restructuring of Our Subsidiaries' Debt --
Banco Galicia -- Restructuring of the Foreign Debt of the Bank's
Head Office in Argentina and its Cayman Branch." As of December 31,
2004, US$ 1,184 million of principal amount of new debt issued in
this restructuring was outstanding.
In addition:
- In 2002, the Argentine government restructured banks'
dollar-denominated deposits and peso time deposits, including Banco
Galicia's deposits dollar-denominated deposits and peso time
deposits, and subsequently issued regulations providing for the
exchange of restructured deposits for government bonds. See Item
4."Information on the Company -- Main Regulatory Changes in 2002,
2003 and 2004 -- Deposits."
- In 2003, the Bank began to restructure the financial assistance from
the Argentine Central Bank, received during the 2001-2002 crisis
until April 2002, and amounting to Ps.5,707.0 million as of
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December 31, 2004, pursuant to the provisions of Decrees No. 739/03
and No. 1262/03. Such financial assistance was a one-month revolving
facility which was restructured into a long-term CER adjusted
facility as explained under Item 4."Information on the Company --
Argentine Banking System and Regulation -- Argentine Banking
regulation -- Financial Assistance from the Argentine Central Bank
-- Financial Assistance for Liquidity Support Granted Before April
1, 2003" and " -- Funding." This process was completed on February
3, 2004.
- As a result of the measures undertaken by the Argentine government
to compensate financial institutions for the asymmetric
pesification, as of December 31, 2004, our balance sheet included
Ps. 2,720.7 million on account of the advance to be granted to the
Bank by the Argentine Central Bank to fund the acquisition of the
Hedge Bond (Boden 2012).
In the restructuring of our liabilities, we sought and managed to create a
new debt profile consistent with the expected cash flow of our assets and to
prevent servicing of the restructured debt from affecting the growth prospects
of our business.
In November 2004, as a result of the improvements in the Bank's financial
condition and the successful implementation of the aforementioned capitalization
and liquidity plan, the Argentine Central Bank released the Bank from the
regulatory restructuring status that had been established in 2002. In addition,
on April 29, 2005, the Bank was notified of the resolution of the Financial
Superintendency to remove, effective April 29, 2005, the oversight of the Bank's
management that had been exercised since February 2002 by two officers from the
Argentine Central Bank, pursuant to Resolution No. 81/02 of the board of
directors of the Argentine Central Bank.
CURRENCY COMPOSITION OF OUR BALANCE SHEET
In 2002, together with the asymmetric pesification and the measures taken
to compensate for it, the Argentine government modified the yields of assets and
the cost of liabilities that had been pesified. In general, maximum and minimum
fixed interest rates were established for pesified assets and liabilities,
respectively. In addition, the principal of those assets and liabilities was
adjusted by the change in the CER or the CVS. The latter was applicable up to
March 31, 2004. In addition, in most cases, but especially in the case of
public-sector assets, maturities were extended. The terms and conditions of
peso-denominated loans to the public sector and of certain peso-denominated
deposits were also modified. See Item 4. "Information on the Company -- Main
Regulatory Changes in 2002, 2003 and 2004."
As a result of these measures, as of December 31, 2004, December 31, 2003,
and December 31, 2002, our balance sheet showed the following currency
mismatches:
- CER mismatch: The Bank's peso-denominated assets subject to
adjustment by the CER (mainly secured loans and certain government
securities) exceeded its CER-adjusted peso-denominated liabilities
(mainly restructured deposits and the advance to be provided by the
Argentine Central Bank to purchase the Hedge Bond). The recording of
the financial assistance from the Argentine Central Bank as a
CER-adjusted long-term peso-denominated liability in mid-2003
partially mitigated the Bank's long CER-indexed position. See " --
Funding" below.
- Foreign-currency mismatch: The Bank's dollar-denominated assets
(mainly Boden 2012) exceeded its dollar-denominated liabilities
(debt securities, borrowings from foreign banks and deposits in
foreign branches and subsidiaries).
- Peso mismatch: The Bank's peso-denominated liabilities (voluntary
deposits and the financial assistance from the Argentine Central
Bank until 2002) exceeded its assets (mainly liquidity reserves and
loans to the private sector), in each case, bearing market interest
rates. This mismatch was partially corrected with the recording in
mid-2003 of the financial assistance from the Argentine Central Bank
as a long-term CER-adjusted liability.
The net portfolios in CER-adjusted and foreign currency-denominated assets
are funded by peso-denominated liabilities and by the Bank's shareholders'
equity.
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The following table sets forth our assets and liabilities denominated in
foreign currency, in pesos and adjustable by the CER, at the dates indicated.
AS OF DECEMBER 31,
--------------------------------------------
2004 2003 2002
------------ ----------- ---------------
(In millions of
February 28,
2003, constant
(In millions of pesos) pesos)
ASSETS
In pesos, unadjusted (1)........................... Ps. 5,666.0 Ps. 3,898.5 Ps. 3,050.8
In pesos, adjusted by the CER ..................... 10,198.4 10,302.8 10,503.3
In pesos, adjusted by the CVS...................... - 317.1 -
In foreign currency................................ 7,786.2 8,304.5 10,310.0
------------ ----------- --------------
TOTAL ASSETS....................................... Ps. 23,650.6 Ps.22,822.9 Ps. 23,864.1
------------ ----------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY...............
In pesos, unadjusted, including shareholders' equity Ps. 7,871.1 Ps. 5,951.6 Ps. 9,270.6
In pesos, adjusted by the CER...................... 9,236.0 8,979.3 4,803.0
In pesos, adjusted by the CVS...................... - - -
In foreign currency................................ 6,543.5 7,892.0 9,790.5
------------ ----------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... Ps. 23,650.6 Ps.22,822.9 Ps. 23,864.1
------------ ----------- --------------
(1) As of December 31, 2002, includes assets eligible to be adju sted by the
CVS in the form of loans to individuals totaling Ps. 356.1 million. The
Bank began to apply the CVS adjustment to the principal of these loans in
November 2003. T he CVS adjustment was applicable until March 31, 2004.
Due to the characteristics of the Argentine financial market, the lack of
hedge instruments and limited access to the international capital markets, the
Bank's capacity to modify these mismatches has been and remains limited.
Although the Bank completed the restructuring of its foreign debt in 2004 and
has restructured the financial assistance from the Argentine Central Banks, both
on terms that are consistent with the Bank's repayment capacity in Argentina's
current economic environment, the Bank will, for the foreseeable future, have
limitations on its ability to manage its assets and liabilities effectively so
as to minimize risks resulting from mismatches in terms of currencies and
yields.
The Bank's inability to manage or hedge its mismatches exposes it mainly
to fluctuations in the exchange rate in the inflation rate and in market
interest rates. In the context of significant and differential fluctuations in
the exchange rate, inflation rate and domestic interest rates, these mismatches
have been a source of losses for the Bank and they expose the Bank to future
potential losses.
In addition, given that, as a result of the measures to compensate banks
for the asymmetric pesification, the Bank's foreign currency-denominated assets
comprise mainly the Compensatory and the Hedge Bonds, which accrue at Libor, the
yield on the Bank's foreign currency-denominated assets has been lower than the
cost of the Bank's foreign currency liabilities.
THE ARGENTINE ECONOMY IN 2004
During 2004, the Argentine economy continued to grow, a growth that began
at the end of 2002. The Argentine Gross Domestic Product (GDP) grew 9.0% in
2004. Estimates for GDP growth in 2005 published by the Argentine Central Bank
currently average 6.7% with the median standing at 7%.
In 2004, the increase in the economy's level of activity was accompanied
by a moderate inflation. This is mainly explained by the significant
foreign-currency surplus -favored by higher export prices-, by the sustained
improvement in the Argentine government's fiscal position -which provided a
foreseeable framework and allowed to keep the exchange rate stable and interest
rates low- and by the existence of idle capacity.
Furthermore, growth and institutional and macroeconomic stability led to
an improvement in economic agents expectations, which was reflected in a gradual
recovery of domestic demand. This process, along with the
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significant amount of idle installed capacity, allowed the industrial sector to
grow considerably. In fact, this sector was one of the most dynamic, together
with the construction sector.
The recovery of the real economy was also reflected in the monetary
variables. That was the case with credit to the private sector and total
deposits, which experienced sustained growth during the year. However, the
recovery of credit was only enough to maintain the ratio between loans to the
private sector and GDP at the level attained in 2003, which is way below the
levels observed during the 90's. Furthermore, while deposits evolved favorably,
their growth was due, to a large extent, to the strong public sector surplus,
most of it deposited in public banks.
In January 2005, the Argentine government launched the debt exchange offer
to restructure Argentina's defaulted foreign debt, a process that ended last on
February 25 of that year with a high degree of creditor participation (76%).
Still, approximately US$ 20.0 billion of defaulted bonds (24%) are in the hands
of non-participating creditors.
On March 25, 2005, non-participating creditors were able, in a New York
court, to secure an attachment of US$ 7.0 billion of Argentine bonds which
participating creditors had relinquished as part of the exchange. On March 31,
2005, the same New York court reversed its position and lifted the attachment
but stayed the order pending review by a U.S. court of appeals. The New York
court reversed its position on the attachment based on the fact that the bonds
were legally owned by the participating bondholders, rather than the Argentine
government, until the exchange is completed. The settlement of the exchange
offer scheduled for April 1, 2005, did not take place on that date and remained
subject to this dispute being decided, given that the Argentine government
considered the debt restructuring as a single integral transaction in which it
could not issue the new securities without receiving and canceling all of the
old bonds tendered to the exchange. On May 13, 2005, the New York's appeals
court overruled the attachment and remanded to the lower court, where the motion
of stay was lifted. The action removed the last pending legal obstacle to
completion of the deal. The settlement process commenced on May 24, 2005, the
completion of which is pending.
THE ARGENTINE FINANCIAL SYSTEM IN 2004
During 2004, change in the financial system in Argentina was very
positive. Deposits and money market mutual funds recovered, and the financial
system's liquidity as a whole increased. Furthermore, total credit to the
private sector increased. Although the change in deposits was positive, their
growth was mainly the result of growth in public-sector deposits. Private sector
deposits growth was discouraged by a high tax levied on bank debits and credits
(which is not to be computed on account of other taxes), which encourages
depositors to hold cash as opposed to deposits.
For 2005, expectations are that the growth of loans to the private sector
and of deposits will continue, thus resulting in better operating results of
financial institutions. A growing banking disintermediation is also expected,
due to the increase in the use of and demand for financial instruments such as
short- and long-term securities from financial trusts and negotiable
obligations. Growth in credit to the private sector is a key factor to allow the
recovery experienced by the Argentine economy to consolidate into a sustainable
long-term growth process.
During 2004, deposits from the public sector experienced the highest
growth, with a 100.4% increase, reaching Ps. 31,774 million at the end of
December 2004. This was a consequence of the high fiscal surplus, the highest in
the past 50 years.
Deposits from the private sector also increased, although less, showing a
consolidation of confidence of the general public and institutional investors in
the banking system. Private-sector time deposits (excluding those restructured)
increased 6.5% to Ps. 35,149 million at year-end, and transactional deposits
(deposits held in current accounts and savings accounts) increased 24.1% to Ps.
44,821 million. Deposits restructured or those subject to judicial proceedings
decreased 66.4% (to Ps. 1,541 million). Total deposits from the private sector
grew 10.6% during the year, reaching Ps. 81,511 million.
Deposits from the financial sector and from residents abroad decreased
8.8%, reaching Ps. 869 million at year-end. Therefore, total deposits in the
financial system grew 28.9%, reaching Ps. 114,407 million at the end of
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2004. It is worth mentioning that, as of that date, restructured deposits or
deposits subject to judicial proceedings accounted for less than 1.5% of such
total.
The growth of total deposits in the financial system increased the
estimated total deposits to GDP ratio to 25.4% at the end of 2004, in comparison
with the 24% recorded at the end of 2003. This ratio is still below the maximum
ratio of 28% of GDP reached in December 1999, although it is a clear sign of
recovery in comparison with the low recorded in December 2002, when it amounted
to only 22% of GDP. At the same time, private-sector deposits are deemed to have
reached 18.3% of GDP, a ratio similar to the one recorded at the end of 2003
(19%).
The growing confidence in the financial system is also shown in the
behavior of the segment corresponding to deposits of more than one million pesos
("proxy" of the placements from institutional investors), the increase in time
deposits adjusted by the CER, as well as the extension of deposit terms. In
2004, private-sector deposits for amounts higher than one million pesos grew
18.3%, reaching Ps. 21,270 million, and private-sector time deposits adjusted by
the CER grew 613% to Ps. 5,007 million. This contributed to the extension of
deposit terms, as the minimum term for these deposits was 90 days at that
moment.
The stock of total loans to the private sector grew 24.9% in 2004,
reaching Ps. 38,730 million at year-end, after having steadily diminished since
1999. This decline increased in 2002 (reaching 31%), and a reduction of 11.9%
was recorded in 2003. The growth experienced in 2004 made the estimated ratio
between total loans to the private sector and GDP be at 8.7% at year-end, a
figure slightly higher than that recorded at the end of 2003, which was 8.1% of
GDP, and still far from the 24.9% maximum reached at the end of 1999.
Even though all types of loans experienced an increase, except for
mortgage loans, the increase in credit to the private sector was mainly
concentrated in credit lines related to the financing of consumption and
businesses' working capital. Commercial loans to the private sector (advances in
current accounts and promissory notes) grew 33.7%, reaching Ps. 12,012 million
at year-end, and consumer credit lines (personal loans and loans through credit
cards) increased 55.2% to Ps. 7,684 million. Personal loans experienced the
highest growth during the year, with a 79.7% increase, reaching a balance of Ps.
4,264 million at the end of 2004. The balance of mortgage loans was the only one
that decreased, by 5.3%, but with a marked deceleration of the decrease rate
towards the second semester, in which it only decreased 1.2%, reaching Ps. 8,835
million at year end.
Loans to the public sector decreased 21.3% in 2004. As a consequence of
that decrease, the strong growth of loans to the private sector and, to a lesser
extent, the increase in loans to the financial sector and to residents abroad
(23.6%), the financial system's exposure to the public sector diminished. The
share of loans to that sector in the total financial system's loans was 44.8% in
December 2003 and 33.9% at the end of 2004.
During 2004, the placement of notes from financial trusts in the primary
market increased 128.5%, from Ps. 726 million in 2003 to Ps. 1,658 million.
Thus, as loans increased, banks aimed at improving their working capital through
the securitization of loan portfolios (transferring loans to financial trusts)
in order to relend the funds obtained. At the same time, this is also an
indication of the growing market interest, both from individuals and
institutional investors, in securities issued by trusts, as investment
alternatives with terms longer than those of deposits. Therefore, after the
2001-2002 crisis and especially in 2004, access to financing through capital
market instruments began to grow in Argentina, entailing the disintermediation
of traditional commercial banks.
Despite the significant increase in loans to the private sector, the
financial system's liquidity remained high. Liquidity (including financial
institutions' cash in vaults, deposits at the Argentine Central Bank and reverse
repurchase agreements with the Argentine Central Bank), which was 27.6% of total
deposits at the end of 2003, increased to 29.2% at the end of 2004. Without
considering reverse repurchase agreements, the financial system's liquidity went
from 27.6% to 24.6% for the same period. These levels are similar to those
recorded in the 90's, and even higher.
At the end of 2004, the monetary base amounted to Ps. 52,768 million,
showing a significant 12.66% increase from the previous year level. Although the
expansionary monetary policy pursued in 2003 was maintained, the monetary base
growth rate in 2004 was significantly lower than that of the previous year,
which had been 26%. This lower expansion is mainly due to the fact that,
although the Argentine Central Bank continued with its policy of issuing pesos
with the purpose of preventing the appreciation of the exchange rate within a
framework of a strong
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surplus in the balance of payment's current account, the fiscal surplus of the
National Treasury and payments made by financial institutions to the Argentine
Central Bank on account of repayment of rediscounts contributed to the lower
expansion in comparison to the previous year.
Liquidity provided by the Argentine Central Bank also contributed to the
maintenance of low interest rates, which were decreasing during the year. The
average interest rate on peso-denominated 30-day time deposits was 2.65% for the
year, with a 1.8% floor and a 3.8% ceiling. Furthermore, lending rates also
experienced a decrease, continuing with the trend that had started in 2003. The
rate for peso-denominated advances in current accounts decreased from an average
of 22.4% in December 2003 to 14.35% in December 2004, while the interest rate
for personal loans decreased from an average of 33.31% in December 2003 to
27.84% for the same month in 2004. In this context, the cut-off rates of the
primary market for peso-denominated Argentine Central Bank Bills (1 year term
Lebac) decreased from 9.1% as of December 31, 2003, to 6.12% as of December 31,
2004.
Real interest rates on deposits were negative throughout 2004, reaching
negative yields of up to an annual 7% in several months. However,
peso-denominated time deposits increased and CER-adjusted time-deposits
increased exponentially, mainly in the second half of the year. Additionally,
the spread between borrowing and lending rates also diminished significantly
during the year, showing strong competition among banks in the credit market.
Lastly, this decrease in spreads took place within an international environment
of increasing interest rates. In fact, the 180-day Libor increased by 147 basis
points during the year.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDING DECEMBER 31, 2004, DECEMBER
31, 2003 AND DECEMBER 31, 2002
GENERAL
We discuss below our results of operations for our fiscal year ended
December 31, 2004, as compared with our results of operations for the fiscal
year ended December 31, 2003. We also discuss our results of operations for our
fiscal year ended December 31, 2003 as compared with our results of operations
for our fiscal year ended December 31, 2002.
NET LOSS
Fiscal Year 2004 Compared to Fiscal Year 2003
For fiscal year 2004, we recorded a net loss of Ps. 109.9 million compared
to a net loss of Ps. 222.2 million for fiscal year 2003. The lower net loss in
2004 was primarily attributable to the following factors:
- A 52.2% increase in net financial income mainly due to the
10.5% decrease in financial expenses. Net financial income
includes a Ps. 193.3 million loss due to the valuation of
public-sector assets in accordance with Argentine Central Bank
rules and a Ps. 119.7 million net gain from the restructuring
of the Bank's foreign debt closed in May 2004.
- A 20.7% increase in net income from services, as a result of
the Bank's higher level of activity in 2004.
- A 33.6% decrease in provisions for loan losses and other
receivables, which decreased from Ps. 286.4 million in fiscal
year 2003 to Ps. 190.2 million in 2004.
- A 10.7% increase in administrative expenses (Ps. 60.5
million), to Ps. 623.9 million in 2004 from Ps. 563.4 million
in the prior fiscal year.
- A 41.5% decrease in miscellaneous net income (Ps. 70.1
million), mainly as a result of an increase in the
amortization of the difference recorded for amparo claims.
- A Ps. 43.2 million increase in the income tax charge.
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Net loss per share amounted to Ps. 0.093 in fiscal year 2004, while it
amounted to Ps. 0.203 in fiscal year 2003.
Return on average assets was a negative 0.42% and return on average
shareholders' equity was a negative 7.32%, compared with a 0.95% negative return
on average assets and a 14.53% negative return on shareholders' equity in the
previous fiscal year.
Fiscal Year 2003 Compared to Fiscal Year 2002
For fiscal year 2003, we recorded a net loss of Ps. 222.2 million compared
to a net loss after loss absorption (described below) of Ps. 1,509.3 million for
fiscal year 2002. The lower net loss in 2003 was primarily attributable to the
following factors:
- a 71.4% reduction in financial expenses, from Ps. 4,560.4
million to Ps. 1,304.8 million;
- a 82.6% reduction in charges for provisions for losses on
loans and other receivables, from Ps. 1,648.6 million to Ps.
286.4 million;
- a 40.5% reduction in administrative expenses, from Ps. 947.5
million to Ps. 563.4 million;
- a 99.0% reduction in the monetary loss from financial
intermediation, from Ps. 1,437.7 million to Ps. 14.2 million;
- the generation of Ps. 168.9 million of miscellaneous income,
net, compared to Ps. 429.4 million of miscellaneous losses for
the same period in fiscal year 2002; and
- a 56.5% reduction in losses from equity investments, from Ps.
52.0 million to Ps. 22.6 million.
The decrease in net loss in 2003 was partially offset by a 74.8% reduction
in financial income, from Ps. 5,757.3 million to Ps. 1,452.1 million.
In fiscal year 2002, we absorbed Ps. 1,370.0 million of net losses in
accordance with Argentine Central Bank Communique "A" 3800. This loss absorption
is explained under " -- Loss Absorption." After giving effect to the loss
absorption allowed under Communique "A" 3800, our net loss for fiscal year 2002
was Ps. 1,509.3 million.
Net loss per share amounted to Ps. 0.203 in fiscal year 2003. For fiscal
year 2003, return on assets was a negative 0.95% and return on average
shareholders' equity was a negative 14.53%, compared with a negative 1.39%
return on assets and a negative 5.73% return on shareholders' equity in the
previous fiscal year (after the loss absorption allowed by Communique "A" 3800).
Before the absorption allowed by Communique "A" 3800, in 2002, these ratios were
(10.68)% and (118.40)%.
GRUPO GALICIA
-------------------------------------------
FISCAL YEAR ENDED
-------------------------------------------
DECEMBER 31,
-------------------------------------------
2004 2003 2002
--------- ------ -------
(in millions of
February 28,
2003, constant
(in millions of pesos, pesos, except
except percentages) percentages)
CONSOLIDATED INCOME STATEMENT
Financial income................................................... Ps. 1,391.6 Ps. 1,452.1 Ps. 5,757.3
Financial expenses................................................. 1,167.4 1,304.8 4,560.4
Net financial income............................................... 224.2 147.3 1,196.9
Provision for losses on loans and other receivables ............... 190.2 286.4 1,648.6
Net income from services........................................... 436.3 361.4 375.4
Monetary loss from financial intermediation........................ - (14.2) (1,437.7)
Administrative expenses............................................ 623.9 563.4 947.5
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GRUPO GALICIA
---------------------------------------------
FISCAL YEAR ENDED
---------------------------------------------
DECEMBER 31,
---------------------------------------------
2004 2003 2002
--------- ------ --------
(in millions of
February 28,
2003, constant
(in millions of pesos, pesos, except
except percentages) percentages)
Monetary gain (loss) from operating expenses....................... - 0.1 21.0
Minority interest.................................................. (14.3) (9.2) 272.2
Income from equity in other companies.............................. 3.0 (22.6) (52.0)
Miscellaneous income (loss), net .................................. 98.8 168.9 (429.4)
Monetary gain (loss) from other transactions....................... - (3.5) (163.2)
Income tax......................................................... (43.8) (0.6) (66.4)
Net income before absorption....................................... (109.9) (222.2) (2,879.3)
Absorption subject to approval of annual shareholders' meeting... - - 1,370.0
NET INCOME AFTER ABSORPTION........................................ Ps. (109.9) Ps. (222.2) Ps. (1,509.3)
Return on average assets........................................... (0.42)% (0.95)% (6.04)%
Return on average shareholders' equity............................. (7.32) (14.53) (62.06)
FINANCIAL INCOME
Our financial income was composed of the following:
GRUPO GALICIA
-------------------------------------------
FISCAL YEAR ENDED
-------------------------------------------
DECEMBER 31,
-------------------------------------------
2004 2003 2002
--------- ------ --------
(in millions
of February
28, 2003,
(in millions of pesos) constant pesos)
Income on loans and other receivables resulting from financial
intermediation and premiums earned on reverse repos................ Ps. 746.3 Ps. 880.7 Ps. 1,404.2
Income from government and corporate securities, net............... - 46.2 560.6
Other (1).......................................................... 645.3 525.2 3,792.5
TOTAL.............................................................. Ps. 1,391.6 Ps. 1,452.1 Ps. 5,757.3
(1) Reflects income from financial leases, net, and differences in the
quotation of gold and foreign currency as well as premiums on forward
sales of foreign exchange. Also includes CER adjustments in the amount of
Ps.559.7 million, Ps.474.1 million and Ps. 3,402.8 million for fiscal
years 2004, 2003 and 2002, respectively, and a CVS adjustment in the
amount of Ps.28.9 million and Ps. 35.0 million for fiscal years 2004 and
2003, respectively.
The following table shows our yields on interest-earning assets and cost
of funds:
GRUPO GALICIA, AS OF DECEMBER 31,
---------------------------------------------------------------------------
2004 2003 2002
---------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE NOMINAL REAL
BALANCE RATE BALANCE RATE BALANCE RATE RATE
------------ ----- ---------- ---- -------- ------- -----
(in millions of
February 28,
2003, constant
pesos, except
(in millions of pesos, except rates) rates)
INTEREST-EARNING ASSETS ....................... Ps. 20,735.4 6.06% Ps. 20,725.1 6.44% Ps. 26,953.5 19.71% 3.43%
Government securities........................ 3,238.7 (0.29) 2,082.8 3.43 2,255.6 13.24 36.49
Loans........................................ 11,137.9 9.87 11,556.7 9.84 15,262.4 28.86 (26.18)
Other (1).................................... 6,358.8 2.61 7,085.6 1.77 9,435.5 6.47 43.42
INTEREST-BEARING LIABILITIES .................. Ps. 18,294.0 5.71% Ps. 18,637.7 6.17% Ps. 22,896.3 18.89% 7.84%
Current accounts............................. 434.0 1.11 215.6 1.39 194.6 8.99 (31.57)
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GRUPO GALICIA, AS OF DECEMBER 31,
---------------------------------------------------------------------------
2004 2003 2002
---------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE NOMINAL REAL
BALANCE RATE BALANCE RATE BALANCE RATE RATE
------------ ----- ---------- ---- ------- ------- -----
(in millions of
February 28,
2003, constant
pesos, except
(in millions of pesos, except rates) rates)
Saving accounts.............................. 1,034.5 0.41 613.1 0.55 1,451.8 0.63 (20.11)
Time deposits................................ 3,317.5 4.05 3,608.3 7.13 6,371.5 20.95 16.06
Argentine Central Bank (2)................... 8,165.6 8.56 8,062.7 5.87 7,147.6 31.31 (39.83)
Other financial entities..................... 983.6 11.66 2,074.4 9.20 2,778.7 8.85 58.68
Debt securities (includes
negotiable obligations)..................... 3,190.6 0.87 2,710.5 5.69 2,568.5 5.90 62.26
Other ....................................... 1,168.2 5.17 1,353.1 5.03 2,383.6 13.82 31.19
SPREAD AND NET YIELD
Interest spread, nominal basis (3)............. 0.35% 0.27% 0.82% (4.41)%
Net yield on interest-earning
assets (4).................................. 1.02 0.89 3.66 (6.41)
Financial margin (5) .......................... 1.08 0.71 4.44
(1) Includes amounts corresponding to the compensatory bond and the Hedge
bond.
(2) Includes the financial assistance from the Argentine Central Bank and the
advance to be granted by the Argentine Central Bank for the subscription
of the Hedge Bond.
(3) Reflects the difference between the average nominal interest rate on
interest-earning assets and the average nominal interest rate on
interest-bearing liabilities. Interest rates include the CER adjustment.
(4) Net interest earned divided by average interest-earning assets. Interest
rates include the CER adjustment.
(5) Represents net financial income, divided by average interest-earning
assets.
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In the preceding table, the bank's holdings of Bogar were not reclassified
as government securities for fiscal year 2003, being included under "Loans" for
that year.
Fiscal Year 2004 Compared to Fiscal Year 2003
Financial income amounted to Ps. 1,391.6 million, showing a 4.2% decrease
compared to the Ps. 1,452.1 million recorded in fiscal year 2003. The slight
decrease in financial income was the result of a lower average yield on
interest-earning assets.
The average yield on interest-earning assets decreased 38 basis points
("b.p.") to 6.06%. This decline is mainly attributable to a 372 b.p. decrease in
the average yield on government securities. This decrease was mainly due to the
adjustment to the valuation of the External Notes held by the Bank, in
accordance with the guidelines of Argentine Central Bank's Communique "A" 4084.
The decrease in the aforementioned yield was partially offset by an 84 b.p.
increase in the average yield of the item "Other Interest-Earning Assets",
mainly as a consequence of the increase of the Libo rate during the fiscal year,
at which rate the Compensatory and Hedge Bonds accrue interest. These two bonds
represent the main portion of the balance of this item.
Average interest-earning assets remained at levels similar to those of the
previous fiscal year as a consequence of : i) a 55.5% increase in the net
position in government securities; ii) a 10.3% decrease in the item "Other
Interest-Earning Assets"; and iii) a 3.6% decrease in the average loan
portfolio.
The average loan portfolio amounted to Ps. 11,137.9 million, 3.6% lower
than the Ps. 11,556.7 million for fiscal year 2003. This reduction was due to a
Ps. 572.8 million decrease in average loans to the public sector, partially
offset by a Ps. 154.0 million increase in average loans to the private sector.
The decrease in average loans to the public sector was mainly due to the
reclassification of the holdings of Bogar from "Loans" to "Government
Securities" in the last quarter of 2004, in the tables regarding yields in this
section. See Item 4. "Information on the Company -- Selected Statistical
Information -- Government and Corporate Securities."
With respect to loans to the private sector, there was an improvement in
the volume of loans granted during the fiscal year, which implied a 3.9%
increase in the average balance for the fiscal year when compared to that of the
prior fiscal year. It is worth noting that this increase would have been
significantly higher if considered before the securitizations and portfolio
sale, as well as the significant charge-offs against allowances for loan losses,
that took place during 2004. See Item 4. "Information on the Company -- Selected
Statistical Information -- Loan Portfolio" and Item 4. "Information on the
Company -- Selected Statistical Information -- Charge offs."
Based on daily information published by the Argentine Central Bank, the
estimated loan market share in the Argentine financial system of the Bank (on an
unconsolidated basis and excluding the regional credit-card companies' loan
portfolio), was 9.15% as of December 31, 2004 and 13.18% as of December 31,
2003. The decrease in the Bank's loan market share during this fiscal year was
mainly due to the already mentioned reclassification of the holdings of Bogar
under the item "Government Securities."
The average yield on total loans, including the CER adjustment, was 9.87%
compared to 9.84% in fiscal year 2003, with the private-sector loan portfolio
accruing a 12.98% average interest rate and the public-sector loan portfolio
accruing an 8.05% average interest rate. It is worth noting that the yield on
public-sector loans, mostly Secured Loans, increased due to: i) the increase in
the CER adjustment, which grew from 3.66% in 2003 to 5.48% in 2004, and ii) the
reclassification of Bogar, already discussed, as a consequence of which the loss
due to the adjustment to the valuation of public-sector assets provided for in
Argentine Central Bank's Communique "A" 3911 and complementary ones (valuation
at present value) was recorded under "Government Securities", while in the
previous fiscal year it had been recorded as reducing the yield of the item
"Loans". The amount of the adjustment of Bogar was Ps. 87.3 million in 2004. The
increase in the yield of public-sector loans was partially offset by the
decrease in the interest-rate on private sector loans. This decrease reflected
the decrease in market interest rates.
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The average interest rate on peso-denominated private-sector loans
decreased by 840 b.p., from 23.67% to 15.27%. This decrease was mainly due to
the drop in interest rates experienced by the market as a whole, partially
offset by the increase in the CER.
The average position in government securities was Ps. 3,238.7 million,
55.5% higher than the Ps. 2,082.8 million for fiscal year 2003. This higher
position was mainly due to the above mentioned Bogar reclassification. It should
be noted that, even though the effect is almost none on average balances, in
2004 the amount of the Compensatory Bond decreased as a consequence of the
transfer of Boden 2012 for a face value of US$ 170 million to Galicia Uruguay,
which were used by Galicia Uruguay for the settlement of the second exchange
offer made to its customers, and of the completion of the restructuring of the
foreign debt of the Bank's Head Office in Argentina and that of its Cayman
Branch, which implied transferring Boden 2012 for a face value of US$ 36.9
million to those creditors who chose to receive such securities. This decrease
was more than offset by a partial crediting of Boden 2012 corresponding to the
Compensatory Bond, which took place in the third quarter of 2003.
The average yield of the position in government securities decreased 372
b.p., from 3.43% in fiscal year 2003 to a negative yield of 0.29% in fiscal year
2004. This decrease was mainly due to : (i) a 290 b.p. decrease in the average
rate of peso-denominated government securities, mainly as a consequence of the
adjustment to the Bogar valuation for Ps. 87.3 million, adjustment that was
recorded under "Loans" in the previous fiscal year; and (ii) a 699 b.p. decrease
in the rate of dollar-denominated government securities, due to the recording of
the adjustment to the valuation of the External Notes in accordance with the
provisions of Communique "A" 4084 of the Argentine Central Bank and
complementary ones. This valuation implied a Ps. 106 million reduction in net
income for the fiscal year.
The aggregate losses from the valuation of public sector assets (Bogar,
External Notes and Secured Loans) in accordance with the Argentine Central Bank
rules (Communiques "A" 3911 and complementary ones) amounted to Ps. 193.3
million in 2004, with a 46.1% increase (Ps. 61.0 million) from the Ps. 132.3
million recorded for the same concept in 2003.
The "Other Interest-Earning Assets" item is mainly comprised of the
Compensatory and Hedge Bonds to be received, resulting from the compensation for
the asymmetric pesification and recorded under "Other Receivables from Financial
Brokerage". The Ps. 726.8 million decrease in the average balance of "Other
Interest-Earning Assets" is mainly due to the partial crediting of the
Compensatory Bond during the third quarter of fiscal year 2003, recorded from
that moment on under the item "Government Securities".
The average yield on "Other Interest-Earning Assets" increased 84 b.p.,
mainly due to: i) a 200 b.p. increase in the average yield of other assets
denominated in pesos, mainly as a consequence of the higher variation of the CER
during the twelve months of fiscal year 2004 (as was discussed in previous
paragraphs), and given that the Galtrust I Financial Trust, among others, is
recorded under this item, the principal of which is adjusted by such
coefficient; and ii) a 36 b.p. increase in the average yield of other assets
denominated in dollars, mainly due to the increase in the Libo rate during
fiscal year 2004, at which rate the Compensatory and Hedge Bonds accrue
interest.
Financial income for fiscal year 2004 includes a Ps. 51.4 million profit
from foreign-exchange quotation differences, which includes a Ps. 54.0 million
gain from foreign exchange brokerage transactions.
Fiscal Year 2003 Compared to Fiscal Year 2002
For fiscal year 2003, our financial income was Ps. 1,452.1 million, a
74.8% decrease compared to Ps. 5,757.3 million in fiscal year 2002. The decrease
was the result of the lower yield on interest-earning assets and a lower average
volume of such assets. The average yield on interest-earning assets decreased
1,327 basis points to 6.44%. This decline is mainly attributable to the 1,902
basis-point decrease in the average yield on loans, which was due in turn to a
CER variation of 3.7% for fiscal year 2003 compared to a CER variation of 40.5%
for fiscal year 2002. Average interest-earning assets for fiscal year 2003 were
Ps. 20,725.1 million, 23.1% lower than the Ps. 26,953.5 million for fiscal year
2002. This decrease was the result of a decline in the average loan portfolio by
24.3%, a 24.9% decrease in the item "Others" and a 7.7% decrease in the net
position in government securities.
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The average loan portfolio for fiscal year 2003 was Ps. 11,556.7 million,
24.3% lower than the Ps. 15,262.4 million for fiscal year 2002. This reduction
was due to the Ps. 2,982.3 million decrease in loans to the private sector and
the Ps. 723.4 million decrease in loans to the public sector. The decrease in
average loans to the private sector was mainly due to significant borrower
repayments and prepayments and the securitization or sale of mortgage and
commercial loans as part of the Galicia capitalization and liquidity plan. In
addition, the variation in the private- and public-sector loan portfolios
reflects the restatement of the figures for the 12 months of fiscal year 2002 in
constant currency of February 28, 2003, while practically no net loan
origination took place during fiscal year 2003.
Based on daily information published by the Argentine Central Bank, the
Bank's estimated loan market share in the Argentine financial system (on an
unconsolidated basis and excluding the regional credit-card companies' loan
portfolio) was 13.18% as of December 31, 2003, and 11.04% as of December 31,
2002.
In fiscal year 2003, the average yield on total loans, including the CER
adjustment, was 9.84% compared to 28.86% in fiscal year 2002. During this
period, the private-sector loan portfolio accrued at an average 20.03% interest
rate and the public-sector loan portfolio accrued at an average 4.51% interest
rate. The yield on public-sector loans (mostly secured loans) was reduced by the
valuation rules issued by the Argentine Central Bank. Those secured loans
resulting from an exposure (in origin) to the Argentine national government
accrued the CER adjustment plus a 4.0% average annual interest rate and those
resulting from an exposure (in origin) to the Argentine provincial governments
accrued the CER adjustment plus a 2.0% average annual interest rate. However,
Argentine Central Bank Communique "A" 3911 established that certain
public-sector assets had to be recorded at their present value calculated using
a discount rate of 3.0% per annum. See Item 4. "Information on the Company --
Selected Statistical Information -- Government and Corporate Securities --
Valuation." The effect of adjusting the book value of secured loans in
accordance with this rule resulted in a Ps. 132.3 million loss for the Bank.
This loss decreased our financial income during fiscal year 2003.
The average interest rate on peso-denominated private-sector loans
decreased by 345 basis points mainly due to the difference in the CER variation
(in fiscal year 2002, the CER increased 40.5% and, in fiscal year 2003, it
increased only 3.7%).
Our average position in government securities in fiscal year 2003 was Ps.
2,082.8 million, 7.7% lower than the Ps. 2,255.6 million for fiscal year 2002.
In addition, the average interest rate on those assets decreased from 13.2% to
3.4% over the same period. Our average position in government securities
decreased due to the acceptance by holders of Ps. 693.0 million in deposits with
the Bank of the Canje I, an offer made to depositors to exchange their deposits
for government bonds, which was completed in late December 2002. See Item 4.
"Information on the Company -- Main Regulatory Changes in 2002, 2003 and 2004 --
Deposits."
The "Other" item is mainly comprised of the Compensatory and Hedge Bonds
resulting from the compensation for the asymmetric pesification to be received
by the Bank and recorded under the balance sheet account "Other Receivables from
Financial Intermediation," the balance of which was Ps. 4,629.6 million as of
December 31, 2003. These bonds are dollar-denominated. The Ps. 2,349.9 million
decrease in the average balance of "Other" mainly reflects reporting the
additional compensation to be received under "Government Securities" in fiscal
year 2003 rather than "Other," as previously, and the net effect of restating in
constant currency of February 28, 2003, the balances of these bonds in fiscal
year 2002 and the decrease in the exchange rate between the two periods.
The average yield on "Other" decreased 470 basis points mainly due to the
lower variation of the CER in fiscal year 2003 (as previously explained). This
item includes the Bank's holdings of notes from the Galtrust I Financial Trust
(whose assets consist of secured loans originally extended to Argentine
provincial governments), the principal of which is adjusted by the CER.
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FINANCIAL EXPENSES
Our financial expenses were composed of the following:
GRUPO GALICIA
-----------------------
FISCAL YEAR ENDED
DECEMBER 31,
--------------------------------------
2004 2003 2002
----------- ----------- ------------
(in millions
of February
28,2003,
constant
(in millions of pesos) pesos)
Expenses from
Interest on deposits ........................................ Ps. 115.7 Ps. 228.6 Ps. 448.4
Debt securities ............................................. 122.3 155.6 281.0
Expenses from Government and Corporate Securities, Net 7.0 0.0 0.0
Contributions and taxes ..................................... 48.8 31.7 50.4
Other (1) ................................................... 873.6 888.9 3,780.6
----------- ----------- -----------
TOTAL ......................................................... Ps. 1,167.4 Ps. 1,304.8 Ps. 4,560.4
----------- ----------- -----------
-----------------
(1) Includes accrued interest on liabilities resulting from financial brokerage
with banks and international entities and premiums payable on repos. For fiscal
years 2004, 2003 and 2002, includes Ps.501.8 million, Ps. 187.5 million and Ps.
1,734.6 million, respectively, of CER adjustments.
Fiscal Year 2004 Compared to Fiscal Year 2003
Financial expenses decreased 10.5% to Ps. 1,167.4 million, from the Ps.
1,304.8 million recorded in fiscal year 2003. This reduction was the result of a
46 b.p. decrease in the average cost of funds and of a 1.8% decrease in the
average balance of interest-bearing liabilities.
Average interest-bearing liabilities amounted to Ps. 18,294.0 million for
fiscal year 2004 compared to Ps. 18,637.7 million for fiscal year 2003. The
slight decrease was mainly the result of a 7.9% increase in interest-bearing
deposits (which grew from Ps. 4,437.0 million to Ps. 4,786.0 million), which was
more than offset by a Ps. 610.7 million decrease in the aggregate balance of the
items "Other Financial Institutions and Debt Securities."
The increase in the average balance of interest-bearing deposits was
mainly the result of the strong increase in the Bank's deposits in Argentina in
current accounts, savings accounts and time deposits (excluding restructured
deposits), which, taking into account end-of-period balances, was of Ps. 1,896.5
million during fiscal year 2004, equivalent to 52.4% as compared to the figure
recorded at the close of the previous fiscal year.
The increase in the average balance of interest-bearing deposits was
partially offset by:
- The exchange offer made by Galicia Uruguay, carried out during the first
quarter of 2004, of restructured deposits and negotiable obligations for
cash and Boden 2012;
- The payment by Galicia Uruguay, in September 2004, of the installment set
up in its deposit restructuring schedule.
- The completion, in the third quarter of 2004, of the Canje II set forth by
Decree No.1836/02, in which restructured deposits were exchanged for
Argentine government securities.
Of the total average interest-bearing deposits, Ps. 1,425.5 million were
dollar-denominated deposits and Ps. 3,360.5 million were peso-denominated,
compared with Ps. 1,631.9 million and Ps. 2,805.1 million, respectively, in
fiscal year 2003.
Considering only private-sector deposits in current and savings accounts
and time deposits (excluding restructured deposits), raised only by the Bank in
Argentina, the estimated deposit market share of the Bank in the Argentine
financial system increased to 7.49% as of December 31, 2004, compared to 5.80%
as of December 31, 2003.
The average cost of interest-bearing deposits was 3.00%, 295 b.p. lower
than the 5.95% average cost for the previous fiscal year. Peso-denominated
deposits accrued a 3.73% average interest rate (including those adjusted by
CER), compared to an 8.45% average interest rate in fiscal year 2003. This
decrease was mainly the consequence of the decrease in peso borrowing interest
rates experienced by the market as a whole in 2004. Likewise, the cost of
dollar-denominated deposits was 1.28%, 36 b.p. lower than the 1.64% for fiscal
year 2003. This reduction was also
-117-
attributable to the decrease in borrowing interest rates in the Argentine market
and to the lower share of Galicia Uruguay's deposits that accrue interests at a
fixed rate through the year.
The average balance of liabilities with financial institutions and debt
securities was Ps. 4,174.2 million on aggregate, lower than the Ps. 4,784.9
million for fiscal year 2003. The change in the composition of such total
between both fiscal years was mainly the consequence of the decisions made by
the creditors that participated in the restructuring of the foreign debt of the
Bank and its Cayman Branch, concluded in May 2004, as many bank creditors chose
to receive bonds. The average cost of these liabilities as a whole was 3.41% for
the twelve months of 2004. For the prior fiscal year, this cost was 7.21%. The
decrease in the average cost for fiscal year 2004 was mainly due to the
reduction in principal and interest that resulted from the restructuring of the
foreign debt of the Bank completed in May 2004. The resulting profit amounted to
Ps. 142.5 million (being offset by Ps. 22.8 million on account of taxes).
The item "Argentine Central Bank" recorded an average balance that was Ps.
102.9 million higher than the Ps. 8,062.7 million of fiscal year 2003, and an
average cost of 8.56%, 269 b.p. higher than the 5.87% interest rate for fiscal
year 2003. This item mainly shows the average balances of the financial
assistance from the Argentine Central Bank and of the advance to be granted by
the Argentine Central Bank for the purchase of the Hedge Bond. End-of-period
balances, as of December 31, 2004, amounted to Ps. 5,707.0 million and Ps.
2,720.7 million, respectively, compared to Ps. 5,663.1 million and Ps. 2,536.1
million, respectively, at the close of the previous fiscal year. Both
liabilities are adjusted by CER, which explains the increase in the average
interest rate for the fiscal year.
The decrease in the average balance of the item "Other Interest-Bearing
Liabilities" was of Ps. 184.9 million for fiscal year 2004, mainly due to the
partial amortization of the loan granted to the Bank by the Fondo Fiduciario
para la Reconstruccion de Empresas (Fiduciary Fund for the Reconstruction of
Businesses, or "FFRE", former Fiduciary Fund for the Assistance of Financial
Institutions and Insurance Companies or "FFAEFyS"), the period-end balance of
which as of December 31, 2003, was Ps. 104.8 million compared to Ps. 32.5
million as of December 31, 2004.
Fiscal Year 2003 Compared to Fiscal Year 2002
Financial expenses for fiscal year 2003 decreased by 71.4% to Ps. 1,304.8
million compared to Ps. 4,560.4 million for fiscal year 2002. The reduction in
financial expenses was the result of a 1,272 basis-point decrease in the average
cost of funds and of an 18.6% decrease in the average balance of
interest-bearing liabilities. Average interest-bearing liabilities for fiscal
year 2003 amounted to Ps. 18,637.7 million compared to Ps. 22,896.3 million for
fiscal year 2002. This decrease is explained, among other factors, by the
restatement of fiscal year 2002 figures in constant currency of February 28,
2003. Average interest-bearing deposits amounted to Ps. 4,437.0 million in
fiscal year 2003, 44.7% lower than the Ps. 8,017.9 million for fiscal year 2002.
This decrease was primarily the result of:
- the significant decrease in the Bank's deposits, both of its Argentine and
foreign operations, that took place during the first months of 2002;
- the restructuring, completed during the last quarter of 2002, of Galicia
Uruguay's deposits, which, in accordance with the restructuring proposal
and depositor preferences, were partially replaced by negotiable
obligations;
- the completion during the third quarter of 2003 of the offer made by
Galicia Uruguay to its customers to exchange its restructured deposits for
different combinations of Boden 2012 and/or new negotiable obligations
issued by Galicia Uruguay;
- the payment by Galicia Uruguay in January 2003 and September 2003 of the
first installments under Galicia Uruguay's deposit restructuring schedule;
- the decrease in the Bank's deposits in Argentina as a consequence of the
judicial orders received by the Bank mandating the reimbursement of
deposits;
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- the completion by late December 2002 of the Canje I (see Item 4.
"Information on the Company -- Main Regulatory Changes in 2002, 2003 and
2004 -- Deposits");
- to a lesser extent, the lifting of restrictions on the availability of
restructured deposits as established by Decree No. 739/03, as a result of
which, between April 2003 and August 2003, the Bank retained approximately
75% of the amount of restructured deposits that became freely available as
well as of the maturity of the installments for the repayment of the
remaining restructured deposits (see Item 4. "Information on the Company
-- Main Regulatory Changes in 2002, 2003 and 2004 -- Deposits"); and
- the appreciation of the peso against the U.S. dollar between 2002 and
2003.
Interest-bearing deposits held with the Bank in Argentina increased from
Ps. 2,535.7 million as of December 31, 2002, to Ps. 3,248.5 million as of
December 31, 2003. This growth was not sufficient to offset the factors outlined
above, however.
Of the total average interest-bearing deposits for fiscal year 2003, Ps.
1,631.9 million were dollar-denominated deposits and Ps. 2,805.1 million were
peso-denominated compared with Ps. 3,938.5 million and Ps. 4,079.4 million,
respectively, in fiscal year 2002. The Bank's estimated market share of
"voluntary" deposits (current account and saving account deposits plus voluntary
time deposits) in the Argentine financial system only, based on daily
information published by the Argentine Central Bank, increased to 4.77% as of
December 31, 2003, compared to 4.34% as of December 31, 2002.
The average cost of interest-bearing deposits was 5.95% in fiscal year
2003, 1,103 basis points lower than the 16.98% average cost for fiscal year
2002. Peso deposits accrued an 8.45% average interest rate (including the
adjustment of principal to reflect the variation of the CER) in fiscal year 2003
compared to a 30.34% average interest rate in fiscal year 2002. This decrease
was mainly the consequence of the decrease in the CER variation (as explained in
" -- Net Financial Income") and of the decrease in peso-offered interest rates
experienced by the whole market in 2003 (as a result of increased relative
exchange rate stability and an expansionary monetary policy). The cost of
dollar-denominated deposits was 1.64% in fiscal year 2003, 150 basis points
lower than the 3.14% for fiscal year 2002. This reduction was mainly
attributable to the restructuring of Galicia Uruguay's deposits, which was
approved by the Uruguayan courts in December 2002. From December 2002 until
December 2003, these deposits accrued interest at a 2.0% annual rate compared to
a higher market-based rate prior to the restructuring.
The average balance of debt securities for fiscal year 2003 amounted to
Ps. 2,710.5 million, slightly greater than the Ps. 2,568.5 million for fiscal
year 2002. The average cost of debt securities was 5.69% in fiscal year 2003.
For the prior fiscal year, this cost was 5.90%.
In fiscal year 2003, the item "Argentine Central Bank" recorded an average
balance that was Ps. 915.1 million greater than the Ps. 7,147.6 million of
fiscal year 2002 and an average cost of 5.87%, 2,544 basis points lower than the
31.31% interest rate for fiscal year 2002. The increase in the average balance
mainly reflects the addition of the supplemental advance from the Argentine
Central Bank to be granted to the Bank for the purchase of the Hedge Bond
corresponding to pesified assets of foreign branches and subsidiaries under the
provisions of Decree No. 2167/02. See Item 4. "Information on the Company
-- Main Regulatory Changes in 2002, 2003 and 2004 -- Compensation to Financial
Institutions -- For the Asymmetric Pesification and its Consequences."
During fiscal year 2003, the average amount of outstanding financial
assistance owed by the Bank to the Argentine Central Bank, excluding borrowings
from the Argentine Central Bank used to repay debt with the Banking Liquidity
Fund, was Ps. 4,786.1 million compared with Ps. 4,878.5 million for fiscal year
2002. The higher amount recorded for fiscal year 2002 reflects the adjustment
for inflation of 2002 amounts through February 28, 2003. The average cost of
this financial assistance was 5.83% for fiscal year 2003 compared to 28.25% for
fiscal year 2002. The Bank obtained approval for the voluntary restructuring of
the financial assistance owed to the Argentine Central Bank in accordance with
the terms of Decrees No. 739/03 and No. 1262/03. Therefore, on April 30, 2003,
this financial assistance began to accrue the CER adjustment plus a 3.5% annual
interest rate. Prior to that date, this financial assistance was a peso-
denominated unadjusted liability accruing interest at a rate equivalent to 80.0%
of the monthly average interest rate on 30-day Lebac or the minimum term Lebac
auctioned on the market.
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The borrowings from the Argentine Central Bank to repay debt with the
Banking Liquidity Fund amounted in average to Ps. 807.2 million in fiscal year
2003 compared with Ps. 484.3 million in fiscal year 2002. This debt is adjusted
by the CER and accrues at a 3.5% annual interest rate. The advance to be granted
by the Argentine Central Bank for the purchase of the Hedge Bond is adjusted by
the CER and accrues at a 2.0% annual interest rate. The average balance of this
liability was Ps. 2,472.0 million in fiscal year 2003 and Ps. 2,008.8 million in
fiscal year 2002. This increase was due to the addition of the advance to be
granted by the Argentine Central Bank for the purchase of the Hedge Bond
corresponding to pesified assets of foreign branches and subsidiaries during the
second half of 2002.
During fiscal year 2003, debt with other financial institutions recorded
an average balance of Ps. 2,074.4 million, 25.3% lower than the Ps. 2,778.7
million for fiscal year 2002. The average cost was 9.20% for fiscal year 2003,
36 basis points higher than the 8.85% for fiscal year 2002. The decrease in the
average balance was mainly attributable to the appreciation of the peso and the
increase in interest rate was mainly attributable to the increase in the cost of
credit lines denominated in pesos.
The decrease in the average balance of the item "Other Interest-Bearing
Liabilities" between fiscal year 2003 and the previous period is mainly
attributable to the repayment of repurchase agreements entered into with the
Argentine Central Bank and the repayment of a loan from the Banking Liquidity
Fund during 2002 with the proceeds of borrowings from the Argentine Central
Bank. In addition, the item "Other Interest-Bearing Liabilities" included the
average balances of loans granted to the Bank by Sedesa and the FFRE (formerly
FFAEFyS), both dollar-denominated and amounting, on average, to Ps. 190.5
million and Ps. 90.6 million, respectively, in fiscal year 2003, compared with
Ps. 158.2 million and Ps. 79.7 million, respectively, in fiscal year 2002.
Financial expenses for fiscal year 2003 include a Ps. 169.1 million loss
for foreign-exchange quotation differences mainly reflecting the revaluation of
the Bank's foreign currency net position for the decrease in the exchange rate
from Ps. 3.36 as of December 31, 2002, to Ps. 2.93 as of December 31, 2003. This
loss was partially offset by a Ps. 57.9 million gain from foreign exchange
brokerage transactions.
NET FINANCIAL INCOME
Net financial income for fiscal year 2004 was Ps. 224.2 million and the
financial margin was 1.08%. For fiscal year 2003 net financial income was Ps.
147.3 million, and the net financial margin was 0.71%. In fiscal year 2002, net
financial income was Ps. 1,196.9 million and the net financial margin was 4.44%.
Net financial income increased in 2004 as compared with 2003 due to the
decrease in net financial expenses, which was mainly due to the lower cost of
deposits, which accompanied the trend in the Argentine market, and to the lower
cost of the Bank's foreign debt which includes the Ps. 119.7 million gain from
the restructuring completed in May 2004.
As a consequence of the measures implemented during the 2001-2002 crisis
regarding the asymmetric pesification of the financial system's assets and
liabilities and the compensation of its effects, the Bank has a net position in
peso-denominated assets adjusted by CER and a net position in assets denominated
in foreign currency, and a net position in non-adjusted-peso-denominated
liabilities. Net financial income for 2004 and 2003 was influenced by the
results from the matched portfolios in these currencies and by the funding of
the mismatches in assets adjusted by CER and assets denominated in foreign
currency with non-adjusted-peso-denominated liabilities.
In terms of currencies, in 2004, our net financial income (before the
losses from the valuation of public-sector assets in accordance with Argentine
Central Bank regulations and before the gain from the restructuring of the
Bank's foreign debt), mainly reflects the gains generated by the matched
portfolios denominated in pesos and in pesos adjusted by CER. The
dollar-denominated matched portfolio recorded a loss due to the fact that the
Compensatory and Hedge Bonds, which represent most of the Bank's
dollar-denominated assets, accrue the LIBO rate. Therefore, the yield on
interest-earning assets denominated in foreign-currency was lower than the cost
of liabilities denominated in foreign currency. Also, the funding with
non-adjusted peso-denominated liabilities of the net position in assets adjusted
by CER recorded a profit, while that of the net position in dollar-denominated
assets showed a break-even situation.
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Also, in fiscal year 2003, the appreciation of the peso from Ps. 3.36 per
US$ 1.00 as of December 31, 2002, to Ps. 2.93 per US$ 1.00 as of December 31,
2003, resulted in a significant loss given the Bank's net asset position in
foreign currency. However, the loss derived from the net position of the Bank in
CER-adjusted assets was significantly reduced in the second quarter of fiscal
year 2003 by the restructuring of the Bank's debt with the Argentine Central
Bank for liquidity support into long-term CER-adjusted liabilities.
In addition, in 2004 and in 2003, accrual by the Compensatory and the
Hedge Bonds, which represent most of our dollar-denominated assets, at LIBOR,
caused the yield of interest-earning foreign currency assets to be lower than
the cost of interest-bearing foreign currency liabilities.
In 2002, our net financial income mainly resulted from the gain generated
by the revaluation of our net asset position in foreign currency from Ps. 1.00
per U.S. dollar as of December 31, 2001, to Ps. 3.36 per U.S. dollar as of
December 31, 2002, partially offset by the losses generated by the mismatches
between assets and liabilities denominated in pesos (net liability position) and
between assets and liabilities adjusted by the CER (net asset position) and by
the negative net yield of the matched positions, particularly in foreign
currency.
PROVISION FOR LOSSES ON LOANS AND OTHER RECEIVABLES
Fiscal Year 2004 Compared to Fiscal Year 2003
The provision for losses on loans and other receivables for fiscal year
2004 amounted to Ps. 190.2 million, 33.6% lower than the Ps. 286.4 million
recorded in fiscal year 2003, thus reflecting an improvement in the quality of
the Bank's loan portfolio. This improvement evidences the favorable developments
in the Argentine economy in the last two years, the achievement of significant
restructurings of the Bank's commercial portfolio and the significant
charge-offs against allowances for loan losses.
As of December 31, 2004, the Bank's non-accrual portfolio represented
7.74% while it represented 15.04% of its total loan portfolio as of the same
date of the previous year. Considering loans to the private sector only, the
Bank's non-accrual portfolio as of December 31, 2004, was 16.02% of such
portfolio, compared to 31.19% as of December 31, 2003.
The coverage of the non-accrual loan portfolio with allowances reached
90.51% and the loan loss allowances as a percentage of total loans (excluding
interbank loans) amounted to 7.33% as of December 31, 2004. As of December 31,
2003, these ratios were 90.61% and 13.91%, respectively.
Fiscal Year 2003 Compared to Fiscal Year 2002
The provision for losses on loans and other receivables for fiscal year
2003 was substantially lower than that recorded in fiscal year 2002, amounting
to Ps. 286.4 million in fiscal year 2003 compared with Ps. 1,648.6 million for
fiscal year 2002.
During 2003, the Bank's ratio of non-accrual loans to total loans
increased to 15.04% of the Bank's total loan portfolio from 13.08% as of
December 31, 2002. This increase was mainly due to the reclassification of Bogar
(recorded as loans in 2002) as government securities in 2003. If this
reclassification is not considered, that is, if the Bogar are considered as
loans, the Bank's ratio of non-accrual loans to total loans decreases to 9.86%
as of December 31, 2003. The actual improvement in the Bank's loan portfolio
quality is also evidenced by the decrease in the ratio of non-accrual loans to
total loans calculated considering only loans to the private sector. The Bank's
non-accrual private-sector loan portfolio as of December 31, 2003, was 31.19% of
the Bank's total private-sector loan portfolio, compared to 35.47% as of
December 31, 2002.
The improvement in loan portfolio quality reflects the recovery of the
Argentine economy during 2003 and the progress made during the year in
restructuring the Bank's commercial loan portfolio.
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Due to the establishment of significant loan loss allowances, mainly
during 2002, the coverage of the non-accrual loan portfolio, with allowances,
reached 90.61% and the loan loss allowances as a percentage of total loans
(excluding interbank loans) amounted to 13.91% as of December 31, 2003. If the
abovementioned reclassification of the Bogar from loans to government securities
is not taken into account, this ratio would have been 9.68%. As of December 31,
2002, these ratios were 104.45% and 13.84%, respectively.
NET INCOME FROM SERVICES
Our net income from services consisted of:
GRUPO GALICIA
-------------------------------------
FISCAL YEAR ENDED
-------------------------------------
DECEMBER 31,
-------------------------------------
2004 2003 2002
--------- --------- ---------------
(in millions
of February
(in millions of 28, 2003,
pesos) constant pesos)
Income from
Credit cards............................................................ Ps. 315.1 Ps. 260.9 Ps. 281.5
Deposits accounts....................................................... 80.3 66.6 91.9
Credit-related fees..................................................... 21.6 12.9 30.1
Check collection........................................................ 10.1 7.5 10.3
Collection services (taxes and utility bills) .......................... 8.3 6.6 7.0
Foreign trade........................................................... 19.9 13.6 14.1
Insurance............................................................... 27.3 22.0 32.8
Other (1)............................................................... 46.5 41.7 48.4
--------- --------- ---------------
TOTAL INCOME.............................................................. Ps. 529.1 Ps. 431.8 Ps. 516.1
TOTAL EXPENSES............................................................ Ps. 92.8 Ps. 70.4 Ps. 140.7
--------- --------- ---------------
NET INCOME FROM SERVICES.................................................. Ps. 436.3 Ps. 361.4 Ps. 375.4
--------- --------- ---------------
--------------------
(1) Includes fees from market making in government securities, investment
banking activities, asset management, safe deposit boxes and cash
management.
-122-
Fiscal Year 2004 Compared to Fiscal Year 2003
Net income from services amounted to Ps. 436.3 million for fiscal year
2004, 20.7% higher than the Ps. 361.4 million recorded in the previous fiscal
year. All categories grew, mainly as a consequence of a significant increase in
the volume of transactions together with an increase, in the third quarter of
2004, in the price of certain services.
Income from credit and debit cards of Ps. 315.1 million contains Ps. 203.3
million of income from the regional credit-card companies. These companies
managed 1,510.8 thousand cards as of December 31, 2004, a 28.1% increase from
December 31, 2003. Income from services of the regional credit-card companies
increased 16.8% from the previous fiscal year, due to the increase in the
average number of cards managed and to the fact that the use of these cards
increased significantly in fiscal year 2004.
The Bank's income from credit and debit card operations not related to the
regional credit-card companies was Ps. 111.8 million. The number of cards
managed by the Bank (excluding those managed by the regional credit-card
companies) increased 42.2%, reaching 718.3 thousand as of December 31, 2004,
compared to 505.1 thousand as of December 31, 2003. Income from services of the
Bank's credit and debit card operations (excluding those managed by the regional
credit-card companies) increased 28.8%, from Ps. 86.8 million to Ps. 111.8
million. This higher income was attributable to both the higher number of credit
cards and the higher average use of such cards shown during the year.
The Bank's total deposit accounts amounted to 1,000.8 thousand as of
December 31, 2004, 4.8% higher than as of December 31, 2003.
Reflecting the higher credit activity, the increase in the volume of
deposits and the higher sales of products and the increase in the price of
certain services during the last quarter, significant growth was achieved in
income from services from the following items : financial fees (67.4%), foreign
trade (46.3%), collection (34.7%), utility bills collection services (25.8%),
insurance (24.1%) and deposit accounts (20.6%).
Expenses from services increased 31.8%, from Ps. 70.4 million in fiscal
year 2003 to Ps. 92.8 million.
Fiscal Year 2003 Compared to Fiscal Year 2002
Net income from services amounted to Ps. 361.4 million in the 12 months of
fiscal year 2003, 3.7% lower than the Ps. 375.4 million recorded in fiscal year
2002. This decrease mainly reflects service prices increasing over fiscal year
2003 by less than the WPI that affected fiscal year 2002.
Fiscal year 2003 income from credit cards of Ps. 260.9 million included
Ps. 174.1 million of income from the regional credit card companies. Income from
regional credit card operations for fiscal year 2003 increased 8.9% from Ps.
159.9 million for fiscal year 2002 due to a 6.5% increase in the average number
of cards managed in 2003 to 1,173.7 thousand from 1,101.7 thousand in 2002 and
due to significantly greater card usage in 2003. As of December 31, 2003, these
companies managed 1,179.2 thousand cards.
Income from credit card operations not related to the regional credit card
companies was Ps. 86.8 million. The number of cards administered by the Bank
(excluding those administered by the regional credit card companies) amounted to
505.1 thousand as of December 31, 2003, compared to 498.6 thousand as of
December 31, 2002. However, income from the Bank's credit card operations not
related to the regional credit cards companies for fiscal year 2003 decreased
28.6% from the Ps. 121.6 million recorded in fiscal year 2002. This decrease was
mainly attributable to the restatement of the 2002 figures for inflation, as in
nominal terms the credit card income of the Bank not related to the regional
credit card companies decreased only slightly. The decrease in nominal terms was
due to a 13.9% decrease in the average number of credit cards managed (from
585.3 thousand in 2002 to 503.7 thousand in 2003). This decline was partially
compensated by an increase in the use of such cards. The improved performance of
the credit card business of the regional companies in 2003 relative to that of
the Bank is attributable
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to an improvement in the competitive and economic conditions prevailing in the
regions of Argentina in which the regional companies operate.
The following table sets forth the number of credit cards outstanding on
the dates indicated:
% CHANGE
--------------------
DECEMBER 31, DECEMBER 31,
----------------------- --------------------
CREDIT CARDS (1) 2004 2003 2002 2004/2003 2003/2002
---------- ----------- ----------- --------- ---------
VISA......................................... 553,316 411,367 423,397 34.51% (2.84)%
"Gold".................................... 85,861 66,303 59,547 29.50 11.35
International............................. 302,115 218,041 231,374 38.56 (5.76)
Domestic.................................. 163,300 125,832 130,081 29.78 (3.27)
"Business"................................ 2,040 1,191 2,395 71.28 (50.27)
AMERICAN EXPRESS............................. 161,799 89,294 67,254 81.20% 32.77%
"Gold".................................... 47,829 34,508 25,014 38.60 37.95
International............................. 113,970 54,786 42,240 108.03 29.70
MASTERCARD................................... 3,231 4,420 7,971 (26.90)% (44.55)%
"Gold".................................... 474 682 1,257 (30.50) (45.74)
MasterCard................................ 2,704 3,738 6,714 (27.66) (44.33)
Argencard................................. 53 0 0 100.00 0.00
REGIONAL CREDIT CARD COMPANIES (2)........... 1,510,804 1,179,192 1,097,838 28.12% 7.41%
Visa....................................... 394,619 368,088 426,075 7.21 (13.61)
Local Brands............................... 1,116,185 811,104 671,763 37.61 20.74
---------- ----------- ----------- ------- -------
TOTAL ....................................... 2,229,150 1,684,273 1,596,460 32.35% 5.50%
AMOUNT OF PURCHASES(3)....................... Ps.3,720.1 Ps. 2,925.7 Ps. 2,423.7 27.15 20.71
---------- ----------- ----------- ------- -------
----------------
(1) Issued by Banco Galicia and subsidiaries.
(2) Tarjeta Naranja, Tarjeta Comfiar, Tarjetas Cuyanas and Tarjetas del Mar.
Tarjeta Naranja and Tarjeta Comfiar merged on November 2003.
(3) In millions of pesos of fiscal years 2003 and 2004. In millions of February
28, 2003, constant pesos, for fiscal year 2002.
The Bank's total deposit accounts amounted to 943.3 thousand as of
December 31, 2003, 9.1% lower than that as of December 31, 2002.
The decrease in credit-related fees was mainly due to the decrease in the
volume of loan operations during all of 2002 and 2003 and to the effect of the
WPI in fiscal year 2002. Expenses from services were affected in fiscal year
2002 by a nonrecurring US$ 10.0 million charge in connection with the Bank's
prepayment of certain structured-note transactions.
MONETARY LOSS FROM FINANCIAL INTERMEDIATION
No monetary loss was recorded in fiscal year 2004, as the adjustment of
financial statements for inflation was not applicable in 2004.
The monetary loss from financial intermediation amounted to Ps. 14.2
million in fiscal year 2003 compared to Ps. 1,437.7 million in fiscal year 2002.
This decrease was the result of a lower increase in the WPI in fiscal year 2003
(2.03%), as compared with fiscal year 2002 (118.4%). In addition, it was the
result of the fact that financial statements for fiscal year 2003 were adjusted
for inflation from January 1, 2003, through February 28, 2003, only. Therefore,
in addition to reflecting the substantial decrease in inflation between both
periods, monetary loss from financial intermediation for year 2003 included only
two months of adjustment.
The monetary loss from financial intermediation represents the net effect
of inflation on financial income and expenses, income and expenses from services
and loan loss provisions. Monetary loss from financial intermediation plus the
monetary effect on administrative expenses and on other income and expenses,
represents the loss caused by the exposure of the Bank's liquid shareholders'
equity (shareholders' equity less fixed assets and equity investments) to
inflation, measured by the variation of the WPI.
-124-
No monetary loss was recorded prior to 2002, as the adjustment for
inflation was not applicable at that time.
ADMINISTRATIVE EXPENSES
The following table sets forth components of our administrative expenses:
GRUPO GALICIA
---------------------------------------
FISCAL YEAR ENDED
---------------------------------------
DECEMBER 31,
---------------------------------------
2004 2003 2002
---------- ---------- ---------------
(in millions of
February 28,
2003, constant
(in millions of pesos) pesos)
Salaries and social security contributions .......................... Ps. 242.0 Ps. 198.3 Ps. 435.3
Property-related expenses ........................................... 55.6 70.1 100.0
Personnel services .................................................. 27.0 15.7 23.6
Advertising and publicity ........................................... 37.8 20.0 15.3
Amount accrued in relation to directors' and syndics' compensation... 4.1 1.9 3.2
Electricity and communications ...................................... 27.0 27.2 42.5
Taxes ............................................................... 40.9 29.8 57.8
Other ............................................................... 189.5 200.4 269.8
---------- ---------- ---------------
TOTAL ............................................................... Ps. 623.9 Ps. 563.4 Ps. 947.5
---------- ---------- ---------------
Fiscal Year 2004 Compared to Fiscal Year 2003
Administrative expenses amounted to Ps. 623.9 million, 10.7% higher than
the Ps. 563.4 million recorded in the previous fiscal year. Personnel expenses
and expenses due to personnel services, increased 25.7% in aggregate, from Ps.
214.0 million in fiscal year 2003 to Ps. 269.0 million in fiscal year 2004. This
increase was mainly due to higher salaries, which included a one-time payment at
the end of the year.
The Bank's staff, including its consolidated subsidiaries' personnel, grew
5.9%, from 5,859 to 6,205 employees, as a consequence of the higher overall
level of activity.
The remaining administrative expenses totaling Ps. 354.9 million in fiscal
year 2004, were 1.6% higher than the Ps. 349.4 million recorded the previous
fiscal year. The decrease in expenses related to property-related expenses (Ps.
14.5 million) and in other expenses (Ps. 10.9 million) were more than
compensated by the increases in expenses related to advertising and publicity
(Ps. 17.8 million), taxes (Ps. 11.1 million) and payments to directors and
syndics (Ps. 2.2 million). The taxes charge includes the provision for the
personal assets tax of the Group's shareholders of fiscal years 2002, 2003 and
2004, which is paid by Grupo Galicia in accordance with the resolution of our
shareholders meeting held on April 22, 2004.
Fiscal Year 2003 Compared to Fiscal Year 2002
Administrative expenses amounted to Ps. 563.4 million in fiscal year 2003,
40.5% lower than the Ps. 947.5 million recorded in fiscal year 2002.
This decrease shows the full impact of the significant efforts made by the
Bank during 2002 to streamline its operational structure and reduce its
administrative expenses within the framework of the Galicia capitalization and
liquidity plan. This process was mainly concentrated in the second half of
fiscal year 2002. Between December 31, 2001, and December 31, 2003, the number
of branches in the Bank's branch network declined by 62, 61 of which were closed
in fiscal year 2002. The "Galicia Ahora" service centers were closed and their
activity was consolidated into the branch network mainly during the second
quarter of 2002.
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In addition, the Bank's staff, excluding staff of subsidiaries, decreased
by 226 employees between December 31, 2002 and 2003, a 5.6% decrease from the
December 31, 2002, level. In fiscal year 2002, the Bank's staff, excluding staff
of subsidiaries, decreased by 1,804 employees through voluntary retirement
plans. Consolidated subsidiaries' staff increased by 24 employees, or 1.2%,
during fiscal year 2003. Moreover, during 2002, the Bank renegotiated all of its
leases and supply contracts. Expenses related to salaries and social security
contributions totaled Ps. 198.3 million in fiscal year 2003, 54.4% lower than in
the previous period. This decrease was due to the decrease in staff.
The remaining administrative expenses totaled Ps. 365.1 million in fiscal
year 2003, 28.7% lower than the Ps. 512.2 million of the prior fiscal year. All
components of the remaining administrative expenses showed a decrease as a
consequence of the cost-reduction initiatives implemented by the Bank, except
for advertising and publicity, which increased by 30.7%.
INCOME/(LOSS) FROM EQUITY INVESTMENTS
In fiscal year 2004, we recorded Ps. 3.0 million in income from equity
investments, as compared to the Ps. 22.6 million loss recorded in fiscal year
2003. The fiscal year profit was mainly due to the Ps. 1.9 million profit from
our interest in Banelco S.A.
In fiscal year 2003, we recorded a Ps. 22.6 million loss from equity
investments as compared to a loss of Ps. 52.0 million recorded in fiscal year
2002. The loss in fiscal year 2003 was mainly due to losses recorded by Aguas
Argentinas S.A. (Ps. 8.8 million), Tradecom International (Ps. 6.5 million),
Camino de las Sierras S.A. (Ps. 2.3 million) and Aguas Cordobesas S.A. (Ps. 0.9
million).
In fiscal year 2002, we recorded a loss from equity investments of Ps.
52.0 million. This loss was mainly due to losses recorded by Aguas Argentinas
(Ps. 25.5 million), Aguas Provinciales de Santa Fe S.A. (Ps. 17.5 million) and
Aguas Cordobesas (Ps. 6.9 million).
MISCELLANEOUS INCOME (LOSS), NET
Miscellaneous net income for fiscal year 2004 amounted to Ps. 98.8
million, 41.5% lower than the Ps. 168.9 million recorded in the previous year.
The amount recorded in fiscal year 2004 was mainly due to the net reversal of
allowances, mainly for loan losses, in the amount of Ps. 123.6 million, and to
loan recoveries for Ps. 110.1 million. The latter amount includes Ps. 56.8
million from the sale of part of the Bank's loan portfolio recorded off-balance
sheet. These gains were partially offset by the loss from the amortization of
amparo claims in the amount of Ps. 121.0 million.
During fiscal year 2003, miscellaneous income, net (excluding the
associated monetary loss), amounted to Ps. 168.9 million compared to a Ps. 429.4
million loss in fiscal year 2002. The gain recorded in fiscal year 2003 was
mainly due to a net reversal of allowances, mainly for loan losses, in the
amount of Ps. 185.4 million and to loan recoveries for Ps. 40 million. This
income was partially offset by the application of the provisions of Argentine
Central Bank Communique "A" 3916, which established that the deferred loss
associated with amparo claims had to be amortized beginning in April 2003, in 60
monthly consecutive installments. This amortization totaled Ps. 77.9 million for
the period from April 2003 to December 2003.
In fiscal year 2002, the loss was mainly the result of the establishment
of allowances for contingencies related to the Bank's interests in non-financial
companies, the amortization of certain goodwill and the coverage of all
estimated restructuring expenses.
LOSS ABSORPTION
Argentine Central Bank Communique "A" 3800 offered financial institutions
the option to absorb losses recorded during fiscal year 2002 with and up to
amounts recorded under the shareholders' equity accounts "Retained Earnings" and
"Unrealized Valuation Difference," subject to the approval by their boards of
directors and share-
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holders. The annual meeting of the Bank's shareholders, held on April 30, 2003,
approved the absorption by the Bank of the amounts mentioned in the paragraph
below.
Under "Absorption subject to the approval of the shareholders' meeting,"
Ps. 1,370.0 million are shown, equivalent to 93.59% of Banco Galicia's gain from
the revaluation of its net asset foreign currency position as of December 31,
2001, from Ps. 1.0 to Ps. 1.4 per US$ 1.0. This gain amounted to Ps. 1,463.9
million and was recorded by the Bank under the shareholders' equity account
"Unrealized Valuation Difference" in accordance with Argentine Central Bank
Communique "A" 3703. This amount, together with Ps. 353.7 million in retained
earnings, was used by the Bank to absorb losses for the same amount.
We absorbed losses for Ps. 1,370.0 million recorded as "Unrealized
Valuation Difference" since we did not have retained earnings.
INCOME TAX
In fiscal year 2004, a charge of Ps. 43.8 million was recorded on account
of income tax, from which Ps. 29.6 million corresponded to Tarjetas Regionales
S.A consolidated with its operating subsidiaries, Ps. 12.9 million corresponded
to Grupo Galicia on non-consolidated basis, Ps. 0.6 million to Sudamericana
Holding S.A., Ps. 0.5 million to Galicia Warrants, and Ps. 0.2 million to
Galicia Valores S.A.
In fiscal year 2003, income tax expense amounted to Ps. 0.6 million.
In fiscal year 2002, income tax expense amounted to Ps. 66.4 million. This
expense is mainly due to Grupo Galicia on a non-consolidated basis beginning to
apply the deferred tax method in 2002. This implied the recognition of a
deferred liability of Ps. 54.2 million and an income tax expense for the same
amount. The tax provision of Grupo Galicia on a non-consolidated basis was Ps. 5
million while the remaining income tax expense was mainly due to the charges
recorded by Galicia Factoring y Leasing S.A. (Ps. 1.8 million) and Galicia
Valores S.A. (Ps. 3.4 million).
During fiscal year 2002, the variation in our shareholders' equity was Ps.
1,502.7 million, while the reported net loss was Ps. 1,509.3 million. The Ps.
6.6 million difference is due to the fact that we began to apply the deferred
tax method in 2002, which implied the recognition of an adjustment to the
previous fiscal year's results for the same amount.
U.S. GAAP AND ARGENTINE BANKING GAAP RECONCILIATION
GENERAL
We prepare our financial statements in accordance with Argentine Banking
GAAP. The more significant differences between Argentine Banking GAAP and U.S.
GAAP relate to the determination of the allowance for loan losses, the carrying
value of certain government securities and receivables for government
securities, the accounting of the Bank's external debt restructuring and
recognition of deferred income taxes. For more detail on differences in
accounting treatment between Argentine Banking GAAP and U.S. GAAP through
December 31, 2004, see note 41 to our consolidated financial statements.
The differences mentioned above do not include the reversal of the
adjustments to the financial statements for the effects of inflation required
under Argentine Banking GAAP, which were applicable mostly during 2002, as the
application of inflation accounting represents a comprehensive measure of the
effects of price-level changes in the Argentine economy and, as such, is
considered a more meaningful presentation than historical-based financial
reporting for U.S. GAAP purposes.
ALLOWANCES FOR LOAN LOSSES
With respect to the determination of the allowance for loan losses, Banco
Galicia follows the rules of the Argentine Central Bank. Under these rules,
reserves are based on minimum reserve requirements established by the
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Argentine Central Bank. U.S. GAAP requires that an impaired loan be generally
valued at the present value of expected future cash flows discounted at the
loan's effective rate or at the fair value of the collateral if the loan is
collateral dependent.
For the purposes of analyzing its loan loss reserve under U.S. GAAP, Banco
Galicia divides its loan portfolio into performing and nonperforming commercial
and consumer loans.
Performing Commercial and Consumer Loans
Performing loans are considered to be loans that are classified under the
Argentine Central Bank classification guidelines as:
- "Normal" and "Normal Performance"
- "Potential Risk" and "Improper Fulfillment"
Banco Galicia performs analyses of historical losses from its performing
commercial and consumer loan portfolios in order to estimate losses for U.S.
GAAP purposes resulting from loan losses that had been incurred in the
performing loan portfolio at the balance sheet date but which had not been
individually identified.
Banco Galicia estimates that, on average, it takes a period of up to one
year between the trigger of an impairment event and the identification of a loan
as being a probable loss. Therefore, Banco Galicia has concluded that the losses
incurred by the performing loan portfolio over the next year give a basis for
estimating the amount of loss at the balance sheet date. The Bank has collected
data on the amounts of losses that had been incurred on commercial loans and
consumer loans that were performing one year before. Using this data, the range
of estimated default probabilities and estimated losses given default yield the
following estimated SFAS 5 reserve for the performing commercial and consumer
loan portfolio:
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ----------------- -----------------
HIGH LOW HIGH LOW HIGH LOW
----- ----- ----- ---- ----- -----
(in millions of
February 28, 2003
(in millions of pesos) constant pesos)
Performing Commercial Loans..... 159.7 1.7 215.2 24.4 242.9 19.1
Performing Consumer Loans....... 15.4 11.1 23.2 20.0 111.3 102.4
Nonperforming Consumer Loan Portfolio
The nonperforming consumer loan portfolio is comprised of loans falling
into the following classifications of the Argentine Central Bank:
- "Defective Fulfillment"
- "Difficulty in Recovery"
- "Uncollectible"
For these loans, Banco Galicia has developed a range of loss projections
based on the default experience of nonperforming loans. Based on this data,
Banco Galicia has calculated a range of estimated loan losses for nonperforming
consumer loans:
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ----------------- ------------------
HIGH LOW HIGH LOW HIGH LOW
------- -------- ------- -------- -------- --------
(in millions of
February 28, 2003
(in millions of pesos) constant pesos)
Non-Performing Consumer Loans... Ps.45.3 Ps. 37.0 Ps.84.6 Ps. 74.4 Ps.248.7 Ps.228.4
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Nonperforming Commercial Loans
The nonperforming commercial loan portfolio is comprised of loans falling
into the following classifications of the Argentine Central Bank:
- "With Problems"
- "High Risk of Insolvency"
- "Uncollectible"
For such nonperforming commercial loans, Banco Galicia applied the
procedures required by SFAS 114.
For loans that were not collateral dependent, the expected future cash
flows to be received from the loans were discounted using the interest rate at
each balance sheet date for variable loans. Loans that were collateral
dependent, and for which there was an expectation that the loan balance would be
recovered via the exercise of collateral, were valued using the fair value of
the collateral. In addition, in order to assess the fair value of collateral,
Banco Galicia has discounted collateral valuations due to the extended period of
time that it can take to foreclose on assets in Argentina.
Summary
The following table identifies the high and low of loan loss reserves for
the periods indicated.
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------- ------------------------ ------------------------
HIGH LOW HIGH LOW HIGH LOW
--------- --------- ----------- ----------- ----------- -----------
(in millions of
February 28, 2003
(in millions of pesos) constant pesos)
Performing Commercial Loans ........... Ps. 159.7 Ps. 1.7 Ps. 215.2 Ps. 24.4 Ps. 242.9 Ps. 19.1
Performing Consumer Loans ............. 15.4 11.1 23.2 20.0 111.3 102.4
Non-Performing Consumer Loans ......... 45.3 37.0 84.6 74.4 248.7 228.4
Non-Performing Commercial Loans ....... 379.5 379.5 953.7 953.7 1,031.5 1,031.5
--------- --------- ----------- ----------- ----------- -----------
TOTAL ................................. Ps. 599.9 Ps. 429.3 Ps. 1,276.7 Ps. 1,072.5 Ps. 1,634.4 Ps. 1,381.4
--------- --------- ----------- ----------- ----------- -----------
LOAN LOSS RESERVE UNDER U.S. GAAP...... Ps. 592.3 Ps. 1,117.2 Ps. 1,634.0
==================== ======================== ========================
As of December 31, 2002, Banco Galicia expected that the loan loss reserve
under U.S. GAAP would fall more toward the high end of the range due to the
significant uncertainties associated with the Argentine economic crisis. The
reserve under U.S. GAAP would be in that range due to the recording of
substantial losses caused by the situation in Argentina in 2002, partially
offset by the decrease of the loan loss reserve of the impaired loans under SFAS
114 due to the effect of inflation. As of December 31, 2003, and December 31,
2004, Banco Galicia expected that the loan loss reserve under U.S. GAAP would
fall more toward to the midpoint and to the high end of the range, respectively,
due to the continuing clean up of its loan portfolio through charge-offs.
In addition to assessing the reasonableness of the loan loss reserve as
described above, Banco Galicia makes an overall determination of adequacy of
each period's reserve based on such ratios as:
- Loan loss reserves as a percentage of non-accrual loans
- Loan loss reserves as a percentage of total amounts past due
- Loan loss reserves as a percentage of past-due unsecured
amounts.
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DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ----------------- -----------------
Loan loss reserves as a percentage of non-accrual loans ............ 84.75% 85.98% 101.48%
Loan loss reserves as a percentage of total amounts past due ....... 131.09 110.50 133.65
Loan loss reserves as a percentage of past-due unsecured amounts.... 454.17 310.59 271.97
CARRYING VALUE OF SECURED LOANS, CERTAIN GOVERNMENT SECURITIES AND RECEIVABLES
FOR GOVERNMENT SECURITIES
Under Argentine Banking GAAP, our holdings of secured loans, Bogar, Boden
2012 corresponding to the Compensatory Bond received or receivable by the Bank
and the External Notes are carried in accordance with Argentine Central Bank
valuation rules for public-sector assets, as explained hereunder in Item 4.
"Information on the Company -- Selected Financial Information -- Government and
Corporate Securities -- Valuation," " -- Critical Accounting Policies -- Secured
Loans" and " -- Critical Accounting Policies -- Government Securities and Other
Accounts Receivable with the Government."
Under U.S. GAAP, all of these assets are carried at fair value due to
several reasons as fully explained in note 41 to our financial statements and "
-- U.S. GAAP - Critical Accounting Policies."
Government securities that are included under investment accounts under
Argentine Central Bank rules (Boden 2012 corresponding to the Compensatory Bond)
as well as Bogar and External Notes, which are classified as unlisted government
securities, are considered as available for sale under U.S. GAAP. Unrealized
gains or losses on these securities are reflected in "Other Comprehensive
Income." Declined value of these securities other than temporary are reflected
in the income statement.
In connection with the Bank's right (but not its obligation) to purchase
the Hedge Bond, under Argentine Banking GAAP, the Bank has recognized the right
to purchase the corresponding Boden 2012 at its equivalent value as if the Bank
had the associated bond in its possession, and recognized the associated
liability to fund the Hedge Bond as if the Bank had executed the debt agreement
with the Argentine Central Bank. The receivable is denominated in U.S. dollars
and bears interest at Libor, while the liability to the Argentine Central Bank
is denominated in pesos and accrues interest at CER plus 2.0%, each retroactive
to February 3, 2002.
Under U.S. GAAP, the right to purchase the Hedge Bond is not considered an
asset under Financial Accounting Standards Board Statement of Financial
Accounting Concepts No. 6, Elements of Financial Statements. Under this concepts
statement, assets are defined as "... probable future economic benefits obtained
or controlled by an entity as a result of past transactions or events." In
addition, one of the three essential characteristics of an asset is that an
entity can obtain the benefit and can control others' access to it. As of
December 31, 2004, December 31, 2003, and December 31, 2002, the Bank could not
obtain the benefit of the Hedge Bond until the transaction is approved by the
Argentine Central Bank and the Bank remits funds to the Argentine Central Bank.
Similarly, the liability under U.S. GAAP will be recognized when the Bank
actually enters into the relevant financing arrangement.
In addition, as of December 31, 2004 and 2003, under Argentine Banking
GAAP, the Bank had recorded under "Intangible Assets" the difference arising
from the reimbursement of restructured deposits at the market exchange rate
pursuant to amparo claims and the carrying value of these restructured deposits.
Such difference was recorded under "Other Receivables from Financial Brokerage"
as of December 31, 2002. The receivable for differences related to amparo claims
does not represent an asset under U.S. GAAP.
ADJUSTMENT TO PRIOR YEAR RESULTS
As fully described in note 38 to our financial statements, under Argentine
Banking GAAP, in accordance with Argentine Central Bank rules, we recorded
adjustments to prior year results as contra equity adjustments. Under U.S. GAAP,
APB 20 generally prohibits retroactive restatement of prior year financial
statements to reflect accounting changes. As a result, we recorded through our
year results the amounts reflected as restatement on our prior year results.
FOREIGN DEBT RESTRUCTURING
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As fully described in note 1 "Foreign Debt Restructuring" to our financial
statements, on May 18, 2004, we completed the restructuring of our foreign debt.
As a result of this restructuring, we recorded a Ps. 119.7 million net gain
under Argentine Banking GAAP.
For U.S. GAAP purposes, we accounted the restructuring in two steps. The
first step of the debt restructuring required the holders of our debt to
exchange its old debt with us for new debt in two tranches. Pursuant to EITF
02-04, we did not receive any concession from the holders of the debt and
therefore, we did not consider the first step of our restructuring as a troubled
debt restructuring. Pursuant to EITF 96-19 we accounted the first step
restructuring as modification of the old debt and therefore we did not recognize
any gain or loss. The second step restructuring allowed the holders of our debt
to forgive us certain amount of debt based on different options that we offered
to exchange our debt. Pursuant to U.S. GAAP we accounted for this second step of
our restructuring in accordance with FAS 15, as the holders of our debt granted
us certain concessions. FAS 15 requires the comparison of the future cash
flows of our restructured debt and the carrying value of our debt at the
restructuring date.
We did not record any gain on our troubled debt restructuring since a gain
can only be recognized when the carrying value of our debt at the date of the
restructuring exceeds the total future cash payments of our restructured debt
reduced by the fair value of the assets and equity given by us as payment of the
debt. As a result, under U.S. GAAP, the carrying amount of our restructured debt
is greater than the amount recorded under Argentine Banking GAAP. Therefore,
under U.S. GAAP we calculated a new effective interest rate to reflect the
present value of the future cash payments of our restructured debt.
INCOME TAX
Argentine Central Bank regulations do not require the recognition of
deferred tax assets and liabilities and therefore income taxes are recognized on
the basis of amounts due in accordance with Argentine tax regulations. This
method was applied to Banco Galicia. However, the Group and the Group's non-bank
subsidiaries applied the deferred income tax method. AS a result the Group's
non-bank subsidiaries recognized a deferred tax.
For the purposes of U.S. GAAP reporting, the Group applies SFAS No. 109
"Accounting for Income Taxes." Under this method, income taxes are recognized
based on the liability method whereby deferred tax assets and liabilities are
established for temporary differences between the financial reporting and tax
bases of the Group's assets and liabilities. Deferred tax assets are recognized
if it is more likely than not that such assets will be realized.
SUMMARY
As a result of the above and other differences, net income and
shareholders' equity for Banco Galicia under Argentine Banking GAAP and U.S.
GAAP for the periods indicated were as follows:
NET INCOME (LOSS) SHAREHOLDERS' EQUITY (DEFICIT)
---------------------------- --------------------------------
ARGENTINE BANKING ARGENTINE BANKING
GAAP U.S. GAAP GAAP U.S. GAAP
----------------- --------- ----------------- -------------
(in millions of pesos)
Fiscal Year 2004 Ps. (109.9) Ps. (1.1) Ps. 1,519.5 Ps. (3,195.7)
Fiscal year 2003......... (222.2) Ps. 731.3 1,419.4 Ps. (4,453.3)
(in millions of February 28, 2003 constant pesos)
Fiscal year 2002......... (1,509.3) 422.5 1,600.8 (5,422.3)
The significant differences that result between net income under U.S. GAAP
and net income under Argentine Banking GAAP primarily reflect that under U.S.
GAAP:
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- significant losses were recognized in 2001 from the effects of
several Argentine government actions reflected at the end of
that year. With the improvement in the Argentine economy and
business environment, changes in estimated losses are
reflected in 2002, 2003 and 2004.
- the recording of the effects of the right to receive the Hedge
Bond are not recognized, the effect of which varies
significantly in 2002, 2003 and 2004.
- the amounts receivable for the Compensatory Bond are reflected
at market values with changes in values being recognized in
the income statement, the effect of which varies significantly
in 2002, 2003 and 2004.
- much of the Argentine public-sector debt balances reflect
market-value adjustments recognized from exchange
transactions. Accretion of the discount, considering the
amounts estimated to be collected, are recognized as income
after the exchange transaction occurs.
- the Bank's foreign debt restructuring completed in 2004 was
accounted as a troubled debt restructuring. Therefore the
carrying value of such debt is higher under U.S. GAAP.
- we recognized a loss on the External Notes tendered to the
exchange offered by the Argentine government to restructure
its foreign debt, to reflect the terms and conditions of such
restructuring.
RESULTS BY SEGMENTS
GENERAL
Banco Galicia is our most significant subsidiary. We also have an 87.5%
direct interest in Sudamericana Holding S.A. (in which Banco Galicia holds a
12.5% stake), an 87.5% direct participation in Net Investment S.A. (Banco
Galicia owns the remaining 12.5% stake) and an 87.5% direct interest in Galicia
Warrants S.A., where Banco Galicia holds the other 12.5%.
Grupo Galicia's main segments are:
- the "Grupo Galicia" segment showing Grupo Galicia's (on a
non-consolidated basis) specific income and expenses not
attributable to its investments in subsidiaries, except for goodwill
amortization;
- the "Insurance" segment, corresponding to Sudamericana Holding's
consolidated results of operations (including the 12.5% interest
owned by the Bank);
- the "Other Grupo Businesses" segment representing the results of
operations of Net Investment S.A. consolidated and Galicia Warrants
S.A. (in both cases, including the results of the 12.5% interests of
the Bank); and
- Banco Galicia's operating segments (see below).
Our results by segment are shown in note 36 to our audited consolidated
financial statements. The column "Corporate Adjustments" comprises intercompany
transactions between Grupo Galicia and its consolidated subsidiaries that are
eliminated in our consolidated income statement and the results corresponding to
minority interests in Banco Galicia. For fiscal year 2002, this column also
includes the loss absorption made by Grupo Galicia. See " -- Results of
Operations for the Fiscal Years Ending December 31, 2004, December 31, 2003 and
December 31, 2002 -- Loss Absorption."
The operating segments employed by Banco Galicia's management for
operating decisions and for assessing performance are based on the following
criteria:
- the geographical location of each branch or business, or "unit";
- the similarity of the businesses conducted with or the services provided
to Banco Galicia's customers; and
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- the existence of homogeneous groups of customers to which products and
services are provided.
Banco Galicia's operating segments are:
Buenos Aires Metropolitan Branches -- corresponds to business conducted
with customers in branches located in the Federal District and the greater
Buenos Aires area.
Rest of the Country Branches -- corresponds to business conducted with
customers in branches located in Argentina but outside the Federal District and
the greater Buenos Aires area.
Head Office -- corresponds to business conducted with customers in Banco
Galicia's Head office and with the national and provincial public sectors.
Regional Credit Cards -- corresponds to the results from Banco Galicia's
investments in the operating regional credit card companies and Tarjetas
Regionales S.A (the holding company for the regional credit card companies).
International -- corresponds to the business of Galicia Uruguay, Banco
Galicia's foreign branches and other international subsidiaries.
Other Financial Businesses -- corresponds to the business of Galicia
Capital Markets S.A., Galicia Valores S.A., Agro Galicia S.A. and Galicia
Factoring y Leasing S.A. In addition, this segment includes the results of the
equity investments of the Bank in financial-related companies not required to be
consolidated in which the Bank holds minority interests.
Other Equity Investments -- corresponds to Banco Galicia's participation
in various infrastructure and public utility services companies.
The net financial income of each unit is determined based on the financial
income and financial expenses generated by the assets and liabilities located in
each unit and through the use of transfer prices to compensate the lending unit
and to charge the borrowing unit, based on Banco Galicia's average margin by
currency and type of funds for the same period. Each unit is also allocated its
income from services, provisions for loan losses and other income generated by
the assets managed by such unit.
The distribution of administrative expenses is made based on the
information arising from the cost system, which gathers the allocation of the
expenses by unit from the accounting system and appropriates to each unit the
cost of the support provided by the rest of the organization.
Below is a discussion of our results of operations by segment for the
years ended December 31, 2004, 2003 and 2002, based on the existing Grupo
Galicia and Banco Galicia segments.
RESULTS BY SEGMENTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2004
Grupo Galicia -- This segment posted a net loss of Ps. 16.5 million in
fiscal year 2004, mainly due to a Ps. 13.0 million income tax provision. This
income tax provision was the result of the appreciation of the value of the
subordinated bond issued by the Bank and held by us. Operating expenses offset
the net financial income (Ps. 13.5 million and Ps. 13.1 million respectively)
and the rest of the negative result was due to other losses corresponding mainly
to the depreciation of intangible assets. The net financial income is explained
by Ps. 6.6 million that is the return on our financial holdings, and Ps. 6.5 due
to a 1.4% increase in the exchange rate that affected our dollar-denominated
assets. The main items of the operating expenses were Ps. 9.4 million
corresponding to the provision of personal assets tax, Ps. 1.1 of fees for
services received and Ps. 0.9 for personnel expenses.
Insurance -- The insurance segment showed a consolidated income of Ps. 4.2
million for the twelve-month period ended September 30, 2004. Galicia Vida S.A.
recorded a Ps. 6.8 million profit, which was partially offset by the Ps. 2.0
million loss recorded by Instituto de Salta Seguros de Vida S.A. The
consolidated income of
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Sudamericana Holding S.A. is mainly made up of the following: (i) collection of
premiums and accrual of claims for Ps. 11.7 million, (ii) net financial income
for Ps. 11.9 million attributable to gains resulting from CER adjustments and
interest earned on deposits, government securities and secured loans, (iii)
administrative expenses amounting to Ps. 13.5 million, approximately 50% of
which corresponds to personnel expenses and (iv) net expenses from services for
Ps. 4.7 million, mainly generated by acquisition commissions paid to the Bank
and to producers.
Other Grupo Businesses -- This segment, showing the results of Net
Investment S.A. and Galicia Warrants S.A., posted a Ps. 2.1 million net loss.
The negative result of this segment was attributable to Net Investment. Galicia
Warrants' net income amounted to Ps. 0.5 million, while Net Investment showed a
Ps. 2.6 million loss, mainly due to the poor performance of its operating
subsidiaries, which generated a Ps. 2.1 million loss from equity investments.
The results of the segments relating to the breakdown of the Bank's
operations were as follows:
Buenos Aires Metropolitan Branches and Rest of the Country Branches -- In
aggregate, these two segments which recorded similar behaviors, showed a Ps.
135.3 million profit (Ps. 76.4 million and Ps. 58.9 million, respectively).
These segments' net profits were the consequence of greater net financial income
and net fee income, and income from reversals of loan loss provisions, which
were partially offset by an increase in administrative expenses.
These segments' net financial income reflects a recovery in average loans
(the branches' loan portfolio is mainly comprised of loans to the private
sector, which increased in average from Ps. 1,917.3 million to Ps. 2,010.3
million for the two segments in aggregate in 2004); and an increase in average
deposits from Ps. 3,092.5 million to Ps.4,041.5 million. In addition, there was
an increase in the lending rates on the branches' loan portfolio and a decrease
in their cost of funds (deposit interest rates).
As a consequence of the improvement in the quality of their loan
portfolios, in 2004, the branches' reversed loan loss provisions. This mainly
reflects the improved performance of the Argentine economy as a whole in the
last two years.
Fee income increased 17.4% when compared with the prior fiscal year,
mainly due to a greater volume of transactions and an increase in the prices of
certain products during the last quarter of 2004.
Administrative expenses were up 5.0% from the prior fiscal year, mainly
due to higher personnel expenses (which include a one-time payment in December
2004). The majority of the remaining administrative expenses items decreased. We
ended fiscal year 2004 with 223 branches (compared to 226 in December 2003)
which had 1,871 employees (compared to 1,837 in December 2003).
Head Office -- This segment showed a Ps. 244.3 million net loss in 2004,
as a consequence of significant net financial losses and loan loss provisions,
partially offset by a significant net other income, and to a lesser extent by an
increase in net fee income and a decrease in administrative expenses.
The Ps. 158.6 million net financial loss was mainly attributable to the
valuation of the Bank's portfolio of Bogar, External Notes and secured loans
(recorded at the Head Office) in accordance with the requirements of Argentine
Central Bank's Communique "A" 3911 and complementary rules. See Item 4.
"Information on the Company -- Selected Statistical Information -- Government
and Corporate Securities -- Valuation." Application of these valuation rules
resulted in a Ps. 193.3 million loss for the Bank, recorded as a lower financial
income. This loss was partially offset by the increase in the Libo rate accrued
by the whole of the Bank's position in Boden 2012, also recorded at the Head
Office. Although deposit cost decreased, this was not sufficient to offset the
increased cost of Argentine Central Bank borrowings (also recorded in whole at
the Head Office) of 269 basis-points. See " -- Results of Operations for the
Fiscal Years Ending December 31, 2004, December 31, 2003 and December 31, 2002
-- Financial Expenses."
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In 2004, this segment's net income from services, amounting to Ps. 54.2
million, increased from Ps. 48.5 million in 2003. Head Office administrative
expenses decreased 8.3% from the prior year as a consequence of the Bank's
efforts to keep costs under control.
The Head Office provisions for loan losses amounted to Ps. 130.7 million.
The Ps. 65.6 million net other income was mainly attributable to a Ps. 251.0 net
reversal of loan loss reserves (as a result of the progress made by the Bank in
the restructuring of its commercial loan portfolio) and reserves for other
contingencies, partially offset by the Ps. 121.0 million amortization of the
deferred loss in connection with amparo claims in accordance with Argentine
Central Bank Communique "A" 3916.
Regional Credit Cards -- The regional credit-card companies recorded net
income of Ps. 96.1 million, reflecting the favorable effect on their results of
operations of the recovery of the Argentine economy's activity level together
with an improvement in operating efficiency and credit quality.
In 2004, the aggregate number of credit card statements issued by the
regional credit-card companies increased by 22% and their loan portfolio grew by
33.7%, both as compared to the previous year-end. Net operating income of the
regional credit-card companies increased by 31.3% as compared to fiscal year
2003, while expenses grew by 22.6%, to keep up with both the rising business
volumes and quality standards. This was possible due to the use of technology
and a continuous improvement in processes and organization, leading to
efficiency gains and economies of scale.
The daily collection efforts made allowed to keep delinquency at minimum
historical levels. In fact, arrears of more than 90 days represented 3.26% of
the aggregate portfolio at year-end, a ratio that is lower than in the previous
years.
Operating expenses increased 22.6% mainly due to higher personnel expenses
and advertising, consistent with the expansion of business activities.
International -- This segment showed a Ps. 162.9 million profit. This
result is mainly attributable to: (i) a Ps. 190.4 million net financial income,
which mainly reflects the gain at the level of Galicia Uruguay generated by the
repayment of restructured deposits with Boden 2012 at par, in the exchange
offered to its depositors in early 2004 (this gain was eliminated in Overhead
and Corporate Adjustments, given that this transaction did not generate a profit
at the consolidated level) and (ii) a Ps. 95.1 million net other income, mainly
attributable to the reversal of loan loss provisions and to the profits of
Galicia Cayman (in provisional liquidation) from its interest in Tarjetas
Regionales S.A. These profits were partially compensated by Ps.86.7 million loan
loss provisions and Ps. 20.5 million administrative expenses. On June 1, 2004,
Galicia Uruguay's license to operate as a domestic commercial bank was revoked
by the Central Bank of Uruguay. However, Galicia Uruguay retained the
authorization to operate that had been granted to it by the Executive Branch of
the Uruguayan government.
Other Financial Businesses -- This segment showed a Ps. 7.5 million net
profit mainly attributable to the Ps. 3.7 million net profit of Galicia Capital
Markets S.A. and the Ps. 1.8 .million profit from our interest in Banelco S.A.
Other Equity Investments -- This segment showed a Ps. 0.2 million profit
reflecting net other income. The "Other Income" line shows the aggregate results
generated by the Bank's interests in infrastructure and utility companies,
mainly Aguas Cordobesas S.A., Caminos de las Sierras S.A. and Inversora Nihuiles
S.A.
RESULTS BY SEGMENTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2003
Grupo Galicia -- This segment posted a net loss of Ps. 20.1 million in
fiscal year 2003, mainly due to a Ps. 18.1 million net financial loss mainly
attributable to the revaluation of Grupo Galicia's US$ 43 million holdings of
dollar-denominated Galicia Uruguay negotiable obligations, from Ps. 3.36 per
U.S. dollar as of December 31, 2002, to Ps. 2.93 per U.S. dollar as of December
31, 2003.
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Insurance -- The insurance segment showed a Ps. 7.9 million net loss,
mainly due to: (i) the recording of earnings for Ps. 16.5 million from premiums
earned and other net charges; (ii) the payment of claims in the amount of Ps.
12.8 million; (iii) a Ps. 14 million loss from other income, which was in turn
mainly due to a Ps. 12.9 million increase in the amounts to be paid to Galicia
Retiro's customers in accordance with the plan previously agreed with its
customers to restructure its dollar-denominated annuities, (iv) administrative
expenses of Ps. 15.6 million; (v) a Ps. 3.1 million net loss from services
mainly reflecting acquisition costs and (vi) a Ps. 11.7 million loss from
inflation adjustment. These losses were partially offset by a Ps. 33.2 million
net financial income attributable to gains resulting from the pesification of
liabilities, CER adjustments and interest earned on deposits, government
securities and secured loans, net of interest on negotiable obligations.
Other Grupo Businesses -- This segment posted a Ps. 5.5 million net loss.
The negative results of this segment were attributable to Net Investment.
Galicia Warrants' net income amounted to Ps. 0.5 million in the fiscal year
ended December 31, 2003. Galicia Warrants' net income was affected by a Ps. 0.4
million loss resulting from the appreciation of the exchange rate during 2003.
Net Investment showed a Ps. 6.1 million loss in fiscal year 2003, mainly due to
the poor performance of its operating subsidiaries, which generated a Ps. 3.0
million loss from equity investments, and due to the establishment by the
company of a Ps. 3.3 million valuation reserve on its interest in Tradecom
International.
The results of the segments relating to the breakdown of the Bank's
operations were as follows:
Buenos Aires Metropolitan Branches and Rest of the Country Branches -- In
aggregate, these two segments which recorded similar behaviors, showed a Ps.
84.1 million loss (Ps. 39.3 million and Ps. 44.8 million, respectively). These
segments' net losses were the consequence of a low net financial income, as in
the previous fiscal year, and lower net fee income, which were not offset by
lower administrative expenses.
These segments' net financial income was affected by a significant
decrease in average loans (the branches' loan portfolio is mainly comprised of
loans to the private sector, which decreased in average from Ps. 3,524.8 million
to Ps. 1,917.3 million for the two segments in aggregate in 2003); and a
decrease in average deposits from Ps. 3,468.1 million to Ps. 3,092.5 million.
The decrease in average deposits was attributable to the same reasons that
accounted for the strong decrease in the Bank's deposits experienced mainly in
2002, as explained under " -- Results of Operations for the Fiscal Years Ending
December 31, 2004, December 31, 2003 and December 31, 2002 -- Financial
Expenses," including the restructuring of Galicia Uruguay's deposits, which are
included in these segments to the extent that the depositor is a client of a
metropolitan or rest of the country branch and by the reduction in the
interest-rate spread for the Bank as a whole, which was mainly due to the
decrease in the lending rate (which was due, in turn, to the decrease in the CER
variation).
As a consequence of the improvement in the quality of their loan
portfolios, in 2003, the branches' loan loss provisions were 78.8% lower than in
the previous fiscal year. This improvement reflects the improved performance of
the Argentine economy as a whole in 2003.
Fee income decreased 10.5% when compared with the prior fiscal year mainly
due to the effect of the restatement in real terms of the net fee income of the
prior fiscal year.
Administrative expenses were 4.0% lower than in the prior fiscal year,
reflecting the Bank's cost containment policy. We ended fiscal year 2003 with
226 branches (compared to 227 in December 2002) and with 1,837 employees
(compared to 1,888 in December 2002).
Head Office -- This segment showed a Ps. 76.5 million net loss in 2003, as
a consequence of a significant net financial loss, partially offset by
significant net other income, an increase in net fee income and a decrease in
loan loss provisions and administrative expenses.
The Ps. 373.2 million net financial loss was mainly attributable to the
valuation of the Bank's portfolio of Bogar and secured loans (recorded at the
Head Office) in accordance with the requirements of Argentine Central Bank's
Communique "A" 3911. See Item 4. "Information on the Company -- Selected
Statistical Information -- Government and Corporate Securities -- Valuation."
Application of this valuation rule resulted in a Ps. 132.3 million
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loss for the Bank (recorded as a lower financial income), a lower yield on
secured loans as a consequence of the decrease in the CER variation and by the
revaluation of the Compensatory and Hedge Bonds (dollar-denominated Boden 2012
also recorded at the Head Office) from Ps. 3.36 per U.S. dollar at December 31,
2002, to Ps. 2.93 at December 31, 2003, and net yield on the Bank's
dollar-denominated assets being negative due to the lower yield on the Boden
2012 (Libor). These effects were not offset by a lower deposit cost and by the
significant (2,544 basis-point) decrease in the cost of Argentine Central Bank
borrowings. See " -- Results of Operations for the Fiscal Years Ending December
31, 2004, December 31, 2003 and December 31, 2002 -- Financial Expenses."
This segment's net income from services recovered its precrisis level
(year 2001), amounting to Ps. 48.5 million in 2003 compared to a net loss of Ps.
3.3 million in 2002. The net loss from services in 2002 included the payment of
extraordinary fees in connection with structured-note transactions. See " --
Results by Segments for the Fiscal Year Ending December 31, 2002 -- Head Office"
below.
Head Office administrative expenses decreased 78.6% from the prior year as
a consequence of the Bank's efforts to cut costs and streamline operations.
Both the Ps. 40.4 million gain from provisions for loan losses and the Ps.
292.9 million net other income were attributable to the net reversal of loan
loss reserves as a result of the improvement in the Argentine economy as a whole
and the progress made by the Bank in the restructuring of its commercial loan
portfolio, both leading to an asset quality improvement from the prior year. The
increase in net other income was also due to the net reversal of reserves for
other contingencies, partially offset by the Ps. 77.9 million amortization of
the deferred loss in connection with amparo claims in accordance with Argentine
Central Bank Communique "A" 3916.
Regional Credit Cards -- The regional credit-card companies recorded net
income of Ps. 49.4 million, reflecting the favorable effect on their results of
operations of the recovery of the Argentine economy's activity levels and of the
appreciation of the peso against the dollar during 2003.
The appreciation of the peso during the year had a positive effect on
these companies' net financial income, which amounted to Ps. 55.5 million
(compared to a Ps. 17.2 million net financial loss in 2002) given their short
foreign-currency position.
As a result of the improvement in the general economic environment and of
the resulting decrease in loan delinquency, loan loss provisions decreased 66.0%
from the prior year level. The non-accrual-to-total loans ratio for these
companies reached 3.61% at the end of fiscal year 2003 from 19.12% a year
before.
Growing economic activity resulted in an increase of these companies' loan
origination (which reduced the decrease in average loans when compared to that
observed in 2002) and in the volume of average credit cards managed by them
(from 1,107 thousand in 2002 to 1,173.7 thousand in 2003). In addition, the
improvement in the general economic environment resulted in an increase of these
companies' customers' consumption and use of the cards managed by the regional
credit card companies. These positive developments were partially offset by the
failure of service prices to increase as much as the general level of prices. As
a result of the above, these companies' net income from services increased 11.5%
from the prior fiscal year.
In addition, administrative expenses decreased 9.9% reflecting these
companies' continuing cost containment efforts after the significant downsizing
of operations carried out in 2002.
International -- This segment showed a Ps. 36.8 million profit. This
result is mainly attributable to the Ps. 186.5 million net financial income,
which mainly reflects the gain generated by the appreciation of the peso during
2003 since Galicia Uruguay was left, after the asymmetric pesification, with a
short foreign-currency position for which the Argentine government compensated
Banco Galicia in Argentina. In addition, loan loss provisions decreased and net
other income showed a Ps. 65.7 million profit mainly due to the net reversal of
loan loss reserves, both as a consequence of the improvement in the quality of
Galicia Uruguay's loan portfolio generated by the overall improvement in the
Argentine economy and by the restructuring of the Galicia Uruguay loan portfolio
achieved during 2003. Administrative expenses for this segment decreased 58.6%,
reflecting a decrease in all expense components but particularly in taxes.
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Other Financial Businesses -- This segment showed a Ps. 31.0 million net
loss mainly attributable to the Ps. 23.4 million net other loss reflecting the
establishment of a valuation reserve by Galicia Capital Markets S.A. on its
holdings of subordinated notes issued by a trust whose assets were shares of an
Argentine private-sector company.
Other Equity Investments -- This segment showed a Ps. 12.0 million loss as
a result of net other losses. The "Other Income" line shows the aggregate losses
generated by the Bank's interests in infrastructure and utility companies,
mainly Aguas Argentinas S.A., Caminos de las Sierras S.A. and Aguas Cordobesas
S.A. These companies were significantly affected by the changes that occurred in
the Argentine economy since 2002.
Results by Segments for the Fiscal Year Ending December 31, 2002
Grupo Galicia -- This segment posted a net loss of Ps. 30.8 million in
fiscal year 2002, mainly attributable to a Ps. 168.5 million monetary loss from
financial intermediation and the recording of a Ps. 59.2 million deferred tax
liability that implied an income tax charge for the same amount in accordance
with applicable regulations for commercial companies. Net financial income in
2002 was Ps. 206.3 million, mainly reflecting the gain associated with the
revaluation of Grupo Galicia's dollar-denominated deposits in Galicia Uruguay
(most of which were restructured at the end of 2002 as subordinated negotiable
obligations) and accrued interest (the exchange rate increased from Ps. 1.0 per
US $1.00 as of December 31, 2001, to Ps. 3.36 per US $1.00 as of December 31,
2002. Administrative expenses amounted to Ps. 7.1 million, remaining practically
unchanged.
Insurance -- The insurance segment showed a Ps. 2.2 million net loss,
mainly as a result of a Ps. 45.2 million net financial loss attributable to the
negative effect of inflation on the company's investments (monetary loss) and
the establishment of valuation reserves on these investments. Net income from
services recorded a Ps. 5.6 million loss, mainly as a result of acquisition
costs. In addition, administrative expenses increased from 2001 levels. These
losses and expenses were not compensated by greater net other income, which
amounted to Ps. 86.4 million, including premiums earned net of benefits, claims
and reinsurance costs.
Other Grupo Businesses -- This segment showed a Ps. 8.5 million net loss,
mainly as a result of the poor operating performance of Net Investment S.A.'s
subsidiaries and Galicia Warrants, together with the losses recorded as "Other
Income," mainly resulting from Net Investments' equity interest in Tradecom
Intl.
The results of the segments relating to the breakdown of the Bank's
operations were as follows:
Buenos Aires Metropolitan Branches and Rest of the Country Branches -- The
two segments reflecting the results of the branches performed similarly. These
segments' net losses were the consequence of an extremely low net financial
income when compared to previous periods. These segments' net financial income
was affected by the significant decreases in deposit and loan volumes and by the
reduction in the interest-rate spread for the Bank as a whole. It should be
noted that the branches' portfolios are mainly private-sector loan portfolios,
which were pesified at parity (Ps. 1.0 per US $1.00) and most of which were
eligible to be adjusted not by the CER but by the CVS. The latter adjustment was
not applied by the Bank during 2002. In addition, these segments' results were
affected by the deterioration of the quality of their loan portfolios as a
result of the unfavorable economic environment prevailing in Argentina during
most of 2002, which led to an increase in their loan loss provisions. These
factors were not offset by positive net income from services and lower
administrative expenses.
Fee income decreased when compared with the prior fiscal year because
services prices did not track the increase in the general level of prices in
2002, especially the WPI, and therefore have fallen in real terms because fee
income was affected by the overall fall in the Bank's activity level in 2002.
Administrative expenses fell significantly as a result of the cost
reduction plan implemented by the Bank in 2002, which involved closing branches
and reducing staffing levels. During 2002, 61 branches in Argentina were closed
(i.e., 21.1% of those existing as of December 31, 2001) and branch staff
decreased by 1,106 employees, 36.9% decrease from the December 31, 2001, staff
level.
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Head Office -- This segment showed a net loss in 2002, mainly as a result
of a monetary loss from financial intermediation for Ps. 1,252.5 million, the
significant charge for the establishment of the unallocated provisions of the
Bank and the recording of net other losses for Ps. 607.4 million, mainly
reflecting the provisions established by the Bank for contingencies related to
its interests in non-financial businesses and the amortization of certain
goodwill.
The Ps. 1,923.8 million net financial income reflects the fact that the
Head Office segment concentrates the financial income attributable to all of the
public-sector assets held by the Bank, including secured loans and the
Compensatory and the Hedge Bonds received or to be received by the Bank for the
effects of the asymmetric pesification on both Banco Galicia (and its foreign
branches) and on Galicia Uruguay. Compensation for the effects of the asymmetric
pesification on Galicia Uruguay's balance sheet was granted to the Bank in
Argentina and was therefore booked at the Head Office. It should be stressed
that public-sector assets were pesified at the Ps. 1.4 per U.S. dollar exchange
rate and accrued the CER adjustment. In addition, the Compensatory and the Hedge
Bonds are dollar denominated and, during 2002, the exchange rate increased by
approximately 240%, both factors explaining the Head Office's relatively high
financial income. Net financial income was positive despite the fact that this
segment's results are net of the cost of the Head Office's foreign debt (and the
corresponding valuation difference in 2002) and that of the Bank's liabilities
with the Argentine Central Bank.
This segment's income from services, historically lower than that of the
branches, was affected by the payment of extraordinary fees in connection with
structured-note transactions that were paid off by the Bank prior to maturity.
In addition, this segment's administrative expenses increased due to the
fact that they include all of the restructuring charges (Ps. 131.1 million)
associated with the decrease in the Bank's overall staff in 2002.
Regional Credit Cards -- The regional credit-card companies' results
showed a Ps. 336.3 million net loss in 2002.
On one hand, these companies' results were affected by the decrease in
their level of activity caused by the recession, especially during the first
half of 2002, and by the decrease of services prices in real terms. This is
reflected in the Ps. 143.0 million income from services, that was 54.1% lower
than in 2001, being practically unchanged in nominal terms from the previous
year's figure.
On the other hand, these companies net loss shows the effects of the
adjustment of their balance sheet for inflation, which resulted in a monetary
loss of Ps. 261.9 million (shown under "Monetary Results of Other Income") and
the devaluation of the peso during 2002 and the decrease in interest-rate
spreads, which account for the Ps. 17.2 million net financial loss. The negative
effect of the increase in the exchange rate, is a result of these companies'
consolidated short foreign currency position, which in turn was caused by the
fact that the loss caused to these companies by the asymmetric pesification
measures were not compensated by the Argentine government. Net financial income
was also affected by the pesification of loans to the private sector at parity.
In addition, provisions for loan losses were higher than in previous
years, given that these companies' customer base, pertaining to the lower-income
segment of the population, was particularly affected by the 2002 recession that
caused high unemployment rates and the fall in real income. However, the
deterioration in asset quality slowed by year-end. The streamlining of these
companies' operations (through reductions in their distribution network and
staff) is reflected in the 55.3% decrease of their consolidated administrative
expenses.
International -- This segment showed a Ps. 1,849.1 million loss. This loss
is mainly attributable to the Ps. 1,521.7 million net financial loss, which
reflects the losses generated by the increase in the exchange rate during 2002.
In addition, this segment's results were affected by high loan loss
provisions reflecting the deterioration of the quality of its assets, mainly
loans granted to Argentine private-sector customers, the repaying capacity of
which was affected by the unfavorable economic environment prevailing in
Argentina during most of 2002, including the devaluation of the peso.
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Banco Galicia Uruguay's activities were suspended on February 13, 2002 and
Banco Galicia wound down most of its foreign-based units during 2002.
Other Financial Businesses -- This segment's net loss was mainly due to
the Ps. 6.3 million monetary loss from financial intermediation, partially
offset by the profits generated by the Bank's investments in non-consolidated
financial-related companies such as Banelco and Visa, shown under "Other
Income." The remaining consolidated companies showed a lower fee income, as
compared to the previous year's figure, as a result of lower levels of activity.
Other Equity Investments -- This segment showed a Ps. 51.1 million loss as
a result of negative net other income. The "Other Income" line shows the
aggregate losses generated by the Bank's interests in infrastructure and utility
companies, mainly Aguas Argentinas S.A., Aguas Cordobesas S.A. and Aguas
Provinciales de Santa Fe S.A. These companies were significantly affected by the
changes that occurred in the Argentine economy in 2002, mainly the devaluation
of the currency, which increased the amount in pesos of these companies'
foreign-currency debts together with the Argentine government's policy of not
allowing utilities to increase prices in the inflationary environment prevailing
in Argentina during 2002, especially in the first half of the year.
CONSOLIDATED ASSETS
The structure and main components of our consolidated assets as of
December 31, 2004, were as follows:
AS OF DECEMBER 31,
2004 % 2003 % 2002 %
------------ ------ ------------ ------ ------------ ------
(in millions of
February 28,
2003 constant pesos,
(In millions of pesos, except percentages) except percentages)
Cash and due from banks........................... Ps. 988.7 4.2% Ps. 826.2 3.6% Ps. 576.8 2.4%
Government and corporate securities............... 5,534.1 23.4% 6,408.3 (1) 28.1% 1,789.4 7.5%
Loans............................................. 8,438.2 35.7% 7,506.5 32.9% 10,682.1 44.8%
Compensatory and Hedge Bonds to be received....... 4,732.3 20.0% 4,629.6 20.3% 7,098.6 29.7%
Other assets...................................... 3,957.3 16.7% 3,452.3 15.1% 3,717.2 15.6%
TOTAL............................................. Ps. 23,650.6 100.0% Ps. 22,822.9 100.0% Ps. 23,864.1 100.0%
============ ===== ============ ===== ============ =====
(1) Includes Ps. 3,539.6 million of Bogar, that were previously recorded as
Loans.
Of our Ps. 23,650.6 million total assets as of December, 31, 2004, Ps.
23,465.3 million, equivalent to 99.2%, corresponded to the Bank. The remaining
0.8% is attributable mainly to Sudamericana Holding S.A. consolidated (Ps. 139.2
million). The composition of the Group's assets has not shown significant
changes from the prior fiscal year.
The item "Cash and Due from Banks" mainly includes Ps. 442.5 million of
cash and Ps. 486.2 million held at the Argentine Central Bank. The cash and the
balance held at the Argentine Central Bank are computable for meeting the
minimum cash requirements set by the Argentine Central Bank and explained under
Item 5. "Operating and Financial Review and Prospects -- Item 5B. Liquidity and
Capital Resources -- Liquidity."
Our holdings of government and corporate securities as of December 31,
2004 amounted to Ps. 5,534.1 million, of which Ps. 5,518.0 million were
government securities. Our holdings of government and corporate securities are
shown under Item 4. "Information on the Company -- Selected Statistical
Information -- Government and Corporate Securities."
As of December 31, 2004, our total net loans amounted to Ps. 8,438.2
million, of which Ps. 8,393.2 million corresponded to the Bank and the remaining
amount to secured loans held by Sudamericana Holding S.A. For more information
on the Bank's loan portfolio, see Item 4. "Information on the Company --
Selected Statistical Information -- Loan Portfolio."
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In addition, as of December 21, 2004, the Bank recorded under "Other
Receivables for Financial Intermediation," the Boden 2012 still to be received
corresponding to the Compensatory Bond and the Boden 2012 to be acquired
corresponding to the Hedge Bond, both representing compensation for the
asymmetric pesification it is entitled to, for Ps. 4,732.3 million. See Item 4.
"Information on the Company -- Selected Statistical Information -- Government
and Corporate Securities" and Item 4. "Information on the Company -- Main
Regulatory Changes in 2002, 2003 and 2004 -- Compensation to Financial
Institutions."
As of December 31, 2004, "Other Assets" mainly comprised:
- Ps. 835.8 million corresponding to bank premises and equipment,
miscellaneous assets and intangible assets.
- Ps. 665.1 million of the Bank's holdings of debt securities and
subordinated notes issued by the Galtrust I Financial Trust, as a
result of the securitization of loans to the provincial public
sector in late 2000, recorded in the balance sheet under the caption
"Other Receivables from Financial Brokerage."
- Ps. 451.4 million corresponding to the recording (as an intangible
asset pursuant to Argentine Central Bank Communique "A" 3916) of the
right to receive compensation for the difference between the amount
paid to depositors who filed legal actions (amparo claims) and
collected their deposits as originally denominated in U.S. dollars
or at the free market exchange rate and the amount established by
the pesification rules (conversion at the exchange rate of Ps. 1.4
per U.S. dollar plus the CER adjustment and accrued interest).
- Ps.374.8 million of forward purchases of Boden 2012 recorded the
balance sheet item "Other Receivables from Financial Brokerage."
- Ps. 282.6 million (recorded under the balance sheet item "Other
Receivables from Financial Brokerage") corresponding to the Bank's
interest in the funds jointly formed by the Bank with other
private-sector banks in order to facilitate the recovery of the
assets of former banks in which restructuring Banco Galicia took
part. The fund's assets, made up of Argentine government securities,
were exchanged for secured loans in late 2001.
- Ps. 183.5 million (recorded under the balance sheet item
"Miscellaneous Receivables") of secured loans granted as collateral
for the assistance received from the FFRE (former FFAEFyS), as part
of the implementation of the Bank's capitalization and liquidity
plan.
- Ps. 170.5 million (recorded under the balance sheet item "Other
Receivables from Financial Brokerage") of the Bank's holdings of
subordinated notes issued by the "Galicia Mortgage Loans Financial
Trust" as part of the implementation of the Bank's capitalization
and liquidity plan.
- Ps. 137.8 million of holdings of certificates of participation
issued by trusts created as a result of the securitization during
2004, of loans of the regional credit card companies (within the
restructuring of their debt with the Bank), which senior
certificates are held by the Bank while the junior certificates are
held by the regional credit card companies.
- Ps. 100.9 million of assets under financial leases.
- Ps. 85.4 million of equity interests.
- Ps. 75.8 million corresponding to balances deposited in escrow
accounts held at the Argentine Central Bank in favor of clearing
houses, which are recorded under the caption "Other Receivables from
Financial Brokerage".
- Ps. 61.6 million (recorded under the balance sheet item "Other
Receivables from Financial Brokerage") of our holding of debt
securities and subordinated notes issued by the Galtrust II and V
Financial Trusts created in late 2001 as a result of the
securitization of part of the Bank's mortgage loan portfolio.
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- Ps. 44.3 million (recorded under the balance sheet item "Other
Receivables from Financial Brokerage") of subordinated notes issued
by the Secured Loans Trust as part of the implementation of the
Bank's capitalization and liquidity plan and held by the Bank.
- Ps. 41.5 million (recorded under the balance sheet item "Other
Receivables from Financial Brokerage") corresponding to the Bank's
portfolio of personal loans that was transferred to the "Galicia
Personales Financial Trust", which placement occurred in January
2005.
EXPOSURE TO THE ARGENTINE PUBLIC SECTOR
The following table shows our total net exposure to the Argentine public
sector, both national and provincial. This exposure mainly consists of exposure
of the Bank.
As of December 31, 2004
-----------------------
(in millions of pesos)
NET POSITION IN GOVERNMENT SECURITIES............................................ Ps. 5,838.2
Trading and Investment Accounts.............................................. 1,240.4
Fiscal Credit Certificate ................................................... 78.2
Compensatory Bond (including forward purchases of Boden 2012)................ 976.1
Bogar.................................................................... 3,543.5
OTHER RECEIVABLES RESULTING FROM FINANCIAL BROKERAGE............................. Ps. 5,700.8
Compensatory Bond............................................................ 1,012.4
Hedge Bond................................................................... 3,719.9
Galtrust I Financial Trust................................................... 665.1
Special Funds Former Almafuerte and Mendoza Banks............................ 259.1
Secured Loans Trust.......................................................... 44.3
LOANS............................................................................ Ps. 4,682.6
Provincial Financial Sector ................................................. 123.7
Secured Loans 4,558.9
MISCELLANEOUS RECEIVABLES........................................................ Ps. 183.5
Secured Loans Granted as Collateral.......................................... 183.5
INTANGIBLE ASSETS................................................................ Ps. 451.4
Difference for Amparo Claims (1)............................................. 451.4
---------------
TOTAL ASSETS (2) ................................................................ Ps. 16,856.5
===============
LIABILITIES WITH THE ARGENTINE CENTRAL BANK...................................... 8,427.7
===============
NET EXPOSURE..................................................................... 8,428.8
===============
(1) Net of amortization.
(2) Does not include deposits with the Argentine Central Bank which constitute
one of the items by which the Bank complies with the Argentine Central
Bank's minimum cash requirements.
Our total exposure to the Argentine public sector as of December 31, 2004
amounted to Ps. 16,856.5 million, and our total exposure net of the liabilities
with the Argentine Central Bank amounted to Ps. 8,428.8 million, representing
35.6% of our total assets.
In connection with the restructuring of the financial assistance it
received from the Argentine Central Bank described under " -- Funding" and
approved by the Argentine Central Bank on February 3, 2004, the Bank has granted
the Argentine Central Bank, as collateral for repayment, secured loans and Bogar
with a book value of Ps. 7,143.4 million (Ps. 2,757.3 million of Bogar and Ps.
4,386.1 million of secured loans) as of December 31, 2004, valued in accordance
with Argentine Central Bank rules. In addition, the advance to be received by
the Bank to purchase the Hedge Bond has to be secured by public-sector assets,
as explained under Item 4. "Information on the Company -- Main Regulatory
Changes in 2002, 2003 and 2004 -- Compensation to Financial Institutions -- For
the Asymmetric Pesification and its Consequences."
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OFF-BALANCE SHEET ARRANGEMENTS
Our off-balance sheet risk mainly arises from the Bank's activities.
In the normal course of its business, the Bank is party to financial
instruments with off-balance sheet risk in order to meet the financing needs of
its customers. These instruments expose the Bank to credit risk in addition to
amounts recognized in our consolidated balance sheets. These financial
instruments include commitments to extend credit, standby letters of credit,
guarantees granted and acceptances.
COMMITMENTS TO EXTEND CREDIT, STAND-BY LETTERS OF CREDIT AND GUARANTEES GRANTED
Guarantees granted are surety guarantees in connection with transactions
between two parties. Standby letters of credit and guarantees granted are
conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. Acceptances are conditional commitments for foreign
trade transactions.
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 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 of the Bank. The Bank evaluates each customer's
creditworthiness on a case-by-case basis.
The Bank uses the same credit policies in making commitments, conditional
obligations and guarantees as it does for granting loans. In the opinion of
management, the Bank's outstanding commitments and guarantees do not represent
unusual credit risk.
The Bank's exposure to credit loss in the event of nonperformance 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.
The Bank's credit exposure related to these items as of December 31, 2004,
is summarized below:
DECEMBER 31,
----------------------
2004
----------------------
(In millions of pesos)
Commitments to extend credit.......................................... Ps. 285.8
Standby letters of credit............................................. 38.1
Guarantees granted.................................................... 122.5
Acceptances........................................................... 19.0
In addition to the above commitments, as of December 31, 2004, available
purchase limits for credit card holders amounted to Ps. 3,703.1 million.
The credit risk involved in issuing letters of credit and granting
guarantees is essentially the same as that involved in extending loan facilities
to customers. In order to grant guarantees to its customers, the Bank may
require counter guarantees. As of December 31, 2004, these counter guarantees,
classified by type, were as follows:
DECEMBER 31,
----------------------
2004
----------------------
(In millions of pesos)
Preferred counter guarantees.......................................... Ps. 44.8
Other counter guarantees.............................................. 17.7
See note 29 to our audited consolidated financial statements.
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OTHER
The Bank accounts for checks drawn on it and other banks, as well as other
items in the process of collection, such as notes, bills and miscellaneous
items, in memorandum accounts until the related item clears or is accepted. In
management's opinion, the risk of loss on these clearing transactions is not
significant. The amounts of clearing items in process as of December 31, 2004,
were as follows:
DECEMBER 31,
----------------------
2004
----------------------
(In millions of pesos)
Checks drawn on the Bank.................................. Ps. 108.3
Checks drawn on other banks................................... 172.3
Bills and other items for collection.......................... 519.2
--------------
With respect to fiduciary risk, the Bank acts as trustee of trust
agreements to guarantee obligations arising from various contracts between the
parties. As of December 31, 2004, the trust funds amounted to Ps. 5.2 million.
In addition, the Bank has securities in custody, mainly related to its
activity as a mutual fund depositary. As of December 31, 2004, these securities
amounted to Ps. 6,283.5 million.
See note 29 to our audited consolidated financial statements.
SECURITIZATION OF ASSETS
In the normal course of business, the Bank uses the securitization of
assets as a source of funding. In addition, in 2002, within the framework of the
Galicia capitalization and liquidity plan, the Bank securitized mortgage loans
and secured loans in order to restore the Bank's liquidity, which had been
adversely affected by the deposit run of late 2001 and early 2002.
The securitization of assets basically involves a company selling assets
to a trust and the trust funding the purchase by issuing securities that are
sold to third parties. A trust is a special-purpose entity, not an operating
entity; typically, a trust is set up for the single purpose of completing the
securitization transaction, has a limited life and no employees.
- Galtrust I Individual Financial Trust
On October 20, 2000, the Bank securitized a group of loans that had been
made to the provinces of Argentina and collateralized by tax revenues shared by
the Argentine national and provincial governments. The Bank transferred the
ownership of these loans to the Galtrust I Financial Trust. The trust issued, in
turn, class A debt securities with a face value of US$ 100.0 million, class B
debt securities with a face value of US$ 200.0 million and participation
certificates (subordinated notes) with a face value of US$ 200.0 million.
Third-party investors purchased Ps. 46.9 million (in historical currency) of the
class B debt securities, and the Bank retained the remainder of the
certificates. As of December 31, 2004, the Bank held debt securities and
subordinated notes totaling an aggregate amount of Ps. 665.1 million. The
trustee is First Trust of New York, National Association, acting through its
permanent representative office in Argentina.
- Galtrust II, III, IV and V Individual Financial Trusts
At a meeting held on December 6, 2001, the Bank's Board of Directors
approved the creation of a program for the securitization of loans and the
issuance of debt securities and/or certificates of participation by various
Galtrust financial trusts. The CNV approved the program on April 6, 2000, for a
face value of up to US$ 1,000 million and authorized the Bank's participation as
originator, trustor and manager of the program.
Four financial trusts, Galtrust II, III, IV and V - Letras Hipotecarias,
were set up under this program. Certificates of participation and debt
securities were then issued under the trusts. In December 2001, the Bank
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transferred ownership of mortgage loans totaling Ps. 521.3 million to the
Galtrust II, III, IV and V - Letras Hipotecarias financial trusts.
The Bank retained 100% of the certificates of participation in such trust.
The remaining class A and class B debt securities were subscribed for by the
Bank and by Hartford Seguros de Vida S.A.
As of December 26, 2002, the Galtrust III and IV financial trusts were
terminated. As of December 31, 2004, the Bank held certificates of participation
and debt securities of the Galtrust II and V financial trusts for Ps. 61.6
million. The trustee for each trust is First Trust of New York, National
Association, acting through its permanent representative office in Argentina.
- Trusts set up as part of the Galicia capitalization and liquidity
plan
As part of the Galicia capitalization and liquidity plan, the Galicia
Mortgage Loans Financial Trust was created in May 2002. The Bank transferred Ps.
312.8 million of mortgage loans to the trust and received in exchange Ps. 234.6
million in cash and Ps. 78.2 million in certificates of participation (in May
2002 currency). The trustee was ABN AMRO Bank Argentine Branch. Thirteen
domestic financial institutions subscribed for the trust's debt securities. The
Bank was obligated to replace the loans in the trust under certain
circumstances. As of December 31, 2004, the Bank held certificates of
participation totaling Ps. 170.5 million.
In January 2005, the Galicia Mortgage Trust was terminated in advance. The
Bank canceled the debt securities outstanding and received back the loans in the
trust's assets for Ps. 172.2 million.
Also as part of the Galicia capitalization and liquidity plan, the Secured
Loans Trust was created. The parties to the trust are Banco de la Provincia de
Buenos Aires as beneficiary and BAPRO Mandatos y Negocios S.A. as trustee. The
Bank transferred Ps. 108 million of secured loans to the trust and received in
exchange Ps. 81 million in cash and Ps. 27 million in certificates of
participation. As of December 31, 2004, the Bank held certificates of
participation totaling Ps. 44.3 million.
- Galicia Personales Financial Trust
On January 11, 2005, the Galicia Personales Financial Trust publicly
offered securities for a total amount of Ps.41.5 million, the underlying assets
of which consist of personal loans granted by the Bank. This trust issued class
A debt securities for a face value of Ps.33.2 million and an 8% interest rate,
class B debt securities, for a face value of Ps.5.2 million and a 12% interest
rate and certificates of participation for Ps.3.1 million that will receive the
remaining profit generated by the trust. In addition to cash, the Bank received
class B debt securities for Ps.2.9 million and certificates of participation for
Ps.3.1 million. The class A debt securities were rated "raAA" and the class B
debt securities were rated "raBBB" by Standard&Poors.
- Galicia Commercial Mortgage Trust
On October 28, 2004, the Bank's Board of Directors approved the creation
of the Galicia Commercial Mortgage Trust. The Bank transferred to the trust
commercial mortgage loans for an aggregate amount of Ps. 29.0 million and the
trust issued class A debt securities for a face value of Ps.24.1 million and an
interest rate equivalent to CER plus 0.5%, and certificates of participation for
a face value of Ps.4.9 million that will receive the remaining profit generated
by the trust. The placement of the trust securities ended on April 5, 2005. The
class A securities were fully subscribed and the Bank received the certificates
of participation. The class A debt securities were rated "raAA+" by
Standard&Poors.
- Regional Credit-Card Companies Trusts
In 2004, Tarjeta Naranja S.A. and Tarjetas Cuyanas S.A. began to
securitize part of their loan portfolio, with the purpose of funding their
operations. The following table shows information on the outsanding trusts as of
December 31, 2004.
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TARJETA NARANJA S.A. TARJETAS CUYANAS S.A.
------------------------------- ------------------------------
TARJETA NARANJA FINANCIAL TRUST TARJETA NEVADA FINANCIAL TRUST
------------------------------- ------------------------------
Trust (1) I (2) II (3) I(4) II (5)
----------- ---------- ---------- ----------
Underlying asset.............................. Credit-card receivables
----------- ---------- ---------- ----------
Date of issue of the trusts' securities...... 08-26-2004 11-03-2004 07-21-2004 12-01-2004
Maturity date of the trusts' securities....... 08-01-2005 04-22-2006 01-15-2006 12-22-2006
----------- ---------- ---------- ----------
Interest Rate
- Class "A" securities..................... - CER+3% - -
- Class "B" securities..................... - CER+5% - -
- Class A certificates of participation.... 8% - 7% CER+3%
- Class B certificates of participation.... 11% - 10% CER+5%
----------- ---------- ---------- ----------
(in millions of pesos)
----------- ---------- ---------- ----------
Assets transferred to the trusts.............. Ps. 40.0 Ps. 50.0 Ps. 16.9 Ps. 16.4
Securities issued
- Debt securities - Class A................ 40.0
- Debt securities - Class B................ 5.0
- Class A certificates of participation.... 32.0 12.0 12.0
- Class B certificates of participation.... 4.0 1.5 2.4
- Certificates of participation or class "C"
certificates of participation............ 4.0 5.0 1.5 1.6
----------- ---------- ---------- ----------
(1) All of them were authorized by the CNV.
(2) The classes A and B certificates of participation were rated "AA(arg)" and
"BBB+(arg)" by Fitch Argentina, respectively, and were fully subscribed.
Tarjetas Naranja S.A. received the class C certificates of participation.
(3) The classes A and B debt securities were fully subscribed and the
certificates were received by Tarjeta Naranja S.A. The class A securities
were rated "AAA(arg)" and the class B securities were rated "A-(arg)" by
Fitch Argentina. The Class A debt securities interest rate has a floor of
8% and a cap of 15%, and the Class B debt securities interest rate has a
floor of 11% and a cap of 20%.
(4) The classes A and B certificates of participation were rated "AA(arg)" and
"BBB+(arg)" by Fitch Argentina, respectively, and were fully subscribed.
Tarjetas Cuyanas S.A. received the class C certificates of participation.
At the end of fiscal year 2004, the Class A certificates of participation
had been fully redeemed and the balance of classes B and C certificates of
participation totaled Ps.2.8 million.
(5) Ps.0.55 million of class B certificates of participation that were not
subscribed as well as class C certificates of participation for Ps. 1.6
million, that will receive the remaining profit generated by the trust,
were kept by Tarjetas Cuyanas S.A. The class A and class B certificates
were rated "AAA(arg)" and "BBB+(arg)," respectively, by Fitch Argentina.
The Class A certificates interest rate has a floor of 8% and a cap of 15%,
and the Class B certificates interest rate has a floor of 10% and a cap of
20%.
On March 18, 2005, the Tarjeta Naranja III Financial Trust notes were
placed in the market. This trust issued: (i) class A certificates of
participation, for a face value of Ps.54.4 million and a 7% interest rate (ii)
class B certificates of participation for a face value of Ps.6.4 million and a
9% interest rate and (iii) class C certificates of participation for a face
value of Ps.3.2 million, that will receive the remaining profit generated by
this trust. All of this trust's securities mature in January 25, 2006.
See notes 34 and 35 to our audited consolidated financial statements.
FUNDING
Traditionally, we have had three principal funding sources: customer
deposits (consisting of current accounts, savings accounts and time deposits),
credit lines from banks and multilateral agencies and funds obtained through
issuances of medium- and long-term securities in the international financial
market. The 2001-2002 crisis changed the composition of our funding, with its
main consequences being the recording of liabilities with the Argentine Central
Bank and the reduced weight of deposits.
The Argentine Central Bank provided liquidity to financial institutions,
including us, in the form of short-term loans or rediscounts between late 2001
and April 2002. As of December 31, 2004, financial assistance from the Argentine
Central Bank amounted to Ps. 5,707.0 million. In accordance with Decrees
No. 739/03 and No. 1262/03, these borrowings were restructured into
a long-term CER-adjusted liability with a 3.5% annual interest rate and maturing
in 92 monthly installments beginning March 2004. Up to April 29, 2003, such
liability had been a peso-denominated monthly revolving facility, the cost of
which was tied to the interest rate of the Lebac (equivalent
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to 64.0% of the interest rate on the 30-day Lebac or the minimum term Lebac
auctioned). During 2002, the Argentine Central Bank's financial assistance for
liquidity support accrued at an average interest rate of 28.25%. The interest
rate accrued in April 2003 was 6.50% per annum. In addition, as a result of the
compensation measures undertaken by the Argentine government, as of December 31,
2004, our balance sheet included Ps. 2,720.7 million on account of the advance
to be granted by the Argentine Central Bank to fund the acquisition of the Hedge
Bond (Boden 2012). The Bank has not entered yet into the debt agreement with the
Argentine Central Bank to receive the advance for the purchase of the Hedge Bond
and, if the Bank enters into such debt agreement before August 2005, the first
principal amortization will be due on that date.
On November 27, 2003, the URSF authorized the Argentine Central Bank to
extend the maturity of the Bank's debt with the Argentine Central Bank for
liquidity support in accordance with the repayment schedule presented by the
Bank to the Argentine Central Bank and the provisions of Decree No. 1262/03. On
February 3, 2004, the Argentine Central Bank approved the request made by the
Bank to adhere to the regime established by Decree No. 739/03, as modified
by Decree No. 1262/03, as well as the amortization schedule proposed by the
Bank. That schedule contemplates repayment in 92 monthly installments beginning
in March 2004.
As a result of the liquidity crisis experienced by the Argentine financial
system, including the Bank, in late 2001 and early 2002, the Bank defaulted on
its foreign debt in June 2002. At the end of 2002 and 2003, the foreign debt of
the Bank's Head Office in Argentina and its Cayman Branch was in the process of
being restructured in order to extend its maturity and to reduce its interest
rate. The restructuring process was completed on May 18, 2004.
Below is a breakdown of our funding as of the dates indicated:
DECEMBER 31, DECEMBER 31,
---------------------------- ----------------------------
2004 2003 2002
----------- ----------- ----------------------------
(In millions of February 28,
(In millions of pesos) 2003, constant pesos)
Deposits (1)................................... Ps. 6,756.9 Ps. 5,584.0 Ps. 5,242.0
Restructured deposits...................... 169.1 561.4 1,335.1
Credit Lines (1) 13,243.2 13,781.8 15,952.2
Argentine Central Bank
Financial assistance.. 5,707.0 5,663.1 5,630.2
Advance to purchase the Hedge Bond (2) 2,720.7 2,536.1 2,489.9
Debt securities ........................... 3,802.5 2,565.5 3,735.7
Other banks and international entities..... 789.3 3,017.1 4,096.4
Repos 223.7 - -
Shareholders' equity .......................... 1,519.5 1,419.4 1,600.8
============ ============ ============
TOTAL FUNDING.................................. Ps. 21,519.6 Ps. 20,785.2 Ps. 22,795.0
------------ ------------ ------------
(1) Includes accrued interest and exchange differences payable, as well as the
CER adjustment where applicable.
(2) Borrowings expected to be incurred for the purchase of the Hedge Bond.
As of December 31, 2004, our most significant source of funding was the
financial assistance from the Argentine Central Bank and the advance to be
granted by such entity for the purchase of the Hedge Bond. In aggregate, these
represented 39.2% of our funding, with practically no change from the close of
the prior fiscal year when it represented 39.4%. The increase from the 35.6% as
of December 31, 2002, is mainly attributable to the adjustment by the CER since
2003 (as explained above) on the financial assistance. This effect was mitigated
in 2004 due to the payments made beginning in March of that year. At the end of
2004, the financial assistance from the Argentine Central Bank represented 26.5%
of our total funding compared to 27.2% at the end of 2003 and 24.7% a year
before.
Before the 2001-2002 crisis, deposits had been our most important funding
source. As of December 31, 2004, our deposits represented 31.4% of our total
funding, up from 26.9% at the end of 2003 and 23.0% at the end of 2002. Our
deposit base, like that of all other banks in Argentina, was significantly
affected by the systemic run on deposits throughout 2001 and early 2002, and by
various regulations implemented by the Argentine government in recent years, as
explained in this annual report. However, our deposit base has grown 21.0% in
2004 and 6.5% in
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2003. Nearly all of this increase occurred in peso-denominated transactional
deposits (deposits in current and savings accounts), short-term time deposits
and CER adjusted time deposits (the latter in 2004).
For more information on deposits, see Item 4. "Information on the Company
-- Selected Statistical Information -- Composition of Deposits."
In the past, we had also funded our operations in international and local
financial markets through the issuance of debt securities (dollar-denominated
negotiable obligations, medium-term notes and U.S. commercial paper).
Dollar-denominated funds raised in the capital markets are an important part of
our funding. These amounted to Ps. 3,802.5 million as of December 31, 2004, as
compared to Ps. 2,565.5 million in dollar-denominated debt securities
outstanding as of December 31, 2003. This increase is the counterpart of the
decrease mentioned below in credit lines from banks and international agencies.
The decrease in 2003 , as compared with the Ps. 3,735.7 million outstanding as
of December 31, 2002, mainly reflect the decrease in the exchange rate in 2003.
See Item 3. "Key Information -- Exchange Rate Information." As of December 31,
2003, Ps. 1,242.3 million (principal only), including the negotiable obligations
issued pursuant to the restructuring of our New York Branch in mid-2002 and the
negotiable obligations issued to settle the restructuring of Galicia Uruguay's
deposits agreed to in late 2002, was current and not included in the Bank's
foreign debt restructuring. The remainder of our debt securities outstanding as
of December 31, 2003, were in payment default and subject to restructuring. The
restructuring of the Bank's foreign debt, which did not include negotiable
obligations issued by the regional credit-card companies, was completed on May
18, 2004. See " -- Contractual Obligations" below.
We also traditionally funded our operations with credit lines from banks
and international agencies. As of December 31, 2004, these credit lines amounted
to Ps. 789.3 million compared to Ps. 3,017.1 million as of December 31, 2003.
This decrease mainly reflects creditor decisions in the restructuring of the
Bank's foreign debt completed in May 2004, as many bank creditors chose to
receive negotiable obligations for their bank loans tendered in the exchange.
The decrease in 2003 from Ps. 4,096.4 million as of December 31, 2002, mainly
reflects the decrease in the exchange rate during 2003. See Item 3. "Key
Information -- Exchange Rate Information." As of December 31, 2003 and 2002,
these credit lines mostly represented credit lines from foreign banks in payment
default that were subject to restructuring, which was completed on May 18, 2004.
See " -- Contractual Obligations" below.
In 2004, the Bank entered into repurchase agreements of Boden 2012
increasing its funding by Ps. 223.7 million, of which Ps. 21.6 million were
premiums.
In addition, in 2004, the Bank generated funds through the securitization
and sale of on-balance and off-balance sheet loans, respectively, for an
aggregate amount of Ps. 246.6 million. The Bank expects this source of funding
to become increasingly more significant in the future.
On May 31, 2004, the Bank's short term obligations received the "raA3"
rating from Standard&Poor's (on its local ratings scale). In accordance with
applicable rules, this rating enabled the Bank, after a period of more than two
years, to raise deposits from local pension funds. This rating also facilitated
deposit raising among other domestic institutional investors. On June 28, 2004,
the Bank's long-term debt received the "raBBB-" rating from Standard & Poor's
(on its local ratings scale). On May 18, 2005, Standard&Poor's raised the Bank's
local long-term debt rating to "raA" and the Bank's local short-term rating to
"raA2", as part of a general improvement of the local ratings of Argentine
financial institutions, as a result of an improved operating environment due to
the upcoming completion of the Argentine sovereign debt restructuring, and due
to the greater value of the Bank's public-sector assets and the Bank's improved
recent performance.
The Bank's annual shareholders meeting held on April 28, 2005, approved
the creation of a Global Program (the "Program") for the issuance and
re-issuance of non-convertible negotiable obligations, subordinated or
non-subordinated, adjustable or non-adjustable, secured or unsecured, for a
maximum outstanding face value during the period the Program, of up to Ps. 1.0
billion or its equivalent in any other currency. The Program shall have a
maximum term of five years beginning on the date the Program is authorized by
the CNV, or any other longer term authorized by the regulations. The negotiable
obligations may be issued in several series and/or classes during the period the
Program will be outstanding, with the possibility to re-issue the amortized
series without exceeding the Program's total amount, and with the possibility
that the maturity dates of the different series and/or classes issued
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occur after the Program's expiration date. The negotiable obligations tenor will
range from the minimum (currently 30 days) and the maximum (currently 30 years)
permitted by the CNV and the Argentine Central Bank regulations. The
shareholders meeting delegated to the Bank's Board of Directors (and/or to one
or more of its members, and/or to one or more members of the Bank's management,
if so decided by the Bank's Board of Directors), in accordance with the
applicable rules in force, the authority to carry out the issuance and placement
of the negotiable obligations under the Program, with broad powers to establish,
within the maximum Program amount, all the remaining terms and conditions of the
Program and those of each issuance and re-issuance thereof, including to file
for the public offering in foreign markets.
CONTRACTUAL OBLIGATIONS
In connection with our operating activities, we enter into certain
contractual obligations. Our main contractual obligations are contractual
obligations of the Bank.
The following tables show the principal amounts of our contractual
obligations and their contractual interest rates (mainly representing
contractual obligations of the Bank) as of December 31, 2004.
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LESS THAN
ANNUAL PAST 1 1 TO 3 3 TO 5 OVER 5
MATURITY INTEREST RATE TOTAL DUE YEAR YEARS YEARS YEARS
-------- ------------------- ----------- ------- ---------- ---------- ---------- ----------
BANCO GALICIA:
BONDS
Floating Rate Notes Due 2010 (1) ...... 2010 Libor + 350 b.p. Ps. 1,035.3 - - Ps. 388.2 Ps. 517.7 Ps. 129.4
Step-Up Notes Due 2014 (1) ............ 2014 3.0%(2) 1,362.1 - - - - 1,362.1
Subordinated Notes Due 2019 (1) (4) ... 2019 11.0%(3) 380.1 - - - - 380.1
9% Notes Due 2003 ..................... 2003 9.0% 34.6 Ps.34.6 - - - -
4th Series Floating Rate Notes Due
2005 ............................... 2005 4.0% 2.4 2.4 - - - -
7.875% Notes Due 2007 (5) ............. 2007 7.9% 216.0 - Ps.72.0 144.0 - -
7th Series Floating Rate Notes Due
2007 (5) ........................... 2007 Libor + 400 bp 128.4 - 42.8 85.6 - -
LOANS
Floating Rate Loans Due 2010
(Banks) (1) ........................ 2010 Libor + 350 b.p. 20.8 - - 7.8 10.4 2.6
Floating Rate Loans Due 2014
(Banks) (1) ........................ 2014 Libor + 85 b.p. 54.6 - - - - 54.6
Floating Rate Loans Due 2019
(Banks) (1) ........................ 2019 Libor + 578 b.p.(3) 6.8 - - - - 6.8
Step-Up Loans Due 2014 (1) ............ 2014 3.0%(2) 280.5 - - - - 280.5
Floating Rate Loans Due 2010
(International Entities) (1) ....... 2010 Libor + 350 b.p. 116.5 - - 43.7 58.3 14.5
Floating Rate Loans Due 2014
(International Entities) (1) ....... 2014 Libor + 85 b.p. 201.6 - - - - 201.6
Floating Rate Loans Due 2019
(International Entities) (1) ....... 2019 Libor + 578 b.p.(3) 28.5 - - - - 28.5
Trade Debt (1) ........................ 2005 Libor + 100 b.p. 32.6 - 32.6 - - -
2005/
Other Financial Loans 2007 Libor + 400 bp 30.2 - 11.0 19.2 - -
BICE Loans (Pesos) .................... Various CER + 4% 81.7 - 35.7 38.3 6.7 1.0
BICE Loans (Dollars) .................. Various Various(6) 35.9 29.7 1.7 4.5 - -
Argentine Central Bank - Financial
Assistance ............................ 2011 CER+2.0% 5,690.9 - 363.6 871.4 2,908.8 1,547.1
Argentine Central Bank - Advance to
Purchase the Hedge Bond (7) ....... 2012 CER+2.0% 2,571.1 - 321.4 642.8 642.8 964.1
Loan from Sedesa (8) .................. 2007 Libor + 300 bp 191.9 - - 191.9 - -
Peso-Denominated Loan from FFRE ....... 2008 CER + 8.0% 28.3 - 7.1 14.1 7.1 -
Dollar-Denominated Loan from FFRE (8).. 2005 8.1% 4.1 - 4.1 - - -
REPOS Various Libor + 350 bp 223.7 - - 223.7 - -
-------- ----------- ----------- ------- ---------- ---------- ---------- ----------
BANCO GALICIA URUGUAY:
Negotiable Obligations (9) ............ Various Various 556.4 - 108.4 137.2 148.4 162.4
-------- ----------- ----------- ------- ---------- ---------- ---------- ----------
TARJETAS CUYANAS:
Negotiable Obligations ................ 2002 8.0% 13.4 - 13.4 - - -
-------- ----------- ----------- ------- ---------- ---------- ---------- ----------
TOTAL ................................. Ps.13,328.4 Ps.66.7 Ps.1,013.8 Ps.2,812.4 Ps.4,300.2 Ps.5,135.3
=========== ======= ========== ========== ========== ==========
Principal only (does not include interest).
(1) Issued in 2004 as part of the restructuring of the foreign debt of the
Bank's Head Office and its Cayman Branch.
(2) The rate increases 1% on January 1st of each year, until reaching 7% on
January 1st, 2008.
(3) Interest paid in cash: 6% per annum from January 1st 2004 until (but not
including) January 1st, 2014. Unless the notes are previously redeemed,
the annual interest rate will increase to 11% per annum from that date
until (but not including) January 1st, 2019. Interest paid in additional
subordinated negotiable obligations due 2019: 5% per annum from January
1st, 2004, to be paid on January 1st, 2014 and January 1st, 2019.
(4) Excludes US$ 79 million of Subordinated Notes due 2019 held by us.
(5) Issued in 2002 as part of the restructuring of the debt of the Bank's
former New York Branch.
(6) Includes US$ 2.0 million of performing debt that accrues Libor+400 b.p.,
and US$10.0 million of past due debt restructured in February 2005. The
latter accrued Libor+550 b.p.
(7) The terms and conditions of the advance to be granted by the Argentine
Central Bank to purchase the Hedge Bond were established by Decree No.
905/02.
(8) Granted as part of the Galicia capitalization and liquidity plan.
(9) Issued in 2002 as part of the restructuring of Galicia Uruguay's deposits.
Excludes subordinated negotiable obligations for US$ 43 million held by
us.
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OTHER COMMITMENTS
The Bank is responsible for 14.53% of the financial debt of Correo
Argentino S.A. if the contract between such company and the Argentine government
is terminated for any cause, including the bankruptcy of Correo Argentino S.A.
The Argentine government rescinded the contract with Correo Argentino on
November 19, 2003. On December 16, 2003, an Argentine court declared Correo
Argentino bankrupt. That decision was appealed and an Argentine appeals court
reverted the bankruptcy into a "cram down" process in accordance with Section 48
of the Argentine Bankruptcy and Reorganization Proceedings Law. As of the date
of this annual report, no claims from Correo Argentino's financial creditors
have been received. On March 25, 2004, a Ps.7.3 million guarantee in favor of
the Argentine government in connection with Correo Argentino S.A.'s concession
was called and the Bank paid such amount in accordance with the terms and
conditions set by the National Communications Commission, and applicable
regulations. As of December 31, 2004, both the Bank's interest in Correo
Argentino S.A. as well as the credits against it had been written off. The Bank
has provisioned the estimated amount of contingencies related to Correo
Argentino S.A.
As a shareholder of the water-supply concessionaires Aguas Argentinas
S.A., Aguas Provinciales de Santa Fe S.A. and Aguas Cordobesas S.A., Banco
Galicia has committed, along with the other shareholders, to provide financial
support to these companies if they were unable to fulfill the commitments they
have undertaken with international financial bodies. The Inter-American
Development Bank ("IDB) requested that the shareholders of Aguas Argentinas S.A.
and Aguas Provinciales de Santa Fe S.A. grant loans to those companies. On
February 18, 2003, and July 14, 2004, assistance was granted to Aguas Argentinas
S.A. in the amount of US$ 0.6 million and US$ 6.3 million, respectively. On
November 5, 2003, at the request of the International Financial Corporation
("IFC"), a loan was granted to Aguas Provinciales de Santa Fe S.A. for US$ 0.3
million.
In addition, in the case of anticipated termination of the concessions, in
accordance with the contracts signed, the Bank and the other shareholders, on a
prorrata basis, had guaranteed the repayment by these water-supply
concessionaires of their debts with the IDB, the European Investment Bank and
the IFC. With respect to Aguas Provinciales de Santa Fe S.A., in February 2005,
the Bank and the other shareholders renegotiated with the IDB and the IFC the
commitments in connection with such company. In the context of the agreement
reached, the Bank made a US$ 7.1 million disbursement, granted a US$ 2.3 million
guarantee in favor of the IDB and the IFC, and assumed a contingent commitment
for the same amount. The latter being the only commitments with the IDB and the
IFC assumed in connection with Aguas Provinciales de Santa Fe S.A.
These water-supply companies are in the process of negotiating with the
Argentine government and the governments of the provinces of Cordoba and Santa
Fe different issues in connection with their concession contracts, including
increases in tariffs and investment plans. The timing and results of these
negotiations are unknown and cannot be estimated.
The Bank has recorded these contingencies in off-balance sheet accounts
and has provisioned their estimated amounts. See note 3 to our audited
consolidated financial statements.
OTHER COMMITMENTS -- OPERATING LEASES
As of December 31, 2004, we leased certain properties used as a part of
our distribution network. The estimated future lease payments in connection with
these properties is as follows:
In millions of pesos (1)
------------------------
2005 Ps.12.4
2006 12.4
2007 11.3
2008 11.3
2009 11.3
2010 AND AFTER 11.3
-------
TOTAL Ps.70.0
-------
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(1) Future lease payments include the CER adjustment until December 31, 2004,
only.
CRITICAL ACCOUNTING POLICIES
We believe the following critical accounting policies applied by us and
our main subsidiary, Banco Galicia, affect our more significant judgments and
estimates used in the preparation of our audited consolidated financial
statements.
ALLOWANCE FOR LOAN LOSSES
Banco Galicia's allowance for loan losses is maintained in accordance with
Argentine Central Bank rules. Under such rules, a minimum allowance for loan
losses is calculated primarily based upon the classification of Banco Galicia's
commercial loan borrowers and upon delinquency aging (or the number of days the
loan is past due) for Banco Galicia's individual loan borrowers (including
commercial loans of less than Ps. 200,000). Although we are required to follow
the methodology and guidelines for determining the minimum loan loss allowance
as set forth by the Argentine Central Bank, we are allowed to establish
additional allowances for loan losses. The determination of the allowance for
loan losses requires a significant degree of judgment.
For commercial loans, we are required to classify all of Banco Galicia's
commercial loan borrowers. In order to perform the classification, we must
consider the management and operating history of the borrower, the present and
projected financial situation of the borrower, the borrower's payment history
and ability to service the debt, the capability of the borrower's internal
information and control systems and the risk in the sector in which the borrower
operates. We apply the Argentine Central Bank minimum loss percentages to Banco
Galicia's commercial loan borrowers based on the loan classification and the
nature of the collateral, or guarantee, of the loan. In addition, based on the
overall risk of the portfolio, we consider whether or not additional loan loss
reserves in excess of the minimum required are warranted.
For Banco Galicia's consumer loan portfolio, we classify loans based upon
delinquency aging, consistent with the requirements of the Argentine Central
Bank. Minimum loss percentages required by the Argentine Central Bank are also
applied to the totals in each loan classification.
Pursuant to Argentine Central Bank Communique "A" 3918, between March 31
and December 31, 2003, the loan loss reserve for debtors with a total
indebtedness with the whole financial system of up to Ps. 5 million was
established exclusively based upon delinquency aging (i.e., in the same manner
as consumer loans). In accordance with the communique, between December 1, 2001,
and March 31, 2003, the number of days such loans had been past due was computed
taking one day for every three days past due in the period from December 1,
2001, to March 31, 2003. This treatment was also provided to the portfolio of
commercial loans of up to Ps. 200.000, which under the previous rules were
already automatically classified according to their delinquency aging.
SECURED LOANS
In addition, Banco Galicia has a significant amount of outstanding secured
loans to the Argentine government. Pursuant to Argentine Central Bank rules,
these loans do not require an allowance for loan losses. However, beginning
March 2003, Communique "A" 3911 required these loans to be valued at the lower
of their book value or their net present value calculated using an increasing
discount rate specified by such Communique and complementary rules. For more
information, see Item 4. "Information on the Company -- Selected Statistical
Information -- Government and Corporate Securities -- Valuation."
Given the current situation in Argentina, realization of these loans at
their contractual maturity is uncertain. In 2003, the Argentine government
issued regulations to restructure the financial assistance received by banks
from the Argentine Central Bank and apply the proceeds of certain public-sector
assets held by banks which had to be granted as collateral to repay the
financial assistance owed to the Argentine Central Bank. The Bank restructured
its financial assistance from the Argentine Central Bank in accordance with such
regulations and granted as collateral of such assistance all of its portfolio of
secured loans.
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GOVERNMENT SECURITIES AND OTHER ACCOUNTS RECEIVABLE WITH THE GOVERNMENT
In accordance with Argentine Banking GAAP the Bank classifies its
portfolio of government securities into trading and investment securities,
unlisted government securities and securities issued by the Argentine Central
Bank.
Realized and unrealized gains and losses and interest income on government
securities are included as "Net Income/(Loss) from Government Securities" in our
financial statements.
Government Securities in Investment Accounts - Boden 2012 Received as
Compensatory Bonds
We carry government securities in investment accounts at their cost plus
accretion of discount or amortization of premiums and accrued interest, as
applicable. For government securities previously included in trading accounts,
the cost value is their closing market value as of the day before their transfer
to an investment account.
The Boden 2012 received as Compensatory Bond are classified as securities
in "Investment Accounts" at par value based upon Argentine Banking GAAP,
notwithstanding that the estimated market value of such bonds is significantly
lower than par value. As of May 20, 2005, Boden 2012 were trading at
approximately 87.18% of par value. As market conditions change, adjustments to
the estimated market value of the Boden 2012 are not reflected in our financial
position. Future sales or settlements of the Boden 2012 will reflect the market
conditions at the time and may result in a significant gain or loss that
represents the difference between the settlement amount and the then carrying
value.
Effective January 7, 2003, Argentine Central Bank Communique "A" 3857
restricted the possibility of classifying securities as holdings in investment
accounts to those existing in the Bank's portfolio as of December 31, 2002,
except for the Compensatory Bond received.
Unlisted Government Securities - Bogar and External Notes
Argentine Central Bank's Communique "A" 3911, dated March 28, 2003, and
complementary rules (mainly Communiques "A" 4084 and "A" 4163) established the
rules in effect for the valuation of secured loans (Decree No. 1387/01),
government securities not subject to capital requirements to cover market risks
(unlisted government securities), secured promissory notes or bonds (Bogar)
issued by the FFDP (Decree No. 1579/02), and other loans to the non-financial
public sector, except for, among others, government securities accounted in
investment accounts, the Compensatory and the Hedge Bonds and the securities
issued by the Argentine Central Bank. These securities had to be carried at the
lower between book value and their present value calculated using a discount
rate specified by the above mentioned rules and in the case of past due and
unpaid public sector assets, the cash flow of the Bogar had to be used to
determine the present value.
Bogar granted as collateral of the financial assistance from the Argentine
Central Bank were carried at their present value. Bogar to be granted as
collateral of the advance to be received from the Argentine Central Bank for the
purchase of the Hedge Bond were recorded at the value admitted by the Argentine
Central Bank for assets used as collateral.
The External Notes were included as eligible for the debt exchange carried
out by the Argentine government to restructure its defaulted foreign debt, which
closed on February 25, 2005. As of December 31, 2004, and as a consequence of
the Bank's decision in January 2005, to tender its External Notes in the
aforementioned exchange, the External Notes were recorded, in accordance with
Argentine Central Bank's valuation rules, at a value equal to the present value
of the cash flows of the Bogar As of December 31, 2003, the External Notes were
held for investment and carried at their face value.
The Bank opted to exchange its holdings of External Notes for
"Peso-Denominated Discount Bonds" and "GDP-Linked Units" in an offer not subject
to proration. The chosen option implied receiving new debt instruments for a
principal amount equal to 33.7% of the eligible debt.
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In order to reduce the effect on bank balance sheets of participating in
the exchange offer, through Communique "A" 4270, the Argentine Central Bank
allowed the aforementioned "Peso-denominated Discount Bonds" and the "GDP-Linked
Units" to be recorded at the lowest of : (i) the carrying value in accordance
with the prevailing valuation rules; and (ii) the total future nominal cash
payments up to maturity specified by the terms and conditions of the new
securities. This valuation will be reduced in the amount of the perceived
service payments and accrued interest will not be recognized.
As market conditions change, adjustments to the estimated market value of
Bogar and External Notes are not reflected in our financial position. Future
sales or settlements of Bogar and External Notes will reflect the market
conditions at the time and may result in a significant gain or loss that
represents the difference between the settlement amount and the then carrying
value. As of May 20, 2005, the market value of the Bogar was approximately
78.98% of par value. Currently, the External Notes do not have an official
trading market.
Other Accounts Receivable with the Government -- Compensatory and Hedge
Bonds
The right to receive Boden 2012 as Compensatory and Hedge Bonds is
recorded as "Other Receivables Resulting from Financial Intermediation" and is
being recognized at the par value of the Boden 2012 to be issued,
notwithstanding that the estimated market value of the bonds linked to this
right is significantly below that carrying value. As stated above, as of May 20,
2005, Boden 2012 were trading at approximately 87.18% of par value.
As of December 31, 2004, the settlement of the right to receive Boden 2012
as Compensatory and Hedge bonds was under discussion with the Argentine Central
bank and subject to its approval. Therefore, as of December 31, 2004, the Bank
had provisioned the estimated differences. In March 2005, the Bank decided to
accept the amount of Compensatory and Hedge Bonds determined by the Argentine
Central Bank and the differences resulting from such decision have been written
off against the provisions established for such purpose. See Item 4.
"Information on the Company -- Main Regulatory Changes in 2002, 2003 and 2004 --
Compensation to Financial Institutions -- For the Asymmetric Pesification and
its Consequences."
Trading Securities and Securities Issued by the Argentine Central Bank
We carry our government and other securities trading portfolios, including
the securities issued by the Argentine Central Bank (Lebac and Nobac) at their
estimated fair value. These amounts are based on either quoted market prices or
estimated values derived by the Bank utilizing dealer quotes. As market
conditions change, adjustments to the fair value of securities and derivatives
will be made to reflect those conditions. Future sales of these securities will
reflect the market conditions at the time and may differ significantly from the
estimated fair market value at the balance sheet date.
GOODWILL
Goodwill is carried at cost less accumulated amortization. The carrying
amount of goodwill is analyzed for impairment based on estimates of future
undiscounted cash flows generated by the business acquired. Because of the
economic conditions in Argentina and their effect on the estimated cash flows of
our acquired businesses that have goodwill, adjustments for impairment of
goodwill increased in 2002. Given these adjustments and the improvement in the
overall Argentine economic situation in 2003, adjustments for impairment were
not made in 2003 and 2004.
INTANGIBLE ASSETS
Effective March 2003, Argentine Central Bank Communique "A" 3916
established that the asset recorded for the difference resulting from compliance
by the Bank with court decisions made in connection with amparo claims
challenging the applicability of regulations on deposits with the financial
system within the framework of the provisions of Law No. 25,561, Decree No.
214/02 and supplementary rules should be recorded under this caption, and that
the amortization of this deferred loss should take place in a maximum of 60
equal consecutive monthly installments beginning in April 2003.
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REPOSSESSED ASSETS AND REAL ESTATE HELD FOR SALE
We carry our repossessed asset portfolio and real estate held for sale at
the lower of their carrying value or fair market value. Our estimates of fair
market values of such repossessed assets and real estate held for sale consider
external and internal appraisals. These appraisals are based on assumptions on
market conditions and presume an ability to dispose of the assets in a
reasonable time period. Should our assumptions regarding market conditions
change, we would adjust our estimates of the fair value of our repossessed asset
portfolio accordingly.
OTHER RECEIVABLES FROM FINANCIAL BROKERAGE AND MISCELLANEOUS RECEIVABLES
We carry other receivables from financial brokerage and miscellaneous
receivables net of allowances for uncollectible amounts. Our judgment regarding
the ultimate collectibility is performed on an account-by-account basis and
considers our assessment of the borrower's ability to pay based on factors such
as the borrower's financial condition, past payment history, guarantees and
past-due status.
EQUITY INVESTMENTS IN OTHER COMPANIES
We carry these investments based on the equity method where a significant
influence in the corporate decision-making process exists. In other cases, the
equity investment is carried at the lower of cost plus dividends or the equity
method value. These balances may be adjusted considering the effects of economic
conditions and other developments on the financial statements of these
corporations.
ADVANCE TO PURCHASE THE HEDGE BOND
In connection with the Bank's right to purchase the Hedge Bond, the Bank
has recognized the associated liability to fund the Hedge Bond as if the Bank
had already executed the debt agreement with the Argentine Central Bank. This
liability to the Argentine Central Bank is denominated in pesos and accrues
interest at CER plus 2.0%, retroactive to February 3, 2002, as provided by
Decree No. 905/02.
U.S. GAAP - CRITICAL ACCOUNTING POLICIES
The above critical accounting policies for Argentine Banking GAAP are key
accounting policies on which our financial condition and results of operations
under U.S. GAAP are dependent. Such key accounting policies involve complex
matters or are based on subjective judgments or decisions. Additional
information in connection with certain key accounting policies for U.S. GAAP
purposes follows.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents the estimate of probable losses
in the loan portfolio. Determining the allowance for loan losses requires
significant management judgments and estimates including, among others,
identifying impaired loans, determining customers' ability to pay and estimating
the fair value of underlying collateral or the expected future cash flows to be
received. Actual events will likely differ from the estimates and assumptions
used in determining the allowance for loan losses. Additional provisions for
loan losses could be required in the future.
The resolution of the allowance for the Argentine provinces secured loans
outstanding in 2002, currently Bogar, was subject to the economic and political
situation in Argentina.
FAIR VALUE ESTIMATES
Quoted market price in active markets is the most reliable measure of fair
value.
During 2001, the Bank swapped, effective as of November 6, 2001, its
Argentine government debt instruments under the promissory note/bond program for
secured loans. Subsequently, Decree No. 644/02
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established the conversion into pesos of the secured loans, which were
originally denominated in US dollars, at the exchange rate of Ps. 1.4 per US$
1.0, pursuant to Decree No. 471/02, which also set the new interest rates
to be accrued by the secured loans. An estimate of the fair value of the loans
received (in exchange of the Argentine national government debt instruments
which swap had been completed by December 31, 2001) was made absent observable
quoted market prices for such loans based on the balance sheet date on the
contractual cash flows of the loans received or to be received, discounted at an
estimated market rate. The estimated fair value of the loan constitutes the cost
basis of the asset. Any difference between the old asset and the fair value of
the new asset is recognized as a gain or loss and the difference between the
cost basis and amounts expected to be collected are amortized on an effective
yield base over the life of the loans.
The secured loans to be received in exchange of Argentine provincial
governments debt instruments were considered to be impaired as of December 31,
2001, given that the swap for these instruments was not completed until 2003. In
accordance with SFAS 114 and accordingly, an allowance for loan losses on
secured loans to Argentine provincial governments was established as of December
31, 2001 and 2002.
As of December 31, 2002, the Bank had offered to exchange certain loans to
Argentine provincial governments for secured loans or securities (Bogar) issued
by the FFDP as explained under Item 4."Information on the Company -- Selected
Statistical Information -- Loan Portfolio." The Bank tendered in the exchange
its entire portfolio of loans to Argentine provincial governments and opted to
receive promissory notes. The Bank received Bogar for such provincial debt which
exchange had been completed as of December 31, 2003. This exchange has
been accounted for similar to the 2001 swap, with the securities received
(Bogar) valued at estimated market value upon receipt.
Under U.S. GAAP purposes and in accordance with SFAS No. 115, satisfaction
of one monetary asset (in this case a loan) by the receipt of another monetary
asset (in this case a security, the Bogar) for the creditor is generally based
on the market value of the asset received in satisfaction of the debt. In this
particular case, the Bogar received is significantly different in structure and
interest rates than the loans swapped. Therefore, such amounts should initially
be recognized at their market value. The estimated fair value of the loan
constitutes the cost basis of the asset. Any difference between the old asset
and the fair value of the new asset is recognized as a gain or loss and the
difference between the cost basis and amounts expected to be collected are
amortized on an effective yield base over the life of the security.
Under U.S. GAAP, as of December 31, 2003 and 2004, these Bogar are
classified by the Bank as available for sale securities and recognized at market
with the unrealized gain or loss from changes in market values recognized as a
charge or credit to equity through other comprehensive income. In connection
with estimating the fair value of the Bogar, the Bank used quoted market values.
There has been limited activity in the trading of these securities, and, as
such, the quoted market values may not represent the price of an actual sale
between a willing buyer and a willing seller or amounts at which the Bogar will
ultimately be realized.
Should secured loans and/or Bogar be available to offset debt due to the
Argentine Central Bank or other Argentine government entities, some or all of
the losses previously recognized on these assets may be reversed.
For U.S. GAAP purposes, the Compensatory Bond received and receivable are
carried at the underlying fair value of the securities to be received. These
estimated fair values are based on the quoted market prices of the Boden 2012
(as quoted on the MAE). These fair market value quotations are based on
relatively low trading volumes and the our carrying value may not be
representative of the value we would have received if we had disposed of these
securities or receivables at the year-end date. Furthermore, it is likely that
the fair market values will fluctuate as economic conditions and other factors
change in Argentina and it is reasonably possible that the realization and
short-term carrying values of these securities will differ significantly from
their carrying value as of December 31, 2004.
Through Law No. 25,561 and Decrees No. 424/01, 1005/01 and 1226/01, the
Argentine government permitted taxpayers to meet their tax obligations with
public-debt securities. The Bank took advantage of this opportunity by
allocating External Notes to the payment of its tax obligations in fiscal year
2002 and part of fiscal year 2003. Therefore, we determined that the carrying
value was a reasonable estimate of their fair value.
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During 2003, the Argentine government suspended this regime and, as a
result, we concluded that these obligations were impaired and an other than
temporary loss was recognized.
Under U.S. GAAP, the External Notes are classified as available for sale
securities and, as of December 31, 2003 and 2004, were recorded at fair value,
the respective unrealized gain or loss being charged to the results for the year
or to equity through "Other Comprehensive Income," depending on whether it
represents an "other than temporary decline" in their value or not. These notes
were in default as of December 31, 2003 and December 2004. There are no
published market values for these securities. Virtually no trades of these
securities occurred in 2003, nor could the Bank use these securities to
extinguish tax liabilities.
For U.S. GAAP purposes as of December 31, 2003, the fair value of these
securities was considered to be the carrying value assigned to the External
Notes by the Argentine Central Bank for purposes of their use as collateral of
the advance to be granted by such entity to the Bank to purchase the Hedge Bond,
and the Group believed this was a reasonable estimate of their fair value. As of
December 31, 2004, having the External Notes been tendered to the exchange to
restructure the Argentine government foreign debt launched in January 2005, and
therefore the Bank being precluded from using such notes as collateral of the
advance to be granted by the Argentine Central Bank for the purchase of the
Hedge Bond, we determined that the fair value of the External Notes was the
discounted cash flow of the Peso-denominated Discount Bonds that the Bank
elected to receive in exchange for the External Notes in the aforementioned
restructuring. Therefore, it is reasonably possible that the estimated fair
value of those securities will change in the near term in amounts that are
material to the Bank's financial statements.
In addition, Banco Galicia holds retained interests in securitization
trusts. Those investments are carried at estimated fair value. Determining fair
values of such investments requires estimating future cash flows and applying a
discount rate to those cash flows. Such estimates do not purport to represent
what those securities could be sold for at the balance sheet date or what those
securities will be settled for. The fair values are affected by the performance
of the underlying loans in the trust and changes in estimated discount rates and
other assumptions. Discount rates are subject to significant fluctuations as
affected by, among other things, the economic and political situation in
Argentina. Therefore, it is reasonably possible that the estimated fair value of
those securities will change in the near term in amounts that are material to
the Bank's financial statements.
IMPAIRMENT OF ASSETS OTHER THAN LOANS
Certain assets, such as goodwill, equity investments, securities available
for sale and premises and equipment, are subject to an impairment review. Asset
impairment charges require considerable judgment and are recorded when market
value declines below the carrying value, other than temporary declines, or where
the cost of the asset is deemed to not be recoverable.
DEFERRED TAX ASSET VALUATION ALLOWANCE
Deferred tax assets and liabilities are recorded for the estimated future
tax effects of temporary differences between the carrying amounts of assets and
liabilities recorded for accounting and tax reporting purposes and for the
future tax effects of net operating loss carryforwards. We had a significant
amount of deferred tax assets as of December 31, 2002, December 31, 2003 and
December 31, 2004, and the carrying amounts of those deferred tax assets are
subject to management's judgment based on available evidence that realization is
more likely than not and they are reduced, if necessary, by a valuation reserve.
Based on the generation of significant tax losses and the uncertainty with
respect to the generation of taxable income in the near term, a valuation
reserve on the net deferred tax assets, except those associated with certain of
our subsidiaries for which realization is more certain than not, has been
recognized.
In the event that all or part of our net deferred tax assets in the future
become realizable under U.S. GAAP, an adjustment to our deferred tax assets
would be credited to income tax expense in the period the determination was
made.
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ASSETS NOT RECOGNIZED UNDER U.S. GAAP
Under U.S. GAAP, the right to purchase the Hedge Bond is not considered an
asset under Financial Accounting Standards Board Statement of Financial
Accounting Concepts No. 6, Elements of Financial Statements. Under this concepts
statement, assets are defined as "... probable future economic benefits obtained
or controlled by an entity as a result of past transactions or events." In
addition, one of the three essential characteristics of an asset is that an
entity can obtain the benefit and can control others' access to it. As of
December 31, 2004, 2003, and 2002, the Bank could not obtain the benefit of the
Hedge Bond until the transaction is approved by the Argentine Central Bank and
the Bank remits funds to the Argentine Central Bank. The liability under U.S.
GAAP would be recognized when the Bank actually enters into the financing
arrangement.
As of December 31, 2004 and 2003, under Argentine Banking GAAP, the Bank
had recorded under "Intangible Assets" the difference arising from the
reimbursement of restructured deposits at the market exchange rate pursuant to
amparo claims and the carrying value of these restructured deposits. As of
December 31, 2002, this difference had been recorded under Argentine Banking
GAAP under "Other Receivables from Financial Brokerage." The receivable for
differences related to amparo claims does not represent an asset under U.S.
GAAP.
FINANCIAL GUARANTEES
Pursuant to Decree No. 1836/02 and the Argentine Central Bank Communique
"A" 3828, the Bank entered into the exchange offer to exchange restructured
deposits certificates ("CEDROs") for Boden 2005, 2006, 2012 and 2013. The Boden
offered to the holders of the CEDROs are dollar-denominated unsecured Argentine
government bonds. As part of the restructuring, the Bank was required to
guarantee the payment of the Boden to the holders of the CEDROs at a price equal
to Ps. 1.4 per US$ adjusted by applying the accumulated CER from February 3,
2002 to the expiration date of the Boden. The price can not exceed the Argentine
peso per US$ free exchange rate at the expiration date of the Boden.
Under U.S. GAAP, effective January 1, 2003, we adopted FAS Interpretation
No. 45. As a result, we recognized a liability for the fair value of the
obligations assumed. If the fair value of the obligations assumed change, we
might have a significant impact in our results.
ITEM 5B. LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
As a financial holding company, we generate our net earnings/losses within
our operating subsidiaries, including Banco Galicia, our main operating
subsidiary. Until 2001, the Bank was the primary source of funds available to us
in the form of dividends.
The Bank's dividend-paying ability was impaired by the effects of the
Argentine economic crisis since late 2001 on its income-generation capacity. In
addition, in 2002, like other financial institutions operating in Argentina, the
Bank was prohibited from paying dividends by the Argentine Central Bank.
Resolution No. 81/02 of the board of directors of the Argentine Central Bank
prohibits the Bank from paying dividends for as long as financial assistance
from the Argentine Central Bank is outstanding. In addition, the loan agreements
entered into by the Bank as part of its foreign debt restructuring limit the
Bank's ability to pay dividends on its capital stock. See Item 8. "Financial
Information -- Dividend Policy and Dividends -- Dividend Policy."
We have not received dividends from the Bank since October 2001. See Item
8. "Financial Information -- Dividend Policy and Dividends -- Dividends."
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 --
Argentine Banking System and Regulation -- Argentine Banking Regulation --
Lending Limits."
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Our current policy is to retain earnings to pay for Grupo Galicia's
operating expenses on a non-consolidated basis and to support the growth of
certain of our businesses. As of December 31, 2004, on a non-consolidated basis,
we had cash and due from banks of Ps. 0.5 million and short-term investments of
Ps. 36.9 million.
We hold US$ 99.4 million of face value of subordinated negotiable
obligations (with a US$ 79.0 million book value) issued by Banco Galicia in
exchange for the 149 million preferred shares issued by us in connection with
the Bank's foreign debt restructuring and US$ 43 million of subordinated
negotiable obligations issued by Galicia Uruguay. We use the interest payments
on these instruments to pay our operating expenses.
Grupo Galicia on a non-consolidated basis does not have any financial debt
outstanding.
Each of our subsidiaries is responsible for its own liquidity management.
Our ability to raise funds in the local market, limited to Argentine
Central Bank financing at the beginning of 2002, as a result of the Argentine
2001-2002 crisis and its effects on the Bank, improved in the second half of
2002 and in 2003 with the implementation of the Galicia capitalization and
liquidity plan and the continuous increase in deposits, and was normalized, in
2004, with the completion of the restructuring of the foreign debt of the Bank's
Head Office in Argentina and that of its Cayman Branch and the restructuring of
the Bank's debt with the Argentine Central Bank. The completion of the process
of restructuring the Bank's foreign debt in 2004 has also improved our ability
to raise funds in the international market.
Even though our liquidity increased since 2002, it has been insufficient
to cover our operating expenses, capital expenditures and all of our financial
obligations in accordance with their contractual terms until the completion of
our debt restructuring which finalized in May 2004. Having completed the
restructuring of the Bank's foreign debt, its financial assistance from the
Argentine Central Bank and the debt of its main subsidiaries (including Galicia
Uruguay, Galicia Cayman (in provisional liquidation) and the regional
credit-card companies) consistently with the cash flow of their assets, our
liquidity is currently sufficient to cover our operating expenses and capital
expenditures, and our contractual obligations in accordance with their
contractual terms.
In light of economic conditions in Argentina, our access to long-term
financing for significant amounts will remain substantially limited to us or to
the Bank in the short term. Management believes that in 2005 we will fund our
cash needs arising from capital expenditures and financial commitments at their
current contractual maturity with the cash derived from operations.
As of December 31, 2004, on a consolidated basis, we had Ps. 988.7 million
in available cash (defined as total cash on hand and cash equivalents).
For a discussion of the Bank's liquidity management, see " -- Banco
Galicia (Unconsolidated) Liquidity Management" below.
CONSOLIDATED CASH FLOWS
Our consolidated statements of cash flows were prepared using the
measurement methods prescribed by the Argentine Central Bank, but in accordance
with the presentation requirements of SFAS No. 95, Statement of Cash Flows. SFAS
No. 95 establishes specific presentation requirements and additional disclosures
but does not provide guidance with respect to inflation-adjusted financial
statements. In our cash flow statements, the effect of inflation restatements
and foreign exchange gains and losses on cash flow related to financing and
operating activities has been included in the line item "Monetary Loss," and the
effect of inflation on cash balances has been included in a separate line item
after cash flows from investing activities. No inflation adjustment was
performed in 2004. See "Presentation of Financial Information" and our
consolidated cash flow statements as of and for the fiscal years ended December
31, 2004, December 31, 2003, and December 31, 2002, included in this annual
report.
At the close of fiscal year 2004, our available cash (and cash
equivalents) had increased in the amount of Ps. 162.5 million from the Ps. 826.2
million of available cash (and cash equivalents) at the close of the prior
fiscal
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year, representing an increase of 19.7%. This increase occurred despite our Ps.
109.9 million net loss for fiscal year 2004.
The increase in our available cash in fiscal year 2004 is explained by the
following changes, classified by type of cash-providing or cash-using activity:
- the net use of cash by operating activities in the amount of Ps. 215.6
million. This amount results from adding or subtracting to the Ps. 109.9
million net loss for the fiscal year: (i) all of the income statement
items that did not represent a decrease or increase, respectively, in cash
and (ii) all transactions related to operating activities that involve an
increase or a decrease in cash. During 2004, the items that did not
represent a decrease in cash available and that therefore must be added to
the fiscal year net loss were: (i) depreciation and amortization of fixed
assets and intangible assets for Ps. 235.3 million and (ii) an increase in
allowances for loans and other losses, net of reversals, for Ps. 69.1
million. The items that did not represent an increase in cash and that
therefore must be subtracted to the fiscal year's net loss were the Ps.
142.5 million increase in income from the restructuring of the Bank's
foreign debt completed in May 2004. In addition, the following items
generated cash movements: (i) a Ps. 273.3 million decrease in other
liabilities, mainly comprised of lower interest on foreign debt subject to
restructuring (for Ps. 77.0 million), payments on restructured trade loans
(for Ps. 41.6 million), payments on the loan with the FFRE (for Ps. 54.5
million), and lower other contingencies (for Ps. 50.0 million), (ii) Ps.
91.6 million decrease in government securities, generated by proceeds from
Bogar (monthly interest payments) and Boden 2012 (semiannual interest
payments) and (iii) a Ps. 74.8 million increase in other assets mainly
attributable to greater leasing activity.
- the net use of cash by investing activities in the amount of Ps. 240.2
million, mainly attributable to the net effect of: (i) a Ps 112.4 million
decrease in cash as a result of a net increase in the Bank's loan
portfolio and (ii) a Ps. 131.8 million net use of cash applied to
intangible assets (mainly in connection with the payment of deposits
pursuant to amparo claims).
- the net generation of cash by financing activities in the amount of Ps
618.3 million, mainly attributable to: (i) a Ps. 1,415.0 million increase
in cash generated by the increase in deposits which is net of the payment
by Galicia Uruguay and Galicia Cayman (in provisional liquidation), during
2004 of the amounts contemplated in the deposit restructuring agreements
reached with its depositors and of the settlement of the exchange offer
made to its depositors in early 2004, (ii) amortization of long term
indebtedness, for Ps. 289.7 million, reflecting mainly the payments by
Galicia Uruguay of negotiable obligations (Ps. 183 million) issued by it
to restructure its deposits, which payments corresponded to the
above-mentioned restructuring agreement reached with depositors, with the
remaining amount corresponding to payments on a credit line from a
domestic bank, (iii) payments of principal and interest made by the Bank
in connection with the financial assistance from the Argentine Central
Bank, for Ps. 453.8 million, with the remaining Ps. 107.2 million
corresponding to payments on debt of the regional credit card companies,
(iv) a Ps. 261.7 million increase in cash generated by the repurchase
agreement with Boden 2012 and (v) Ps 207.6 million principal and interest
payments on the debt restructured, which was completed in May 2004, made
to settle the exchange.
The increase in our available cash in fiscal year 2003 is explained by the
following changes, classified by type of cash-providing or cash-using activity:
- the net use of cash by operating activities in the amount of Ps. 344.0
million. This amount results from adding or subtracting to the Ps. 222.2
million net loss for the fiscal year (i) all of the income statement items
that did not represent a decrease or increase, respectively, in cash and
(ii) all transactions related to operating activities that involve an
increase or a decrease in cash. During 2003, the items that did not
represent a decrease in cash available and that therefore must be added to
the fiscal year net loss were (i) depreciation and amortization of fixed
assets and intangible assets for Ps. 215.9 million and (ii) an increase in
allowances for loans and other losses, net of reversals, for Ps. 118.9
million. The items that did not represent an increase in cash and that
therefore must be subtracted to the fiscal year's net loss were (i) a Ps.
324.1 million increase in assets due to the CER adjustment accrued and
(ii) the Ps. 90.2 million decrease in the receivable for the Compensatory
Bond related to the adjustment that the Bank made to the
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carrying value of compensation to be received for the asymmetric
pesification. In addition, Ps. 314.3 million was used to increase
government securities (Lebac).
- the net generation of cash by investing activities in the amount of Ps.
629.8 million, mainly attributable to the net effect of: (i) the increase
in available cash for Ps. 734.7 million as a result of a net decrease in
the Bank's loan portfolio, reflecting primarily a decrease in Galicia
Uruguay's loan portfolio and (ii) a Ps. 124.5 million net use of cash
applied to an increase in intangible assets.
- the net use of cash by financing activities in the amount of Ps. 31.6
million, mainly attributable to: (i) a Ps. 782.7 million increase in cash
generated by an increase in deposits which is net of the payment by
Galicia Uruguay and Galicia Cayman (in provisional liquidation), during
2003, of the first and second installments contemplated in the deposit
restructuring agreements reached with depositors, (ii) a Ps. 537.1 million
amortization of long term indebtedness, reflecting mainly the payments by
Galicia Uruguay of negotiable obligations issued by this company to
restructure its deposits, which payments corresponded to the above
mentioned first and second installments contemplated in the deposit
restructuring agreement reached with depositors, and the payment made by
Galicia Uruguay to settle the exchange offered to its customers in 2003 of
restructured deposits for different alternatives, including a cash payment
and (iii) the payments made by the Bank's Argentine operation in
connection with the financial assistance from the Argentine Central Bank,
mainly corresponding to the payment of interest, in the amount of Ps.
252.6 million.
BANCO GALICIA CONSOLIDATED LIQUIDITY GAPS
Liquidity risk is the risk that liquid assets are not available for the
Bank to meet financial commitments at contractual maturity, take advantage of
potential investment opportunities and meet demand for credit.
To monitor and control liquidity risk, the Bank monitors and
systematically calculates the gaps between financial assets and liabilities
maturing within set time intervals based on contractual maturity. All of the
deposits in current accounts and other demand deposits and deposits in savings
accounts are included in the first time interval. These figures are used to
simulate different liquidity crisis scenarios based on assumptions stemming from
historical experience.
As of December 31, 2004, the gaps between maturities of the Bank's
financial assets and liabilities based on contractual maturity were as follows:
AS OF DECEMBER 31, 2004 (1)
------------------------------------------------------------------------------
LESS THAN 1-5 5-10 OVER 10 UNDER
ONE YEAR YEARS YEARS YEARS RESTRUCTURING TOTAL
--------- ---------- ---------- -------- ------------- ---------
(in millions of pesos, except ratios)
ASSETS
Cash and Due from Banks................... Ps. 499.6 - - - - PS. 499.6
Argentine Central Bank - Escrow
Accounts................................. 562.0 - - - - 562.0
Overnight Placements...................... 379.2 - - - - 379.2
Loans - Public Sector..................... 69.9 Ps. 2427.8 Ps. 2074.3 Ps. 2.6 - 4,574.6
Loans - Private Sector.................... 2319.4 680.2 216.4 15.9 - 3,231.9
Government Securities..................... 1457.8 3434.8 3459.8 1321.9 Ps. 749.7(2) 10,424.0
Corporate Debt Securities................. 11.2 3.3 5.7 - - 20.2
Financial Trusts (Galtrust I, II and V -
Galicia Mortgage Loans Trust)........... 66.1 346.2 347.6 247.5 - 1,007.4
Financial Trusts (Special Fund Former
Almafuerte and Mendoza Banks)............ - 287.7 - - - 287.7
Assets under Financial Lease.............. 31.5 68.7 0.7 - - 100.9
Secured Loans Granted as Collateral of
the FFRE Loan........................... - 61.1 122.2 - - 183.3
TOTAL ASSETS............................ 5,396.7 7,309.8 6,226.7 1,587.9 749.7 21,270.8
LIABILITIES
Saving Accounts........................... 1639.1 - - - - 1,639.1
Demand Deposits........................... 1401.9 - - - - 1,401.9
Time Deposits............................. 2965.5 392.8 195.4 - - 3,553.7
Restructured Deposits and CEDROS.......... 165.2 0.3 0.3 - - 165.8
Argentine Central Bank ................... 684.9 5065.8 2511.3 - - 8,262.0
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AS OF DECEMBER 31, 2004 (1)
-------------------------------------------------------------------------------
LESS THAN 1-5 5-10 OVER 10 UNDER
ONE YEAR YEARS YEARS YEARS RESTRUCTURING TOTAL
--------- ---------- ---------- -------- ------------- --------
(in millions of pesos, except ratios)
Negotiable Obligations.................... 236.6 1420.9 1782.0 655.3 37.0 (4) 4,131.8
Bank and International Entities........... 43.7 139.5 553.9 35.3 - 772.4
Loans From Domestic Financial
Institutions............................. 111.0 49.6 0.9 - 29.7 (5) 191.2
Other Liabilities (3)..................... 790.3 230.8 - - - 1,021.1
TOTAL LIABILITIES....................... 8,038.2 7,299.7 5,043.8 690.6 66.7 21,139.0
Asset / Liability Gap...................... (2,641.5) 10.1 1,182.9 897.3 683.0 131.8
Cumulative Gap............................. (2,641.5) (2,631.4) (1,448.5) (551.2) 131.8 131.8
Ratio of Cumulative Gap to Cumulative
Liabilities.............................. (32.9)% (17.2)% (7.1)% (2.6)% 0.6%
Ratio of Cumulative Gap to Total
Liabilities.............................. (12.5)% (12.4)% (6.9)% (2.6)% 0.6%
---------------
(1) Principal only. Includes the CER adjustment. Does not include interest.
(2) Represents the Bank's holdings of External Notes, tendered in the exchange
to restructure the sovereign foreign debt in an offer not subject to
proration. The Bank chose to receive Discount Bonds in Pesos. The exchange
is pending settlement.
(3) Includes debt with Sedesa and the FFRE, debt with retailers, repos and
forward sales.
(4) Represents debt held by creditors that did not participate in the exchange
offer to restructure the foreign debt of the Bank's Head Office in
Argentina and its Cayman Branch completed in May, 2004.
(5) Represents a loan that was restructured in February 2005.
In the table above, assets and liabilities in payment default as of
December 31, 2004, were included in the column under the heading "under
restructuring" including : (i) Ps. 749.7 million of External Notes, which were
tendered in the exchange offer made by the Argentine government to restructure
its sovereign debt in payment default, which closed in February 2005, having the
Bank opted to receive Peso-denominated Discount Bonds, in an offer not subject
to proration (see Item 4. "Information on the Company -- Selected Statistical
Information -- Government and Corporate Securities;" (ii) Ps 37.0 million of
negotiable obligations held by creditors that did not participate in the
restructuring of the Bank's foreign debt completed in May 2004; and (iii) Ps.
29.7 million of a credit line from a domestic bank which restructuring was
completed in February 2005.
The Bank has established a limit for the ratio of "cumulative gap" to
"total liabilities" of 25% for the "less than one year" negative gap. The table
above shows that the Bank was in compliance with this limit as of December 31,
2004.
BANCO GALICIA (UNCONSOLIDATED) LIQUIDITY MANAGEMENT
The following discussion of the Bank's liquidity management excludes 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, to take advantage of
potential investment opportunities and to meet demand for credit. To set the
appropriate level, forecasts are made based on historical experience and
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, 2004, the Bank's liquidity structure in Argentina was
as follows:
AS OF DECEMBER 31, 2004
-----------------------
(in millions of pesos)
Legal Requirement...................... Ps. 1,049.7
Excess Liquidity....................... 799.5
-----------
TOTAL LIQUIDITY (1) ................... Ps. 1,849.2
===========
---------------
(1) Excludes cash of Galicia Uruguay, the Cayman Branch and related companies.
Legal liquidity refers to the "minimum cash requirements" set by
regulations of the Argentine Central Bank minus the permitted reduction in the
requirement in the amount of the balance of the "Special Fund Former Almafuerte
and Mendoza Banks" (Argentine Central Bank Resolution No. 36/03).
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Excess liquidity consists of: (i) 100% of total overnight placements in
foreign banks, (ii) 80% of checks purchased, short-term loans to prime
companies, (iii) 90% of Lebacs and (iv) 100% of the balances held at the
Argentine Central Bank in excess of the minimum cash requirements.
As regards legal requirements, such requirements correspond to the Minimum
Cash Requirements for peso- and dollar-denominated assets and liabilities,
established by the Argentine Central Bank. See Item 4. "Information on the
Company -- Argentine Banking System and Regulation -- Argentine Banking
Regulation -- Legal Reserve Requirements for Liquidity Purposes."
The assets computable for compliance with this requirement are technical
cash, which comprises bills and coins, and the balances of peso- and
dollar-denominated deposit accounts at the Argentine Central Bank and of the
escrow accounts held at the Argentine Central Bank in favor of clearing houses.
The Bank's Board of Directors has defined a total liquidity objective,
which was determined based on the analysis performed on the behavior of the
Bank's deposits during the crisis that affected the financial system at the end
of 2001 and during the first half of 2002 (considered as the "worst-case"
scenario). Two liquidity levels were defined: "operational liquidity" (to
address the Bank's daily operations) and "additional liquidity" (excess amount
available at any possible crisis). Deposits were classified into "wholesale
deposits" (deposits raised by the trading desk) and "retail deposits."
"Operational liquidity" was established at 7% of retail demand deposits
and time deposits maturing in less than 10 days, plus the balance in the escrow
accounts held at the Argentine Central Bank and balances in correspondent banks
needed to address foreign trade operations.
"Additional liquidity" is variable depending on the remaining maturity of
total deposits, including Cedros. As a result of the analysis performed, the
Bank defined a floor for "additional liquidity" at 50% of the necessary funds to
bear the worst-case scenario. "Additional liquidity" included in the table above
amounted to Ps. 1,542.4 million, reaching 81.2% of the funds necessary to bear
the worst-case scenario.
CAPITAL
Our capital adequacy is not under the supervision of the Argentine Central
Bank.
Our capital management policy is designed to ensure prudent levels of
capital.
We, as well as our controlled companies, except for Banco Galicia and the
affiliates of Sudamericana Holding S.A. mentioned in the paragraph below, are
regulated by the Corporations Law. That statute provides that the capital of a
corporation cannot be less than Ps. 12,000.
The insurance companies held by Sudamericana Holding S.A. are Galicia Vida
Compania de Seguros S.A., Galicia Retiro Compania de Seguros S.A., Galicia
Patrimoniales Compania de Seguros S.A. and Instituto de Salta Compania de
Seguros de Vida S.A. These companies meet the minimum capital requirements set
by General Resolution No. 25,804 of the National Insurance Superintendency. See
Item 4. "Information on the Company -- Government Regulation -- Minimum Capital
Requirements of Insurance Companies."
As of September 30, 2004, the computable capital of the companies held by
Sudamericana Holding S.A. exceeded the minimum requirement of Ps. 11.9 million
by Ps. 23.9 million.
Sudamericana Holding S.A. also holds interests in Medigap Salud S.A.
(formerly, Hartford Salud S.A.) and Sudamericana Asesores de Seguros S.A. Both
companies are regulated by the Corporations' Law. Sudamericana Asesores de
Seguros S.A. is also regulated by the National Insurance Superintendency.
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The following table analyzes our capital resources as of the dates
indicated.
GRUPO GALICIA
AS OF DECEMBER 31,
----------------------------------
2004 2003 2002
------------- ------------- ------------------
(in millions of
February 28, 2003,
constant pesos,
except ratios,
(in millions of pesos, except multiples and
ratios, multiples and percentages) percentages)
Shareholders' Equity..................................... Ps. 1,519.5 Ps. 1,419.4 Ps. 1,600.8
Shareholders' Equity as a Percentage of Total Assets..... 6.42% 6.22 % 6.71%
Total Liabilities as a Multiple of Total Shareholders'
Equity................................................... 14.56x 15.08 x 13.91x
Tangible Shareholders' Equity(1) as a Percentage of
Total Assets............................................. 3.73% 3.03 % 5.36%
Total Capital Ratio...................................... - - -
Excess Capital over Required Minimum Capital............. - - -
---------------
(1) Tangible shareholders' equity represents shareholders' equity minus
intangible assets.
The Argentine Central Bank supervises the capital adequacy of Banco
Galicia on an unconsolidated basis and consolidated with its significant
subsidiaries, Galicia Uruguay and the five regional credit-card companies that
Banco Galicia controls. Compliance with the Argentine Central Bank's minimum
capital requirement rule was suspended during the whole of 2002 and 2003. In
June 2003, the Argentine Central Bank issued a new minimum capital requirement
rule, which became effective on January 1, 2004. The Bank has been in compliance
with this new capital adequacy regime in 2004. For more information on Banco
Galicia's capital adequacy, see Item 4. "Information on the Company -- Selected
Statistical Information -- Regulatory Capital."
CAPITAL EXPENDITURES
For a description of our capital expenditures in 2004 and our capital
commitments for 2005, see Item 4. "Information on the Company -- Capital
Investments and Divestitures."
For a description of financing of our capital expenditures, see " --
Liquidity."
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
OUR BOARD OF DIRECTORS
Our ordinary shareholders' meeting took place on April 28, 2005. The
following table sets out the members of our Board of Directors as of that date
(all of whom are resident in Buenos Aires, Argentina), the positions they hold
within Grupo Galicia, their dates of birth, their principal occupations and the
expiry dates of their current terms.
PRINCIPAL CURRENT
NAME POSITION DATE OF BIRTH OCCUPATION TERM ENDS
---- -------- --------------- ----------- ------------
Antonio Garces Chairman of the Board and Chief May 30, 1942 Banker April 28, 2008
Executive Officer
Federico Braun Vice-Chairman February 4, 1948 Businessman April 28, 2008
Abel Ayerza Director May 27, 1939 Businessman April 23, 2006
Eduardo J. Zimmermann Director January 3, 1931 Businessman April 23, 2006
Silvestre Vila Moret Director April 26, 1971 Businessman April 28, 2008
Marcelo L.S. Tonini Director March 11, 1931 Businessman April 23, 2006
Eduardo J. Escasany Director June 30, 1950 Businessman April 28, 2007
Luis O. Oddone Director May 11, 1938 Accountant April 28, 2007
Pedro Richards Director November 14, 1952 Businessman April 28, 2007
Pablo Gutierrez Alternate Director December 9, 1959 Banker April 23, 2006
Maria Ofelia Hordenana
de Escasany Alternate Director December 30, 1920 Businesswoman April 28, 2008
Luis Sila Monsegur Alternate Director August 15, 1936 Accountant April 28, 2008
Alejandro Maria Rojas
Lagarde Alternate Director July 17, 1937 Attorney April 28, 2008
Sergio Grinenco Alternate Director May 26, 1948 Banker April 23, 2006
The following are the biographies of the members of our Board of
Directors:
Antonio Roberto Garces: Mr. Garces obtained a degree in national public
accounting at the Universidad de Buenos Aires. He has been associated with the
Bank since 1959. Mr. Garces is also president of Banco Galicia, Galicia
Factoring y Leasing and Gal Mobiliaria S.A. de Ahorro para Fines Determinados,
as well as third vice president of the Argentine Bankers Association and a
lifetime trustee of the Fundacion Banco de Galicia y Buenos Aires.
Federico Braun: Mr. Braun obtained a degree in industrial engineering at
the Universidad de Buenos Aires. He was associated with the Bank from 1984 to
2002 having served as a member of the Bank's Board of Directors during such
period. Mr. Braun is president of Codigo S.A., Campos de la Patagonia S.A.,
Garabi Forestal S.A., Martseb S.A., , and S.A. Importadora y Exportadora de la
Patagonia; vice president of Club de Campo "Los Pinguinos" S.A., Inmobiliaria y
Financiera "La Josefina" S.A., Asociacion de Supermercados Unidos and
MayoristaNet S.A., a Director of Estancia Anita S.A. and a lifetime trustee of
the Fundacion Banco de Galicia y Buenos Aires.
Abel Ayerza: Mr. Ayerza obtained a degree in business administration at
the Universidad Catolica Argentina. He was associated with the Bank from 1966 to
2002, having served as a member of the Bank's Board of Directors from 1976 to
2002. Mr. Ayerza is president of Aygalpla S.A. and a lifetime trustee (and
second vice president) of the Fundacion Banco de Galicia y Buenos Aires.
Eduardo Jesus Zimmermann: Mr. Zimmermann obtained a degree in banking
management at the Universidad Argentina de la Empresa. He was associated with
the Bank from 1958 to 2002, including his service as a member of the Bank's
Board of Directors from 1975 to 2002. Mr. Zimmermann is a lifetime trustee of
the Fundacion Banco de Galicia y Buenos Aires.
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Silvestre Vila Moret: Mr. Vila Moret studied banking administration at the
Universidad Catolica Argentina. He was associated with the Bank from 1997 to
2002. Mr. Vila Moret is president of Inversora en Servicios S.A. and vice
president of El Benteveo S.A. Mr. Vila Moret is the grandson of Maria Ofelia
Hordenana de Escasany.
Marcelo Lorenzo Silvio Tonini: Mr. Tonini obtained a degree in banking
management at the Universidad Argentina de la Empresa. He held a variety of
positions at Banco Galicia beginning in 1963, including serving as a member of
the Board of Directors of the Bank from 1985 to 1998. Currently, Mr. Tonini is
president of Maradona S.A. and a lifetime trustee of the Fundacion Banco de
Galicia y Buenos Aires.
Eduardo J. Escasany: Mr. Escasany obtained a degree in economics from the
Universidad Catolica Argentina. He was associated with the Bank from 1973 to
2002. He was appointed to the Bank's Board of Directors in 1975, in 1979 he was
elected vice-chairman and since 1989 he was chairman of the Board of Directors
and chief executive officer. He was president of the Argentine Bankers
Association from Novmeber 1993 to July 2002 having served as vice-president
between 1989 and 1993. He was also president of Grupo Galicia from April 2000 to
June 2002. He is a lifetime trustee (and first vice president) of the Fundacion
Banco de Galicia y Buenos Aires.
Luis Omar Oddone: Mr. Oddone obtained a degree in national public
accounting at the Universidad de Buenos Aires. Mr. Oddone is president of La
Cigarra S.A., vice president of Scharstorf S.A., and syndic of American Plast
S.A., Bohue S.A., Lamarca y Cia. S.A., Pilaga S.A., SATEX S.A., Tango Jet S.A.,
Walmont S.A. and Tinocam S.A.
Pedro A. Richards: Mr. Richards obtained a degree in economics from the
Universidad Catolica Argentina and holds a master of science in management from
the Sloan School of Management at the Massachusetts Institute of Technology. He
was a director of the National Development Bank (BANADE). 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. Since August 2000, he has
been our managing director. Mr. Richards is also vice president of Sudamericana
Holding S.A, Galicia Warrants S.A. and Net Investment S.A.
Pablo Gutierrez: Mr. Gutierrez obtained a degree in business
administration from the Universidad de Buenos Aires. Since 1985, he has been
associated with the Bank. He currently serves as the head of the Bank's Treasury
Division. On April 2005 he was appointed to the Board of Directors of the Bank
subject to the authorization of the Argentine Central Bank. Mr Gutierrez is also
president of Galicia Valores S.A. Sociedad de Bolsa and vice president of
Galicia Pension Fund Ltd. and Argenclear S.A.
Maria Ofelia Hordenana de Escasany: Mrs. Hordenana de Escasany held a
variety of positions at various subsidiaries of Banco Galicia. Currently, she is
president of the Fundacion Banco de Galicia y Buenos Aires and Santamera S.A.
and vice president of Santa Ofelia S.A.
Luis Sila Monsegur: Mr. Monsegur obtained a degree in national public
accounting at the Universidad de Buenos Aires. He held a variety of positions at
Banco Galicia from 1962 to 1992 and is an alternate trustee of the Fundacion
Banco de Galicia y Buenos Aires.
Alejandro Maria Rojas Lagarde: Mr. Rojas Lagarde obtained a degree in law
at the Universidad de Buenos Aires. He held a variety of positions at Banco
Galicia beginning in 1963. From 1965 to January 2000, he was responsible for the
general counsel office of Banco Galicia. Currently, he is a lifetime trustee of
the Fundacion Banco de Galicia y Buenos Aires and a director of Santiago Salud
S.A.
Sergio Grinenco: Mr. Grinenco obtained a degree in economics at the
Universidad Catolica Argentina and a master's degree in business administration
from Babson College in Wellesley, Massachusetts. He has been associated with the
Bank since 1977. Mr. Grinenco is vice president of Banco Galicia, liquidator of
Galicia Equity Analysis S.A. "En Liquidacion" and a director of Galicia Capital
Markets S.A. Mr. Grinenco is also an alternate trustee of the Fundacion Banco de
Galicia y Buenos Aires.
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Our Board of Directors may consist of between three and nine permanent
members; currently it has nine members. In addition, the number of alternate
directors -- individuals to act in the temporary or permanent absence of a
director -- has been set at five. The directors and alternate directors are
elected by the shareholders at our annual general shareholders' meeting.
Directors and alternate directors may be elected for either a two-or three-year
term.
Some of our directors are also directors of Banco Galicia. In addition,
some members of our Board of Directors may serve on the board of directors of
any subsidiary we establish in the future.
Four of our directors and two of our alternate directors are members of
the families that are controlling shareholders of Grupo Galicia.
FUNCTIONS OF OUR BOARD OF DIRECTORS
The members of our Board of Directors serve on the following committees:
Audit Committee: In compliance with CNV rules regarding the composition of
the audit committee of companies listed in Argentina, which require that the
audit committee be comprised of at least three directors, with a majority of
independent directors, the Board of Directors established an audit committee
with three members. Currently, Messrs. Eduardo Zimmermann, Marcelo L. S. Tonini
and Luis O. Oddone are the members of the audit committee. All of the members of
our audit committee are independent directors under the CNV requirements and as
defined by the new Nasdaq rules that will become applicable to foreign private
issuers such as us on July 31, 2005. All three members of the audit committee
are financially literate and have extensive managerial experience. The Board of
Directors has determined that Mr. Tonini is the financial expert serving on its
audit committee.
The audit committee is primarily responsible for (i) issuing a report on
the Board of Directors' proposed independent auditor and ensuring that
independence criteria are met, (ii) supervising the reliability of our internal
control systems, including the accounting system, and of external reporting of
financial or other information, (iii) verifying compliance with the applicable
conduct rules, (iv) issuing a report on related party transactions and
disclosing any transaction where a conflict of interest exists with corporate
governance bodies and controlling shareholders, (v) following-up the use of
information policies on risk management at the company's main subsidiaries and
(vi) reviewing the annual working plan of our internal and independent auditors,
and issuing an opinion thereof. The audit committee has access to all
information and documentation that it requires and is broadly empowered to
fulfill its duties. During 2004, the audit committee held ten meetings.
Disclosure Committee: This committee was established in response to the
U.S. Sarbanes-Oxley Act of 2002. The 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. Antonio
Garces, Pedro Richards, Jose Luis Gentile and Adrian Enrique Pedemonte. In
addition, at least one of the members of this committee attends all of the
meetings of the Bank's Disclosure Committee.
OUR SUPERVISORY COMMITTEE
Our bylaws provide for a supervisory committee consisting of three members
who are referred to as "syndics" and three alternate members who are referred to
as "alternate syndics." In accordance with the Argentine Companies 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 elected by the shareholders at the annual general
shareholders' meeting. Unlike directors, 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 as alternates in the temporary or permanent
absence of a syndic. Currently, there are three syndics and three alternate
syndics. Syndics and alternative 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
28, 2005.
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PRINCIPAL
NAME POSITION OCCUPATION CURRENT TERM ENDS
------------------ ---------------- ----------------- -----------------
Adolfo Melian Syndic Lawyer April 28, 2006
Norberto Corizzo Syndic Public Accountant April 28, 2006
Alejandro H. Massa Syndic Public Accountant April 28, 2006
Miguel N. Armando Alternate Syndic Lawyer April 28, 2006
Miguel C. Maxwell Alternate Syndic Public Accountant April 28, 2006
Luis Curuchaga Alternate Syndic Public Accountant April 28, 2006
The following are the biographies of the members of our supervisory
committee:
Adolfo Hector Melian: Mr. Melian obtained a degree in law at the
Universidad de Buenos Aires. He has been associated with the Bank since 1970. He
served as counsel to the Bank's Board of Directors until 1975. Mr. Melian is
also a syndic of Banco Galicia, Galicia Warrants, Galicia Capital Markets S.A,
Galicia Valores S.A. Sociedad de Bolsa, Galicia Factoring y Leasing
S.A.,Tarjetas Regionales S.A., Tarjeta Naranja S.A., Tarjetas Cuyanas S.A. and
Tarjetas del Mar S.A. and an alternate syndic of Banco Galicia Uruguay. Mr.
Melian is a lifetime trustee of the Fundacion Banco de Galicia y Buenos Aires.
Norberto Daniel Corizzo: Mr. Corizzo obtained a degree in national public
accounting at the Universidad de Buenos Aires. He has been associated with the
Bank since the 1977. Mr. Corizzo is also syndic of Banco Galicia, Tarjetas
Regionales S.A., Tarjetas del Mar S.A., Tarjeta Naranja S.A., Tarjetas Cuyanas
S.A., Galicia Warrants, Sudamericana Holding, Sudecor Valores S.A. Sociedad de
Bolsa, Galicia Capital Markets S.A., Galicia Valores S.A. Sociedad de Bolsa,
Galicia Factoring y Leasing S.A., Agro Galicia S.A., Net Investment S.A. and
Banco Galicia Uruguay S.A.
Alejandro H. Massa: Mr. Massa obtained a degree in national public
accounting at the Universidad de Buenos Aires in 1978. Mr. Massa is a partner at
Deloitte & Co. S.R.L. He is a syndic of numerous companies, including Met AFJP
Sudamericana Holdings S.A. and its subsidiaries, Net Investment S.A. and Galicia
Warrants S.A., and an alternate syndic of Tarjetas Regionales S.A.
Miguel Norberto Armando: Mr. Armando obtained a degree in law at the
Universidad de Buenos Aires. He was first elected a syndic of the Bank in 1986.
Mr. Armando is also a director of Arnoar S.A., syndic of EBA Holding S.A. and
Tarjetas del Mar S.A. and an alternate syndic of Banco Galicia.
Miguel C. Maxwell: Mr. Maxwell obtained a degree in national public
accounting at the Universidad de Buenos Aires in 1979. Mr. Maxwell has been a
partner at Deloitte & Co. S.R.L. since 1999. He is a syndic of numerous
companies, including Galicia Capital Markets S.A., Galicia Factoring y Leasing
S.A., Net Investment S.A., Sudamericana Holding S.A. and Tarjetas Regionales
S.A.
Luis Curuchaga: Mr. Curuchaga obtained a degree in national public
accounting in 1977 and a degree in business administration at the Universidad de
Buenos Aires in 1974. Mr. Curuchaga has been a partner of the Audit Department
of Deloitte & Co. S.R.L. since 1999. He is a syndic of numerous companies,
including: Galicia Administradora de Fondos S.A. Sociedad Gerente de Fondos
Comunes de Inversion, American Plast S.A., Rombo Compania Financiera S.A.,
Frances Valores Sociedad de Bolsa S.A., Frances Administradora de Inversiones
S.A., General & Cologne Re. Cia. de Reaseguros S.A and an alternate syndic of:
Athuel Fideicomisos S.A., BNL Sociedad Gerente FCI S.A., Fiat Credito Compania
Financiera, Sudamericana Holding S.A. and its subsidiaries, INTA Industria
Textil Argentina S.A., Schering Plough S.A., Lamarca y Cia. Sociedad de Bolsa
S.A. and Iveco Argentina S.A.
COMPENSATION OF DIRECTORS
We pay a fixed fee to some of the members of the Board of Directors who
are not members of the Board of Directors of the Bank. For fiscal year 2004, and
taking into consideration the new responsibilities and increased activities of
the audit committee's , the Shareholders' Meeting held on April 28, 2005,
approved a payment of Ps. 80,000 to the independent directors who have functions
on our audit committee. Currently, the only compensation
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paid to the members of our Board of Directors who are also members of the Board
of Directors of the Bank is paid by the Bank for their services to the Bank.
Compensation for Grupo Galicia's managers is determined by the Board of
Directors. Managers receive a fixed compensation plus the Board of Directors
determines for every fiscal year whether or not it is advisable to make a
payment of a variable fee which, if any, is fixed according to the Company's
performance, the performance of the unit for which the manager is responsible,
as well as each manager's performance.
For a description of the amounts to be paid to the board of directors of
Banco Galicia, see " -- Compensation of Banco Galicia's Directors" below.
We do not maintain a stock-option, profit-sharing or pension plan or any
other retirement plan for the benefit of our directors, nor do our directors
qualify for benefits upon termination of employment.
In connection with the Bank's foreign debt restructuring, we agreed to
limit the amounts paid per fiscal year to the members of our Board of Directors
and agreed not to make any payments to our management in excess of market
compensation. See Item 10. "Additional Information -- Material Contracts."
MANAGEMENT OF GRUPO GALICIA
Grupo Galicia's organizational structure consists of a managing director
who reports to the Board of Directors, and two managers who report directly to
the managing director, the financial and accounting manager and the investor
relations manager.
The managing director's main function is implementing policies defined by
our Board of Directors and to oversee the financial and accounting department
and investor relations.
The financial and accounting manager is mainly responsible for assessing
current and potential investments, (e.g., suggesting whether we should invest or
divest our position in various companies or businesses). His department also
plans and coordinates our administrative services and financial resources in
order to ensure their proper management. His department is also responsible for
meeting requirements set by several controlling bodies, complying with
information requirements and for internal controls and budgeting. Our financial
and accounting manager is Jose Luis Gentile, who was born March 15, 1956.
The investor relations manager is in charge of the functions related to
communication channels and services to local and foreign institutional investors
as well as retail investors and research analysts. He prepares periodic reports
with respect to our capital stock, market performance and trading volume. Our
investor relations manager is Pablo Eduardo Firvida, who was born March 17,
1967.
We do not maintain a stock-option, profit-sharing or pension plan or any
other retirement plan for the benefit of our managers, nor do our managers
qualify for benefits upon termination of employment.
BOARD OF DIRECTORS OF BANCO GALICIA
The ordinary and extraordinary shareholders' meeting held on April 28,
2005, established the size of the Bank's Board of Directors at nine members and
five alternate directors. The following table sets out the members of our Board
of Directors as of April 28, 2005, all of whom are resident in Buenos Aires,
Argentina, the years of appointment, position currently held by each of them,
their dates of birth, their principal occupation and when their term ends. The
business address of the members of the Board of Directors is Tte. General J. D.
Peron 407, (C1038AAI) Buenos Aires, Argentina.
YEAR OF PRINCIPAL DATE OF CURRENT
NAME APPOINTMENT POSITION BIRTH OCCUPATION TERM ENDS
------------------------ ----------- ---------------------- -------------- ---------- -----------------
Antonio R. Garces 2001 Chairman of the Board May 30, 1942 Banker December 31, 2005
and Chief Executive
Officer
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YEAR OF PRINCIPAL DATE OF CURRENT
NAME APPOINTMENT POSITION BIRTH OCCUPATION TERM ENDS
------------------------ ----------- ---------------------- ------------------ ---------- -----------------
Sergio Grinenco 2003 Vice-Chairman and May 26, 1948 Banker December 31, 2005
Chief Financial
Officer
Enrique M. Garda 2005 Director and Secretary April 29, 1946 Banker December 31, 2007
Olaciregui
Daniel A. Llambias 2004 Director February 8, 1947 Banker December 31, 2006
Luis M. Ribaya 2005 Director July 17, 1952 Banker December 31, 2007
Guillermo J. Pando 2005 Director October 23, 1948 Banker December 31, 2007
Pablo Gutierrez (1) 2005 Director December 9, 1959 Banker December 31, 2007
Eduardo O. Del Piano (2) 2004 Director May 12, 1938 Accountant December 31, 2006
Pablo M. Garat (2) 2004 Director January 12, 1953 Lawyer December 31, 2006
Eduardo A. Fanciulli 2004 Alternate Director April 10, 1951 Banker December 31, 2006
Raul Hector Seoane (1) 2005 Alternate Director July 18, 1953 Banker December 31, 2005
Juan C. Fossatti 2003 Alternate Director September 11, 1955 Banker December 31, 2005
Osvaldo H. Canova (3) 2004 Alternate Director December 8, 1934 Accountant December 31, 2006
Julio P. Naveyra (3) 2004 Alternate Director March 24, 1941 Accountant December 31, 2006
--------------
(1) Authorization from the Argentine Central Bank to assume their positions is
pending.
(2) In accordance with the rules of the CNV, and pursuant to the classifications
adopted by the CNV, Messrs. Eduardo O. Del Piano and Pablo M. Garat are
independent and were elected at the ordinary shareholders' meeting held on April
29, 2004, as members of the audit committee. Messrs. Del Piano and Garat are
also independent directors in accordance with the new Nasdaq rules.
(3) In accordance with the rules of the CNV, and pursuant to the classifications
adopted by the CNV, Mr. Canova and Mr. Naveyra are independent alternate
directors elected at the ordinary shareholders' meeting held on April 29,
2004. They would replace the independent directors in case of vacancy. They are
also independent directors in accordance with the new Nasdaq rules.
The following are the biographies of the members of the Board of Directors
of the Bank:
Antonio Roberto Garces: Mr. Garces obtained a degree in national public
accounting at the Universidad de Buenos Aires. He has been associated with the
Bank since 1959. Mr. Garces is also president of Banco Galicia, Galicia
Factoring y Leasing and Gal Mobiliaria S.A. de Ahorro para Fines Determinados,
as well as third vice president of the Argentine Bankers Association and a
lifetime trustee of the Fundacion Banco de Galicia y Buenos Aires.
Sergio Grinenco: Mr. Grinenco obtained a degree in economics at the
Universidad Catolica Argentina and a master's degree in business administration
from Babson College in Wellesley, Massachusetts. He has been associated with the
Bank since 1977. Mr. Grinenco is vice president of Banco Galicia, liquidator of
Galicia Equity Analysis S.A. "En Liquidacion" and a director of Galicia Capital
Markets S.A. Mr. Grinenco is also an alternate trustee of the Fundacion Banco de
Galicia y Buenos Aires.
Enrique M. Garda Olaciregui: Mr. Garda Olaciregui obtained a degree in law
at the Universidad del Salvador, a master degree in finance from Universidad del
CEMA and a master degree in Management Law at the Universidad Austral. He has
been associated with the Bank since 1970. Mr. Garda Olaciregui is also a
director of Galicia Factoring y Leasing S.A. and Galicia Warrants S.A. and an
alternate trustee of the Fundacion Banco de Galicia y Buenos Aires.
Daniel Antonio Llambias: Mr. Llambias obtained a degree in national public
accounting at the Universidad de Buenos Aires. He has been associated with the
Bank since 1964. Mr. Llambias is president of Galicia Capital Markets S.A. and
Sudamericana Holding S.A He is also a director of Gal Mobiliaria S.A. de Ahorro
para Fines Determinados, Galicia Valores S.A. Sociedad de Bolsa, Tarjeta Naranja
S.A., Tarjetas Regionales S.A., Visa Argentina S.A. and Banelco S.A. and
delegate of the shareholders meeting's of Automovil Club, and an alternate
trustee of the Fundacion Banco de Galicia y Buenos Aires.
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Luis Maria Ribaya: Mr. Ribaya obtained a degree in law from the
Universidad de Buenos Aires. He has been associated with the Bank since 1971.
Mr. Ribaya is the president of Argencontrol S.A. and Mercado Abierto Electronico
S.A., director of Galicia Capital Markets S.A. and Galicia Valores S.A. Sociedad
de Bolsa,, and an alternate trustee of the Fundacion Banco de Galicia y Buenos
Aires.
Guillermo Juan Pando: Mr. Pando has been associated with the Bank since
1969. He is president of Tarjetas Regionales S.A., Galicia Pension Fund Ltd. and
Galicia Warrants S.A., vice president of Gal Mobiliaria S.A. Sociedad de Ahorro
para Fines Determinados, a director of Galicia Capital Markets S.A., Galicia
Factoring y Leasing S.A., Tarjetas del Mar S.A. and Tarjeta Naranja S.A., a
liquidator of Galicia Equity Analysis S.A. "En Liquidacion," alternate director
of Electrigal S.A. and Distrocuyo S.A. and an alternate trustee of the Fundacion
Banco de Galicia y Buenos Aires.
Pablo Gutierrez: Mr. Gutierrez obtained a degree in Business
Administration from the Universidad de Buenos Aires. Since 1985, he has been
associated with the Bank. He currently serves as the head of the Treasury
Division. Mr. Gutierrez is also president of Galicia Valores S.A. Sociedad de
Bolsa, vicepresident of Galicia Pension Fund Ltd. and Argenclear S.A. and an
alternate director of Grupo Galicia.
Eduardo Oscar Del Piano: Mr. Del Piano obtained a degree in national
public accounting at the Universidad de Buenos Aires. He has been associated
with the Bank since 2004. Mr. Del Piano is also an independent auditor of
Fundacion Sociedad Rural, Sociedad Rural Argentina, Establecimientos Ortopedicos
Argentina S.A., Fundacion Jose Maria Aragon, Asociacion Argentina de Polo,
Asociacion Argentina de Ortopedia y Traumatologia and syndic of La Rural de
Palermo S.A. and OGDEN-Rural S.A.
Pablo Maria Garat: Mr. Garat obtained a degree in law at the Universidad
de Buenos Aires. He has been associated with the Bank since 2004. Mr. Garat has
been an official representative of the Province of Tierra del Fuego, an advisor
to the Argentine Senate and he currently develops its professional independent
activity at his own law firm and is a professor at the University of
Constitutional Law and Constitutional Tributary Law.
Eduardo Antonio Fanciulli: Mr. Fanciulli obtained a degree in business
administration from the Universidad de Buenos Aires. He has been associated with
the Bank since 1983. Mr. Fanciulli is a director of Galicia Capital Markets S.A.
and Galicia Factoring y Leasing S.A.
Raul Hector Seoane: Mr. Seoane obtained a degree in economics from the
Universidad de Buenos Aires. He has been associated with the Bank since 1988.
Juan Carlos Fossatti: Mr. Fossatti obtained a degree in law from the
Universidad de Buenos Aires. He has been associated with the Bank since June 6,
2002, when he was elected at the annual general shareholders' meeting. Mr.
Fossatti is also a director of Tierras del Bermejo S.A., Grenoble Inversiones
S.A., and Barlocher do Brazil S.A. (Sao Paulo - Brazil).
Osvaldo Hector Canova: Mr. Canova obtained a degree in accounting at the
Universidad de Buenos Aires. He has been associated with the Bank since 2004.
Mr. Canova has been a member of Harteneck, Lopez y Cia. (now Price Waterhouse &
Co. S.R.L.) and Mcduliffe, Turquan Young. Mr. Canova is also alternate director
of Telecom Argentina S.A. and syndic of Arcor S.A.I. y C, Unilever S.A., Bagley
Argentina S.A., Naral S.A. and Cartocor S.A.
Julio Pedro Naveyra: Mr. Naveyra obtained a degree in accounting at the
Universidad de Buenos Aires. He has been associated with the Bank since 2004.
Mr. Naveyra has been a member of Harteneck, Lopez y Cia. (now Price Waterhouse &
Co. S.R.L.). He is also syndic of S.A. La Nacion, Supermercados Makro S.A., IDEA
S.A. and Transener S.A. and director of Telecom Personal S.A., Publicom S.A.,
Gas Ban S.A. and Telecom Argentina S.A.
FUNCTIONS OF THE BOARD OF DIRECTORS OF BANCO GALICIA
The Bank'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
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of this annual report, seven directors and two alternate directors were engaged
on a full time basis in the day-to-day operations of the Bank. Messrs. Fossatti,
Del Piano, Garat, Canova and Naveyra are not employees of the Bank.
The Bank's Board of Directors meets formally twice each week and
informally on a daily basis. The Bank's Board of Directors is responsible for
all of the major decisions, including those relating to credit, the Bank's
securities portfolio, the design of the branch network and entering into new
businesses.
Members of the Bank's Board of Directors serve on the following
committees:
Risk Management Committee: Six directors and the Risk Management
Department manager, the Wholesale Banking Division manager and the Treasury
Division manager are members of this committee. The committee is responsible for
establishing general limits (both in accordance with regulatory requirements and
with the Bank's internal guidelines) and verifying compliance with such limits
with respect to the following risks, among others: credit, cross border,
currency, interest rate, liquidity, market and operational. This committee meets
at least once every two months and acts formally by written resolutions.
The Credit Committee: This committee is composed of four directors and the
managers of the Credit Division and the Wholesale Banking Division. The managers
responsible for the commercial departments may be present at this committee's
meetings in case the account subject to the committee's approval belongs to any
of those departments. It meets four days a week with a quorum of at least one
director. The committee's function is to approve loans greater than Ps. 3.5
million in the case of corporate customers, on loans greater than Ps. 1.0
million in the case of individuals and on all loans to be granted to financial
institutions (local and foreign) and related companies. Approved operations are
recorded in signed and dated documents.
Financial Risk Policy Committee (Comision de Posicion Financiera): This
committee is made up of six directors and the managers responsible for the
Retail Banking and the Treasury divisions and the Risk Management Department. It
is responsible for analyzing the evolution of the Bank's business from a
financial point of view regarding fund-raising and placement of assets.
Moreover, this committee is in charge of the follow-up and control of liquidity
and interest-rate and currency gaps. In all cases, it is responsible for
creation of the Bank's policies related to each of these areas. The committee
meets at least once every fifteen days and acts formally by written resolutions.
Systems Committee: The Systems Committee is composed of six directors, the
managers responsible for the Wholesale Banking, Treasury , Retail Banking and
the Corporate Services divisions, as well as the managers in charge of the
Operations and Organization departments. This committee is in charge of
supervising and approving new systems development plans and budgets as well as
supervising these systems' budget controls. It is also responsible for approving
the general design of the system's structure implemented and for supervising the
quality of the Bank's systems This committee meets at least once every three
months and acts formally by written resolutions.
Audit Committee: In accordance with the requirements set forth by the
Argentine Central Bank, the Bank has an Audit Committee composed of two
directors, one of which is an independent director, and the Internal Audit
manager. In addition, the Bank, in its capacity as a publicly listed company in
Argentina, has complied with the System for the Transparency of Public Offerings
(Regimen de Transparencia de la Oferta Publica) set forth by Decree No. 677/01
and by the rules established by the CNV in its Resolution No. 400/02. In order
to comply with the CNV rules regarding the composition of the audit committee of
companies listed in Argentina, which require that the audit committee be
comprised of at least three directors, with a majority of independent directors,
the ordinary shareholders' meeting held on April 29, 2004, elected Messrs.
Eduardo O. Del Piano and Pablo M. Garat as independent directors to the Board of
Directors and appointed them as members of the audit committee. The third
member, Mr. Daniel Llambias, a non-independent director, was appointed to the
audit committee by the Bank's Board of Directors.
The audit committee is primarily responsible for (i) issuing a report on
the Board of Directors' proposed independent auditor and ensuring that
independence criteria are met; (ii) supervising the reliability of the Bank's
internal control system, including the accounting system, and of external
reporting of financial or other information; (iii) verifying compliance with the
applicable conduct rules; (iv) issuing a report on related party transactions
and
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disclosing any transaction where a conflict of interest exists with corporate
governance bodies and controlling shareholders, v) following-up the use of
information policies on risk management at the company's main subsidiaries and
(vi) reviewing the annual working plan of the Bank's internal and independent
auditors, and issuing an opinion thereof. The audit committee has access to all
information and documentation that it requires and is broadly empowered to
fulfill its duties. The audit committee meets at least once a month.
Committee for the Control and Prevention of Money Laundering: This
committee is responsible for establishing the Bank's general strategy guidelines
with respect to the prevention and control of money laundering, in accordance
with the rules in effect. It also provides general objectives and policies to be
followed in the area. It is composed of three directors, the manager of the
Treasury Division, the managers responsible for the Risk Management and the
Operations departments and the Internal Audit manager The committee is scheduled
to meet at least once every two months. Resolutions must be registered in a
minutes book bearing folios and seals.
Disclosure Committee: This Committee was created to comply with the
provisions of the Sarbanes-Oxley Act of the United States of America issued in
2002. This committee is composed of two directors, the managers responsible for
the Wholesale Banking, Retail Banking and Treasury divisions, the manager of the
Planning and Management Control Division, the Internal Auditor and other Bank
officers, as well as a representative of the Bank's Supervisory Syndics'
Committee. A member of the committee that was created for the same purpose by
Grupo Galicia also attends the meetings held by this committee.
Periodically, the Board of Directors is advised as to the decisions taken
by the various committees, which are recorded in minutes.
BANCO GALICIA'S EXECUTIVE OFFICERS
In 2004, Banco Galicia implemented a new corporate organizational
structure. The new structure does not include the position of chief executive
officer, whose functions are performed by the Board of Directors.
The following divisions report to the Bank's Board of Directors:
DIVISION MANAGER
Treasury Pablo Gutierrez
Wholesale Banking Juan Miguel Woodyatt
Retail Banking Daniel A. Llambias (in charge)
Corporative Services Miguel Angel Pena
Credit Juan Carlos L'Afflitto
Treasury: This Division is responsible for planning and managing the
correct use of financial resources and providing the appropriate funding for the
Bank's businesses, establishing and applying the Bank's deposit-raising and
funding policies within the parameters established by the Bank's risk policies.
It also manages short-term funds and the investment portfolio, ensuring the
correct execution of transactions. The following areas report to this Division:
Financial Analysis and Planning, Asset Management and Financial Operations.
Wholesale Banking: This division is responsible for managing the Bank's
business relating to corporate customers The areas reporting to wholesale
banking are Corporate Banking, Middle-market Banking, Investment Banking,
Capital Markets, Wholesale Marketing and Foreign Trade.
Retail Banking: This division is responsible for managing the Bank's
business individuals. The areas reporting to Retail Banking are: Consumer
Banking, Retail Marketing and Quality Assurance, Private Banking, Traditional
Channels and Alternative Distribution Channels.
Corporate Services: this Division is responsible for providing logistic
support for all the organization's operations. The following areas report to
this Division: Systems, Organization, Operations and Administration.
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Credit: this Division is responsible for defining credit risk management
policies, verifying compliance with these policies, and developing the credit
assessment models to be applied to the different risk products. It is also
responsible for approving credit extensions to the Bank's customers while
ensuring that the credit quality of the Bank's portfolio is preserved and
generating the information on credit risk required by the Bank's Board of
Directors and by the regulatory authorities. The following areas report to this
Division: Corporate Credit, Retail Credit and Corporate Recovery.
In addition, the Legal Counsel, Planning and Management Control, Internal
Audit, Corporate Programs Management, Human Resources, International Banking
Relationships, Institutional Affairs and Chief Economist offices report to the
Board of Directors. Messrs. Enrique M. Garda Olaciregui, Raul H. Seoane, Luis A.
Diaz, Benito Silva, Enrique C. Behrends, Hector Arzeno, Diego F. Videla and
Nicolas Dujovne are in charge of the aforementioned offices, respectively
The following are the biographies of the Bank's senior executive officers
mentioned above and not provided in the section " -- Board of Directors of Banco
Galicia" or " -- Our Board of Directors" above.
Pablo Gutierrez: See " -- Board of Directors of Banco Galicia" and " --
Our Board of Directors" above.
Juan Miguel Woodyatt: Mr. Woodyatt was born October 8, 1955. He obtained a
degree in Business Administration from the Universidad Catolica Argentina. He
has been associated with the Bank since 1990. Mr. Woodyatt is president of
B2Agro S.A., Net Investment S.A. and Galicia Advent Corporation Ltd., vice
president of Galicia Capital Markets S.A., director of Galicia Factoring y
Leasing S.A., Tarjetas Cuyanas S.A., Aguas Argentinas S.A., Aguas Provinciales
de Santa Fe S.A., Aguas Cordobesas S.A., AEC S.A., Electrigal S.A. and
liquidator of Galicia Advent Private Equity Fund Ltd (in liquidation).
Daniel Llambias: See " -- Board of Directors of Banco Galicia."
Miguel Angel Pena: Mr. Pena was born January 22, 1962. He obtained a
degree in information systems from the Universidad Nacional Tecnologica. He has
been associated with the Bank since 1994. Mr. Pena is a director of Tarjeta
Naranja S.A. and alternate director of Tarjetas Regionales S.A. He is also a
voting member of the ONG-Usuaria (Asociacion Argentina de Usuarios de la
Informatica y las Comunicaciones).
Juan Carlos L'Afflitto: Mr. L'Afflitto was born September 15, 1958. He
received a degree in national public accounting at the Universidad de Buenos
Aires. He has been associated with the Bank since 1986. Prior to such time, he
worked at Morgan, Benedit y Asociados, where he acted as advisor and accountant.
He has been a professor of "financial statements analysis" at the Universidad
Catolica Argentina until 1990.
Raul Hector Seoane: See " -- Board of Directors of Banco Galicia."
Luis Alberto Diaz: Mr. Diaz was born April 11, 1945. He obtained a degree
in national public accounting from the Universidad de Buenos Aires. He has been
associated with the Bank since 1965.
Benito Silva: Mr. Silva was born May 20, 1944. He received a bachelor's
degree in operational research from the Argentine Ministry of Defense. He has
been associated with the Bank since 1989. Prior to such time, he was employed
with financial institutions since 1960. Mr. Silva is a director of Compensadora
Electronica S.A. ("Coelsa") and Tarjetas Cuyanas S.A., and alternate director of
Tarjetas Regionales S.A.
Enrique Carlos Behrends: Mr. Behrends was born January 31, 1946. He
obtained a degree in sociology from the Universidad del Salvador. Mr. Behrends
has been associated with the Bank since 1987. Prior to such time, he worked at
Arthur Andersen, Coopers & Lybrand and Ernst & Young.
Hector Arzeno: Mr. Arzeno was born October 1, 1947. He obtained a degree
in Business Administration at the Universidad Catolica Argentina and completed
post-graduate studies at Wharton University. He has been associated with the
Bank since 1990. Prior to such time, he worked at Banco Espanol de Credito de
Espana since
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1982. He is a vice president of Galicia Advent Corporation Ltd. and liquidator
of Galicia Private Equity Fund (in liquidation).
Diego Francisco Videla: Mr. Videla was born November 7, 1947. He has been
associated with the Bank since 1997. Prior to such time, he acted as advisor in
the privatization of Banco de la Provincia de Misiones S.A. Mr. Videla is a
voting member of Fundacion Policia Federal Argentina, Fundacion Escuela de
Guerra Naval Argentina and counselor of Fundacion Fides.
Nicolas Dujovne: Mr. Dujovne was born May 18, 1967. He received a degree
in Economics at the Universidad de Buenos Aires and a master's degree in Economy
at the Universidad Torcuato Di Tella. He has been associated with the Bank since
1997. Prior to such time, he worked at Citibank Argentina, Alpha and
Macroeconomica. He also served, in 1998, as the Chief of Advisors to the
Secretary of the Argentine Treasury and, in 2000, as the representative of the
Ministry of Economy at the Argentine Central Bank's board of directors. He also
worked as a consultant for The World Bank.
BANCO GALICIA'S SUPERVISORY COMMITTEE
Banco Galicia's bylaws provide for a supervisory committee consisting of
three members ("syndics") and three alternate members ("alternate syndics").
Pursuant to Argentine Law and to the provisions of the Bank's bylaws, syndics
and alternate syndics are responsible of ensuring that all of the Bank's actions
are in accordance with applicable Argentine law. Unlike directors, 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 the Bank'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 reelected. Alternate syndics act as alternates in the temporary or
permanent absence of a syndic.
The table below shows the composition of Banco Galicia's supervisory
committee as they were reelected by the annual shareholders' meeting held on
April 28, 2005.
YEAR OF PRINCIPAL CURRENT
NAME APPOINTMENT POSITION OCCUPATION TERM ENDS
------------------------ ----------- ---------------- ---------- -----------------
Adolfo Hector Melian 2005 Syndic Lawyer December 31, 2005
Norberto Daniel Corizzo 2005 Syndic Accountant December 31, 2005
Ricardo Adolfo Bertoglio 2005 Syndic Accountant December 31, 2005
Alejandro Hector Massa 2005 Alternate Syndic Accountant December 31, 2005
Fernando Noetinger 2005 Alternate Syndic Lawyer December 31, 2005
Miguel N. Armando 2005 Alternate Syndic Lawyer December 31, 2005
For the biographies of Messrs. Adolfo Hector Melian, Norberto D. Corizzo,
Alejandro H. Massa and Miguel Norberto Armando, see " -- Our Supervisory
Committee" above.
Ricardo Adolfo Bertoglio: Mr. Bertoglio obtained a degree in national
public accounting at the Universidad de Buenos Aires. He has been associated
with the Bank since 2002. Mr. Bertoglio is also president of Plasmer S.A.
Fernando Noetinger: Mr. Noetinger obtained a degree in law at the
Universidad de Buenos Aires. He has been associated with the Bank since 1987.
Mr. Noetinger is also president of Arnoar S.A., Hijos de Ybarra S.A., and Dona
Ines S.A. and alternate syndic of EBA Holding S.A. and Tarjetas del Mar S.A.
COMPENSATION OF BANCO GALICIA'S DIRECTORS
Those members of the Bank's Board of Directors who perform technical and
administrative functions through their participation on committees receive an
honorarium in accordance with section 25 subsection 2 of the Bank's bylaws.
Seven directors and two alternate directors are employees of the Bank.
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Section 39 subsection 2 of the Bank's bylaws establishes a variable
compensation for the Board of Directors that consists of an incentive
compensation that shall not exceed 6.0% of the Bank's pre-tax net income. For
fiscal year 2004, the ordinary shareholders' meeting held on April 28, 2005,
approved remuneration for the Board of Directors corresponding to the salaries
of the directors that are also employees and the honorarium for the directors
that exercised technical and administrative functions for participation in
special committees, in the total amount of Ps. 2,593,915.60, which amount
includes the remuneration of the independent directors. The variable
compensation was not paid for the fiscal years ended December 31, 2004, 2003,
and 2002. We are considering making a payment corresponding to such period to
the Bank's directors during 2005.
It should be noted that, for so long as Resolution No. 81/02 of the board
of directors of the Argentine Central Bank is in force, which resolution dates
from February 8, 2002, the Bank "shall be prohibited from paying any cash
dividends or making any distribution on or in respect of its capital stock,
transferring profits abroad or paying fees or any bonuses or variable
compensations tied to the Bank's profits, or granting financial assistance to
related parties."
As a result of the conclusion of the negotiations for the Bank's foreign
debt restructuring, a limit per fiscal year was established to the aggregate
amount that the Board of Directors can perceive as honorarium. Therefore, those
members of the Board of Directors who hold executive offices may receive
additional payments as compensation for performing said functions, provided that
these additional payments do not exceed the standard levels of Argentina's
financial market.
The Bank does not maintain a stock-option, profit-sharing or pension plan
or any other retirement plan for the benefit of its directors, nor do its
directors qualify for benefits upon termination of employment.
COMPENSATION OF BANCO GALICIA'S OFFICERS
The Board of Directors establishes the policy for compensation of the
Bank's personnel. The Bank's managers receive a fixed compensation and they may
receive a variable compensation, determined by the Bank's overall results,
and/or the performance of the unit for which the manager is responsible and/or
the manager's individual performance. Although the variable compensation was not
paid for the fiscal years ended December 31, 2004, 2003, and 2002, the Bank is
considering making a one-time payment corresponding to such periods during 2005.
It should be noted that, for so long as Resolution No. 81/02 of the
board of directors of the Argentine Central Bank is in force, which resolution
dates from February 8, 2002, the Bank "shall be prohibited from paying any cash
dividends or making any distribution on or in respect of its capital stock,
transferring profits abroad or paying fees or any bonuses or variable
compensations tied to the Bank's profits, or granting financial assistance to
related parties."
Under the terms of the loan agreements entered into by the Bank with its
bank creditors to restructure its foreign debt the Bank has agreed not to make
any payment to its management in excess of market compensation.
On November 4, 1999, the Bank, in its capacity as grantor, entered into a
framework trust agreement with First Trust of New York, in its capacity as
trustee, to implement a bonus program in favor of certain members of the senior
management of the Bank and its controlled or related companies. This program was
to be reviewed from time to time by the Bank's Board of Directors. The program's
purpose was to reward and foster productivity and reward management's permanence
at the Bank. Rewards under this program consisted of our shares or our ADSs.
The grantor transferred to each trust pertaining to the program, as
fiduciary property, certain amounts of money that were to be determined in each
case pursuant to its own criteria, which were to be invested by the trustee in
our shares or ADSs. The trustee was to administer such shares or ADSs for the
benefit of the staff appointed as beneficiaries in each trust. The trustee was
to hold title to such shares until the moment on which they shall be given to
the beneficiaries as their full property in accordance with the provisions set
forth in each corresponding trust.
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The amount transferred by the grantor to the trustee, on November 4, 2000,
was US$ 4.0 million, which has been applied to the purchase of 855,442 shares
and 189,116 ADSs of Grupo Galicia.
On October 30, 2000, the Galicia 2004 Trust was established, which
received 855,442 shares and 31,446.60 ADSs of Grupo Galicia. On August 15, 2001,
certain individuals who held managerial positions at Banco de Galicia y Buenos
Aires S.A. and Galicia Capital Markets S.A. were named as beneficiaries. On June
15, 2003, the shares and ADSs were distributed to the appointed beneficiaries
and the Galicia 2004 Trust was early terminated. On November 19, 2001, the
balance of 157,669.40 ADSs of Grupo Galicia that was not awarded to the
beneficiaries was transferred to the Galicia 2005 Trust, which expires on
September 30, 2005. The beneficiaries of the Galicia 2005 Trust have not been
named yet. The 3,400 ADSs of Grupo Galicia not assigned to the Galicia 2005
Trust returned to the grantor.
The Bank does not maintain a stock-option, profit-sharing or pension plan
or any other retirement plan for the benefit of its officers, nor do its
officers qualify for benefits upon termination of employment.
EMPLOYEES
The following table shows the composition of our staff:
AS OF DECEMBER 31,
-------------------------------
2004 2003 2002
----- ----- -----
GRUPO FINANCIERO GALICIA S.A..................... 8 8 9
BANCO DE GALICIA Y BUENOS AIRES S.A.............. 3,946 3,831 4,066
Branches................................. 1,871 1,837 1,888
Head Office.............................. 2,075 1,994 2,178
GALICIA URUGUAY.................................. 19 40 51
REGIONAL CREDIT-CARD COMPANIES................... 2,216 1,951 1,903
SUDAMERICANA HOLDING S.A. CONSOLIDATED........... 129 132 136
OTHER SUBSIDIARIES............................... 46 73 64
----- ----- -----
TOTAL............................................ 6,364 6,035 6,229
===== ===== =====
Grupo Galicia's management considers its relations with its employees to
be very good.
As of December 31, 2004, approximately 8.3% of the Bank's employees were
affiliated with the national bank union. Banco Galicia has not experienced a
strike by its employees since 1973. The Bank believes that its relationship with
its employees has developed within normal and satisfactory parameters despite
the environment created by the 2001-2002 crisis.
As a consequence of the 2001-2002 crisis, during 2002 the Bank reduced its
staff through voluntary mechanisms. Within the measures of the Galicia
capitalization and liquidity plan, the number of employees (excluding the
consolidated subsidiaries) decreased by 1,804 or 30.7% of the Bank's staff
(excluding the consolidated subsidiaries) as of December 31, 2001.
During 2003, the Bank's Human Resources Division placed special emphasis
on counteracting the consequences of the restructuring process and the Bank
maintained, to the extent possible, staff training programs geared toward
increasing the staff's efficiency and proficiency. During fiscal year 2004, the
level of training courses for the Bank's staff was maintained, with a strong
emphasis on commercial and operating needs. Face-to-face and distance training
courses were offered for an equivalent of 72,000 man-hours, including attendees
from the branch network and central areas. Similarly, 220 employees attended
external training programs. Another 110 employees took part in different
development programs. All these activities are carried out in close contact with
the different sectors and in order to satisfy current needs and anticipate
future ones.
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As regards the staff's loyalty and integration, the Bank has implemented
and expanded the program called Beneficios Internos Programados ("Scheduled
Internal Benefits"). Within this program, the Bank has put in place social,
cultural and sport events, as well as out-of office activities and benefits, in
which the Bank's total staff has participated, both in the Federal Capital and
in the provinces of Argentina.
Grupo Galicia will continue its current policy of monitoring both wage
levels and labor conditions in the financial industry in order to be
competitive. Grupo Galicia does not maintain any pension, profit-sharing or
retirement programs for its employees.
The Fundacion Banco de Galicia y Buenos Aires (the "Fundacion") is an
Argentine nonprofit organization that provides various services to Banco Galicia
employees. The various activities of the Fundacion include, among others,
managing the medical services of Banco Galicia employees and their families,
purchasing school materials for the children of Banco Galicia employees and
making donations to hospitals and other charitable causes, including cultural
events. The Fundacion has a board of lifetime trustees, certain members of which
are members of our Board of Directors and supervisory committee. Members and
alternate members of the board of trustees do not receive remuneration for their
services as trustees.
NASDAQ CORPORATE GOVERNANCE STANDARDS
Pursuant to Nasdaq Marketplace Rule 4350(a), a foreign private issuer may
follow home country corporate governance practice in lieu of the requirements of
Rule 4350, provided that the foreign private issuer complies with certain
mandatory sections of Rule 4350, discloses each requirement of Rule 4350 that it
does not follow and describes the home country practice followed in lieu of such
requirement. The requirements of Rule 4350 and the Argentine corporate
governance practice that we follow in lieu thereof are described below:
(i) Rule 4350(b)(1)(A) - Distribution of Annual and Interim Reports. In
lieu of the requirements of Rule 4350(b)(1)(A), we follow Argentine
law, which requires that companies make public a Spanish language
annual report, including annual audited consolidated financial
statements prepared in accordance with generally accepted accounting
principles in Argentina, by filing such annual report with the CNV and
the BASE, within 70 calendar days of the end of the company's fiscal
year. Interim reports must be filed with the CNV and the BASE within 42
calendar days of the end of each fiscal quarter. The BASE publishes the
annual reports and interim reports in the BASE bulletin and makes the
bulletin available for inspection at its offices. In addition, our
shareholders can receive copies of annual reports and any interim
reports upon such shareholders' request. English language translations
of our annual reports and interim reports are furnished to the SEC. We
also post the English language translation of our annual reports and
quarterly press releases on our website. Furthermore, under the terms
of the Second Amended and Restated Deposit Agreement, dated as of June
22, 2000, among us, The Bank of New York, as depositary, and owners of
ADSs issued thereunder, we are required to furnish The Bank of New York
with, among other things, English language translations of our annual
reports and each of our quarterly press releases. Annual reports and
quarterly press releases are available for inspection by ADR holders at
the offices of The Bank of New York located at, 101 Barclay Street,
22nd Floor, New York, New York. Finally, Argentine law requires that 20
calendar days before the date of a shareholders' meeting, the board of
directors must provide to the shareholders, at the company's executive
office or through electronic means, all information relevant to the
shareholders' meeting, including copies of any documents to be
considered by the shareholders (which includes the annual report), as
well as proposals of the company's board of directors.
(ii) Rule 4350(c)(1) - Majority of Independent Directors. In lieu of the
requirements of Rule 4350(c)(1), we follow Argentine law which does not
require that a majority of the board of directors be comprised of
independent directors. Argentine law instead requires that public
companies in Argentina such as us must have a sufficient number of
independent directors to be able to form an audit committee of at least
three members, the majority of which must be independent pursuant to
the criteria established by the CNV. In addition, because we are a
"controlled company" as defined in Rule 4350(c)(5), we are relying on
the exemption provided thereby for purposes of complying with Rule
4350(c)(1).
(iii) Rule 4350(c)(2) - Executive Sessions of the Board of Directors. In lieu
of the requirements of Rule 4350(c)(2), we follow Argentine law which
does not require independent directors to hold regularly scheduled
meetings at which only such independent directors are present (i.e.,
executive sessions). Our board of directors as a whole is responsible
for monitoring our affairs. In addition, under Argentine law,
the Board of Directors may approve the delegation of specific
responsibilities to designated directors or non-director managers of
the company. Also, it is mandatory for public companies to form a
supervisory committee (composed of syndics) which is responsible for
monitoring the legality of the company's actions under Argentine law
and the conformity thereof with its by-laws. Finally, our audit
committee has regularly scheduled meetings and, as such, such meetings
will serve a substantially similar purpose as executive sessions.
(iv) Rule 4350(c)(3) - Compensation of Officers. In lieu of the requirements
of Rule 4350(c)(3), we follow Argentine law which does not require
companies to form a compensation committee comprised solely of
independent directors. It also is not required in Argentina for the
compensation of the chief executive officer and all other executive
officers to be determined by either a majority of the independent
directors or a compensation committee comprised solely of independent
directors. Under Argentine law, the board of directors is the corporate
body responsible for determining the compensation of the chief
executive officer and all other executive officers, so long as they are
not directors. In addition, under Argentine law, the audit committee
shall give its opinion about the reasonableness of management's
proposals on fees and option plans for directors or managers of the
company. Finally, because we are a "controlled company" as defined in
Rule 4350(c)(5), we are relying on the exemption provided thereby for
purposes of complying with Rule 4350(c)(3).
(v) Rule 4350(c)(4) - Nomination of Directors. In lieu of the requirements
of Rule 4350(c)(4), we follow Argentine law which requires that
directors be nominated directly by the shareholders at the
shareholders' meeting and that they be selected and recommended by the
shareholders themselves. Under Argentine law, it is the responsibility
of the ordinary shareholders' meeting to appoint and remove directors
and to set their compensation. In addition, because we are a
"controlled company" as defined in Rule 4350(c)(5), we are relying on
the exemption provided thereby for purposes of complying with Rule
4350(c)(4).
(vi) Rule 4350(d)(1) - Audit Committee Charter. In lieu of the requirements
of Rule 4350(d)(1), we follow Argentine law which requires that audit
committees have a charter but does not require that companies certify
as to the adoption of the charter nor does it require an annual review
and assessment thereof. Argentine law instead requires that companies
prepare a proposed plan or course of action with respect to those
matters which are the responsibility of the company's audit committee.
Such plan or course of action could, at the discretion of our audit
committee, include a review and assessment of the audit committee
charter.
(vii) Rule 4350(d)(2) - Audit Committee Composition. Argentine law does not
require that companies have an audit committee comprised solely of
independent directors and it is equally not customary business practice
in Argentina to have such a committee. Argentine law instead requires
that companies establish an audit committee with at least three members
comprised of a majority of independent directors as defined by
Argentine law. Nonetheless, although not required by Argentine law, we
have a three member audit committee comprised of entirely independent
directors, as independence is defined in Rule 10(A)-3(b)(1), one of
which the Board has determined to be an audit committee financial
expert. In addition, we have a supervisory committee ("comision
fiscalizadora") composed of three 'syndics' which are in charge of
monitoring the legality, under Argentine law, of the actions of our
board of directors and the conformity of such actions with our by-laws.
(viii) Rule 4350(f) - Quorum. In lieu of the requirements of Rule 4350(f), we
follow Argentine law and our bylaws, which distinguish between ordinary
meetings and extraordinary meetings and require, in connection with
ordinary meetings, that a quorum consist of a majority of stock
entitled to vote. If no quorum is present at the first meeting, a
second meeting may be called at which the shareholders present,
whatever their number, constitute a quorum and resolutions may be
adopted by an absolute majority of the votes present. Argentine law,
and our bylaws, require in connection with extraordinary meetings, that
a quorum consist of 60% of the stock entitled to vote. However, if such
quorum is not present at the first meeting, our bylaws provide that a
second meeting may be called which may be held with the number of
shareholders present. In both ordinary and extraordinary meetings,
decisions are adopted by an absolute
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majority of votes present at the meeting, except for certain
fundamental matters (such as mergers and spin-offs (when we are not the
surviving entity and the surviving entity is not listed on any stock
exchange), anticipated liquidation, change in our domicile outside of
Argentina, total or partial recapitalization of our statutory capital
following a loss, any transformation in our corporate legal form or a
substantial change in our corporate purpose) which require an approval
by vote of the majority of all the stock entitled to vote (all stock
being entitled to only one vote.
(ix) Rule 4350(g) -- Solicitation of Proxies. In lieu of the requirements
of Rule 4350(g), we follow Argentine law which requires that notices of
shareholders' meetings be published, for five consecutive days, in the
Official Gazette and in a widely circulated newspaper in Argentina no
earlier than 45 calendar days prior to the meeting and at least 20
calendar days prior to such meeting. In order to attend a meeting and
be listed on the meeting registry, shareholders are required to submit
evidence of their book-entry share account held at Caja de Valores up
to three business days prior to the scheduled meeting date. If entitled
to attend the meeting, a shareholder may be represented by proxy
(properly executed and delivered with a certified signature) granted to
any other person, with the exception of a director, syndic, member of
the surveillance committee ("consejo de vigilancia"), manager or
employee of the issuer, which are prohibited by Argentine law from
acting as proxies. In addition, our ADS holders receive, prior to the
shareholders' meeting, a notice listing the matters on the agenda, a
copy of the annual report and a voting card.
(x) Rule 4350(h) -- Conflicts of Interest. In lieu of the requirements of
Rule 4350(h), we follow Argentine law which requires that related party
transactions be approved by the audit committee when the transaction
exceeds one percent (1%) of the corporation's net worth, measured
pursuant to the last audited balance sheet, so long as the relevant
transaction exceeds the equivalent of three hundred thousand Argentine
Pesos (Ps. 300,000). Directors can contract with the corporation only
on terms consistent with prevailing market terms. If the contract is
not in accordance with prevailing market terms, such transaction must
be pre-approved by the board of directors (excluding the interested
director). In addition, under Argentine law, a shareholder is required
to abstain from voting on a business transaction in which its interests
may be in conflict with the interests of the company. In the event such
shareholder votes on such business transaction and such business
transaction would not have been approved without such shareholder's
vote, such shareholder may be liable to the company for damages and the
resolution may be declared void.
Other than as noted above, we are in full compliance with all other
applicable Nasdaq corporate governance standards.
SHARE OWNERSHIP
For information on the share ownership of our directors and executive
officers as of December 31, 2004, see Item 7. "Major Shareholders and Related
Party Transactions -- Major Shareholders."
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
As of March 31, 2005, Grupo Galicia's capital structure was made up of
class A shares, each of which is entitled to five votes, class B shares, each of
which is entitled to one vote, and nonvoting preferred shares. The preferred
shares automatically converted into class B shares on May 13, 2005. As of March
31, 2005, we had 1,241,407,017 shares outstanding composed of 281,221,650 class
A shares, 811,185,367 class B shares (373,171,060 of which were evidenced by
37,317,106 ADSs) and 149,000,000 preferred shares. As of the date of this annual
report, the number of class A shares remains the same but the number of class B
shares increased to 960,185,367 after the conversion of the entirety of the
preferred shares.
Our controlling shareholders are members of the Escasany, Ayerza and Braun
families and the Fundacion. As of March 31, 2005, the controlling shareholders
owned 100% of our class A shares, through EBA Holding, which in turn owns 22.7%
of our total outstanding shares, 8.0% of our class B shares and 14.2% of our
preferred shares, as more fully set forth in the tables below.
Based on information that is available to us, the table below sets forth,
as of March 31, 2005, the number of our class A, class B and preferred shares
held by holders of more than 5% of each class of shares and 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 the total possible votes of Grupo
Galicia.
CLASS A SHARES
% OF
CLASS A % OF
NAME CLASS A SHARES SHARES TOTAL VOTES
EBA Holding S.A............................... 281,221,650 class A shares 100 63.4
CLASS B SHARES
% OF
CLASS B % OF
NAME CLASS B SHARES SHARES TOTAL VOTES
The Bank of New York(1)....................... 373,171,060 class B shares 46.0 16.8
Banco Santander Central Hispano(2)............ 82,741,540 class B shares 10.2 3.7
Members of the families that are shareholders
of EBA Holding S.A............................ 64,829,923 class B shares 8.0 2.9
M.V.B.A.(3)................................... 63,202,995 class B shares 7.8 2.9
PREFERRED SHARES
% OF
PREFERRED % OF
NAME PREFERRED SHARES SHARES TOTAL VOTES(4)
Euroclear Bank (5)............................ 33,656,092 preferred shares 22.6 -
Members of the families that are shareholders
of EBA Holding S.A............................ 21,162,226 preferred shares 14.2 -
-----------------
(1) Pursuant to the requirements of Argentine law, all class B shares
represented by ADSs are owned of record by The Bank of New York, as
Depositary. The address for the Bank of New York is 101 Barclay Street,
22W, New York 10286, and the country of organization is the United States.
Includes the holdings of Banco Santander Central Hispano.
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(2) Information is based on a Schedule 13 G filed by Banco Santander Central
Hispano dated February 16, 2001. However, we have confirmed the amount
with information provided by third party companies. The address for Banco
Santander Central Hispano is Plaza de Canalejas 28014, Madrid, Spain, and
the country of organization is the Kingdom of Spain. The holding is in
ADRs.
(3) Information is based on Caja de Valores files. MVBA (Mercado de Valores de
Buenos Aires) acts as custodian for individual shareholders when they put
the shares as a guarantee for cash advances. As of March 31, 2005, the
shares deposited with MVBA corresponded to 1,225 individual accounts. The
address for MVBA is 25 de Mayo 367 9th floor, Buenos Aires, and the
country of organization is the Republic of Argentina.
(4) The preferred shares were nonvoting shares. After their conversion into
class B shares on May 13, 2005, the preferred shares became class B shares
with one vote per share.
(5) Information is based on Caja de Valores' files. The address for Euroclear
Bank is 1 Blvd du Roi Albert 21210, Brusels, and the country of
organization is Belgium.
Based on information that is available to us, the table below sets forth,
as of March 31, 2005, the shareholders that either directly or indirectly have
more than 5% of the votes or the shares of Grupo Galicia.
% OF % OF
NAME TOTAL SHARES TOTAL CAPITAL TOTAL VOTES
MEMBERS OF THE CONTROLLING SHAREHOLDERS:
EBA Holding S.A............................... 281,221,650 Class A shares 22.7 63.4
Members of the families that are shareholders
of EBA Holding S.A............................ 64,829,923 Class B shares 5.2 2.9
21,162,226 Preferred shares 1.7 0.0
OTHERS:
The Bank of New York (1)...................... 373,171,060 Class B shares 30.1 16.8
Banco Santander Central Hispano............... 82,741,540 Class B shares 6.7 3.7
M.V.B.A....................................... 63,202,995.Class B shares 5.1 2.9
-----------------
(1) Pursuant to the requirements of Argentine law, all Class B shares
represented by ADSs are owned of record by the Bank of New York, as Depositary.
Members of the three controlling families have historically 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 the Bank since 1923. The
Ayerza and Braun families have been represented on the Board of Directors of the
Bank since 1943 and 1947, respectively. Currently, there is one member of the
controlling families on the Bank's Board of Directors and four members of these
families on our Board of Directors. Additionaly, there are two alternate
directors on our Board of Directors that are members of the controlling
families.
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, having one vote per share, of EBA Holding. In addition, EBA
Holding's bylaws contain rights of first refusal, buy-sell provisions and
tag-along rights.
A public shareholder of Banco Galicia, who indirectly owns in excess of 5%
of the outstanding capital stock of Banco Galicia, has granted a right of first
refusal for the purchase of all or part of its shares to certain of our
controlling shareholders in the event such public shareholder decides to sell
all or part of its Banco Galicia shares.
As of March 31, 2005, we had 60 identified United States record
shareholders, of which 33 held our class B shares, 23 held our ADSs and 4 held
combined our class B shares and our ADSs. Such United States holders, in the
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aggregate, held approximately 145.0 million of our class B shares, directly or
through ADSs, representing approximately 11.7% of our total outstanding capital
stock as of March 31, 2005.
As of March 31, 2005, we had 46 identified United States record
shareholders of our preferred shares. Such United States holders, in the
aggregate, held directly 21,287,212 of our preferred shares, representing
approximately 1.7% of our total outstanding capital stock as of March 31, 2005.
RELATED PARTY TRANSACTIONS
Grupo Galicia is not party to any transactions with, and has not made any
loan to, any of its directors, key management personnel or other related
persons, nor are there any proposed transactions with such persons.
Some of the directors of Grupo Galicia and Banco Galicia have been
involved in certain credit transactions with Banco Galicia as permitted by
Argentine law. The Argentine Corporations' Law and the Argentine Central Bank's
regulations allow directors of a limited liability company to enter into a
transaction with such company if such transaction follows prevailing market
conditions. Additionally, lending to persons or entities affiliated with Banco
Galicia is subject to the regulations of the Argentine Central Bank. Such
regulations set limits on the amount of credit that can be extended to
affiliates based on, among other things, a percentage of the Bank's Adjusted
Shareholders' Equity. See Item 4. "Information on the Company -- Argentine
Banking System and Regulation -- 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, a list of the outstanding amount of
credit advanced to directors, controlling shareholders, officers and other
related entities which is transcribed in the minute books of the Board of
Directors. The Argentine Central Bank's rules establish that loans 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 2002, this practice was suspended, given that as a result of the
financial assistance that the Bank had received from the Argentine Central Bank,
through its Resolution No. 81/02, the Argentine Central Bank prohibited the Bank
from paying any cash dividends or making any distribution on or in respect of
its capital stock, transfer profits abroad, paying fees or any bonuses or
variable compensations tied to the Bank's profits, or granting financial
assistance to related parties, for as long as such assistance is outstanding.
As of April 30, 2005, the latest period for which information is
available, an aggregate of Ps. 81.8 million in financial assistance granted by
the Bank (equity participations and credit, including guarantees granted) was
outstanding to related parties. Related parties is defined as 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 individuals related to them and any entities directly or indirectly
affiliated with any of these parties that are not required to be consolidated.
The total amount of this financial assistance was distributed among 179
individuals and 47 companies, with the average amount of financial assistance
being Ps. 0.4 million. The single largest amount of financial assistance
outstanding as of April 30, 2005, was Ps. 18.0 million for Marin S.A., a holding
company.
As of December 31, 2004, the aggregate amount of financial assistance
granted by the Bank to related parties was Ps. 80.7 million. This was
distributed among 175 individuals and 45 companies, with the average amount of
financial assistance being Ps. 0.4 million. The single largest amount of
financial assistance outstanding as of December 31, 2004, was Ps. 16.8 million
for Marin S.A., a holding company.
As of December 31, 2003, the aggregate amount of financial assistance
granted by the Bank to related parties was Ps. 129.5 million. This was
distributed among 159 individuals and 50 companies, with the average amount of
financial assistance being Ps. 0.6 million. The single largest amount of
financial assistance outstanding as of December 31, 2003, was Ps. 30.7 million
for Freddo S.A., a company in the food industry whose shares the Bank received
through a trust as payment on a defaulted debt.
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As of December 31, 2002, the aggregate amount of financial assistance
granted by the Bank to related parties was Ps. 138.3 million. This was
distributed among 133 individuals and 40 companies, with the average amount of
financial assistance being Ps. 0.8 million. The single largest amount of
financial assistance outstanding as of December 31, 2002, was Ps. 29.2 million
for Inversora en Servicios S.A., a holding company with interests in electricity
generation and transportation.
All financial assistance was granted to related parties on terms as
favorable to the Bank as those granted to unaffiliated persons.
The Bank and Grupo Galicia have executed a trademark license agreement
under which the Bank has authorized Grupo Galicia to use the word "Galicia" in
its corporate name and has authorized Grupo Galicia's direct or indirect
subsidiaries to use in their corporate names the Bank's registered trademarks,
including the word "Galicia," in promoting their products and services. The
trademark license agreement has a 10-year term, commencing as of July 1, 2000,
and provides for payment of an annual royalty of Ps. 722,000.
ITEM 8. FINANCIAL INFORMATION
We have elected to provide the financial information set forth in Item 18
of this annual report.
LEGAL PROCEEDINGS
We are party to the following legal proceedings:
(i) Theseus S.A. and Lagarcue S.A. v. Grupo Financiero Galicia S.A.
Summary Proceeding: This suit was filed on September 6, 2002. The suit is
seeking to have Decree No. 677/01 and Resolutions No. 400/02, No. 401/02 and No.
402/02 of the CNV declared unconstitutional, thereby curtailing Grupo Galicia of
the ability thereunder to exclude minority shareholders. The plaintiff obtained
an injunction on September 26, 2003, which would prohibit Grupo Galicia, in the
event that Grupo Galicia becomes the owner of more than 95% of Banco Galicia (as
of the date of this annual report Grupo Galicia owns less than 95% of Banco
Galicia), from taking advantage of the above rules to the detriment of minority
shareholders such as Theseus S.A. and Lagarcue S.A. On October 29, 2004, the
court found Chapter VII of Decree No. 677/01 to be unconstitutional. We and the
plaintiff both appealed and the case is currently being heard in the Camara
Nacional de Apelaciones en lo Comercial (The National Commercial Appeals
Chamber). It should be noted that the matter, in itself, is not monetarily
measurable.
(ii) Theseus S.A. et al. v. Banco de Galicia y Buenos Aires S.A. and Grupo
Financiero Galicia S.A. Ordinary Proceeding: This suit was filed on March 11,
2003. The proceeding's purpose is to have the court "declare null the corporate
legal act done by Grupo Galicia with the cooperation of Banco Galicia pursuant
to which there was an exchange of class B shares of Banco Galicia for class B
shares of Grupo Galicia." Banco Galicia and Grupo Galicia have answered the
claim, arguing in defense, among other things, that there was not one act of
exchange of shares but rather as many legal acts (exchange agreements) as there
were shareholders who tendered their Banco Galicia shares to receive shares of
Grupo Galicia (i.e., 3,172 legal acts). Therefore, in order to nullify all of
the exchange contracts, it would be necessary that every single person who
tendered shares be named in the suit, not just Banco Galicia and Grupo Galicia.
The material effect that the suit could have, if it were successful, which is
considered unlikely, is not monetarily measurable, since these additional
defendants have not been included in the suit. Currently, this suit is in the
discovery stage.
BANCO GALICIA
In response to legal proceedings, Banco Galicia has made reserves to cover
(i) various types of claims filed by customers against Banco Galicia (e.g.,
claims for thefts from safe deposit boxes, the cashing of checks that had been
fraudulently altered, discrepancies related to deposit and payment services
rendered to its customers by the Bank, etc.) and (ii) estimated amounts payable
under labor related lawsuits filed against Banco Galicia by former employees.
Please refer to the captions "Litigation" and "For Severance Payments" in note
12 to our audited consolidated financial statements for additional information
concerning Banco Galicia's reserves to cover these potential liabilities.
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Additionally, the Bank is subject to court orders in connection with
amparo claims, mandating the reimbursement of deposits in connection with the
establishment, in December 2001, of the so called "corralito" and the compulsory
conversion into pesos and rescheduling of bank deposits implemented by the
Argentine government at the beginning of 2002 (the so called "corralon"). The
amount that the Bank has had to pay to comply with these court orders has been
significant, as disclosed in our audited consolidated financial statements. As
of December 31, 2004 the court orders demanding payment as a consequence of such
legal actions amounted up to Ps. 16.8 million and US$ 585.5 million and the Bank
had paid, as of such date, Ps. 938.4 million and US$ 123.0 million.
Criminal proceedings have been initiated against various directors and
managers of Banco Galicia as a result of the emergency economic legislation
issued toward the end of 2001 which imposed restrictions on the Bank's dealings
with its clients. None of the proceedings thus far have found grounds or
evidence sufficient to direct a judgment against any director or manager of the
Bank. As of the date hereof, no adverse monetary judgments have been obtained
and according to the Bank's outside lawyers it is not expected that there will
be any adverse judgments in the future.
As a result of the Bank's decision in May 2002 to suspend payments on its
dollar-denominated foreign debt governed by foreign law, various creditors
instituted legal proceedings in order to recover their lendings. Such
dollar-denominated foreign debt was restructured in May 2004 with the
participation of a high percentage of creditors (98.2%). As of the date hereof,
the Board of Directors of the Bank does not believe that an adverse result in
such proceedings in the aggregate would have a material adverse effect on the
Bank or its operations.
Banco Europeo para America Latina S.A. ("BEAL") has begun a legal
proceeding against the Bank seeking the recovery of US$ 11 million in connection
with the compulsory conversion into pesos of three forward currency contracts.
Dollar amounts subject to these forward contracts were converted into pesos in
accordance with Decree No. 214/02, Decree No. 992/02 and Argentine Central Bank
Communique "A" 3967. The Bank has paid BEAL all outstanding amounts due under
the contracts as provided for by the above mentioned regulations. In the suit,
BEAL claims that the Bank made only a partial payment and contests the
compulsory conversion of the original contract amounts. As of the date hereof,
the Bank has answered the complaint. The proceeding is in a discovery stage.
Management does not consider such claim or the potential result thereof to be
material.
Bank of America N.A. has sued the Argentine government over the
constitutionality of Decree No. 992/02 and relevant regulations issued
thereunder. Banco Galicia and the Argentine Central Bank have been named as
third parties in connection with a transaction involving futures contracts
subject to Argentine Law, which the Bank settled in compliance with such Decree,
as it was obligated to, and for which Bank of America N.A. is claiming payment,
in the event the above decree is found unconstitutional, of US$ 8.1 million. The
National Commercial Appeals Chamber has ruled that it does not have the
jurisdictional competence to adjudicate the proceeding and has ordered that it
be sent to the Justicia Federal Civil y Comercial de la Capital Federal (The
Federal Civil and Commercial Judiciary of the Argentine Federal Capital). At its
current stage, it is not expected that the proceeding would have a material
adverse effect on the Bank.
DIVIDEND POLICY AND DIVIDENDS
DIVIDEND POLICY
We may only declare and pay dividends out of our retained earnings
representing the profit realized on our operations and investments. The
Argentine 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 Argentine Corporations' Law, 5% of our net income is
allocated to a legal reserve until the reserve equals 20% of our outstanding
capital. The payment of cash dividends will not be affected by the legal reserve
as long as such reserve is covered by our subsidiaries' retained earnings.
Dividends may not be paid if the legal reserve has been impaired until it
reaches the required level. The legal reserve is not available for distribution
to shareholders.
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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 the Argentine crisis described in
this annual report and the impact on our subsidiaries, as well as the dividend
restrictions contained in the Bank's loan agreements as described below, our
ability to distribute cash dividends to our shareholders has been materially and
adversely affected.
Our ability to pay dividends to our shareholders in the future will
principally depend on (i) our net income (on a consolidated basis), (ii)
availability of cash and (iii) 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 ADS depositary in
pesos, although we reserve the right to pay cash dividends in any other
currency, including dollars. The ADS deposit agreement provides that the
depositary will convert cash dividends received by the ADS depositary in pesos
to dollars and, after deduction or upon payment of fees and expenses of the ADS
depositary and deduction of other amounts permitted to be deducted from such
cash payments in accordance with the ADS deposit agreement (such as for unpaid
taxes by the ADS holders (in connection with personal asset taxes or
otherwise)), will make payment to holders of our ADSs in dollars.
Under the loan agreements entered into by the Bank in connection with its
foreign debt restructuring, the Bank may only pay dividends on its capital stock
if there is no event of default under the loan agreements and only after the
aggregate principal amount of the long term instruments and medium term
instruments (together, the "senior debt") issued in its foreign debt
restructuring is equal to or less than 50% of the originally issued senior debt.
If the Bank is able to pay dividends, it is required to repay US$ 2 of the long
term instruments issued in its foreign debt restructuring for each US$ 1 of
dividends paid on its capital stock.
In light of the restrictions on Banco Galicia's ability to make
distributions, our current policy is to retain earnings and cash flows to pay
for our operating expenses and to support the growth of our business.
DIVIDENDS
We did not pay any dividends in fiscal years 2002, 2003 and 2004 since
Banco Galicia did not post any income that could be distributed and since the
Bank is prohibited from paying any cash dividends or making any capital
contributions to its affiliates or subsidiaries for so long as the Argentine
Central Bank's financial assistance is outstanding. Furthermore, Argentine
Central Bank Communique "A" 3785 further restricted the distribution of cash
dividends by establishing that the Bank should adjust its earnings to be
distributed as cash dividends with the difference between the market value and
the carrying value of the Compensatory and Hedge Bonds after netting the legal
reserve and other reserves established by the Bank's bylaws.
In addition, the cash and deposits we maintained on deposit at Galicia
Uruguay that may have otherwise been available for distribution or to pay our
operating expenses, were restructured and converted into (i) subordinated
negotiable obligations for US$ 43 million, (ii) negotiable obligations for US$
2.5 million and (iii) a savings account available on demand for US$ 1.4 million.
In September 2003, Grupo Galicia exchanged US$ 1.26 million of the US$ 2.5
million of negotiable obligations for Boden 2012 under an exchange offer made by
Galicia Uruguay. In March 2004, Grupo Galicia exchanged US$ 1.24 million of
negotiable obligations for Boden 2012 under another exchange offer made by
Galicia Uruguay. As of the date of this annual report, the only credit we have
against Galicia Uruguay is the US$ 43 million subordinated negotiable
obligations.
Net loss per share and per ADS was Ps. 0.093 and Ps. 0.930, respectively,
for the year ending December 31, 2004. Each ADS represents 10 common shares.
The last cash dividend Grupo Galicia has received from Banco Galicia was
in October 2001 for Ps. 116.4 million.
SIGNIFICANT CHANGES
No significant changes have occurred since the date of the annual
financial statements included in this annual report.
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ITEM 9. THE OFFER AND LISTING
SHARES AND ADSS
Our class B shares are listed on the BASE and the Cordoba Stock Exchange
under the symbol "GGAL." Our ADSs, each representing ten class B shares, are
listed on the Nasdaq Smallcap Market, under the symbol "GGAL." Our ADSs have
been listed on Nasdaq Smallcap Market since August 2002. Previously, our ADSs
were listed on the Nasdaq National Market since July 24, 2000.
On May 13, 2004, we issued 149.0 million preferred shares in connection
with the restructuring of the foreign debt of the Bank's Head Office and its
Cayman Branch. Under the terms and conditions of the restructuring, our
preferred shares were automatically convertible into class B shares on May 13,
2005. Such conversion took place on May, 13, 2005. Our preferred shares have
been listed on the BASE and the Cordoba Stock Exchange under the symbol "GGAL6"
between May 13, 2004 and May 12, 2005.
The following tables present for the periods indicated the high and low
closing prices and the average trading volume of our class B shares and
preferred shares on the BASE as reported by the BASE and the high and low
closing prices and the average trading volume of our ADSs on Nasdaq as reported
by the Nasdaq National Market and the Nasdaq Smallcap market. There has been low
trading volume of our class B shares on the Cordoba Stock Exchange. The
following prices have not been adjusted for any stock dividends and/or stock
splits.
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GRUPO GALICIA - CLASS B SHARES - BUENOS AIRES STOCK EXCHANGE (IN PESOS)
AVERAGE DAILY VOLUME
CALENDAR YEAR HIGH LOW (IN THOUSANDS OF CLASS B SHARES)
------------- -------- -------- --------------------------------
2000 (FROM JULY 24, 2000)............................... Ps. 1.78 Ps. 1.15 940.6
2001(1)................................................. 2.19 0.40 2,908.7
2002.................................................... 0.74 0.12 3,358.0
2003.................................................... 2.02 0.69 4,175.3
2004(2)................................................. 2.61 1.42 5,571.5
TWO MOST RECENT FISCAL YEARS
2003
First Quarter...................................... 0.84 0.69 3,003.0
Second Quarter.................................... 1.36 0.76 4,310.7
Third Quarter..................................... 1.49 1.10 4,634.3
Fourth Quarter..................................... 2.02 1.45 4,740.7
2004
First Quarter...................................... 2.61 1.96 5,199.9
Second Quarter (2)................................. 2.39 1.42 5,887.6
Third Quarter..................................... 1.96 1.42 4,667.6
Fourth Quarter..................................... 2.57 1.94 6,534.0
2005
First Quarter...................................... 2.81 2.13 6,232.6
Second Quarter (through May 20, 2005 )............. 2.40 2.06 6,107.1
MOST RECENT SIX MONTHS
November 2004........................................... 2.55 2.03 6,199.2
December 2004........................................... 2.57 2.12 5,536.4
January 2005............................................ 2.55 2.35 3,927.8
February 2005........................................... 2.77 2.49 6,881.5
March 2005.............................................. 2.81 2.13 7,842.8
April 2005 ............................................. 2.31 2.06 6,178.4
May 2005 (through May 20, 2005 )........................ 2.40 2.17 6,007.2
----------
(1) On March 23, 2001, our class B shares began trading ex-dividend. The value
of each class B share was reduced by the amount of the stock dividend of Ps.
0.0296 per class B share.
(2) On April 28, 2004, our class B shares began trading ex-coupon, which coupon
related to the right to subscribe for the preferred shares as part of the
preemptive rights offering. The value of each class B share was reduced by the
value of the coupon of Ps. 0.101 per class B share.
GRUPO GALICIA - - PREFERRED SHARES - - BUENOS AIRES STOCK EXCHANGE (IN PESOS)
AVERAGE DAILY VOLUME
CALENDAR YEAR HIGH LOW (IN THOUSANDS OF CLASS B SHARES)
------------- ------- ------- --------------------------------
2004 (from May 13, 2004)................................ Ps.2.48 Ps.1.29 475.2
MOST RECENT FISCAL YEAR
2004
Second Quarter (from May 13, 2004)................... 1.59 1.29 345.6
Third Quarter........................................ 1.87 1.33 650.4
Fourth Quarter....................................... 2.48 1.88 364.7
2005
First Quarter........................................ 2.72 2.10 227.3
Second Quarter (through May 11, 2005)................ 2.34 2.03 81.8
MOST RECENT SIX MONTHS
November 2004........................................... 2.40 1.89 333.4
December 2004........................................... 2.48 1.99 263.3
January 2005............................................ 2.44 2.26 146.0
February 2005........................................... 2.69 2.37 184.3
March 2005.............................................. 2.72 2.10 343.9
April 2005 ............................................. 2.25 2.03 100.4
May 2005 (through May 11, 2005)......................... 2.34 2.15 32.9
GRUPO GALICIA -- ADSS - NASDAQ NATIONAL MARKET / NASDAQ SMALLCAP MARKET (IN
US$)
AVERAGE DAILY VOLUME
CALENDAR YEAR HIGH LOW (IN THOUSANDS OF ADRs)
------------- -------- -------- ----------------------
2000 (from July 24, 2000)............................... US$17.69 US$11.88 192.7
2001 (1)................................................ 22.00 3.13 672.9
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2002.................................................... 3.45 0.22 242.8
2003.................................................... 6.73 2.05 238.1
2004.................................................... 8.85 4.65 324.2
TWO MOST RECENT FISCAL YEARS
2003
First Quarter........................................ 2.90 2.05 110.3
Second Quarter....................................... 4.90 2.51 339.4
Third Quarter........................................ 5.08 3.84 231.4
Fourth Quarter....................................... 6.73 5.00 266.7
2004
First Quarter........................................ 8.85 6.81 294.6
Second Quarter....................................... 8.51 4.83 303.6
Third Quarter........................................ 6.59 4.65 273.6
Fourth Quarter....................................... 8.78 6.52 423.5
2005
First Quarter........................................ 9.62 7.28 518.5
Second Quarter (through May 20, 2005)................ 8.29 6.99 311.4
MOST RECENT SIX MONTHS
November 2004........................................... 8.68 7.00 435.7
December 2004........................................... 8.78 7.00 225.5
January 2005............................................ 8.73 7.96 221.6
February 2005........................................... 9.49 8.49 598.3
March 2005.............................................. 9.62 7.28 719.5
April 2005.............................................. 7.95 6.99 258.2
May 2005 (through May 20, 2005)......................... 8.29 7.45 385.8
-------------------
(1) On March 27, 2001, our ADSs began trading ex-dividend. The value of each
ADS was reduced by the amount of the stock dividend of US$ 0.2835 per ADS.
The following tables present for the periods indicated the high and
low closing prices and the average trading volume of the Bank's Class B shares
on the BASE as reported by the BASE and the high and low closing prices and the
average trading volume of the Bank's ADSs on the Nasdaq National Market as
reported by the Nasdaq National Market. Banco Galicia's ADSs (trading symbol
BGALY) were delisted from the Nasdaq National Market on July 31, 2000. Banco
Galicia Class B shares continue to be listed on the BASE with very low trading
volume.
BANCO GALICIA -- CLASS B SHARES - BUENOS AIRES STOCK EXCHANGE (IN PESOS)
AVERAGE DAILY TRADING VOLUME
----------------------------
CALENDAR YEAR HIGH LOW (IN THOUSAND CLASS B SHARES)
------------- -------- -------- ----------------------------
2000.................................................... Ps. 4.95 Ps. 1.99 322.61
2001.................................................... 3.16 1.39 14.27
2002.................................................... 1.63 0.45 0.96
2003.................................................... 3.85 1.58 1.06
2004.................................................... 5.10 3.30 1.22
TWO MOST RECENT FISCAL YEARS
2003
First Quarter........................................... Ps. 1.90 Ps. 1.58 0.95
Second Quarter.......................................... 2.75 1.90 1.52
Third Quarter........................................... 2.70 2.20 0.99
Fourth Quarter.......................................... 3.85 2.73 0.82
2004
First Quarter........................................... Ps. 5.10 Ps. 3.70 1.12
Second Quarter.......................................... 5.00 3.85 0.53
Third Quarter........................................... 4.30 3.30 1.76
Fourth Quarter.......................................... 4.00 3.57 1.45
2005
First Quarter........................................... Ps. 4.30 Ps. 3.65 1.34
Second Quarter (through May 20, 2005)................... 3.88 3.30 3.16
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MOST RECENT SIX MONTHS
November 2004 Ps.3.90 Ps.3.80 0.17
December 2004 3.85 3.67 0.62
January 2005 4.00 3.76 0.55
February 2005 4.30 3.81 2.40
March 2005 4.18 3.65 1.11
April 2005 3.88 3.30 4.98
May 2005 (through May 20, 2005) 3.80 3.65 0.6
BANCO GALICIA -- ADSS -- NASDAQ NATIONAL MARKET (IN US$)
AVERAGE DAILY TRADING VOLUME
----------------------------
(IN THOUSANDS OF CLASS B
CALENDAR YEAR HIGH LOW SHARES) (1)
------------- --------- --------- ----------------------------
2000 US$ 22.44 US$ 12.75 1,889.97
------------
(1) One ADS equaled four class B shares.
ARGENTINE SECURITIES MARKET
The principal and oldest exchange for the Argentine securities market is
the BASE. Securities listed on the BASE include corporate equities and bonds and
government securities. Bonds listed on the BASE may also be listed on the
Mercado Abierto Electronico (the Argentine OTC market, the "MAE"). As a result
of an agreement between the Buenos Aires Stock Market and the MAE, equity
securities are traded exclusively on the BASE and debt securities (both public
and private) are traded on both the MAE and the BASE.
The Buenos Aires Stock Market (the "MERVAL"), which is affiliated with the
BASE, is the largest stock market in Argentina. The MERVAL is a corporation
whose 135 shareholder members are the only individuals and entities authorized
to trade, either as principal or as agent, in the securities listed on the BASE.
Trading on the BASE is conducted by continuous open outcry, or the traditional
auction system, from 11:00 a.m. to 5:00 p.m. each business day of the year.
Trading on the BASE is also conducted through SINAC. SINAC is a computer trading
system that permits trading in debt securities and equity securities from 11:00
a.m. to 5:00 p.m. SINAC is accessed by brokers directly from workstations
located at their offices. Currently, all transactions relating to listed
negotiable obligations and listed government 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, equity
securities. Such trades are reported on the MAE, an electronic OTC reporting
system.
Although companies may list all of their capital stock on the BASE, in
most cases a continuing block is retained by the controlling shareholders. This
results in only a relatively small percentage of most companies' stock being
available for active trading by the public on the BASE. 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 pension funds also represent an increasing
percentage of BASE trading activity. As of March 31, 2005, such pension funds'
participation represented approximately 5.8% of market capitalization. Argentine
mutual funds (fondos comunes de inversion), by contrast, continue to have very
low participation in the market. Although 107 companies had equity securities
listed on the BASE as of March 31, 2005, the 10 most-traded domestic companies
on the exchange accounted for approximately 90% of total trading value. Our
shares were the most-traded shares on the BASE in March 2005, with a 26.8% share
of trading volume.
The Cordoba Stock Exchange is another important stock market in Argentina.
Securities listed on the Cordoba Stock Exchange include both corporate equities
and bonds and government securities. Through an agreement with BASE, all of the
securities listed on the BASE are authorized to be listed and subsequently
traded on the Cordoba Stock Exchange. Thus, many transactions that originate on
the Cordoba Stock Exchange relate to companies listed on the BASE and such
trades are subsequently settled in Buenos Aires.
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MARKET REGULATIONS
The CNV oversees the regulation of the Argentine securities markets and is
responsible for authorizing public offerings of securities and supervising
intermediaries, 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 governed generally by Law No. 17,811, as
amended, which created the CNV and regulates stock exchanges, market operations
and public offering of securities.
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
BASE, the Buenos Aires Stock Market and certain provincial exchanges. Caja de
Valores is the central securities depository of Argentina which provides central
depository facilities for securities and acts as a transfer and paying agent in
connection therewith. It also handles settlement of securities transactions
carried out by the BASE and operates the computerized exchange information
system.
There is a relatively low level of regulation of the market for Argentine
securities and investors' activities in that market, and enforcement of existing
regulatory provisions has been extremely limited. Furthermore, there may be less
publicly available information about Argentine companies than is regularly
published by or about companies in the United States and certain other
countries. However, the CNV has taken steps to strengthen disclosure and
regulatory standards for the Argentine securities market, including the issuance
of regulations prohibiting insider trading and requiring insiders to report on
their ownership of securities, with associated penalties for noncompliance.
In order to improve Argentine securities market regulation, Decree No.
677/01, "Capital Transparency and Best Practices," was promulgated and took
effect June 1, 2001. 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 applies to
individuals and entities that participate in the public offering of securities
and as well as to stock exchanges. Among its key provisions, the decree broadens
the definition of "security"; governs the treatment of negotiable securities,
obligates 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; authorizes market-stabilization transactions
under certain circumstances; governs insider trading, market manipulation and
securities fraud; and regulates going-private transactions and acquisitions of
voting shares, including controlling stakes in public companies.
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 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 be freely traded in Argentine markets but certain
restrictions exist to residents and non-residents access to the local foreign
exchange market and to transfers of foreign exchange abroad. See Item 10.
"Additional Information -- Exchange Controls" and Item 4. "Information on the
Company -- Main regulatory Changes in 2002, 2003 and 2004 -- Foreign Exchange
Market."
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ITEM 10. ADDITIONAL INFORMATION
DESCRIPTION OF OUR BYLAWS
GENERAL
Set forth below is a brief description of certain provisions of Grupo
Galicia's bylaws and Argentine law and regulations with regard to Grupo
Galicia's 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 Grupo Galicia's bylaws, Argentine law
and the rules of the BASE, the Cordoba Stock Exchange as well as the CNV. A copy
of Grupo Galicia's bylaws has been filed with and can be examined at the CNV in
Buenos Aires and the SEC in Washington, D.C.
Grupo Galicia was incorporated on September 14, 1999, as a stock
corporation (a "sociedad anonima") under the laws of Argentina and registered on
September 30, 1999, with the Inspeccion General de Justicia (the "Argentine
Superintendency of Companies") under corporate registration number 14,519 of
Book 7, Volume of Stock Corporations. Our domicile is in Buenos Aires,
Argentina. Under our bylaws, the duration of Grupo Galicia is until June 30,
2100. This duration may be extended by resolution taken at a general
extraordinary shareholders' meeting.
During the shareholders' meeting held on April 23, 2003, we decided not to
adhere to the "Optional Statutory System for the Mandatory Acquisition of Shares
in a Public Offering" regime in compliance with Decree No. 677/01, which
requires a company to announce whether it has adopted this regime.
OUTSTANDING CAPITAL STOCK
The total subscribed and paid-in share capital of Grupo Galicia as of
December 31, 2004, amounted to Ps. 1,241,407,017, composed of class A ordinary
shares (the "class A shares"), class B ordinary shares (the "class B shares"),
and preferred shares, each with a par value of Ps. 1.00. As part of the Bank's
foreign debt restructuring, on May 13, 2004, we issued 149 million preferred
shares, with Ps. 1.00 par value, representing 12% of our total capital stock, on
a fully diluted basis. The preferred shares were non-voting shares, with
preference in the event of the liquidation of Grupo Galicia and until their
automatic and mandatory conversion into class B shares on May 13, 2005. As
payment for the issuance of the shares, we received US$ 100 million of the
Bank's subordinated bonds. After the issuance of the preferred shares, we have a
total of 1,241,407,017 ordinary shares outstanding. No further class A shares
are allowed to be issued.
The following table presents the number of our shares outstanding as of
December 31, 2004, and the voting interest that the shares represent.
AS OF DECEMBER 31, 2004
NUMBER % OF
SHARES OF SHARES CAPITAL STOCK % OF VOTING RIGHTS
------ ------------- ----------------------- ------------------
Class A shares.............................. 281,221,650 22.7% 63.4%
Class B shares.............................. 811,185,367 65.3 36.6
Preferred shares (1)........................ 149,000,000 12.0 -
------------- ----- -----
TOTAL....................................... 1,241,407,017 100.0% 100.0%
============= ===== =====
----------------------------
(1) After the preferred shares were converted into class B shares, the voting
rights of the class A shares became 59.4% and the voting rights of the class B
shares became 40.6%.
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 Grupo Galicia and only
those persons listed in such registry will be recognized as shareholders of
Grupo Galicia. Caja de Valores periodically delivers to Grupo Galicia 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 Grupo Galicia's registry. Within 10 days of
any such transfer, Caja de Valores is required to confirm the registration of
transfer with the transferor.
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Of the 149.0 million formerly preferred shares, now class B shares, 147.7
million are held in book-entry form at Caja de Valores and approximately 1.3
million are certificated shares corresponding to US persons for which Grupo
Galicia maintains the registry and records all transfers.
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 1 vote in certain matters, such as:
- a merger or spin-off in which Grupo Galicia is not the surviving
corporation, unless the acquirer's shares are authorized to be
publicly offered or listed on any stock exchange;
- a transformation in Grupo Galicia's legal corporate form;
- a fundamental change in Grupo Galicia's corporate purpose;
- a removal of Grupo Galicia's domicile outside Argentina;
- a voluntary termination of Grupo Galicia's public offering or listing
authorization;
- a continuation of Grupo Galicia following a delisting or a mandatory
cancellation of its public offering or listing authorization;
- a total or partial recapitalization of the statutory capital of Grupo
Galicia following a loss; or
- the appointment of syndics.
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:
- EBA Holding sells 100% of its class A shares;
- EBA Holding sells a portion of its Grupo Galicia class A shares to a
third person who, when aggregating all Grupo Galicia class A shares
with Grupo Galicia class B shares owned by such person, if any,
obtains 50% plus one vote of our total votes; or
- the current shareholders of EBA Holding sell shares of EBA Holding
that will allow the buyer to exercise more than 50% of the voting
power of EBA Holding at any general shareholders' meeting of EBA
Holding shareholders, except for transfers to other current
shareholders of EBA Holding or to their heirs or their legal
successors or to entities owned by any of them.
On June 5, 2000, our Board of Directors passed a resolution to clarify that
any transfer by EBA Holding, including by way of a sale, exchange, gift,
assignment of voting rights, spin-off or merger of EBA Holding, which results in
a transfer of Grupo Galicia to any entity or individual, would trigger a change
of control event. In addition, the Board of Directors clarified that if EBA
Holding were to transfer a portion of its Grupo Galicia class A shares with 5
votes to a transferee, all distinctions between our class A shares and our class
B shares would be eliminated if, when aggregating the 5 votes to the votes of
the other shares that such transferee may have or acquire in the future, such
transferee acquires more than 50% of all of the outstanding votes of Grupo
Galicia.
Our Board of Directors also clarified that when two or more persons act or
agree to act in concert or through entities which are under common control with
such persons, such persons would be treated as one person.
In addition, in July 2001, the limitation on selling class B shares
belonging to the control group ceased to be applicable.
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
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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 the voting rights of Grupo Galicia, at least three business days before
the date the general ordinary shareholders' meeting is to be held.
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. 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 requests.
Our bylaws state that the board of directors may decide to appoint an
executive committee and/or a delegate director.
APPOINTMENT OF DIRECTORS AND SYNDICS BY CUMULATIVE VOTING
The Argentine 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 Argentine Corporations' Law and the CNV establish rules regarding the
compensation of the 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 Argentine Corporations' Law provides that aggregate director
compensation may exceed the maximum percentage of adjusted net income in any one
year when the Company's profits are nonexistent 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 Grupo Galicia's shareholders present at such
shareholders' meeting.
In addition to the above, the bylaws of Grupo Galicia 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
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and may be reelected. 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 nonfulfillment 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.
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 Argentine
Corporations' Law, including:
- approval of Grupo Galicia's financial statements and general
performance of the management for the preceding fiscal year;
- appointment and remuneration of directors and members of the
supervisory committee;
- allocation of profits; and
- any other matter the board of directors decides to submit to the
shareholders' meeting concerning the company's business
administration. Matters which may be discussed at these or other
ordinary meetings include resolutions regarding the responsibility of
directors and members of the supervisory committee, as well as capital
increases and the issuance of negotiable obligations.
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 the Company,
limitation of the shareholders' preemptive rights to subscribe new shares,
issuance of bonds and debentures, transformation of the corporate form, the
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, 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 Grupo Galicia's 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 passed-on at such meeting and no other matters may be passed-on.
Additionally, the bylaws provide that any shareholder holding at least 5%
in the aggregate of Grupo Galicia 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 bound 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 Grupo
Galicia's shares are traded. In order to attend a meeting and to be listed on
the meeting registry, shareholders must
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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
thirty days of the date for which the first ordinary meeting was called.
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 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
thirty days of the date for which the first extraordinary meeting was called,
and the notice must be published for three days, at least eight 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 on our operations and investments
reflected in our annual financial statements according to Argentine GAAP 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 Argentine Corporations' Law, 5% of our net income is
allocated to a legal reserve until the reserve equals 20% of our outstanding
capital. The payment of cash dividends will not be affected by the legal reserve
as long as such reserve is covered by our subsidiaries' retained earnings.
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 Grupo Galicia's 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 CNV regulations and our bylaws, cash dividends must be paid to
shareholders within 30 days of the shareholders' meeting approving the dividend.
Payment of dividends in shares requires authorization from the CNV, the BASE and
the Cordoba Stock Exchange, whose authorizations must be requested within 10
business days after the shareholders' meeting approving the dividend. Grupo
Galicia must make 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 Grupo
Galicia once 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. Voluntary reduction
of capital must be approved by an extraordinary shareholders' meeting after the
corresponding authorization by the BASE, the Cordoba Stock
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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. 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 a preemptive right, 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 Grupo Galicia's 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 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. Our bylaws do not grant preemptive rights
to preferred shares.
Preemptive rights are exercisable following the last publication of notice
of shareholders' 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 10 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 Argentine Corporations'
Law. Class B shares not subscribed for by shareholders through 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 if an exemption from registration is not available.
APPRAISAL RIGHTS
Whenever the shareholders of Grupo Galicia approve:
- a merger or spin-off in which Grupo Galicia is not the surviving
corporation, unless the acquirer's shares are authorized to be
publicly offered or listed on any stock exchange,
- a transformation in Grupo Galicia's legal corporate form,
- a fundamental change in Grupo Galicia's corporate purpose,
- a change of Grupo Galicia's domicile to be outside Argentina,
- a voluntary termination of Grupo Galicia's public offering or listing
authorization,
- a continuation of Grupo Galicia following a delisting or a mandatory
cancellation of its public offering or listing authorization, or
- a total or partial recapitalization of the statutory capital of Grupo
Galicia following a loss,
any shareholder that voted against such action or did not attend the relevant
meeting may exercise the right to have its shares canceled in exchange for the
book value of its shares, determined on the basis of Grupo Galicia's latest
balance sheet prepared in accordance with Argentine laws and regulations,
provided that such shareholder exercises its appraisal to rights within the
periods set forth below.
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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 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.
Payment on the appraisal rights must be made within one year of the date of
the shareholders' meeting at which the resolution was adopted, except where the
resolution was to delist Grupo Galicia's 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 Argentine 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 Grupo Galicia's profits, as decided by
shareholders at a shareholders' meeting when drawing the conditions of the
issuance. They may also have other preferences, such as a preference in the
liquidation of the company.
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, the merger into another company and
spin-offs (when Grupo Galicia is not the surviving entity and the surviving
entity is not listed on any stock exchange), early winding-up, a change of Grupo
Galicia'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 or in the event the 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 Argentine 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
that of Grupo Galicia. In the event such shareholder votes on such resolution,
and such resolution would not have been approved without such shareholder's
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 Decree No. 677/01, a "sociedad anonima" 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 CNV has not yet issued its regulations. The above mentioned
conditions are: (a) the shares to be acquired shall be fully paid up; (b) there
shall be a resolution signed by the board of directors to such effect; (c) the
acquisition shall be made out of net profits or free or voluntary reserves; and
(d) 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
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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 no exercise, in whole or in part, their preemptive rights, the sale shall be
made at a stock exchange.
LIQUIDATION
Upon liquidation of Grupo Galicia, one or more liquidators may be appointed
to wind up the company. 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 a liquidation, in Argentina as well as in any other
country, the assets of Grupo Galicia shall first be applied to satisfy its debts
and liabilities.
OTHER PROVISIONS
The bylaws are governed by Argentine law and the ownership of any kind of
Grupo Galicia's shares represents acceptance of its bylaws and submission to the
exclusive jurisdiction of the ordinary commercial courts of Buenos Aires for any
claim or dispute related to the company, its shareholders, directors and members
of the supervisory committee.
EXCHANGE CONTROLS
From 1989 to November 30, 2001, there were no foreign exchange controls
preventing or restricting the conversion of pesos into U.S. dollars and
transfers abroad. However, on December 3, 2001, the Argentine government
introduced controls over the foreign exchange market and on transfers of foreign
currency abroad. Since late 2002 and during 2003 and 2004, controls over the
foreign exchange market and capital movements were lifted to a large extent. As
of the date of this annual report, certain restrictions still remain.
For a description of the exchange controls that would affect us or the
holders of our securities, see Item 4. "Information on the Company -- Main
Regulatory Changes in 2002, 2003 and 2004 -- Foreign Exchange Market."
TAXATION
The following is a summary of certain U.S. Federal income and Argentine tax
matters that may be relevant with respect to the acquisition, ownership and
disposition of ADSs or class B shares. Currently, there is no tax treaty between
the United States and Argentina.
ARGENTINE TAXES
Taxation of Dividends
In general, dividend payments on ADSs or ordinary shares, whether in cash,
property, or stock, are not subject to Argentine withholding tax or other taxes.
There is an exception under which a 35% tax ("equalization tax") will be
imposed on certain dividends approved by the registrant's shareholders. The
equalization tax will be applied only to the extent that distributions of
dividends exceed the taxable income of the company increased by nontaxable
dividends received by the distributing company in prior years and reduced by
Argentine income tax paid by the distributing company.
In this situation the equalization tax will be imposed as a withholding tax
on the shareholder receiving the dividend. Dividends distributions made in
property (other than cash) will be subject to the same tax rules as cash
dividends. Stock dividends are not subject to Argentine taxation.
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Taxation of Capital Gains
Pursuant to Decree No. 2,284/91 (the "Deregulation Decree"), capital
gains derived by nonresident individuals or foreign companies from the sale,
exchange or other disposition of ADSs or class B shares are not currently
subject to income tax.
Beginning on January 1, 2001, capital gains from the sale, exchange or
other dispositions of shares not listed in a stock exchange will be subject to
income tax when derived by individuals domiciled in Argentina.
In addition, in the case of legal entities or permanent organizations
incorporated or domiciled abroad that, pursuant to their bylaws, charters,
documents or the applicable regulatory framework, have as their principal
activity investing outside of the jurisdiction of their incorporation or
domicile, or are generally restricted from doing business in their country of
incorporation, it will be assumed, without any proof to the contrary being
admitted, that the seller is an individual domiciled in Argentina. Such legal
entities will be subject to income tax imposed as a withholding tax on the
seller receiving the payment (for payments made beginning April 30, 2001) at the
rate of 17.50% (that is, 35% on 50% of the amount of the payment), but the
foreign party may choose instead to pay a tax of 35% on the net gain realized on
the sale. In such situation, the Deregulation Decree will not be applicable.
On July 3, 2003, the Argentine government Chief Counsel (Procurador del
Tesoro) issued an opinion that the provisions of the income tax law that taxed
capital gains arising from unlisted shares obtained by resident individuals or
"offshore companies," as defined by the Argentine Income Tax Law, are no longer
in force because they have been implicitly abrogated. The validity of this
opinion is difficult to assess. Opinions of the Argentine government Chief
Counsel are binding upon all Argentine government attorneys, including attorneys
of the Argentine Tax Administration.
Transfer Taxes
No Argentine transfer taxes are applicable on the sale or transfer of ADSs
or class B shares.
Tax on Minimum Notional Income
The tax reform in force since 1999 reinstituted a tax on assets on
Argentine companies that will be in effect during 10 years, unless that term is
extended by future legislation. 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 basis of imposition of 20% of the value
of taxable assets.
A company's asset tax liability for a tax year will be reduced by its
income tax payments, and asset tax payments for a tax year can be carried
forward to be applied against the company's income tax liability in any of the
following ten tax years.
Personal Assets Tax
Individuals domiciled in Argentina will be subject to a 0.5% annual tax in
respect of assets located in Argentina and abroad for assets not exceeding Ps.
200,000. For assets exceeding Ps. 200,000 the tax rate is 0.75%. The tax will be
levied on the difference between the total value of the taxpayer's assets at of
December 31 of each year and a nontaxable threshold of Ps. 102,300. 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 legal entities domiciled in Argentina which, as of December
31st of each year, hold the joint ownership, possession, use, enjoyment,
deposit, safekeeping, custody, administration or tenure of the assets located in
Argentina subject to the tax belonging to the individuals domiciled abroad. In
such case the annual nontaxable amount of Ps. 102,300 will not be deductible.
When the direct ownership of negotiable obligations, government securities and
certain other investments, except shares issued by companies ruled by Law No.
19,550 (the Argentine Corporations' Law),
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corresponds to 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 any proof to the contrary being admitted, that those assets
belong ultimately to individuals and therefore the system for paying the tax for
such individuals domiciled abroad is applicable to them. The annual nontaxable
amount of Ps. 102,300 will not be deductible and the tax will not have to be
paid when it is less than Ps. 256. The regulations for applying these
requirements have not yet been issued. In the case of government securities or
bonds, the personal assets tax will be applied at the rate of 1.5%.
There is an exception pursuant to a recent tax reform that 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 Law No. 19,550, which ownership belongs
to individuals domiciled in Argentina or abroad and companies or legal entities
domiciled abroad. In the case of companies or legal entities domiciled abroad,
it will be assumed, without any proof to the contrary being admitted, that those
shares belong ultimately to individuals domiciled abroad.
The tax will be assessed and paid by those companies ruled by Law No.
19,550 at the rate of 0.5% on the value of the shares or equity interest. The
valuation of the shares, whether listed or not, must be made according to their
proportional equity value. In such case the annual nontaxable amount of Ps.
102,300 will not be deductible. These companies may eventually seek
reimbursement from the direct owner of their shares in respect of any amounts
paid to the Argentine tax authorities as personal assets tax. Grupo 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 amounts unpaid for fiscal year 2002 and to have us absorb the amounts due
for fiscal year 2003 onward when not withheld from dividends.
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 stamp, issue, registration or similar taxes or duties
payable by holders of ADSs or class B shares.
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 TAXES
The following summary of U.S. Federal income taxes describes certain U.S.
Federal income tax consequences of the ownership of class B shares or ADSs, as
such securities 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 of 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 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 are deemed to own for U.S. tax
purposes) at least 10% or more (by voting power or value) of the shares of Grupo
Galicia, investors whose functional currency is not the U.S. dollar and persons
that will 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. 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.
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This summary (i) is based on the tax laws of the United States as in effect
on the date of this annual report and on United States Treasury Regulations in
effect as of the date of this annual report, as well as judicial and
administrative interpretations thereof available on or before such date 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.
The U.S. Treasury Department has expressed concern that depositaries for
American depositary receipts, or other intermediaries between the holders of
shares of an issuer and the issuer, may be taking actions that are inconsistent
with the claiming of U.S. foreign tax credits by U.S. holders of such receipts
or shares. Accordingly, the U.S. foreign tax credit analysis described below
could be affected by future actions that may be taken by the U.S. Treasury
Department.
For purposes of this summary, a "U.S. Holder" is a beneficial owner of
class B shares or ADSs who, for U.S. Federal income tax purposes, is (i) a
citizen or resident of the United States, (ii) a corporation or partnership
organized in or under the laws of the United States or any state thereof
(including 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
United States 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
other than a U.S. Holder.
If a partnership (or any other entity 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 foreign tax consequences of acquiring,
owning or 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 ADSs evidenced thereby and of the class B shares
represented by such ADSs.
Taxation of Cash Dividends and Distribution of Stock
Subject to the discussion below under "Passive Foreign Investment Company
Considerations," for U.S. Federal income tax purposes, distributions by the
Company of cash or property (other than certain distributions, if any, of class
B shares or ADSs distributed pro rata to all shareholders of the Company,
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 of the Company's current and accumulated earnings and
profits, 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 may be taxed on
distributions on ADSs (or 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 for taxable years beginning on
or before December 31, 2008 (i.e., gains from the sale of capital assets held
for more than one year). Non-corporate U.S. Holders that do not meet a minimum
holding period requirement during which they are not protected from the risk of
loss with respect to such ADSs (or shares), that elect to treat the dividend
income as "investment income" pursuant to Section 163(d)(4)(B) of the Code or
that receive dividends with respect to which they are obligated to make related
payments, will not be eligible for the reduced rates of taxation. Such dividends
will not be eligible for the dividends received deduction generally allowed to
corporations under the Internal Revenue Code of 1986, as amended (the "Code").
Subject to the discussion below under "Passive Foreign Investment Company
Considerations," if distributions with respect to the class B shares exceed the
Company's current and accumulated earnings and profits, the excess would 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 the amount of the dividend and
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the return of capital would be treated as capital gain. The Company 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 U.S. 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 U.S. 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 classes of income. For this purpose,
dividends generally will constitute foreign source "passive income" (or in the
case of certain holders, "financial services income") for U.S. foreign tax
credit purposes. U.S. Holders should note that recently enacted legislation
eliminates the "financial services income" category with respect to taxable
years beginning after December 31, 2006. Under the new legislation, the foreign
tax credit limitation categories would be limited to "passive category income"
and "general category income."
Subject to the discussion below under "Backup Withholding and Information
Reporting Requirements," 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 that hold class B shares or ADSs as capital assets
will recognize capital gain or loss for U.S. Federal income tax purposes upon a
sale or exchange of such 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 federal income
tax rate for ordinary income (other than certain dividends) if the U.S. Holder's
holding period for the class B shares or ADSs exceeds one year (i.e., long-term
capital gains). Gain or loss, if any, recognized by a U.S. Holder generally will
be treated as United States source income or loss for U.S. foreign tax credit
purposes. Certain limitations exist on the deductibility of capital losses for
U.S. Federal income tax purposes.
The initial tax basis of the class B shares to a U.S. Holder is the U.S.
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 U.S. dollar value of the payment received
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 U.S. 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 Tax and
Information Reporting Requirements," 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.
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Passive Foreign Investment Company Considerations
A Non-United States 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.
Based on certain estimates of its gross income and gross assets and the
nature of its business, the Company believes that it will not be classified as a
PFIC for the taxable year ended December 31, 2004. The Company's status in
future years will depend on its assets and activities in those years. The
Company 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 the Company will not be considered a PFIC for any taxable year.
If the Company 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 (including the denial of the taxation of certain dividends at the
lower rates applicable to long-term capital gains, as discussed above under
"Taxation of Cash Dividends and Distribution of Stock") with respect to any gain
from the sale or exchange of, and certain distributions with respect to, the
class B shares or ADSs.
If the Company 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 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
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 the Company were treated as a PFIC.
Backup Withholding and Information Reporting
United States backup withholding tax and information reporting requirements
generally apply to certain payments to certain non-corporate 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," including a corporation, a
payee that is not a United States person that provides an appropriate
certification and certain other persons).
A payor will be required to withhold backup withholding tax from any
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 corporation or a payee
that is not a United States person and that provides an appropriate
certification) 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 28% through 2010. In the case of such payments made within the
United States to a foreign simple trust, foreign grantor trust or a foreign
partnership (other than payments to a foreign simple trust, a foreign grantor
trust or a foreign partnership that qualifies as a "withholding foreign trust"
or a "withholding foreign partnership" within the meaning of certain Treasury
Regulations and payments to a foreign simple trust, a foreign grantor trust or a
foreign partnership that are effectively connected with the conduct of a trade
or business in the United States), the beneficiaries of the foreign simple
trust, the persons treated as the owners of the foreign grantor trust or the
partners of the foreign partnership, as the case may be, will be required to
provide the certification discussed above in order to establish an exemption
from backup withholding tax and information reporting requirements. Moreover, a
payor only may rely on a certification provided by a payee that is not a United
States person only if such payor does not have actual knowledge or a reason to
know that any information or certification stated in such certificate is
incorrect.
THE ABOVE SUMMARIES ARE NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF
ALL TAX CONSEQUENCES RELATING TO THE OWNERSHIP OF THE CLASS B SHARES OR ADSs.
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MATERIAL CONTRACTS
In connection with the Bank's foreign debt restructuring, we entered into a
registration rights agreement and a corporate governance/financial reporting
agreement (the "Grupo Galicia agreement") as described in Item 4. "Information
on the Company -- History -- Restructuring of Our Subsidiaries' Debt -- Banco
Galicia -- Restructuring of the Foreign Debt of the Bank's Head Office in
Argentina and its Cayman Branch."
Under the Grupo Galicia agreement, in addition to agreeing to provide
financial and other information to the lenders under the Bank's loan agreements,
we agreed that so long as any amounts payable under the loan agreements remained
outstanding, we would, by November 18, 2004, cause our audit committee to have
at least three members, a majority of which would be "independent directors" (as
such term is defined in NASDAQ Stock Market Inc. Rule 4350(d)(2)(A)), and comply
with certain provisions of the U.S. Sarbanes-Oxley Act of 2002 relating to
granting of personal loans to executives, implementing internal controls and a
code of ethics and providing certifications from our chief executive officer and
chief financial officer.
We also agreed that we would not make any payment to our management in
excess of market compensation or pay compensation to the members of our board of
directors during any fiscal year, or enter into agreements or any other kind of
transactions pursuant to which we would pay fees, salaries, retainers or any
other kind of compensation to the members of our Board of Directors during any
fiscal year, if the aggregate amount of such fees, salaries, retainers or other
compensation during such fiscal year would exceed US$ 1.5 million.
In addition, each year, we agreed to inform the lenders under the loan
agreements as to whether a change of control, as defined in the Grupo Galicia
agreement, has occurred. If a change of control occurs, it may trigger an event
of default under the Bank's loan agreements.
In connection with its foreign debt restructuring, the Bank entered into
various restructured loan agreements with its bank creditors and into an
indenture with The Bank of New York, acting as trustee, pursuant to which the
bond instruments were issued. These loan agreements and/or indenture include a
number of significant covenants that, among other things, restrict the Bank's
ability to: pay dividends on stock or purchase stock (see Item 8. "Financial
Information -- Dividend Policy and Dividends -- Dividend Policy"); make certain
types of investments; use the proceeds of the sale of certain assets or the
issuance of debt or equity securities; engage in certain transactions with
affiliates; and engage in business activities unrelated to the Bank's current
business. In addition, certain of these agreements also require the Bank to
maintain specified financial ratios and to comply with certain reporting and
informational requirements.
In December of 2004, the Bank entered into an amendment and waiver of the
loan agreements, whereby the Bank and the lenders agreed mainly to (i) amend
certain terms to allow for certain securitization transactions and to allow for
the financing of the construction of the new corporate tower and (ii) waive
delivery requirement of certain documents in connection with certain
transactions.
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
450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information about
the operation of the Public Reference Room by calling the SEC at (202) 942-8090.
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 Nasdaq
Stock Market, Inc., 1735 K Street, N.W., Washington, D.C. 20006-1506.
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
Market risks faced by the Group are the risks arising from the fluctuations
in interest rates and in foreign exchange rates. Market risk for Grupo Galicia
arises mainly from the operations of Banco Galicia in its capacity as a
financial intermediary. Grupo Galicia's subsidiaries and equity investees other
than Banco Galicia are also subject to market risk. However, the amount of these
risks are not significant and are not discussed below. Grupo Galicia's policy
regarding these risks is applied at the level of its operating subsidiaries.
At Banco Galicia, the process of establishing the consolidated Bank risk
tolerance and practices is carried out under the direction of the Bank's Board
of Directors and the supervision of the risk management committee and the
financial risk policy committee ("Comite de Posicion Financiera"). The Bank's
Board of Directors delegates risk policy definition and supervision to these
committees, the Treasury Division and the Credit Division and the Risk
Management Department, and specific risk supervision and management functions to
senior officers of the Treasury Division (liquidity management and market
risks), the Credit Division (credit risk) and the Risk Management Department
(operational risk). The above mentioned committees are the most senior corporate
forums for supervising and monitoring risk management practices and compliance.
See Item 6. "Directors, Senior Management and Employees -- Functions of the
Board of Directors of Banco Galicia."
The Risk Management Department's (which in 2004 was incorporated within the
Planning and Management Control Division) mission is to assure that the Bank's
Board of Directors and Bank senior management are fully aware of all of the
risks to which Banco Galicia is exposed. For this, it participates in the design
of the necessary policies to achieve a proper global risk management, reviews on
an ongoing basis the different risk exposures and monitors compliance across the
Bank with the established risk standards.
The Treasury Division is responsible for managing liquidity and market
risks. It presents to the financial risk policy committee, on a weekly basis, a
report containing the information necessary to assess and control market risk.
The review of such information provides the Bank with an overview of the
environment in which it operates and of its exposure to market risk. Based on
this review the committee formulates recommendations and actions.
Before 2002, the interest rate, cash flow and currency mismatches in the
Bank's balance sheets were the result of the Bank's risk management decisions,
limited to a certain extent by the unavailability of hedging instruments in the
local market and to a limited availability of such instruments in the
international market.
The economic policy implemented by the Argentine government in 2002 meant
the compulsory modification by the Argentine government of most of the contracts
outstanding between economic agents, which, among others, radically modified the
currency of denomination of bank assets and liabilities, their maturity and
their interest rates from those outstanding as of December 31, 2001. In addition
the adjustment by the CER or the CVS coefficients of the principal of pesified
assets or liabilities was introduced. As a result of these measures, currently
the Bank's balance sheet shows interest rate and currency mismatches between
assets and liabilities, that have been created by the economic policy of the
Argentine government in 2002. These mismatches are currently, to a large extent,
beyond the Bank's control. See Item 5. "Operating and Financial Review and
Prospects -- Item 5A. Operating Results -- Currency Composition of our Balance
Sheet."
Liquidity management is discussed in Item 5. "Operating and Financial
Review and Prospects - - Item 5B. Liquidity and Capital Resources -- Liquidity."
Credit risk management is discussed in Item 4. "Information on the Company
-- Selected Statistical Information -- Credit Review Process" and the other
sections under Item 4. "Information on the Company -- Selected Statistical
Information" describing the Bank's loan portfolio and loan loss experience.
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INTEREST RATE RISK
Interest-rate risk is the effect on the Bank's net interest income of the
fluctuations of market interest rates. Sensitivity to interest rate arises in
the Bank's normal course of business as the repricing characteristics of its
interest-earning assets do not necessarily match those of its interest-bearing
deposits and other borrowings. The repricing structure of assets and liabilities
is matched when an equal amount of assets and liabilities reprice for any given
period. Any excess of assets or liabilities over these matched items results in
a gap or mismatch.
Banco Galicia aims to minimize the impact of interest rate changes on its
net interest income.
The Bank monitors the repricing structure of interest-earning assets and
interest-bearing liabilities, using mainly such method as gap analysis, and
complements measurement with such methods as rate-shock analysis and
net-present-value analysis together with gap-duration analysis. Interest-rate
gap reports are used primarily for measuring risk in the short term.
As of December 31, 2004, the Bank's interest-earning assets and
interest-bearing liabilities, taking into account the different segments of
interest-earning assets and interest-bearing liabilities, and the total mismatch
in each one of the segments, was as follows:
AS OF DECEMBER 31, 2004 (1)
---------------------------------------------------------------------------------------------
LESS THAN 1 - 5 5 - 10 OVER 10 NON- UNDER
ONE YEAR YEARS YEARS YEARS SENSITIVE RESTRUCTURING TOTAL
----------- ------------ ------------ ----------- ----------- ------------- ------------
(in millions of pesos)
ASSETS
PESOS - ADJUSTABLE BY CER............ Ps. 657.7 Ps. 3,865.0 Ps. 3,972.2 Ps. 1,572.0 - - Ps. 10,066.9
Government Securities.............. 236.1 678.6 1,392.6 1,321.9 - - 3,629.2
Financial Trusts (Galtrust I,
Secured Loans, Special Funds
Almafuerte and Mendoza Banks)........ 27.2 423.2 304.8 247.3 - - 1,002.5
Loans - Public Sector.............. 18.4 2,400.5 2,073.4 2.6 - - 4,494.9
Loans - Private Sector............. 366.9 289.2 78.6 0.2 - - 734.9
Assets under Financial Lease....... 9.1 12.4 0.6 - - - 22.1
Secured Loans Granted as
Collateral of the FFRE
Loan............................. - 61.1 122.2 - - - 183.3
PESOS................................ 2,483.1 350.9 140.2 14.2 Ps. 780.2 - 3,768.6
Cash and Due from Banks............ - - - - 780.2 - 780.2
Government Securities.............. 525.6 - - - - - 525.6
Corporate Debt Securities.......... - - 5.7 - - - 5.7
Financial Trusts................... 38.9 210.7 42.8 0.2 - - 292.6
Loans - - Public Sector........... 79.7 - - - - - 79.7
Loans - - Private Sector.......... 1,760.1 140.2 91.7 14.0 - - 2,006.0
Assets under Financial Lease....... 78.8 - - - - - 78.8
DOLLARS.............................. 1,445.3 2,852.7 2,106.2 - 281.4 Ps. 749.7 7,435.3
Cash and Due from Banks............ - - - - 281.4 - 281.4
Overnight Placements............... 379.2 - - - - - 379.2
Government Securities.............. 696.1 2,756.2 2,067.2 - - 749.7(2) 6,269.2
Corporate Debt Securities.......... 11.2 3.3 - - - - 14 5
Loans- Private Sector.............. 358.8 93.2 39.0 - - - 491.0
TOTAL ASSETS......................... Ps. 4,586.1 Ps. 7,068.6 Ps. 6,218.6 Ps. 1,586.2 Ps. 1,061.6 Ps. 749.7 Ps. 21,270.8
LIABILITIES
PESOS - ADJUSTABLE BY CER............ Ps. 1,415.0 Ps. 5,132.4 Ps. 2,512.5 - - - Ps. 9,059.9
Time Deposits...................... 523.5 - - - - - 523.5
Restructured Deposits and CEDROs... 163.9 0.3 0.3 - - - 164.5
Other Liabilities.................. 8.3 22.9 - - - - 31.2
Loans from Domestic Financial
Institutions....................... 34.4 43.4 0.9 - - - 78.7
Argentine Central Bank............. 684.9 5,065.8 2,511.3 - - - 8,262.0
PESOS................................ 3,282.1 1.8 - - Ps. 2,007.7 - 5,291.6
Saving Accounts.................... 441.0 - - - 838.6 - 1,279.6
Demand Deposits.................... 129.9 - - - 1,169.1 - 1,299.0
Time Deposits...................... 2,084.1 1.8 - - - - 2,085.9
Restructured Deposits and CEDROs... 1.3 - - - - - 1.3
Negotiable Obligations............. 13.4 - - - - - 13.4
Loans from Domestic Financial
Institutions....................... 76.6 - - - - - 76.6
Other Liabilities.................. 535.8 - - - - - 535.8
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AS OF DECEMBER 31, 2004 (1)
-------------------------------------------------------------------------------------------------
LESS THAN 1 - 5 5 - 10 OVER 10 NON- UNDER
ONE YEAR YEARS YEARS YEARS SENSITIVE RESTRUCTURING TOTAL
------------ ----------- ------------- ----------- -------------- ------------- -------------
(in millions of pesos)
DOLLARS.......................... 971.1 2,165.4 2,531.3 Ps. 690.6 362.4 Ps. 66.7 6,787.5
Saving Accounts................ 89.7 - - - 269.8 - 359.5
Demand Deposits................ 10.3 - - - 92.6 - 102.9
Time Deposits.................. 358.0 390.9 195.4 - - - 944.3
Loans from Domestic Financial
Institutions................... - 6.2 - - - 29.7(3) 35.9
Negotiable Obligations......... 223.2 1,420.9 1,782.0 655.3 - 37.0(4) 4,118.4
Bank and International
Entities....................... 43.7 139.5 553.9 35.3 - - 772.4
Other Liabilities.............. 246.2 207.9 - - - - 454.1
------------ ----------- ----------- ---------- ------------ ---------- -------------
TOTAL LIABILITIES................ Ps. 5,668.2 Ps. 7,299.6 Ps. 5,043.8 Ps. 690.6 Ps. 2,370.1 Ps. 66.7 Ps. 21,139.0
Asset / Liability Gap............ (1,082.1) (231.0) 1,174.8 895.6 (1,308.5) 683.0 131.8
Cumulative Gap................... (1,082.1) (1,313.1) (138.3) 757.3 (551.2) 131.8
Ratio of Cumulative Gap to
Cumulative
Asset.......................... (23.6)% (11.3)% (0.8)% 3.9% (2.7)% 0.6%
Ratio of Cumulative Gap to Total
Asset.......................... (5.1)% (6.2)% (0.7)% 3.6% (2.6)% 0.6%
Asset / Liability Gap CER........ (757.3) (1,267.4) 1,459.7 1,572.0 - - 1,007.0
Asset / Liability Gap Interest
Rate
Pesos.......................... (799.0) 349.1 140.2 14.2 (1,227.5) - (1,523.0)
Asset / Liability Gap Interest
Rate
Dollars.......................... 474.2 687.3 (425.1) (690.6) (81.0) 683.0 647.8
TOTAL ASSETS..................... 4,586.1 7,068.6 6,218.6 1,586.2 1,061.6 749.7 21,270.8
TOTAL LIABILITIES................ 5,668.2 7,299.6 5,043.8 690.6 2,370.1 66.7 21,139.0
GAP.............................. Ps. (1,082.1) Ps. (231.0) Ps. 1,174.8 Ps. 895.6 Ps. (1,308.5) Ps. 683.0 Ps. 131.8
(1) Principal only. Includes the CER adjustment. Does not include interest.
(2) Represents the Bank's holdings of External Notes, which were tendered to the
exchange offered by the Argentine Government. The Bank chose to receive Discount
Bonds in Pesos, in an offer not subject to proration. The exchange is pending
settlement
(3) Represents a loan that was restructured in February 2005.
(4) Represents debt held by creditors that did not participate in the exchange
offer to restructure the foreign debt of the Bank's Head Office in Argentina and
its Cayman Branch completed in May 2004.
In the table above, the item "Argentine Central Bank" comprises: (i) the
financial assistance granted to the Bank by the Argentine Central Bank, for a
principal amount (including the CER adjustment) of Ps. 5,707.0 million. This
liability accrues at the CER plus a 3.5% fixed annual interest rate, and its
principal will be amortized in 92 monthly installments beginning March 2004; and
(ii) the advance to be granted by the Argentine Central Bank to fund the
purchase the Hedge Bond, for a principal amount including the CER adjustment of
Ps. 2,720.7 million, which accrues interest at an annual 2% fixed rate, and the
principal of which will be amortized in eight annual installments between August
2005 and 2012, subject to the Bank actually entering into this facility before
August 2005.
To measure interest-rate risk, but with a longer term perspective, the Bank
also uses the following methods:
(i) net present-value / gap duration analysis: first the net present value
method is used to obtain the economic value of the Bank's assets and
liabilities, by: a) valuing assets and liabilities with a market quotation, when
available, at their market value; and b) calculating the net present value of
financial assets and liabilities by using market interest rates, when available,
to discount the cash flows of financial assets and liabilities with similar
credit risk, collateral and maturity. When not available, interest rates
estimated by the Bank were used. This results from the situation of the
financial markets in Argentina as of the date of preparation of this information
not having normalized sufficiently for market interest rates to be available for
the different types of exposures in the Bank's balance sheet.
Second, the individual "duration" of each financial asset and liability is
determined. Subsequently individual durations are weighted by the net present
value of the corresponding asset or liability. The weighted net duration of the
Bank's shareholders' equity (net portfolio) is obtained. This measurement allows
the determination of the variation of the economic value of the Bank's net
portfolio for a given variation (typically 50 or 100 basis points) in market
interest rates. The lower the weighted net duration of shareholders' equity, the
lower the exposure to changes in market interest rates.
(ii) Rate shock analysis: this method enables the Bank to measure the
impact of given interest-rate variations (typically 50 or 100 basis points) on
the Bank's year-one net financial income. The method assumes that
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interest-rate movements from December 31, 2004, levels are immediate and of the
same magnitude and direction, while the structure and volume of assets and
liabilities remains unchanged.
The following discussion about Banco Galicia's management of interest-rate
rate risk contains forward-looking statements that involve risk and
uncertainties. Actual results could differ from those projected in the
forward-looking statements.
The table below measures as of December 31, 2004, the net present values of
the Bank's net portfolio for various interest-rate scenarios, as well as the
absolute and percentage changes from the net present value of this portfolio
corresponding to the December 31, 2004, interest rate levels. The table also
shows the Bank's year-one net interest income generated for various
interest-rate scenarios, as well as the absolute and percent changes from
amounts generated by the December 31, 2004 interest rate levels. The same is
presented as of December 31, 2003, and December 31, 2002.
For fiscal year 2004, the weighted net duration of the Bank's shareholders'
equity was calculated considering the Bank's CER-adjusted assets and liabilities
as variable rate instruments. The interest rate on CER-adjusted assets and
liabilities was considered as comprising a variable component, the CER variation
which protects principal in real terms, plus a fixed component, the real fixed
interest rate. Therefore the interest rate on CER-adjusted assets and
liabilities is equivalent to a variable interest rate composed of a fixed spread
over a variable reference interest rate. For fiscal years 2003 and 2002, assets
and liabilities adjusted by a coefficient had been considered as fixed rate
instruments. In order to allow comparison, information for fiscal year 2004 is
presented using both criteria.
For December 31, 2004, the breakdown of the Bank's net portfolio into
trading and non-trading is presented. The trading net portfolio represents
primarily short-term securities issued by the Central Bank (Lebac).
For December 31, 2003 and 2002 the breakdown of the Bank's net portfolio
into trading and nontrading portfolios is not presented, as: (i) the Bank had an
immaterial trading portfolio in 2002, as a result of the Bank's participation in
the public-sector debt swaps of Argentine government securities for secured
loans and of the overall Argentine financial markets situation at the end of
that year and (ii) its trading portfolio as of December 31, 2003 was low and
substantially made of short-term securities (Lebac).
The tables below show the weighted net duration of the Bank's shareholders'
equity as of December 31, 2004, considering CER-adjusted portfolios as
fixed-rate instruments. As of December 31, 2004, the weighted net duration of
the Bank's shareholders' equity was approximately 7.0, as result of weighting
both trading and non-trading portfolios. This compares with the duration for the
prior fiscal year which was 30.0. This indicates that, as of December 31, 2004,
a 100-basis-points increase in interest rates would result in a 7.0% decline in
the net present value of the Bank's shareholders' equity, while a decrease of
100 basis points would have the opposite effect. As in prior years, this high
level is a consequence of considering the assets and liabilities adjusted by a
coefficient as being fixed-rate instruments.
AS OF DECEMBER 31, 2004
------------------------------------------------------------------------
NET PORTFOLIO FAIR VALUE NET INTEREST INCOME (1)
----------------------------------- ------------------------------------- ---------------------------------
CHANGE IN INTEREST RATES IN BASIS ABSOLUTE ABSOLUTE
POINTS (RATE SHOCK) AMOUNT VARIATION % CHANGE AMOUNT VARIATION % CHANGE
----------------------------------- ---------- --------- ------------ --------- --------- ----------
(in millions of pesos, except percentages)
200................................ Ps. 831.7 Ps.(119.5) Ps. (12.56)% Ps. 146.8 Ps. 69.7 Ps. 90.34%
150................................ 860.0 (91.2) (9.59)% 129.2 52.1 67.60%
100................................ 889.3 (61.9) (6.51)% 111.8 34.7 44.97%
50................................. 919.6 (31.6) (3.32)% 94.4 17.3 22.43%
Static............................. 951.2 - - 77.1
(50)............................... 984.0 32.8 3.45% 59.9 (17.2) (22.33)%
(100).............................. 1,018.1 66.9 7.03% 42.7 (34.4) (44.57)%
(150).............................. 1,053.5 102.3 10.75% 17.6 (59.5) (77.21)%
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AS OF DECEMBER 31, 2004
------------------------------------------------------------------------
NET PORTFOLIO FAIR VALUE NET INTEREST INCOME (1)
----------------------------------- ------------------------------------- ---------------------------------
CHANGE IN INTEREST RATES IN BASIS ABSOLUTE ABSOLUTE
POINTS (RATE SHOCK) AMOUNT VARIATION % CHANGE AMOUNT VARIATION % CHANGE
----------------------------------- ---------- --------- ------------ --------- --------- --------
(in millions of pesos, except percentages)
(200).............................. 1,090.3 139.1 14.62% (7.5) (84.6) (109.71)%
(1) Net interest income of the first year.
AS OF DECEMBER 31, 2004
------------------------------------------------------------------------
NET TRADING PORTFOLIO FAIR VALUE NET INTEREST INCOME (1)
----------------------------------- ------------------------------------- ---------------------------------
CHANGE IN INTEREST RATES IN BASIS ABSOLUTE ABSOLUTE
POINTS (RATE SHOCK) AMOUNT VARIATION % CHANGE AMOUNT VARIATION % CHANGE
----------------------------------- ---------- --------- ------------ --------- --------- --------
(in millions of pesos, except percentages)
200................................ Ps. 525.7 Ps. (2.3) Ps. (0.44)% Ps. 37.5 Ps. 10.0 36.36%
150................................ 526.3 (1.7) (0.32)% 35.0 7.5 27.27%
100................................ 526.8 (1.2) (0.23)% 32.5 5.0 18.18%
50................................. 527.4 (0.6) (0.11)% 30.0 2.5 9.09%
Static............................. 528.0 27.5 -
(50)............................... 528.6 0.6 0.11% 25.0 (2.5) (9.09)%
(100).............................. 529.2 1.2 0.23% 22.5 (5.0) (18.18)%
(150).............................. 529.7 1.7 0.32% 20.0 (7.5) (27.27)%
(200).............................. 530.3 2.3 0.44% 17.5 (10.0) (36.36)%
(1) Net interest income of the first year.
AS OF DECEMBER 31, 2004
------------------------------------------------------------------------
NET NON-TRADING PORTFOLIO FAIR VALUE NET INTEREST INCOME (1)
----------------------------------- ------------------------------------- ---------------------------------
CHANGE IN INTEREST RATES IN BASIS ABSOLUTE ABSOLUTE
POINTS (RATE SHOCK) AMOUNT VARIATION % CHANGE AMOUNT VARIATION % CHANGE
----------------------------------- ---------- ---------- ------------ ---------- --------- -----------
(in millions of pesos, except percentages)
200................................ PS. 306.0 Ps.(117.2) Ps.(27.69)% Ps. 109.3 Ps. 59.7 Ps. 120.36%
150................................ 333.7 (89.5) (21.15)% 94.2 44.6 89.92%
100................................ 362.5 (60.7) (14.34)% 79.3 29.7 59.88%
50................................. 392.2 (31.0) (7.33)% 64.4 14.8 29.84%
Static............................. 423.2 49.6 -
(50)............................... 455.4 32.2 7.61% 34.9 (14.7) (29.64)%
(100).............................. 488.9 65.7 15.52% 20.2 (29.4) (59.27)%
(150).............................. 523.8 100.6 23.77% (2.4) (52.0) (104.84)%
(200).............................. 560.0 136.8 32.33% (25.0) (74.6) (150.40)%
(1) Net interest income of the first year.
The tables below show the weighted net duration of the Bank's shareholders'
equity as of December 31, 2004, considering CER-adjusted portfolios as
variable-rate instruments. As of December 31, 2004, the weighted net duration of
the Bank's shareholders' equity is reduced to approximately 0.08 (from the
approximately 7.0 duration shown above). This indicates that, as of December 31,
2004, a 100-basis-points increase in interest rates would result in a 0.08%
decline in the net present value of the Bank's shareholders' equity, while a
decrease of 100 basis points would have the opposite effect. This shows that the
Bank's shareholders' equity is not sensitive to interest rate movements.
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AS OF DECEMBER 31, 2004
------------------------------------------------------------------------
NET PORTFOLIO FAIR VALUE NET INTEREST INCOME (1)
----------------------------------- ------------------------------------- ---------------------------------
CHANGE IN INTEREST RATES IN BASIS ABSOLUTE ABSOLUTE
POINTS (RATE SHOCK) AMOUNT VARIATION % CHANGE AMOUNT VARIATION % CHANGE
----------------------------------- ---------- ---------- ------------ ---------- --------- -----------
(in millions of pesos, except percentages)
200................................ 949.9 Ps. (1.3) (0.14)% Ps. 146.8 Ps. 69.7 90.34%
150................................ 950.2 (1.0) (0.11)% 129.2 52.1 67.60%
100................................ 950.5 (0.7) (0.07)% 111.8 34.7 44.97%
50................................. 950.8 (0.4) (0.04)% 94.4 17.3 22.43%
Static............................. 951.2 - 77.1
(50)............................... 951.6 0.4 0.04% 59.9 (17.2) (22.33)%
(100).............................. 952.0 0.8 0.08% 42.7 (34.4) (44.57)%
(150).............................. 952.3 1.1 0.12% 17.6 (59.5) (77.21)%
(200).............................. 952.8 1.6 0.17% (7.5) (84.6) (109.71)%
(1) Net interest income of the first year.
The tables below show that the weighted net duration of the Bank's
shareholders' equity as of December 31, 2003, was approximately 30.0 as compared
to approximately 320.0 as of December 31, 2002. These values were calculated
considering as fixed-rate instruments the assets and liabilities that are
adjusted by a coefficient. If such assets and liabilities are considered as
variable-rate instruments, the weighted net duration of the Bank's shareholders'
equity as of December 31, 2003 was approximately 6.8 and, as of December 31,
2002, it was approximately 70.0.
AS OF DECEMBER 31, 2003
------------------------------------------------------------------------
NET PORTFOLIO FAIR VALUE NET INTEREST INCOME (1)
----------------------------------- ------------------------------------- ---------------------------------
CHANGE IN INTEREST RATES IN BASIS ABSOLUTE ABSOLUTE
POINTS (RATE SHOCK) AMOUNT VARIATION % CHANGE AMOUNT VARIATION % CHANGE
----------------------------------- ---------- ----------- ------------ ---------- --------- -----------
(in millions of pesos, except percentages)
200................................ Ps. 426.8 Ps. (551.5) (56.37)% Ps. 130.9 Ps. 4.2 3.30%
150................................ 552.5 (425.8) (43.52)% 129.8 3.1 2.47%
100................................ 686.0 (292.3) (29.88)% 128.8 2.1 1.64%
50................................. 827.7 (150.6) (15.39)% 127.7 1.0 0.82%
Static............................. 978.3 - - 126.7 - -
(50)............................... 1,132.0 153.7 15.71% 125.8 (0.9) (0.72)%
(100).............................. 1,295.7 317.4 32.44% 124.9 (1.8) (1.43)%
(150).............................. 1,453.9 475.6 48.62% 118.0 (8.7) (6.89)%
(200).............................. 1,607.1 628.8 64.27% 111.4 (15.3) (12.06)%
(1) Net interest income of the first year.
AS OF DECEMBER 31, 2002
-------------------------------------------------------------------------
NET PORTFOLIO FAIR VALUE NET INTEREST INCOME (1)
----------------------------------- -------------------------------------- ---------------------------------
CHANGE IN INTEREST RATES IN BASIS ABSOLUTE ABSOLUTE
POINTS (RATE SHOCK) AMOUNT VARIATION % CHANGE AMOUNT VARIATION % CHANGE
----------------------------------- ---------- ----------- ------------ ---------- ---------- -----------
(in millions of February 28, 2003 constant pesos, except percentages)
200................................ Ps. (312.1) Ps. (369.6) (642.70)% Ps. 198.7 Ps. (68.9) (25.74)%
150................................ (233.8) (291.3) (506.64)% 216.0 (51.6) (19.27)%
100................................ (136.3) (193.8) (336.98)% 233.3 (34.3) (12.83)%
50................................. (39.1) (96.6) (168.03)% 250.6 (17.0) (6.36)%
Static............................. 57.5 - - 267.6 - -
(50)............................... 146.8 89.3 155.36% 285.8 18.2 6.80%
(100).............................. 235.6 178.1 309.70% 304.0 36.4 13.61%
(150).............................. 325.3 267.8 465.68% 320.9 53.3 19.93%
(200).............................. 515.1 457.6 795.91% 334.5 66.9 25.00%
(1) Net interest income of the first year.
210
As of December 31, 2004, the weighted net duration of the Bank's
shareholders' equity shows a significant decrease from December 31, 2003, mainly
attributable to the decrease of the weighted duration of the Bank's assets in
2004, while the weighted duration of liabilities remained similar to that of the
prior year. The latter was due to a greater participation in total liabilities
of the net present value of the foreign debt of the Bank's Head Office and its
Cayman Branch that was restructured in 2004. For December 31, 2003, the net
present value of such debt was calculated by discounting the associated cash
flows by the yield of the Boden 2012, which was 17%. This discount rate was
considered as the most appropriate one, given that similar instruments were not
available as of that date. Given that the restructuring of the foreign debt of
the Bank's Head Office and its Cayman Branch was completed in May 2004, the
discount rate used as of December 31, 2004, was the yield resulting from the
market price for each component of such debt, which was approximately 10%. The
decrease in the discount rate generated a greater net present value than in the
prior year and, therefore, the participation of such debt in total liabilities
increased.
As of December 31, 2003, the weighted net duration of the Bank's
shareholder's equity was approximately 30.0, showing a significant decrease from
December 31, 2002. The decrease is mainly attributable to an increase in the
weighted duration of liabilities, which reflected the restructuring of: (i) the
financial assistance from the Argentine Central Bank and (ii) the foreign debt
of the Bank's Head Office and its Cayman Branch completed in May 18, 2004. In
the previous fiscal year, both debts were considered callable.
FOREIGN EXCHANGE RATE RISK
Exchange-rate sensitivity is the relationship between the fluctuations of
exchange rates and the Bank's net financial income resulting from the
revaluation of the Bank's assets and liabilities denominated in foreign
currency. The impact of variations in the exchange rate on the Bank's net
financial income depends on whether the Bank has a net asset foreign currency
position (the amount by which foreign currency denominated assets exceed foreign
currency denominated liabilities) or a short 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
derives in a gain/loss, respectively. In the second case, an increase/decrease
derives in a loss/gain, respectively.
Before the 2001-2002 crisis, Banco Galicia aimed at minimizing the impact
of foreign exchange rate fluctuations on its financial results by closely
matching assets and liabilities not denominated in pesos, while keeping a net
asset position in foreign currency (Banco Galicia's position in currencies other
than dollars was always insignificant, therefore in the paragraphs below foreign
currency positions largely represent U.S. dollar positions).
As of December 31, 2004, 2003 and 2002, the Bank's position in foreign
currency was to a large extent the result of the measures taken by the Argentine
government during 2002, mainly the compulsory asymmetric pesification of certain
assets and liabilities which changed the currency denomination of Bank's balance
sheets components and the compensation for the effects of the former, through
dollar-denominated bonds (Boden 2012). As of December 31, 2004, Banco Galicia
had a net asset foreign currency position of Ps 776.3 million (U$S 261.0
million), which amounted to Ps. 256.7 million (US$ 87.5 million) as of December
31, 2003, and to Ps. 338.1 million (US$ 100.5 million) as of December 31, 2002.
A net asset foreign currency position exposes the Bank to losses if the peso
appreciates (a decrease in the exchange rate of the peso vis-a-vis the U.S.
dollar). If the Bank's holdings of dollar-denominated External Notes for
Ps.749.7 million (US$ 252.1 million) are considered as peso-denominated assets
adjusted by CER (as a result of having being tendered to the exchange offered by
the Argentine government and of the Bank's decision to receive Discount Bonds in
pesos in an offer not subject to proration), its net asset foreign currency
position is almost null. The Bank does not have the ability to significantly
modify its foreign currency position, due to the characteristics of the
Argentine financial markets, the lack of hedge instruments in the local market
and the limited access to the international capital markets.
The following tables contain information on Banco Galicia's sensitivity to
exchange-rate risk that constitute forward-looking statements that involve risk
and uncertainties. Actual results could differ from those projected in the
forward-looking statements.
The tables below show the effects of changes in the exchange rate of the
peso vis-a-vis the U.S. dollar on the value of the Bank's foreign currency net
asset position as of December 31, 2004, 2003 and 2002. As of these
-211-
dates, the breakdown of the Bank's foreign currency net asset position into
trading and nontrading was not presented as the Bank had an immaterial foreign
currency trading portfolio.
VALUE OF FOREIGN CURRENCY NET POSITION AS
OF DECEMBER 31, 2004
------------------------------------------
PERCENTAGE CHANGE IN THE VALUE OF THE PESO RELATIVE TO THE ABSOLUTE
DOLLAR (1) AMOUNT VARIATION % CHANGE
------------------------------------------------------------ ------- --------- ------------
(in millions of pesos, except percentages)
40%......................................................... Ps. 1,086.8 Ps. 310.5 40.0%
30%......................................................... 1,009.2 232.9 30.0
20%......................................................... 931.6 155.3 20.0
10%......................................................... 853.9 77.6 10.0
Static...................................................... 776.3 - -
(10)%....................................................... 698.7 (77.6) (10.0)
(20)%....................................................... 621.0 (155.3) (20.0)
(30)%....................................................... 543.4 (232.9) (30.0)
(40)%....................................................... 465.8 (310.5) (40.0)
(1) Devaluation / (Revaluation).
VALUE OF FOREIGN CURRENCY NET POSITION AS
OF DECEMBER 31, 2003
-----------------------------------------
PERCENTAGE CHANGE IN THE VALUE OF THE PESO RELATIVE TO THE ABSOLUTE
DOLLAR (1) AMOUNT VARIATION % CHANGE
------------------------------------------------------------ --------- --------- ---------
(in millions of pesos, except percentages)
40%......................................................... Ps. 359.4 Ps. 102.7 40.0%
30%......................................................... 333.7 77.0 30.0
20%......................................................... 308.0 51.3 20.0
10%......................................................... 282.4 25.7 10.0
Static...................................................... 256.7 - -
(10)%....................................................... 231.0 (25.7) (10.0)
(20)%....................................................... 205.4 (51.3) (20.0)
(30)%....................................................... 179.7 (77.0) (30.0)
(40)%....................................................... 154.0 (102.7) (40.0)
(1) Devaluation / (Revaluation).
VALUE OF FOREIGN CURRENCY NET
POSITION AS OF DECEMBER 31, 2002
-------------------------------------
PERCENTAGE CHANGE IN THE VALUE OF THE PESO RELATIVE TO THE ABSOLUTE
DOLLAR (1) AMOUNT VARIATION % CHANGE
------------------------------------------------------------ --------- ---------- --------
(in millions of February 28, 2003
constant pesos, except percentages)
40%......................................................... Ps. 473.3 Ps. 135.2 40.0%
30%......................................................... 439.5 101.4 30.0
20%......................................................... 405.7 67.6 20.0
10%......................................................... 371.9 33.8 10.0
Static...................................................... 338.1 - -
(10)%....................................................... 304.3 (33.8) (10.0)
(20)%....................................................... 270.5 (67.6) (20.0)
(30)%....................................................... 236.7 (101.4) (30.0)
(40)%....................................................... 202.9 (135.2) (40.0)
(1) Devaluation / (Revaluation).
-212-
The increase in the Bank's net asset foreign currency position as of
December 31, 2004 from that as of December 31, 2003, when expressed in pesos,
was mainly attributable the repayment of debt in connection with the
reestructuring of the Bank's foreign debt for US$ 135.0 million, and to the
repayment of Galicia Uruguay deposits, in accordance with the restructuring
agreement for US$ 118.0 million. These reductions were partially offset by the
raising of debt denominated funding through repurchase agreements with Boden
2012, for US$ 67.6 million.
The decrease in the Bank's net asset foreign currency position as of
December 31, 2003 from that as of December 31, 2002, when expressed in pesos,
was mainly attributable to the appreciation of the peso vis-a-vis the U.S.
dollar during 2003, reflected by a decrease in the exchange rate from Ps. 3.36
per U.S. dollar as of December 31, 2002, to Ps. 2.93 as of December 31, 2003.
When expressed in U.S. dollars the net asset position amount was substantially
similar, given that the decrease in the Bank's dollar-denominated assets that
resulted from the recognition of a lower compensation to be received for the
asymmetric pesification following observations by the Argentine Central Bank to
the determination of the compensation made by the Bank, for US$ 53.9 million in
nominal value of Boden 2012, was compensated by the payment of
dollar-denominated liabilities mainly representing liabilities of Galicia
Uruguay, which payments were contemplated by the restructuring schedule agreed
with depositors in 2002 (and the exchange offer carried in 2003) and made by
using pesos.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
-213-
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
As of the date of this annual report, payment defaults remain on the
following foreign debt of the Bank's head office in Argentina as a result of
certain holders not participating in the foreign debt restructuring of the Bank
which was completed on May 18, 2004:
- 9% Notes due 2003 issued under the Indenture dated November 8, 1993,
among the Bank, The Bank of New York, as trustee, co-registrar,
principal paying agent and registrar. As of May 20, 2005, the total
principal amount in default was US$ 10.5 million and the total
accrued and unpaid interest as of May 31, 2005 was US$ 3.4 million.
- Floating Rate Notes issued under the a global medium term note
program and a purchase agreement, dated June 7, 2001, among the
Bank, Santander Central Hispano Investment Securities Inc., New
York, as arranger and syndication agent, Banco Santander Central
Hispano S.A., acting through its New York branch, as administrative
and PRI Agent, the initial purchasers and The Bank of New York, New
York, as principal paying agent. As of May 20, 2005, the total
principal amount in default is US$ 0.9 million and the total accrued
and unpaid interest as of May 31, 2005 was US$ 0.1 million.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
In April 2003, we formed a working group consisting of members of senior
management of various business areas of Grupo Galicia and its main subsidiaries,
to evaluate our internal controls and to propose and implement improvements to
the extent any weaknesses were identified. In conducting its review and
developing an action plan, the working group utilized the methodology proposed
by the Committee of Sponsoring Organizations of the Treadway Commission, a
private-sector organization dedicated to improving the quality of financial
reporting through business ethics, effective internal controls and corporate
governance.
As part of this evaluation, we and each of our principal subsidiaries
focused on the following areas: corporate governance, business ethics,
production and gathering of information, audit committees, auditing, risk
administration, fraud prevention, management, business planning, information
technology, internal control, law and regulation and U.S. GAAP requirements.
During 2003 and 2004, we took the following actions to improve our
financial internal controls and procedures in response to the working group's
recommendations:
- We formed disclosure committees at our level as well as at the level
of the Bank and other main operating subsidiaries and developed
responsibilities and guidelines for each committee of each company.
- We constituted the audit committee at our level and developed its
functions and charter.
- We documented the procedures for identifying risks and implemented a
risk matrix at the Bank.
- We updated the job descriptions and functions of key personnel at
our level and at the level of the Bank, the insurance companies and
the regional credit-card companies.
- We adopted a corporate code of ethics for us and our main
subsidiaries in accordance with the requirements of section 406 of
the Sarbanes-Oxley Act of 2002. In 2004, no changes were made to our
corporate code of ethics and there have been no waivers to such
code.
-214-
- We reviewed and improved the procedures contemplated by the Bank's
business contingency plan.
In addition, in 2004, we designed and put into place a project aimed at
complying with the requirements for foreign issuers of section 404 of the
Sarbanes-Oxley Act. This project was entrusted to a multidisciplinary team led
by the Corporate Programs Division of the Bank with the participation of
different areas from all of our subsidiaries. As of December 31, 2004, more than
3,000 hours have been devoted to achieving this plan's stated objectives.
In general terms, the project covered the following matters:
- Creation of a task force: A task force was created, with resources coming
from us, certain subsidiaries and the following Bank sectors: Internal
Audit, Treasury, Operations, Accounting, and Corporate Programs.
- Determination of the scope: We determined the most important items of the
consolidated balance sheet in terms of amount and inherent risk. This way,
items accounting for more than 90% of the consolidated balance sheet's
balances were included in the project's scope, all of them mainly from the
Bank. In connection with these items, the Bank's business and support
processes that use those items to record their transactions and need to be
examined in detail based on the recommendations issued by the PCAOB were
then identified.
- Adaptation of the process documentation to the chosen methodology:
Selected processes were analyzed from a risk standpoint, taking into
account the recommendations issued by the PCAOB. Although the Bank had
already had its processes documented, it was deemed necessary to adapt the
documentation to meet the new requirements and to reinforce the recording
of transactions through those processes.
- Identification of key controls and their documentation: Key controls for
each documented process are being identified and documented in the form of
risk matrixes to allow an assessment of their contribution to mitigating
the risks with regard to completeness, certainty, validity, and restricted
access to the accounting data generated through the processes under
examination.
- Correction of shortcomings, if found: Improvements were made in certain
processes to improve their controls and implement missing controls when
necessary.
- Testing of the processes and controls: The Internal Audit team included
the processes within the project's scope in its Annual Audit Plan in order
to verify compliance therewith and generate any recommendations necessary
to ensure compliance.
Moreover, work was done with our most important subsidiaries within the
project framework, to assess the control environment in effect at each of them,
and efforts were focused on improving and documenting all the processes that may
have a direct impact on the generation of financial information flowing to us
and the Bank.
In addition, Grupo Galicia, through each subsidiary's specialized
departments, allocates the resources needed to keep the operating rules up to
date and documented, and conducts periodic audits pursuant to the Annual Audit
Plans of each subsidiary and of the holding company.
We conducted an evaluation of the effectiveness of the design and
operation of our financial disclosure controls and procedures as of December 31,
2004, under the supervision and participation of our senior management,
including our chief executive officer and chief financial officer pursuant to
Rules 13a-15 and 15d-15 under the Exchange Act. Based on this evaluation, our
chief executive officer and chief financial officer have concluded that, as of
December 31, 2004, our financial disclosure controls and procedures are
effective in ensuring that all material information we are required to disclose
in the reports we file under the Exchange Act is gathered and communicated to
our management, including our chief executive officer and chief financial
officer, in a timely fashion, and that information required to be disclosed in
this annual report or our other reports to be filed under the Exchange Act is
timely recorded, processed, summarized and reported.
-215-
During the year ended December 31, 2004, there have been no significant
changes in our internal financial disclosure controls (including any corrective
actions with regard to significant deficiencies and material weaknesses) or in
other factors that could significantly affect these controls.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Marcelo L. S. Tonini is the
audit committee financial expert.
ITEM 16B. CODE OF ETHICS
We have adopted a corporate code of ethics for us and our main
subsidiaries in accordance with the requirements of section 406 of the
Sarbanes-Oxley Act of 2002. We have posted a copy of our code of ethics on our
website, http://www.gfgsa.com.
ITEM 16C. PRINCIPAL ACCOUNTANTS' FEES AND SERVICES
The following table sets forth the total remuneration billed to Grupo
Galicia and its subsidiaries by its independent registered public accounting
firm, Price Waterhouse & Co. S.R.L., during the fiscal years ended December 31,
2003 and 2004. While Net Investment S.A. and Galicia Warrants S.A. used the
services of a local accounting firm, amounts paid to this firm were minimal in
the two reported fiscal years.
2004 2003
(In thousands of pesos)
Audit fees............................. 2,099 2,336
Audit related fees..................... 1,254 714
Tax fees............................... 136 1
All other fees......................... 403 646
----- -----
TOTAL 3,892 3,697
----- -----
AUDIT FEES
Audit fees are mainly the fees billed in relation with professional
services for auditing our consolidated financial statements for the fiscal years
2003 and 2004 and for the review of our interim financial statements, for local
purposes and our annual report on Form 20-F.
AUDIT-RELATED FEES
Audit-related fees are fees billed for professional services related to
the review of our consolidated financial statements, other than the services
included under "audit fees" in each of the years 2003 and 2004. Audit-related
fees are mainly fees associated with Banco Galicia's debt restructuring.
TAX FEES
Tax fees are fees billed with respect to tax compliance, advice and
planning. Prior to the fiscal year ended December 31, 2003, we conducted our tax
compliance work in-house.
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.
-216-
AUDIT COMMITTEE PREAPPROVAL
Commencing with the fiscal year ending December 31, 2004, our audit
committee was required to preapprove all audit and nonaudit services to be
provided by our independent registered public accounting firm. In 2004, our
audit committee reviewed and approved audit and non-audit services fees proposed
by the auditors. Additionally, our audit committee acknowledged a report issued
by Banco Galicia in compliance with Argentine Central Bank's Communique "A"
2525, which included a complete detail of all audit and non-audit fees paid and
billed during 2004 to us, Banco Galicia and their subsidiaries.
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.
-217-
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 years ended December 31, 2004, 2003 and 2002
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Income for the years ended December 31, 2004, 2003
and 2002
Consolidated Statements of Cash Flows for the years ended December 31, 2004,
2003 and 2002
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2004, 2003 and 2002
Notes to the Consolidated Financial Statements
You can find our audited consolidated financial statements on pages F-1 to F-101
of this annual report.
ITEM 19. EXHIBITS
EXHIBIT DESCRIPTION
------- ------------
1.1 Unofficial English language translation of the Amended By-laws (estatutos
sociales).
2.1 Form of Deposit Agreement between The Bank of New York and the
registrant, including the form of American Depositary Receipt.*
2.2 Indenture, dated as of May 18, 2004, among the Bank, The Bank of New
York and Banco Rio de la Plata S.A.**
4.1 English translation of form of Financial Trust Contract, dated April
16, 2002, among the Bank, Banco Provincia de Buenos Aires and BAPRO Mandatos y
Negocios S.A.***
4.2 English translation of form of Loan Agreement, dated March 21, 2002, by
and between Seguro de Depositos S.A. and the Bank.***
4.3 English translation of form of Loan Agreement, dated April 30, 2002,
between Banco de la Nacisn Argentina, in its capacity as trustee of the Trust
Fund for Assistance to Financial Institutions and Insurance Companies
Fiduciary Fund for the Assistance to Financial Institutions and Insurance
Companies and the Bank.***
4.4 Form of restructured loan facility (as evidenced by the note purchase
agreement, dated as of April 27, 2004, among the Bank, Barclays Bank PLC, the
holders party thereto and Deutsche Bank Trust Company Americas).**
4.5 Form of Amendment No. 1 and Waiver to Restructured Loan Facility (as
evidenced by the Amendment No. 1 and Waiver to Note Purchase Agreement, dated
as of December 20, 2004, among Banco de Galicia y Buenos Aires S.A., the
holders party thereto and Deutsche Bank Trust Company Americas).
8.1 For a list of our subsidiaries as of the end of the fiscal year covered
by this annual report, please see Item 4. "Information on the Company --
Organizational Structure."
12.1 Certification of the principal executive officer required under Rule
13a-14(a) or Rule 15d-14(a), pursuant to Section 302 of the Sarbanes Oxley Act
of 2002.
12.2 Certification of the principal financial officer required under Rule
13a-14(a) or Rule 15d-14(a), pursuant to Section 302 of the Sarbanes Oxley Act
of 2002.
13.1 Certification of the principal executive officer required pursuant to
18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes Oxley Act of
2002.
13.2 Certification of the principal financial officer required pursuant to
18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes Oxley Act of
2002.
* Incorporated by reference from our Registration Statement on Form F-4
(333-11960).
** Incorporated by reference from our Annual Report on Form 20-F for the
year ended December 31, 2003.
*** Incorporated by reference from our Annual Report on Form 20-F for the
year ended December 31, 2002.
-218-
SIGNATURE
The registrant hereby certifies that it meets all of 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.
GRUPO FINANCIERO GALICIA S.A.
By: /s/ Antonio Garces
------------------------------------
Name: Antonio Garces
Title: Chairman of the Board, Chief
Executive Officer
Date: May 26, 2005
-219-
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of the Independent Registered Public Accounting Firm....................................... F-2
Consolidated Balance Sheets as of December 31, 2004 and 2003...................................... F-4
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and
2002.............................................................................................. F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002........ F-9
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31,
2004, 2003 and 2002............................................................................... F-11
Notes to the Consolidated Financial Statements.................................................... F-12
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders' and the Board of Directors of
Grupo Financiero Galicia S.A.
We have audited the consolidated balance sheets of Grupo Financiero Galicia S.A.
and subsidiaries (together "the Group") at December 31, 2004 and 2003 and the
related consolidated statements of income, of changes in shareholders' equity
and of cash flows for each of the three years in the period ended December 31,
2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and the auditing standards generally
accepted in Argentina and performed the auditing procedures required by the
Banco Central de la Republica Argentina (the "Argentine Central Bank"). Those
standards require that we plan and perform an audit to obtain reasonable
assurance as to whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Notes 2 and 40, the accompanying consolidated financial
statements have been prepared in accordance with accounting rules prescribed by
the Argentine Central Bank, which differ in certain respects from, and is a
comprehensive basis of accounting other than, Argentine generally accepted
accounting principles applicable to enterprises in general.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Grupo Financiero
Galicia S.A. and its subsidiaries at December 31, 2004 and 2003, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2004, in conformity with accounting rules prescribed
by the Argentine Central Bank.
The quality of the Grupo Financiero Galicia S.A. financial condition and results
of operations depend to a significant extent on macroeconomic and political
conditions prevailing from time to time in Argentina and to the Argentine
Government's ability to perform on its obligations to Banco de Galicia y Buenos
Aires S.A., which is the Group's main subsidiary, and to the entire financial
system in Argentina, in connection with Federal secured loans, federal
government securities and on its obligation to approve and deliver government
securities under various laws and regulations.
F-2
Accounting rules prescribed by Argentine Central Bank vary in certain
significant respects from accounting principles generally accepted in the United
States of America and as allowed by Item 18 to Form 20-F. Information relating
to the nature and effect of such differences is presented in Notes 27 and 41 to
the consolidated financial statements.
PRICE WATERHOUSE & CO. S.R.L.
/s/ SANTIAGO J. MIGNONE
PARTNER
Buenos Aires, Argentina
February 14, 2005, except for notes 1 and 41 as to which the date is May 24,
2005.
F-3
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2003
(Expressed in thousands of Argentine pesos)
DECEMBER 31,
-----------------------------------------------
2004 2003
---------------------- -----------------------
ASSETS
A. Cash and due from banks
Cash.......................................................... Ps. 442,494 Ps. 400,699
Banks and correspondents...................................... 546,175 424,603
Other......................................................... - 848
--------------------- ----------------------
Ps. 988,669 Ps. 826,150
B. Government and corporate securities
Holdings of investment account securities..................... 601,264 1,609,982
Holdings of trading securities................................ 37,105 18,710
Unlisted government securities................................ 4,371,716 4,469,529
Securities issued by the Argentine Central Bank............... 508,544 309,201
Investments in listed corporate securities.................... 16,086 2,950
Allowances.................................................... (618) (2,107)
--------------------- ----------------------
Ps. 5,534,097 Ps. 6,408,265
C. Loans
To the non-financial public sector............................ 4,558,873 4,323,279
To the financial sector....................................... 150,530 194,692
To the non-financial private sector and residents abroad 4,361,393 4,165,829
Overdrafts................................................. 199,668 218,902
Notes...................................................... 1,099,243 1,280,062
Mortgage loans............................................. 623,944 719,593
Pledge loans............................................... 92,889 54,644
Consumer loans............................................. 58,161 55,175
Credit card loans.......................................... 1,105,386 818,837
Others..................................................... 772,996 498,616
Accrued Interest, adjustment and quotation differences
receivable................................................. 414,400 523,080
Document interest.......................................... (5,286) (2,485)
Unallocated collections.................................... (8) (595)
Allowances................................................. (632,619) (1,177,315)
--------------------- ----------------------
Ps. 8,438,177 Ps. 7,506,485
D. Other receivables resulting from financial brokerage
Argentine Central Bank........................................ 78,463 69,846
Amounts receivable for spot and forward sales to be
settled....................................................... 56,209 -
Securities receivable under spot and forward purchases to
be settled.................................................... 313,462 138
Unlisted negotiable obligations............................... 20,384 103,792
Compensation to be received from the national government...... 4,732,288 4,629,595
Other......................................................... 1,524,593 1,393,341
Allowances.................................................... (27,711) (102,008)
--------------------- ----------------------
Ps. 6,697,688 Ps. 6,094,704
The accompanying notes are an integral part of these consolidated financial
statements
F-4
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
AS OF DECEMBER 31, 2004 AND 2003
(Expressed in thousands of Argentine pesos)
DECEMBER 31,
-------------------------------------------------
2004 2003
------------------------ -----------------------
ASSETS (CONTINUED)
E. Assets under financial leases
Assets under financial leases.................................. Ps. 103,443 Ps. 29,418
Allowances..................................................... (2,493) (4,806)
----------------------- ----------------------
Ps. 100,950 Ps. 24,612
F. Equity investments in other companies
In financial institutions...................................... 3,029 3,009
Other ........................................................ 108,714 141,916
Allowances..................................................... (28,924) (57,858)
----------------------- ----------------------
Ps. 82,819 Ps. 87,067
G. Miscellaneous receivables
Debtors for sale of assets..................................... 879 185
Presumptive Minimum Income tax - Fiscal Credit Certificate..... 138,010 89,262
Other.......................................................... 353,507 368,025
Accrued interest, adjustment on debtors for sale of assets
receivable..................................................... 33 40
Other accrued interest receivable.............................. 64,263 67,055
Allowances..................................................... (36,911) (54,277)
----------------------- ----------------------
Ps. 519,781 Ps. 470,290
H. Fixed assets................................................... 489,182 517,532
I. Miscellaneous assets........................................... 160,033 158,098
J. Intangible assets
Goodwill....................................................... 115,080 139,681
Organization and development expenses.......................... 522,924 587,376
----------------------- ----------------------
Ps. 638,004 Ps. 727,057
K. Unallocated items.............................................. 1,154 2,594
----------------------- ----------------------
TOTAL ASSETS............................... Ps. 23,650,554 Ps. 22,822,854
======================= ======================
The accompanying notes are an integral part of these consolidated financial
statements
F-5
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
AS OF DECEMBER 31, 2004 AND 2003
(Expressed in thousands of Argentine pesos)
DECEMBER 31,
------------------------------------------------
2004 2003
---------------------- -----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
L. Deposits
Non-financial government sector............................... Ps. 131,932 Ps. 12,412
Financial sector.............................................. 17,157 19,460
Non-financial private sector and residents abroad............. 6,607,824 5,552,119
Current accounts............................................ 1,192,474 902,438
Saving accounts............................................. 1,638,694 1,080,153
Time deposits............................................... 3,415,788 2,838,480
Investment accounts......................................... 383 184
Other....................................................... 280,220 533,626
Accrued interest, adjustment and quotation differences
payable .................................................... 80,265 197,238
---------------------- -----------------------
Ps. 6,756,913 Ps. 5,583,991
M. Other liabilities resulting from financial brokerage
Argentine Central Bank 8,059,550 8,132,902
Liquidity assistance loans ................................. 5,321,697 5,579,978
Other....................................................... 2,737,853 2,552,924
Banks and international entities.............................. 772,393 2,735,480
Unsubordinated negotiable obligations......................... 3,348,652 2,392,909
Amounts payable for spot and forward purchases to be settled.. 229,537 -
Securities to be delivered under spot and forward sales to
be settled.................................................... 56,155 99,604
Loans from domestic financial institutions.................... 191,195 131,763
Other......................................................... 909,926 1,003,865
Accrued interest, adjustment and quotation differences
payable....................................................... 489,159 602,898
---------------------- -----------------------
Ps. 14,056,567 Ps. 15,099,421
N. Miscellaneous liabilities
Dividends payable............................................. 5 46
Directors' and Syndics' fees payable.......................... 3,676 1,347
Other......................................................... 294,888 232,246
Accrued adjustments and interest payable...................... 2,043 1,827
---------------------- -----------------------
Ps. 300,612 Ps. 235,466
O. Provisions.................................................... 517,806 388,961
P. Subordinated negotiable obligations........................... 380,077 -
Q. Unallocated items............................................. 5,574 2,638
R. Minority interests............................................ 113,467 92,994
---------------------- -----------------------
TOTAL LIABILITIES............................ Ps. 22,131,016 Ps. 21,403,471
---------------------- -----------------------
SHAREHOLDERS' EQUITY ......................................... 1,519,538 1,419,383
---------------------- -----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ Ps. 23,650,554 Ps. 22,822,854
====================== =======================
The accompanying notes are an integral part of these consolidated financial
statements
F-6
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
DECEMBER 31,
---------------------------------------------------
2004 2003 2002
----------------- -------------- ----------------
A. Financial income
Interest on cash and due from banks......................... Ps. 44 Ps. 68 Ps. 2,369
Interest on loans granted to the financial sector........... 5,189 101,107 86,822
Interest on overdrafts...................................... 28,254 38,801 136,840
Interest on notes........................................... 97,544 192,816 220,811
Interest on mortgage loans.................................. 67,935 94,832 125,421
Interest on pledge loans.................................... 6,706 11,714 59,692
Interest on credit card loans............................... 163,054 127,522 177,204
Interest on other loans..................................... 26,050 28,888 116,417
Interest income from other receivables resulting from
financial brokerage......................................... 90,017 98,663 227,978
Net income from government and corporate securities......... - 46,221 564,390
Net income from secured loans - Decree No. 1387/01.......... 186,038 178,708 223,730
Consumer price index adjustment (CER /CVS)................. 588,653 509,077 3,402,790
Others...................................................... 132,101 23,657 412,825
----------------- -------------- ----------------
Ps. 1,391,585 Ps. 1,452,074 Ps. 5,757,289
B. Financial expenses
Interest on current accounts................................ 4,858 3,039 17,565
Interest on savings accounts................................ 4,124 3,045 8,144
Interest on time deposits................................... 90,511 201,766 291,851
Interest on loans from the financial sector................. 6,146 6,756 26,478
Interest expense from other liabilities resulting from
financial brokerage......................................... 172,558 340,567 653,039
Other interest ............................................. 323,245 408,764 1,605,374
Net loss from government and corporate securities........... 7,027 - -
Net loss on options......................................... - - 263
Consumer price index adjustment............................. 501,831 187,532 1,734,648
Others...................................................... 57,144 153,347 223,043
----------------- -------------- ----------------
Ps. 1,167,444 Ps. 1,304,816 Ps. 4,560,405
C. Gross brokerage margin...................................... 224,141 147,258 1,196,884
Loan loss provision ........................................ 190,232 286,428 1,648,576
D. Income from services
In relation to lending transactions......................... 157,084 136,075 142,397
In relation to borrowing transactions....................... 140,375 116,165 149,885
Other commissions........................................... 8,035 9,347 14,412
Others...................................................... 223,558 170,170 209,331
----------------- -------------- ----------------
Ps. 529,052 Ps. 431,757 Ps. 516,025
E. Expenses for services
Commissions................................................. 40,899 35,237 100,356
Others...................................................... 51,860 35,121 40,283
----------------- -------------- ----------------
Ps. 92,759 Ps. 70,358 Ps. 140,639
The accompanying notes are an integral part of these consolidated financial
statements
F-7
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
DECEMBER 31,
-------------------------------------------------
2004 2003 2002
------------- --------------- --------------
F. Monetary result of financial brokerage....................... Ps. - Ps. (14,157) Ps. (1,437,745)
G. Administrative expenses
Personnel expenses........................................... 296,733 243,501 496,025
Directors' and syndics' fees................................. 4,040 1,917 3,236
Other fees................................................... 19,808 21,294 28,026
Advertising and publicity.................................... 37,796 20,020 15,369
Taxes........................................................ 40,872 29,806 57,761
Other operating expenses..................................... 179,983 204,599 290,204
Others....................................................... 44,708 42,227 56,893
------------- --------------- --------------
Ps. 623,940 Ps. 563,364 Ps. 947,514
H. Monetary result of operating expenses........................ Ps. - Ps. 84 Ps. 21,001
Net (loss)/income from financial brokerage................... (153,738) (355,208) (2,440,564)
I. Minority interests........................................... (14,302) (9,232) 272,163
J. Miscellaneous income
Net loss on long-term investments............................ 2,990 - -
Penalty interest............................................. 895 3,183 6,252
Loans recovered and allowances reversed...................... 366,645 563,838 38,130
Others....................................................... 134,348 97,805 245,900
Consumer price index adjustment (CER)........................ 9,728 54,381 1,125
------------- --------------- --------------
Ps. 514,606 Ps. 719,207 Ps. 291,407
K. Miscellaneous losses
Net loss on long-term investments............................ - 22,570 51,971
Penalty interest and Charges in favor of the Argentine
Central Bank................................................. 19 125 646
Loan loss provision from miscellaneous receivables and
other provisions............................................. 134,135 315,167 449,288
Amortization of differences arising from court resolution.... 121,010 77,880 -
Others....................................................... 157,119 155,311 270,906
Consumer price index adjustment.............................. 336 1,827 22
------------- --------------- --------------
Ps. 412,619 Ps. 572,880 Ps. 772,833
L. Monetary Result of other operations.......................... Ps. - Ps. (3,517) Ps. (163,090)
Net (loss)/income before tax................................. (66,053) (221,630) (2,812,917)
M. Income tax................................................... 43,818 590 66,421
------------- --------------- --------------
Net loss before Absorption................................... Ps. (109,871) Ps. (222,220) Ps. (2,879,338)
N. Absorption subject to the Approval of the Annual
Shareholders Meeting (*)..................................... - - 1,370,034
------------- --------------- --------------
Net loss for the year........................................ Ps. (109,871) Ps. (222,220) Ps. (1,509,304)
============= =============== ==============
Net loss per common share before the absorption (basic and
assuming full dilution)...................................... (0.093) (0.203) (2.636)
Net loss per common share after the absorption (basic and
assuming full dilution)...................................... (0.093) (0.203) (1.382)
(*) Effect on the foreign currency position compensation.
The accompanying notes are an integral part of these consolidated financial
statements
F-8
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
DECEMBER 31,
---------------------------------------------------
2004 2003 2002
-------------- --------------- ----------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss for the year........................................... Ps. (109,871) Ps. (222,220) Ps. (1,509,304)
Adjustments to reconcile net income to net cash from
Operating activities:
Depreciation of bank premises and equipment and
Miscellaneous assets............................................ 41,567 52,496 65,776
Amortization of intangible assets............................... 193,744 163,390 168,622
(Decrease)/Increase in allowances for loan and other losses,
net of reversals................................................ 69,132 118,920 2,081,741
Equity loss of unconsolidated subsidiaries...................... (3,580) 8,095 51,971
Loss (gain) on sale of premises and equipment................... (391) 11,486 (59,948)
Gain on trouble debt restructuring.............................. (141,610) - -
Absorption subject to the Approval of the Annual Shareholders
Meeting(*)...................................................... - - (1,370,034)
Monetary loss................................................... - 17,939 1,579,834
Adjustment of Compensatory Bond to be received.................. - 90,243 -
Consumer price index adjustment (CER/CVS) ...................... (26,447) (324,073) (1,630,582)
Unrealized foreign exchange gain / (loss)....................... 19,212 47,018 (516,888)
Decrease (Increase) in government securities - trading.......... 91,557 (314,324) -
Decrease in other assets........................................ (75,634) 54,599 456,918
Decrease (Increase) in other liabilities........................ (273,297) (47,614) (254,395)
-------------- --------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES........................... Ps. (215,618) Ps. (344,045) Ps. (936,289)
CASH FLOW FROM INVESTING ACTIVITIES:
(Decrease)/Increase in loans, net .............................. (112,368) 734,720 2,613,642
Increase in deposits at the Argentine Central Bank.............. (8,617) (13,938) (18,989)
Additions to bank premises and equipment, miscellaneous,
and intangible assets........................................... (131,807) (124,469) (64,280)
Proceeds of sales of premises and equipment..................... 12,599 33,520 85,934
-------------- --------------- ---------------
NET CASH PROVIDED BY INVESTING ACTIVITIES....................... Ps. 240,193 Ps. 629,833 Ps. 2,616,307
CASH FLOW FROM FINANCING ACTIVITIES:
Increase/(Decrease) in deposits, net............................ 1,415,052 782,718 (6,016,672)
Payments on credit facilities - long term....................... (289,719) (537,074) (48,755)
(Decrease)/Increase in short-term borrowings, net............... (561,018) (252,600) 3,397,137
(Decrease)/Increase in repurchase agreements.................... 261,654 (24,601) 1,112,462
Repayment of principal and interest on restructured debt........ (207,639) - -
-------------- --------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES...................... Ps. 618,330 Ps. (31,557) Ps. (1,555,828)
(*) Effect on the foreign currency position compensation.
The accompanying notes are an integral part of these consolidated financial
statements
F-9
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
DECEMBER 31,
---------------------------------------------------
2004 2003 2002
---------------- --------------- ---------------
INCREASE IN CASH AND CASH EQUIVALENTS NET..................... Ps. 162,519 Ps. 254,231 Ps. 124,190
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR........ 826,150 576,838 1,139,854
MONETARY EFFECT ON CASH AND CASH EQUIVALENT................... - (4,919) (687,206)
---------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR.............. Ps. 988,669 Ps. 826,150 Ps. 576,838
SUPPLEMENTAL DISCLOSURES RELATIVE TO CASH FLOWS:
Interest paid................................................. Ps. 509,901 Ps. 621,162 Ps. 823,377
Income tax paid............................................... Ps. 528 Ps. - Ps. -
Presumptive minimum income tax.(*)............................ Ps. 24,886 Ps. 48,436 Ps. 14,773
For the fiscal years ended December 31, 2004 and 2003, Ps. 906,025 and Ps.
1,485,056 for the compensation received and to be received from the national
government and Ps. 184,597 and Ps. 67,801 respectively advance to be requested
from the Argentine Central Bank for the subscription of the Hedge Bond,did not
require the movement of cash.
The swap of provincial loans into secured bonds ("BOGAR"), which as of December
31, 2004 and 2003, amounted to Ps 3,543,479 and 3,473,661 did not required the
movement of cash.
(*) The PMIT is calculated based on assets and can be credited against future
income tax.
The accompanying notes are an integral part of these consolidated financial
statements
F-10
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(Expressed in thousands of Argentine pesos)
INFLATION
ADJUSTMENTS
TO CAPITAL
STOCK AND PROFIT RESERVES UNREALIZED
PAID IN PAID IN ----------------- VALUATION ACCUMULATED
CAPITAL STOCK CAPITAL CAPITAL LEGAL OTHER DIFFERENCE (*) DEFICIT
------------- ----------- ------------- ---------------------- ------------- ---------------
BALANCE AT DECEMBER 31, 2001 Ps. 1,092,407 Ps. 79,251 Ps. 1,410,048 Ps. 16,266 Ps. 238,941 Ps. - Ps. 266,658
------------- ----------- ------------- ---------- ----------- ------------- ---------------
Adjustment to retained earnings - - - - - - 6,577
Distribution of retained earnings
Approved by the shareholders'
meeting on June 3, 2002:
- Legal reserve 13,227 (13,227)
- Reserve provided by the Bylaws 253,398 (253,398)
Net loss for the year
before the absorption - - - - - - (2,879,338)
Absorption subject to the
approval of the Annual
Shareholders Meeting (*) - - - - - 1,370,034 -
Transfer to net loss of the
absorption,net - - - - - (1,370,034) 1,370,034
---------------
Net loss after the absorption - - - - - - (1,509,304)
------------- ----------- ------------- ---------- ----------- ------------- ---------------
BALANCE AT DECEMBER 31, 2002 Ps. 1,092,407 Ps. 79,251 Ps. 1,410,048 Ps. 29,493 Ps. 492,339 Ps. - Ps. (1,502,694)
============= =========== ============= ========== =========== ============= ===============
Adjustment to retained earnings - - - - - - 40,759
Absorption approved by the
shareholders' meeting on
April 23,2003 - - - - (492,339) - 492,339
Net loss for the year - - - - - - (222,220)
------------- ----------- ------------- ---------- ----------- ------------- ---------------
BALANCE AT DECEMBER 31, 2003 Ps. 1,092,407 Ps. 79,251 Ps. 1,410,048 Ps. 29,493 Ps. - Ps. - Ps. (1,191,816)
============= =========== ============= ========== =========== ============= ===============
Capital Increase 149,000 61,026 - - - - -
Net loss for the year - - - - - - (109,871)
------------- ----------- ------------- ---------- ----------- ------------- ---------------
BALANCE AT DECEMBER 31, 2004 Ps. 1,241,407 Ps. 140,277 Ps. 1,410,048 Ps. 29,493 Ps. - Ps. - Ps. (1,301,687)
============= =========== ============= ========== =========== ============= ===============
TOTAL
SHAREHOLDERS'
EQUITY
-------------
BALANCE AT DECEMBER 31, 2001 Ps. 3,103,571
-------------
Adjustment to retained earnings 6,577
Distribution of retained earnings
Approved by the shareholders' meeting
on June 3, 2002:
- Legal reserve
- Reserve provided by the Bylaws
Net loss for the year
before the absorption (2,879,338)
Absorption subject to the
approval of the Annual
Shareholders Meeting (*) 1,370,034
Transfer to net loss of the
absorption,net -
-------------
Net loss after the absorption (1,509,304)
-------------
BALANCE AT DECEMBER 31, 2002 Ps. 1,600,844
=============
Adjustment to retained earnings 40,759
Absorption approved by the
shareholders' meeting on
April 23,2003 -
Net loss for the year (222,220)
-------------
BALANCE AT DECEMBER 31, 2003 Ps. 1,419,383
=============
Capital Increase 210,026
Net loss for the year (109,871)
-------------
BALANCE AT DECEMBER 31, 2004 Ps. 1,519,538
=============
(*) Effect on the foreign currency position compensation
The accompanying notes are an integral part of these consolidated financial
statements
F-11
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
1. BASIS OF PRESENTATION, ACQUISITIONS, ESTIMATES AND UNCERTAINTIES
Grupo Financiero Galicia S.A. ("Grupo Galicia", the "Company" or "the Group") is
a corporation organized under the laws of Argentina that acts as a holding
company for Banco de Galicia y Buenos Aires S.A. and its subsidiaries ("Banco
Galicia" or the "Bank"). Grupo Galicia was formed by the controlling
shareholders of the Bank on September 14, 1999 to consummate an exchange of
shares with the shareholders of Banco Galicia and establish Grupo Galicia as the
Bank's holding company. Grupo Galicia was formed with two classes of shares:
Class A shares, which are entitled to 5 votes per share, and Class B shares,
which are entitled to 1 vote per share. To effect the exchange, Grupo Galicia
offered to exchange Grupo Galicia class B shares for all outstanding Banco
Galicia class B shares on a 2.5-for-1 basis and to exchange Grupo Galicia ADSs
for all outstanding Banco Galicia ADSs on a 1-for-1 basis. The controlling
shareholders retained all the class A shares. As a result of the exchange, which
was consummated on July 26, 2000, the Company became holder of 93.23% of the
Bank's capital stock, and the remaining 6.77% remained as a minority interest in
the Bank. At December 31, 2004 and 2003 the Company's interest in Banco Galicia
as a result of open market purchases was 93.59%.
Banco Galicia is a private-sector commercial bank organized under the laws of
Argentina which provides general banking services, mainly through its Argentine
branches, to corporate and retail customers. Banco Galicia also provides banking
services through it branch in the Grand Cayman Island. As a result of the
Argentine economic crisis and the economic policy measures adopted by the
government during 2002, Banco Galicia New York branch was closed on January 30,
2003. The Bank's services included, until December 31, 2001, accepting deposits
and granting loans in Argentine pesos and U.S. dollars. The end of the
Convertibility regime in early 2002, the devaluation of the currency and the
measures adopted by the government in 2002 have restricted Argentine banks'
operations in U.S. dollars.
As a result of the political and economic crisis that Argentina experienced in
late 2001 and in 2002 and the material and adverse effect that such crisis has
had on the Bank and other financial institutions in Argentina, the Bank's future
business activities, as well as the levels of such business activities may
differ substantially from pre-crisis periods.
Grupo Galicia consolidates the financial statements of its subsidiaries over
which it has effective control, including Banco Galicia and its subsidiaries,
Net Investment S.A. (and its subsidiaries), Sudamericana Holding S.A. (and its
subsidiaries), Banco de Galicia Uruguay S.A. (and its subsidiaries), Galicia
Capital Markets S.A. (and its subsidiaries), Galicia Factoring y Leasing S.A.,
Galicia Warrants S.A., Galicia Valores S.A. Sociedad de Bolsa, AgroGalicia S.A.,
and Tarjetas Regionales S.A.(and its subsidiaries). All significant intercompany
accounts and transactions have been eliminated for the preparation of the
consolidated financial statements..
The preparation of financial statements in conformity with the Argentine Central
Bank generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent liabilities, at the date of the
financial statement, and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
F-12
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
THE ARGENTINE ECONOMY AND ITS IMPACT ON GRUPO GALICIA'S ECONOMIC AND FINANCIAL
POSITION
Along with the recovery of the Argentine economy over the last two years, the
Bank has recorded an increasing level of activity during 2004 and 2003, as well
as a more favorable financial condition which has enabled it to recover from the
crisis that affected the financial system at the end of 2001.
The financial system has gradually strengthened its liquidity levels, recording
a significant increase in deposits and borrowings.
Also, during 2004 the Argentine Government has submitted to the consideration of
creditors an offer to exchange defaulted debt issued prior to December 31, 2001
for new bonds called "Par Bonds", "Quasi-Par Bonds" and "Discount Bonds". The
securities offered contemplate different terms and conditions, such as currency
of denomination, amortization term, nominal value relief and yield. The period
for exchanging securities started on January 14 and ended on February 25, 2005
with a high percentage of participation. There are some issues relating to this
process that are still pending final resolution, so uncertainty still persists
regarding compliance by the public sector with its obligations.
As part of the recovery of the Bank, the following matters are worth mentioning
which put at risk the Bank's business activities, mainly as a result of the
measures adopted by the Argentine Government to confront the crisis and which
were and are being resolved by the Bank in 2004.
RESTRUCTURING OF THE BANK'S FOREIGN DEBT
In 2004, the Bank finalized its plan for the restructuring of its foreign debt.
During the restructuring of its foreign debt, the Bank managed to refinance the
liabilities of its New York Branch (which was closed in January 2003) and the
liabilities of its subsidiaries Galicia Uruguay and Galicia Cayman, which
consisted mainly of deposits. Furthermore, with the approval of the Argentine
Central Bank, the debt carried with Galicia Uruguay for a principal amount of
US$ 399.5 million was restructured.
As a result of the restructuring of the New York Branch, the Bank increased its
capitalization levels by US$ 43 million.
In May 2004, an agreement was signed which enabled the restructuring of the
foreign debt of the Head Office's and Cayman Branch..
In the Bank's foreign debt restructuring, the Bank offered its bondholders and
bank creditors the ability to exchange their existing debt for units comprised
of a new long-term debt instrument maturing in 2014 and a new subordinated debt
instrument maturing in 2019 in a par-for-par first step exchange offer. The
bondholders and bank creditors were then given the option to participate in a
second step to the exchange, in which they could receive for their units:
- cash (at a discount) (the "cash offer");
- Boden 2012 (at a discount) (the "Boden offer");
- new long-term debt instruments (at par); or
- new medium-term debt instruments (at par) and up to 149 million
preferred shares of our preferred shares (or, instead of such
shares, cash, if any, paid to us
F-13
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
by existing shareholders electing to subscribe for our preferred
shares in a preemptive rights offering) (the "equity participation
option").
In addition, creditors that agreed to sign firm commitments to the Bank for new
trade facilities in an aggregate principal amount up to US$ 35 million were
permitted to elect to receive new medium-term debt instruments maturing in 2010
(at par) (the "new money option").
Each of the optional second-step offers was subject to proration.
By offering the units, which contained a subordinated component, in the
par-for-par first step exchange offer, the Bank's main objective was to generate
complementary regulatory capital for an extended period. The second step was
intended to satisfy creditors' varying investment preferences.
To make the Bank's foreign debt restructuring possible:
Grupo Financiero Galicia S.A. approved a capital increase through the issuance
of up to 149 million preferred shares, each of them mandatorily convertible into
one of our class B shares on May 13, 2005, the first anniversary date of
issuance (or, if earlier, on the occurrence of a change of control of Grupo
Galicia). As a result of the exercises made by the existing shareholders in our
preemptive rights offering, creditors opting for the equity participation offer
received 87.8 million preferred shares and US$ 30 million in cash and Grupo
Financiero Galicia S.A. received approximately US$ 100 million of subordinated
bonds in exchange for those shares and cash. We issued the 149 million preferred
shares on May 13, 2004.
Our controlling shareholders assigned part of their preemptive and accretion
rights to a trust established for the benefit of the Bank's creditors.Grupo
Financero Galicia S.A. entered into a registration rights agreement for the
benefit of the holders of our preferred shares in the United States in which
Grupo Financiero Galicia S.A. agreed to (1) file a shelf registration statement
with the U.S. Securities and Exchange Commission covering the resale of those
restricted preferred shares within 180 days of the expiration date of the
exchange offer; (2) use our reasonable best efforts to cause the shelf
registration statement to become effective within 360 days of the offer's
expiration date; and (3) use our reasonable best efforts to keep the shelf
registration statement effective from on or before June 1, 2005, until the date
on which all of the restricted preferred shares have been sold under the shelf
registration statement or September 30, 2005, whichever comes first.Grupo
Financiero Galicia S.A. entered into an agreement with the Bank's bank creditors
in which Grupo Financiero Galicia S.A. agreed to maintain certain corporate
governance standards and to provide them with certain financial information and
reports on a quarterly and annual basis.
In addition, in accordance with the terms of the Bank's foreign debt
restructuring, the Bank made a US$ 15.5 million cash payment for interest
accrued until April 30, 2002, and applied US$ 42.4 million not used in the cash
offer to prepay at par (plus capitalized interest) long-term instruments to be
delivered to creditors participating in the restructuring.
Based on the options exercised, the final outcome of the restructuring was as
follows:
-The following debt instruments were issued:
F-14
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
long-term debt instruments for US$ 648.5 million, of which US$ 464.8 are US
dollar-denominated Negotiable Obligations due 2014, while the remainder is in
the form of restructured loans to the Bank.
-medium-term debt instruments for US$ 399.8 million, of which US$ 352.8 are US
dollar-denominated Negotiable Obligations due 2010, while the remainder is in
the form of restructured loans to the Bank.
-subordinated debt instruments for US$ 230.0 million, of which US$ 218.2 are US
dollar-denominated subordinated Negotiable Obligations due 2019, while the
remainder is in the form of restructured loans to the Bank.
In addition, commercial creditors accepted the terms and conditions for the
restructuring of their receivables in the amount of US$ 24.4 million.
-US$ 36.9 million, to repay debt equivalent to US$ 45.0 million, was transferred
to creditors who opted to receive National Government Bonds due 2012 (BODEN
2012), and US$ 13.6 million were paid to creditors who have participated in the
cash offer for debt equivalent to US$ 26.8 million, was paid to creditors. In
addition, under the terms of the restructuring, an interest payment of US$ 15.5
million was made.
The Bank also restructured trade debt for a principal amount of US$ 25.3 million
in exchange for US$ 26.6 million of new trade debt to be repaid in 12 equal,
consecutive monthly installments beginning in June 2004 and ending in May 2005.
In addition, the Bank entered into a new trade facility agreement for US$ 35
million with creditors participating in the new money option.
The following table shows certain information on the Bank's debt restructuring:
Principal amount of: In US$ millions
---------------------------------------------------------------------------- -----------------
a) Old debt to be restructured as of December 31, 2003...................... 1,349.6
b) Old debt to be restructured as of April 27, 2004 (1)..................... 1,344.7 (2)
c) Old debt participating in the restructuring as of April 27, 2004 (1)..... 1,320.9
d) New debt, including past due interest capitalized (3) (4)................ 1,399.6
e) New debt issued (4) (5).................................................. 1,278.3
f) Old debt not restructured as of May 18, 2004 (6)......................... 22.9 (7)
g) Old debt not restructured as of December 31, 2004........................ 12.5
(1) Expiration date of the exchange offer.
(2) The decrease in the principal amount of debt to be restructured as
compared to December 31, 2003, resulted from the fact that, in accordance
with Argentine law, borrowers that were also holders of certain of the
Bank's debt instruments under restructuring used such holdings to repay
past-due loans granted to them by the Bank.
(3) Interest past due between May 1, 2002, and December 31, 2003, was
capitalized at 4.75% per annum, except for trade debt for a principal
amount of US$ 25.3 million for which interest was capitalized at Libor
plus 1%. Interest past due until April 30, 2002, was paid in cash.
(4) Excludes trade debt.
(5) After having applied US$ 42.4 million not used in the cash offer to prepay
long-term debt instruments included in (d).
(6) Settlement date of the exchange offer.
F-15
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
(7) Between the expiration date and the settlement date, the amount of debt
not restructured decreased by US$ 0.9 million as a result of the repayment
by borrowers that were also holders of debt subject to restructuring of
past-due loans made to them by the Bank by using their holdings of such
debt and, to a lesser extent, as a result of the renegotiation of debt not
restructured under the terms of the restructuring.
The agreements executed within the framework of the Bank's foreign debt
restructuring established that the Bank may not, directly or indirectly, declare
or pay dividends or make distributions on shares of common stock, except for
stock dividends or distributions. This restriction shall not apply to dividends
paid to the Bank by a consolidated subsidiary. Notwithstanding this, those
agreements foresee that the Bank may directly or indirectly declare or pay
dividends, and may allow its subsidiaries to do so, if "(i) no default or event
of default has taken place and continues to take place immediately before and
after such payment has been made; (ii) the total outstanding senior debt were to
be equal to or lower than fifty percent (50%) of the total senior debt amount
originally issued; and (iii) the Bank were to reimburse two US dollars (US$2) of
the long-term debt principal amount for each US dollar (US$1) paid as dividends.
Restrictions were also imposed on the Bank's ability making certain types of
investments; using the proceeds from the sale of certain assets or from the
issue of debt or shares; participating in certain operations with subsidiaries,
non-financial activities and compliance with certain financial ratios.
The above process included the restructuring of foreign financial liability
repayment terms, by adjusting the expected payment expenses and making the
Bank's future development more foreseeable, as well as complying with the
increased capitalization envisaged in the Plan.
As a result of this restructuring, the Bank has increased its regulatory
capitalization by approximately US$ 278.7 million, because of relief granted in
respect of principal and interest for US$48.7 million, which were recognized
under Financial income - "Others" and Financial Expenses - Interest expense for
other liabilities resulting from financial brokerage, respectively. Also, the
subordinated debt for US$ 230 million which was issued, is considered capital
for regulatory purposes. As a result of the restructuring of the New York Branch
debt in 2002, the Bank had increased its capitalization by US$ 43 million.
TREATMENT OF EXTRAORDINARY ASSISTANCE TO FINANCIAL INSTITUTIONS BY THE ARGENTINE
CENTRAL BANK
In light of the financial system crisis at the end of 2001 and in order to cover
the decrease in deposits, the Bank obtained advances from the Argentine Central
Bank, the principal and CER adjustment of which amounted to Ps. 5,690,864 and
Ps. 5,647,113, as of December 31, 2004 and 2003, respectively.
In February 2004, the Bank adhered to the regime for repayment of debt with the
Argentine Central Bank called for by Decrees 739/03 and 1262/03, as well as the
amortization schedule proposed, the term of which is 92 months beginning in
March 2004, on the basis of the minimum amortization period established by the
regulations and of the cash flow provided by the assets eligible for collateral
for repayment of the debt.
Through Communique "A" 4268, the Argentine Central Bank approved a mechanism for
financial institutions to provide funds in advance to settle principal
installments on rediscounts received, according to the original schedule.
F-16
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
As a result of this restructuring with the Argentine Central Bank, the Bank did
not recognize any gain or loss in the transaction.
COMPENSATION TO FINANCIAL INSTITUTIONS
Section 7 of Decree No. 214/02, provides for the issuance of bonds payable with
the funds of the Argentine Treasury to cover the imbalance generated in the
financial system by the devaluation of the peso and the asymmetric pesification
of assets and liabilities.
In June 2002, Sections 28 and 29 of Decree 905/02 established the method of
calculating the amount of the compensation to financial institutions, so as to
compensate them for:
a) the losses arising from the conversion into pesos of a large portion of their
obligations at the exchange rate of Ps. 1.40 per US dollar, which is higher than
the exchange rate of Ps.1 per US dollar applied for the conversion into pesos of
certain receivables in foreign currency, by means of the delivery of a
Compensatory Bond, in the form of National Government Bonds in pesos, due 2007.
b) the mismatching of their foreign currency positions after the mandatory
conversion into pesos of a portion of their loan and deposit portfolios, by
transforming the Compensatory Bond originally issued in pesos into a
dollar-denominated bond and, if necessary, through the subscription of a
dollar-denominated hedge bond (the "Hedge Bond"), in the form of
dollar-denominated Boden 2012, accruing interest at Libor and falling due in
2012 ("BODEN 2012").
The Bank originally calculated a total compensation amount of US$ 2,254,027 in
BODEN 2012 (face value). However, the Argentine Central Bank formulated
observations on certain criteria and the computation of certain items that would
modify the final amount of the compensation.
The Bank initially accepted and recorded part of the adjustments indicated by
the Argentine Central Bank, while it analyzed and discussed the rest of the
adjustments stated by the regulatory body. However, the Bank recorded provisions
under other contingencies for the full amount under discussion. Lastly, in March
2005 after an in-depth analysis of the adjustments still required by the
Argentine Central Bank and of the implications of the failure to determine the
final amount of the compensation and when it would be granted, the Bank decided
to accept as final the pending adjustments. Accordingly, the final amount of the
compensation to be granted to the Bank, including the Hedge Bond, is
US$2,178,030 in BODEN 2012 (face value). The difference arising from the
adjustments claimed by the Argentine Central Bank and accepted by the Bank was
offset against the provisions previously set up.
As of December 31, 2004, the amount of $ 4,732,288 for the compensation to be
received from the National Government was recorded in Other receivables
resulting from financial brokerage - In foreign currency - Compensation to be
received from the National Government, while Ps. 601,264 recorded as of December
31, 2004 for the securities received for the compensation, has been neeted with
transfers made to Galicia Uruguay, to settle debts (mainly deposits) and Ps.
374,792 of securities used in repo transactions. The net amount of the
securities received for the compensation is recorded in government securities -
in foreign currency - holding in investment accounts. The securities used in
repo transaction have been recorded under Other receivables resulting from
financial brokerage - In foreign currency - Forward purchases of securities
under repo transactions and under Miscellaneous Receivables
The Bank will solicit an advance from the Argentine Central Bank for the
subscription of the hedge bond, including the effect of Decree 2167/02, has been
recorded under Other Liabilities for financial brokerage - In pesos - Advance
for the acquisition of National Government Bonds in US dollars accruing interest
at Libor and due 2012" for Ps. 1,673,147 which, including the CER
F-17
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
adjustment and accrued interest for Ps. 1,047,596, totaled Ps. 2,720,743. The
conditions for financing the subscription of the Boden 2012 corresponding to the
Hedge Bond have been specified in Section 29, subsection g of Decree 905/02,
which contemplates the delivery by financial institutions of assets as
collateral for at least 100% of the advance to be received.
At the date of these financial statements, the final settlement of the
compensatory bonds requested by the Bank and verified in their determination by
the Argentine Central Bank, as well as the final settlement of the advance for
their acquisition of the Hedge Bond and the acceptance of the assets offered by
the Bank as collateral for this advance were still pending.
BANCO GALICIA URUGUAY S.A. AND BANCO DE GALICIA (CAYMAN) LTD. (IN PROVISIONAL
LIQUIDATION)
The financial crisis of late 2001 also affected the controlled companies Galicia
Uruguay and Galicia Cayman.
As of December 2002, Galicia Uruguay restructured its deposits with a high
degree of participation (79%) on the part of depositors and subsequently
implemented two voluntary exchanges of restructured deposits, which allowed it
to reduce its liabilities considerably.
In June 2004, after the total suspension of all of its activities after February
6, 2002, the Uruguayan authorities resolved to maintain the authorization to
operate as a commercial bank granted by the Executive Branch of that country and
withdraw the authorization to act as a commercial bank. The adoption of this
resolution by the Central Bank of Uruguay will not affect the rights of
depositors and holders of obligations arising under the restructuring plan
approved in 2002, or those arising from successive debt swaps or swaps to be
undertaken.
The Bank and Galicia Uruguay agreed to take the necessary steps to provide the
latter with the necessary funds for it to be able to reimburse all its deposits
with the prior authorization of the Argentine Central Bank, where applicable
subject to the stabilization of the Bank's economic and financial condition and
repayment of the assistance from the Argentine Central Bank, as provided for by
clause No. 52 of Argentine Central Bank Resolution No. 281.
As of December 31, 2004, the principal balance of restructured obligations (time
deposits and negotiable obligations) amounted to Ps. 1,239,343. The first two
installments of negotiable obligations for September 2003 and 2004 have been
paid.
At the beginning of 2002, the situation of Galicia Uruguay affected its
subsidiary Galicia Cayman because one of Galicia Cayman's main assets was a
deposit in Galicia Uruguay). Consequently, at the request of that subsidiary, on
July 18, 2002 the authorities in the Cayman Islands appointed a provisional
liquidator in order to reach a voluntary restructuring agreement between Galicia
Cayman and its creditors, as an alternative to the Company's liquidation.
The restructuring plan, which had a high degree of participation (99,7%), will
be in force until April 30, 2012 and is applicable and mandatory for all
creditors. While this plan remains in effect, the Galicia Cayman's assets will
be administered by the liquidators for the benefit of creditors.
The initial payment for the Cayman restructuring was made on August 8, 2003, the
last installment falling due in September 2011. At the date of these financial
statements, the first two installments for September 2003 and 2004 have been
paid.
F-18
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
For all periods presented, the financial statements have been consolidated on a
line-by-line basis with the balances of Galicia Uruguay and Galicia Cayman and
its subsidiaries.
After the end of the fiscal year ended 2004, Galicia Uruguay and Galicia Cayman
offered to receive expressions of interest from holders, for the exchange and
sale, respectively, of rescheduled deposits for cash and Boden 2012. This offer
will expire on May 27, 2005. Furthermore, the Argentine Central Bank has
authorized the transfer to Galicia Uruguay of the necessary bonds to settle the
restructured debt exchange being carried out.
In view of this, the Bank ratified its intention to meet the commitments
previously undertaken with its Uruguayan subsidiary, subject to the necessary
authorizations.
LEGAL ACTIONS REQUESTING PROTECTION OF CONSTITUTIONAL GUARANTEES
National Executive Branch (PEN) Decree No. 1570/2001 and Law No. 25561 imposed
restrictions on the withdrawals of funds from financial institutions.
Subsequently, various regulations were issued rescheduling maturities of
deposits with the financial system and establishing a new maturity scheme.
Decree 214/02 established that all deposits denominated in US dollars or any
other currency placed with the financial system were to be converted into pesos
at a Ps. 1.40 = US$ 1 parity. These rules also established that financial
institutions were to comply with their obligations by reimbursing pesos. The CER
and a minimum interest rate have been applied to those deposits. On various
occasions, the National Executive Branch has given accounts holders the option
to exchange their deposits originally arranged in foreign currency for peso and
US dollar-denominated government securities, payable by the National Government.
As of December 31, 2004, the principal of deposits for which the original
maturity was rescheduled amounted to Ps.107,377.
As a result of the measures adopted by the Government and restructure foreign
currency deposits, since December 2001, a significant number of complaints have
been filed against the National State and/or financial institutions, challenging
the emergency regulations, particularly Decree 214/02 and supplementary
provisions, and requesting prompt payment of deposits in their original
currency. As of December 31, 2004, the court orders received by the Bank
mandating the reimbursement of deposits in foreign or Argentine currency at the
free exchange rate amounted to Ps. 16,778 and US$ 585,544. In compliance with
those court orders, the Bank has paid the amounts of Ps. 938,412 and US$ 123,013
in respect of reimbursement of deposits in pesos and foreign currency.
The emergency norms have been declared unconstitutional by most lower and upper
courts. The difference between the amount paid as a result of the
above-mentioned court orders and the amount resulting from converting deposits
at Ps.1.40 per US dollar, adjusted by applying the CER and interest accrued at
the settlement date, for Ps. 650,318 and Ps. 564,900 as of December 31, 2004 and
at the end of the previous year, respectively, has been recognized in Intangible
Assets, net of related amortization for Ps. 451,428 and Ps. 487,020 at those
dates, as called for by Argentine Central Bank Communique "A" 3916.
The Bank has repeatedly reserved its right to claim compensation for the damage
caused to it by the reimbursement of deposits in US dollars or their equivalent
in pesos at the free exchange rate, decreed under precautionary measures or
judgments issued by courts, and which have not been included by the Argentine
Government in the calculation of the compensation to financial
F-19
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
Institutions. The method of accounting for that compensation as a deferred loss,
envisaged by the Argentine Central Bank in the mentioned Communique "A" 3916,
does not affect the legitimacy of the rights. The Bank has reserved its rights
for such purposes.
On December 30, 2003, the Bank formally requested from the National Executive
Branch, with a copy to the Ministry of Economy and the Argentine Central Bank,
compensation for the damage suffered by the Bank as a result of the asymmetric
pesification and, especially, that deriving from the negative effect on assets
and liabilities caused by court decisions which, sustaining legal actions filed
by depositors, ordered the Bank to reimburse deposits at a higher exchange rate
than US$1=$1.40. The Bank has reserved the right to request further compensation
for such other amounts as may be ordered to be paid upon final and conclusive
judgments that permit the Bank to seek liquidated damages.
The Argentine Supreme Court of Justice ruled Province of San Luis v. Argentine
Federal Government that article 2 of Decree No.214/02 was unconstitutional.
On October 26, 2004, the Argentine Supreme Court of Justice ruled "Bustos,
Alberto et al v. National State, on legal action requesting protection of
constitutional guarantees", admitting the declaration of national emergency
established by Law 25561 and the constitutionality of article 2 of Decree
214/02, and overruling the decision that ordered the repayment of a US
dollar-denominated deposit to a group of depositors. Notwithstanding the fact
that under Argentine law the Supreme Court rulings are not mandatory for lower
courts, this ruling is expected to set a precedent in similar cases to be heard
by those courts.
At the date of these financial statements, the final outcome of these disputes
cannot be foreseen. However, during recent months, the number of legal actions
filed by depositors requesting reimbursement of deposits in their original
currency decreased significantly, which has reduced the risk that this problem
may be worsen in the future.
ISSUES PENDING RESOLUTION
The following are certain claims made by the Bank before the Argentine
authorities and the Argentine Central Bank:
a) Compensation for application of the CER or the CVS
Law 25796 established compensation to financial institutions for the negative
effects on their equity derived from the application of the CER to deposits
originally denominated in foreign currency and converted into pesos, and from
the application of the CVS to certain loans. This compensation will be paid
through the delivery of certain Bonds.
On May 3, 2004, through Resolution 302/2004 the Ministry of Economy approved the
calculation method to be used by the Finance Secretariat to determine the face
value amount of the "National Government Bonds in pesos at variable rate due
2013 (Boden 2013)" to be delivered to financial institutions adhering to the
Compensation Regime created by Law No. 25796. The above resolution and Argentine
Central Bank Communique "A" 4136 have interpreted the compensation regime in
such a way that, in the opinion of the Bank, is contrary to the provisions of
Law No. 25796. For this reason, on May 6, 2004 the Bank made a submission to the
National Executive Branch, the Ministry of Economy and the Argentine Central
Bank, maintaining the claim made on December 30, 2003 and expanding on its
justification. As the deadline granted by the Argentine Central Bank for
adhering to the established compensation regime expired on May 18,
F-20
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
2004, on that date the Bank made a new submission to the Ministry of Economy and
the Argentine Central Bank reiterating its right to be compensated for the
negative effects on its equity derived from application of the CVS to certain
assets converted into pesos and from the unequal application of the CER to
certain liabilities, and challenging Ministry of Economy Resolution No. 302/2004
under the terms of Section 24 of Law 19549.
At the end of fiscal 2003, the Bank had recorded the estimated recoverable value
of that compensation as provided for by regulations in force at that date.
During 2004, due to lack of resolution on this issue, the above mentioned asset
has been written off (see Note 38 "Prior Year Adjustments").
This accounting recognition does not affect the Bank's right to seek relief for
all the losses derived from the unequal application of the CER to deposits
originally denominated in foreign currency subsequently converted to pesos, and
application of the CVS to certain receivables.
The Bank maintains its claims, on which no resolution has been issued so far.
b) Claims due to foreign exchange differences arising from the repayment of
financial assistance during the exchange holidays that took place in January
2002
During December 2001, the Bank received financial allowance in pesos from the
Argentine Central Bank to cover temporary lack of liquidity. These financial
assistance was repaid applying resources in US dollars granted by the Bank
Liquidity Fund (BLF) on January 2 and 4, 2002. On the date those funds were
credited, the Argentine Central Bank declared an exchange holiday.
Before the markets were reopened, Law 25561 was enacted on January 6, 2002,
which repealed the convertibility system and fixed the new exchange rate at Ps.
1.40 per US dollar. As a result of the mentioned rules, during the exchange
holidays the Bank was unable to perform exchange operations. Accordingly, the
funds in US dollars credited by the BLF on January 2 and 4 of 2002 had to remain
in US dollars until the markets were reopened.
At the date markets were reopened, in view of the terms and conditions of the
rules in force, the US dollar was sold at Ps. 1.40.
For this reason, when the Argentine Central Bank allocated US$ 410,000 for the
Bank to repay the financial assistance provided to it, should have allocated US$
410,000 at Ps. 1.40, that is, the amount of Ps. 574,000.
This has affected the guarantees of inviolability of private property and
equality under the law. In view of the above, the return of the difference of
Ps. 164,000 in constant values as of January 2002 to the Bank or the restoration
of its equity for an equivalent amount should be considered. This right has not
been given accounting recognition in these financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies and financial statement presentation conform to the
rules of the Argentine Central Bank which prescribes the generally accepted
accounting principles for all banks in Argentina (the "Argentine Banking GAAP")
that differs in certain significant respects from generally accepted accounting
principles of Argentina applicable to enterprises in general ("Argentine GAAP")
(see note 40) and from generally accepted accounting principles in the United
States of America ("US GAAP") (see note 27 and 41)
F-21
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
Certain required disclosure has not been presented herein since they are not
material to the accompanying financial statements. In addition, certain
presentations and disclosures, including the statements of cash flows, have been
included in the accompanying financial statements to comply with the Securities
and Exchange Commission's regulations for foreign registrants.
Certain reclassification of prior year information have been made to conform
with current year presentation.
The following is a summary of significant policies followed by the Group in the
preparation of the consolidated financial statements.
2.1 PRESENTATION OF FINANCIAL STATEMENTS IN CONSTANT ARGENTINE PESOS
Effective September 1, 1995, pursuant to Decree No. 316/95, the Bank
discontinued its prior practice of adjusting the financial statements for
inflation. Effective January 1, 2002, however, as a result of the application of
Argentine Central Bank Communique "A" 3702, Resolution No. 415/02 of the CNV and
Resolution No. 240/02 of the Argentine Federation of Professional Councils in
Economic Sciencies "FACPCE", the Bank resumed the application of the adjustment
for inflation. The adjustments resulting from the change in the purchasing power
of the peso between January 1, 2002 and December 31, 2002 are stated in the
currency value as of December 31, 2002.
In 2002, Argentina experienced a high rate of inflation. The wholesale Price
Index (WPI) increased approximately 118.44% in 2002. Accordingly, the Bank's
consolidated financial statements as of and for the year ended December 31, 2002
have been adjusted for inflation and restated in constant pesos as of December
31, 2002.
Primarily as a result of the stabilization of the WPI during the first half of
2003, the Argentine government published Decree No. 664/03 and the Argentine
Central Bank issued Communique "A" 3821 dated April 8, 2003, which eliminated
the requirement that financial statements be prepared in constant currency.
These rules became effective for financial periods ending on or after March 1,
2003. Likewise, on April 8, 2003, the CNV issued resolution No. 441/03
discontinuing inflation accounting as of March 1, 2003. Between January 1, 2003
and February 28, 2003, the WPI increased approximately 0.87%.
2.2 FOREIGN CURRENCY
Foreign currency is stated at the U.S. dollar rate of exchange set by the
Argentine Central Bank, prevailing at the close of operations on the last
business day of each month.
Assets and liabilities valued in foreign currencies other than the US dollar
will be converted into U.S. dollars using the year end exchange rates issued by
the Argentine Central Bank's trading desk.
For financial reporting purposes, these assets and liabilities are then
translated into pesos at the year end U.S. dollar to Argentine peso exchange
rate.
2.3 GOVERNMENT AND CORPORATE SECURITIES
F-22
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
Government securities mainly represent obligations of the Argentine and U.S.
governments. Corporate securities included in this caption consist of listed
corporate equity securities and listed debt securities. Corporate equity and
debt securities are considered as held for trading purposes.
Realized and unrealized gains and losses on sales and interest income on
government and corporate securities are included as "Net Income from Government
and Corporate Securities" in the accompanying statements of operations.
VALUATION OF GOVERNMENT SECURITIES UNDER ARGENTINE BANKING GAAP
The Argentine Central Bank established the categories in which banks classify
Argentine government securities listed on local or foreign markets and the
accounting valuation for the securities in each of these categories. The
categories established by the Argentine Central Bank are the following:
"investment account" and "held for trading".
Trading securities are marked to market, and any difference between book value
and their market price is recognized as a gain or loss in the income statement.
Through Communique "A" 3278, the Argentine Central Bank established that,
effective June 1, 2001, the holdings incorporated as investment securities had
to be valued at their acquisition cost increased by accruing their internal rate
of return over the period elapsed since the date of inclusion of the securities
in the investment account category. If the aforementioned carrying value of the
security at the last day of each month is greater than the market value plus
20%, then the value of the security must be written down to the market value
plus 20%.
These holdings include BODEN 2012, received within the framework of Sections 28
and 29 of Decree 905/02 (see note 1) recorded at their cost plus accrued
interest. The treatment of the difference exceeding 20% between the market value
and the carrying value mentioned above does not apply to these securities. While
this valuation criterion is followed, no cash dividends may be distributed,
except for the amount of profits in excess of the difference between the
carrying value and the market value of these securities. If the position of
these securities and the balances receivable not used as collateral for the
subscription of the Hedge Bond which were included in "Other receivables
resulting from financial brokerage" had been stated at market value, a decrease
of Ps. 617,764 and Ps.1,648,530 would have been recorded in the shareholders'
equity at December 31, 2004 and 2003 respectively.
The securities BODEN 2005, 2007 and 2013 are considered trading securities and
they have been recorded at market value.
Effective January 7, 2003, Argentine Central Bank Communique "A" 3857 restricted
the possibility of classifying securities as holdings in investment accounts, to
those existing in the Bank's portfolio as of December 31, 2002.
Unlisted government securities are valued at cost plus income accrued up to the
end of the year, where applicable. The secured bonds in pesos have been valued
in accordance with Communique "A" 3911 and supplementary rules, as mentioned in
this Note, under section "National secured loans and provincial secured bonds".
A portion of the holdings of these bonds is used as collateral for financial
assistance from the Argentine Central Bank and will be used as collateral of the
Hedge Bond.
UNPAID AND PAST DUE US DOLLAR EXTERNAL NOTES
F-23
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
In order to meet its fiscal obligations under adverse domestic and international
capital market conditions, in May 2001 the Argentine Government issued a bond
named the "Patriotico" bond or External Notes, for a face value of US$ 1,000
million subsequently issued to finance Treasury Bills which fell due between
July and December 2001.
Subsequently, External Notes, defaulted as other Argentine Government foreign
debt.Therefore External Notes are eligible debt to be swap in the Argentine
Government restructuring.
In January 2005, the Bank accepted the foreign debt swap offered by the
Argentine Government. The offer enables the Bank to receive new instruments for
an original principal amount equal to 33.7% of the eligible debt, which is equal
to the unamortized principal at December 31, 2001, plus past due and unpaid
interest at that date.
Pursuant to Comunique "A" 4084, the Bank valued the External Notes at the
present value of the cash flow of the BOGAR reduced by the accrued interest
after December 31, 2001.
The face value External Notes to be exchanged for "Discount Bonds in Pesos" and
"GDP-linked marketable securities" issued under the conditions established by
the Argentine debt restructuring amounted to US$280,471.
In order to reduce the effect on banks balance sheets of participating in the
exchange offer, through Communique "A" 4270, the Argentine Central Bank allowed
the aforementioned "Peso-denominated Discount Bonds" and the "GDP-Linked Units"
to be recorded at the lowest of : (i) the carrying amount of the old debt in
accordance with the prevailing valuation rules Communiques "A" 4084 or (ii) the
total future nominal cash payments up to maturity specified by the terms of the
new securities. This valuation will be reduced in the amount of the perceived
service payments and accrued interest shall not be recognized.
NATIONAL SECURED LOANS AND PROVINCIAL SECURED BONDS
Within the framework of decree 1387/01, the Bank has participated in the
exchange of Argentine public debt securities and loans under the Promissory
Note/Bond program for new loans called Secured Loans. As established by article
20 of the above mentioned decree, the conversion was made at the face value, at
a rate of exchange of Ps. 1=US$ 1 and in the same currency as that of the
converted obligation.
Had the position of government securities classified in investment accounts and
presented for their exchange been valued under Argentine GAAP, shareholders'
equity would have decreased by Ps. 446,688 at the exchange date (November 6,
2001).
The Bank also participated in the restructuring of the provincial government
debt. Decree No. 1579/02 established a voluntary provincial government debt
exchange for bonds ("BOGAR") or loans (Promissory Notes) issued by the Fiduciary
Fund for the Provincial Development (FFDP) and secured by the tax revenue the
National Government shares with the provinces, for a term of 16 years and will
be amortized in 156 consecutive installments from March 4, 2005 at a fixed 2%
annual interest rate, adjusted by applying the CER. Such Decree also considered
the financial assistance granted to the Argentine provinces through loans to the
FFDP to be eligible for the exchange. This portfolio was not eligible under
Decree No. 1387/01 which had established the first exchange of government debt
for secured loans that took place in November 2001.
F-24
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
As provided in Section 3, subsection. k) of that Decree, the Bank had opted to
exchange the BOGAR to be received under the exchange for Promissory Notes.
Considering that this option will not be exercised in the near future, these
debt instruments have been disclosed in these financial statements under
Unlisted Government Securities at December 31,2004 and 2003.
Under Argentine Central Bank rules, secured loans, government securities not
subject to the minimum capital requirement to cover market risk (mainly
government securities not listed on stock exchanges), promissory notes and
secured bonds (Boden) issued by the FFDP for Provincial Development and other
financing to the public sector held in financial institutions' portfolios at
that date or that are added to it in the future, must be carried at the lower of
their "present value" and "technical value". The "present value" is defined as
the net present value of a cash flow structure, determined under contractual
conditions, and discounted at the rate set by the Argentine Central Bank of 3%
for the March-December 2003 period, 3.25% for the January-June 2004 period, then
increased monthly by 0.04 in the July- October 2004 period, by 0.05% in November
2004 and by 0.04% in December 2004, a rate of 3.50% having been applied to the
latter month. The "technical value" is the CER-adjusted principal amount of each
instrument under contractual conditions.
If the difference between the value arising as described in the preceding
paragraph (the lower of present value or technical value), and the theoretical
value (balances as of December 31, 2004, which include principal amounts net of
amortization, adjusted by applying the CER, where applicable, net of the
adjustment account mentioned above) is positive, it is reflected in an asset
adjustment account and, if negative, a loss should be recognized.
The Bank had charged Ps. 87,334 to results as of December 31, 2004 for this
item. In the previous year, application of this criterion led to the recognition
a loss of a Ps. 132,286 loss considering the adjustment to prior year results.
The assets to be used as collateral for the advance to be granted by the
Argentine Central Bank for the subscription of the bonds envisaged in Sections
10, 11 and 12 of Decree 905/02, ratified by Section 71 of Law 25827, have been
recorded at the value allowed for purposes of the creation of guarantees, as
called for by Communique "A" 3911 and supplementary rules. The figures for the
previous year have been modified for comparison purposes according to this
criterion.( See note 38)
The negotiable obligations issued by Galicia Uruguay have been valued at their
face value, plus accrued interest at period/year end.
The Bank's subordinated Negotiable Obligations due in 2019 have been added to
the Company's assets at 73% of their dollar-denominated face value, as resolved
by the Extraordinary Meeting of Shareholders held on January 2, 2004.
As of December 31, 2004, the Subordinated Negotiable Obligations due in 2019
have been valued on the basis of: (i) the original measurement of the asset,
(ii) the portion accrued on any difference between this measurement and the
amount receivable upon maturity, calculated exponentially at the internal rate
of return determined at the time of and on the basis of the initial measurement,
under the conditions previously agreed, and (iii) net of collections made.
2.4 LOANS TO THE NON-FINANCIAL PRIVATE SECTOR
F-25
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
On July 25, 2003, through Communique "A" 3987, the Argentine Central Bank
authorized financial institutions to grant loans adjustable by CER, for the
purpose of increasing peso-denominated loan origination, both medium-and-long
term.
The Argentine Congress enacted Law No. 25,796, which was sent to the National
Executive Branch for its promulgation. This Law amends Law No. 25,713,
establishing the application of the CVS for the index-adjustment of loans
subject to this coefficient until March 31, 2004. As from April 1, 2004 no
further adjustment index will be applied to financing previously subject to CVS
adjustment.
This Law also contemplates compensating financial institutions for the negative
effects on their equity derived from the application of the CER to all deposits
denominated in foreign currency and converted into pesos, and from the
application of the CVS to certain loans in accordance with the above-mentioned
regulations.
2.5 INTEREST INCOME (EXPENSE) RECOGNITION
Generally, interest income is recognized on an accrual basis using the linear
(effective interest) method. For loans and deposits denominated in pesos, with
maturities greater than 92 days, interest is recognized on a compounded basis,
which provides for an increasing effective rate over the life of the loan or
deposit.
The Bank suspends the accrual of interest generally when the related loan is
past due and the collection of interest and principal is in doubt. The
suspension of interest corresponds to the loans classified as "with problems"
and "deficient performance", or below under the Argentine Central Bank's
classification rules. Accrued interest remains on the Bank's books and is
considered to be part of the loan balance when determining the allowance for
loan losses. Interest is recognized on a cash basis after reducing the balance
of accrued interest, if applicable.
As indicated in Note 1, for lending and borrowing transactions originally
carried out in foreign currency and converted into pesos, the adjustment from
the application of the CER or the CVS was accrued at year end, where applicable.
2.6 ALLOWANCE FOR LOAN LOSSES AND PROVISION FOR CONTINGENCIES
The Bank provides for estimated future possible losses on loans and the related
accrued interest generally through the establishment of an allowance for loan
losses. The allowance charged to expense is determined by management based upon
loan classification, actual loss experience, current and expected economic
conditions, delinquency aging, and an evaluation of potential losses in the
current loan portfolio with specific attention to loans where any evidence that
may negatively affect the Bank's ability to recover the loan and accrued
interest is known.
Related to debtor's classification according to the execution grade, and
pursuant to Communique "A" 3918 of the Argentine Central Bank from March 31,
2003, to December 31, 2003, the loan loss reserve for debtors with total
indebtedness equal to or lower than Ps.5 million with all Argentine financial
institutions should be reserved exclusively based upon its past due performance.
The past due performance between, December 1, 2001 and March 31, 2003, should be
computed based on one day for every three days past due.
The Bank has been in process to restructure its loan protfolio for last three
years. As of December 31, 2004 this process is in its final stage.
F-26
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
The Group has certain contingent liabilities with respect to existing or
potencial claims, lawsuits and other proceedings, including those involving
labor and other matters.The Group accrues liabilities when it is probable that
future costs will be incurred and such costs can be reasonably estimated. Such
accruals are based on developments to date, the Group's estimates of the
outcomes of theses matters and the Group's lawyers' experience in contesting,
litigating and settling other matters. As the scope of the liabilities becomes
better defined, there may be changes in the estimates of future costs, which
could have a material effect on the Group's future results of operations and
financial condition or liquidity.
2.7 INVESTMENTS IN OTHER COMPANIES
Investments in Other Companies include equity investments in companies where a
minority interest is held, including investments in infrastructure companies and
utilities.
Under Argentine Banking GAAP, the equity method is used to account for
investments where a significant influence in the corporate decision making
process exists. Significant influence is considered to be present if one of the
following applies:
- Ownership of a portion of a related company's capital granting the voting
power necessary to influence the approval of such company's financial
statements and profits distribution.
- Representation in the related company's Board of Directors or corporate
governance body.
- Participation in the definition of the related company's policies.
- Existence of significant transactions between the company holding the
interest and the related company (for example, when the former is the
latter's only supplier or by far its most important client).
- Interchange of senior officers among companies.
- Technical dependence of one of the companies on the other.
Permanent equity investments in companies where corporate decision are not
influenced, in terms of the criteria listed above, are accounted for at the
lower of cost or share of net book value of the investee.
2.8 FIXED ASSETS AND MISCELLANEOUS ASSETS
Fixed assets and miscellaneous assets are valued at cost adjusted for inflation,
less accumulated depreciation.
Accumulated depreciation is computed, where appropriate, under the straight-line
method at rates over the estimated useful lives of the assets, which generally
are estimated to be 50 years for properties, 10 years for furniture and fixtures
and 5 years for others. Leasehold improvements are depreciated using the
straight-line method over the shorter of the lease term or the estimated useful
life of the asset.
The cost of maintenance and repairs is charged to expense as incurred. The cost
of significant renewals and improvements is added to the carrying amount of the
respective fixed assets. When
F-27
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
assets are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or los is
reflected in the consolidated statement of operations.
2.9 INTANGIBLE ASSETS
Intangible assets are valued at cost adjusted for inflation ( as described in
note 2.1)and are amortized on a straight-line basis over 120 months for goodwill
and over a range of 60 months for organization and development costs. Under
Argentine Banking GAAP, goodwill is no longer recognized as an asset when it is
estimated that amounts of future income will not be sufficient to absorb the
amortization of goodwill or when there are other reasons to presume that the
amount of an investment that has been made will not be recovered in full.
Effective March 2003, Argentine Central Bank Communique "A" 3916 established
that the difference resulting from compliance with court decisions in connection
with "amparo claims", should also be recorded under this caption, the
amortization of which should take place in a maximum of 60 equal, monthly and
consecutive installments as from April 2003 (See Note 1).
2.10 SHAREHOLDERS' EQUITY
Shareholders' Equity accounts have been adjusted for inflation following the
procedure described in note 2.1, except for "Capital Stock" and "Paid in
Capital" accounts, which have been stated at their original values. The
adjustment stemming from the restatement of these accounts was allocated to the
"Inflation adjustments to capital stock and paid in capital" account.
Income and expense accounts have been restated.
Monetary results of exposure to inflation were determined as follows:
a. "Monetary result of financial brokerage" includes the result of exposure
to inflation generated by assets and liabilities related to the usual
period of finance intermediation activity between the supply and demand of
financial resources.
b. "Monetary result of operating expenses" includes the result of exposure to
inflation generated by monetary assets and liabilities in pesos, related
to administrative expenses, pursuant to Argentine Central Bank Communique
"A" 3702.
c. "Monetary result of other operations" includes the result of exposure to
inflation generated by assets and liabilities not related to the financial
brokerage activity.
The income statement and statement of changes in shareholders' equity have
been disclosed in accordance with Communique "A" 3800 of the Argentine
Central Bank.The Bank absorbed the loss for the fiscal year 2002, up to
the limit of the balances of the retained earnings and the unrealized
valuation difference arising from the net foreign currency position
accounts.
2.11 PRESUMPTIVE MINIMUM INCOME TAX AND INCOME TAX
Effective 1998 and for a ten year period, a presumptive minimum income tax
(PMIT) was established as a complementary component of income tax obligation.
PMIT is a minimum taxation, which assesses at the tax rate of 1% of certain
assets. Ultimately, the tax obligation will be the highest of PMIT and income
tax. For financial entities, the taxable basis is 20% of their
F-28
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
computable assets. If in a fiscal year, the PMIT obligation exceeds the income
tax liability, the surplus will be available as a credit against future income
tax.
The Bank has recognized the tax on minimum notional income accrued in the
current year and paid in prior years as a credit, because it expects to be able
to compute it as a payment on account of income tax in future years.
Futhermore, during 2004 and 2003, the Bank incurred in tax losses. Therefore,
the Bank was required to pay PMIT.
Recognition of this payment on the Bank's account and its recoverability arises
from the ability to generate sufficient taxable income in future years. Based on
projections prepared in conformity with the provisions of Argentine Central Bank
Communique "A" 4111 and supplementary rules, the Group recorded an asset related
to the PMIT amounting to 138,010.
Below is a detail of the Bank's tax credits and their probable offsetting
date:
Tax credit Date of generation Probable offsetting date
11,702 2001 2010
38,765 2002 2010
40,146 2003 2010/2011
25,299 2004 2011
In addition, as of December 31, 2004, Tarjetas Regionales S.A. records an assets
for PMIT for Ps. 20,020, while as of December 31, 2003 it amounted to Ps.
12,561.
Beginning in fiscal year 2003, Grupo Galicia and its non-bank subsidiaries
adopted the deferred tax method.
2.12 STATEMENTS OF CASH FLOWS
The consolidated statements of cash flows were prepared using the measurement
methods prescribed by the Argentine Central Bank, but in accordance with the
presentation requirements of Statement of Financial Accounting Standards No. 95:
Statement of Cash Flows ("SFAS No. 95"). SFAS 95 establishes specific
presentation requirements and additional disclosures but does not provide
guidance with respect to the inflation adjustment of financial statements. The
effect of inflation restatements and foreign exchange gains and losses on cash
flows related to financing and operating activities has been included in the
line items "Monetary Loss" and "Unrealized foreign exchange gain/ (loss)",
respectively, and the effect of inflation on cash balances has been included in
a separate line item after cash flows from investing activities.
3. RESTRICTED ASSETS
In accordance with Argentine Central Bank regulations, the Bank is required to
maintain average monthly assets. Those assets computable for compliance with
minimun cash requirements are cash and Argentine Central Bank accounts.
The required daily averages calculated on a monthly basis for the month ending
on each balance sheet date were as follows:
F-29
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
DECEMBER 31,
------------------------------------
2004 2003
----------------- -----------------
Peso balances.......................... Ps. 738,056 Ps. 445,143
Foreign currency balances.............. 367,582 319,192
Certain of the Group's other assets are pledged or restricted from use under
various agreements. The following assets were restricted at each balance sheet
date:
DECEMBER 31,
----------------------------------
2004 2003
----------------- ---------------
Funds and securities pledged under various arrangements.............. Ps. 190,681 Ps. 295,814
Share on equity investments (*) .................................... 24,094 51,554
Deposits in the Argentine Central Bank, frozen under Argentine
Central Bank regulations............................................. 2,018 4,277
Loans granted as collateral.......................................... 5,890,424 5,848,789
Loans pledged and Real property as collateral-Banco Galicia Uruguay
S.A.(**)............................................................. 607,274 821,777
----------------- ---------------
Total................................................................ Ps. 6,714,491 Ps. 7,022,211
================= ===============
(*) Shares the transferability of which is subject to the prior approval of the
National or Provincial authorities, as applicable, under the terms of certain
concession contracts signed.
(**) At the request of creditors of Galicia Uruguay, a restraining order has
been issued enjoining this entity from disposing of its real property. Under a
security interest agreement signed on July 24, 2003 and registered with the
Registry of Movable Property - Pledge Division - Montevideo - Uruguay, on August
5, 2003, the rights to collect debts from all debtors have been pledged as
collateral in favor of the holders of transferable time deposit certificates
and/or negotiable obligations issued in compliance with the debtor restructuring
plan approved. All of the Banco Galicia Cayman Limited's (in provisional
liquidation) assets will be administred by the liquidators for the benefit of
creditors until the restructuring plan is complete.
The Bank has granted a senior pledge on all its shares in Correo Argentino S.A.,
in favour of the International Finance Corporation (the "IFC"), the
Inter-American Development Bank (the "IDB") and a syndicate of local finance
institutions, as collateral for financing granted to that company. The Argentine
Central Bank through Resolution No. 408 dated September 9, 1999 authorized this
transaction. Under the sponsorship contract, the Bank is liable for 14,53% of
the financial debt held by Correo Argentino S.A. with its financial creditors,
in the event of an early termination of the concession for any reason or title,
including bankruptcy.
On November 19, 2003, the national government rescinded the concession contract
awarded to Correo Argentino S.A.. On December 16, 2003, this company was
declared bankrupt. This was not a final judgment, so it has been appealed. On
October 27, 2004, the appeals Court sustained the claim filed by the Correo
Argentino S.A., leaving without effect the declaration of bankruptcy and
converting the proceeding into a Cram down process, pursuant to Section 48 of
the Insolvency and Bankruptcy Law.
The Bank has made a provision for the amount it estimates it will be required to
pay for this contingency.
On March 25, 2004, the guarantee for Ps. 7,265 provided in favour of the
national government as security for compliance with the concession of Correo
Argentino S.A. was called. The related claim was proved as a possible claim in
the reorganization proceedings involving Correo
F-30
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
Argentino S.A. The claim had been fully covered by an allowance. The Bank paid
the guarantee under the conditions established by the National Communications
Commission. Notice of this payment was given in the Correo Argentino S.A.
reorganization proceedings.
Both the investment and the receivables have been written off from assets.
The Bank, as a shareholder of Aguas Argentinas S.A., Aguas Provinciales de Santa
Fe S.A. and Aguas Cordobesas S.A., together with the other shareholders has
committed to provide financial support to these companies if they are unable to
fulfill the commitments they have undertaken with international creditors.
The Inter-American Development Bank ("IDB") requested that the shareholders of
Aguas Argentinas S.A. and Aguas Provinciales de Santa Fe S.A. grant loans to
those companies. In February 2003 and July 2004, assistance was granted to Aguas
Argentinas S.A. in the amount of US$ 598 and US$ 6,300, respectively. On
November 5, 2003 a loan equivalent to US$ 329 was granted to Aguas Provinciales
de Santa Fe S.A., under the terms of the contract signed with the IFC.
Since November 2004, the Bank has been negotiating a contribution of funds in
Aguas Provinciales de Santa Fe S.A. with the IDB and the International Finance
Corporation ("IFC"), within the framework of the commitments undertaken as a
shareholder.
Furthermore, in the event of an early termination of the concession contracts,
under the terms thereof, the Bank and the other shareholders have guaranteed the
IDB, European Investment Bank and the IFC the pro rata collection of the
financial assistance due from Aguas Argentinas S.A., Aguas Provinciales de Santa
Fe S.A. and Aguas Cordobesas S.A., as the case may be.
These guarantees have been recognized under Memorandum Accounts - Credit -
Contingencies.
On the basis of information as of at December 31, 2004, the Bank has recognized
a reserve for the amount it estimates it will have to pay for these
contingencies.
At the date these financial statements were prepared, Aguas Argentinas S.A. was
still carrying out negotiations in relation to its activities with the Argentine
Government. It is not possible to estimate the future development of those
negotiations and the consequent effects on the Bank, although this matter is
being regularly followed studied and analyzed by management of the Bank.
In addition, as of December 31, 2004 the Bank recorded Ps. 208,921 for Direct
Obligations to cover the commitments undertaken under the contracts for the
transfer and/or sale of portfolio signed with Galicia Creditos Hipotecarios
Financial Trust and Citibank NA, Buenos Aires Branch. Under the terms of those
contracts, in the event of default the Bank undertakes to repurchase and/or
replace the loans transferred with other loans of similar characteristics.
4. INTEREST-BEARING DEPOSITS WITH OTHER BANKS
At December 31, 2004 and 2003, the overnight foreign bank interest-bearing
deposits included in loans amounting to Ps.379,192 and Ps.172,360, respectively.
5. GOVERNMENT AND CORPORATE SECURITIES
F-31
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
The government and corporate securities classification set forth below was
determined in accordance with Argentine Banking GAAP.
Government and corporate securities consist of the following at the respective
balance sheet dates:
DECEMBER 31,
---------------------------
2004 2003
------------- -------------
Government Securities
Quoted:
Carried at market value
Held for trading purposes:
Government Bonds........................................ Ps. 31,488 Ps. 15,030
Argentine Treasury Bonds................................ 5,268 2,355
Others.................................................. 349 1,325
Less: Provision for devaluation......................... (346) (341)
------------- -------------
Total trading securities..................................... Ps. 36,759 Ps. 18,369
------------- -------------
Carried at amortized cost
Held for investment purposes
Government Bonds (Boden 2012)........................... 601,264 1,609,982
------------- -------------
Total investment securities.................................. Ps. 601,264 Ps. 1,609,982
------------- -------------
Securities issued by the Argentine Central Bank..............
Lebac quoted............................................ 456,359 309,201
Lebac unquoted.......................................... 52,185 -
------------- -------------
Total Securities issued by the Argentine Central Bank....... Ps. 508,544 Ps. 309,201
------------- -------------
Unquoted
Fiscal Credit Certificate (*) .......................... 78,232 78,575
Government Bonds........................................ 3,543,751 3,550,023
Argentine Treasury Bonds................................ 749,729 840,228
Others.................................................. 4 703
Less: Provision for devaluation......................... (272) -
------------- -------------
Total 4,371,444 4,469,529
============= =============
Unlisted securities..........................................
Total government securities.................................. Ps. 5,518,011 Ps. 6,407,081
============= =============
Corporate Securities
Negotiable obligations (Listed)......................... 16,086 2,950
Less: Provision for devaluation ........................ - (1,766)
------------- -------------
Total corporate securities................................... Ps. 16,086 Ps. 1,184
============= =============
Total government and corporate securities.................... Ps. 5,534,097 Ps. 6,408,265
============= =============
(*) Government securities collateralized by future tax payments.
6. LOANS
The lending activities of the Bank consist of the following:
- Loans to the non-financial public sector: loans to the federal and provincial
governments of Argentina.
- Loans to the financial sector: loans to banks and financial entities.
- Loans to the non-financial private sector and residents abroad: include the
following types of lending:
Overdrafts - short-term obligations drawn on by customers through overdrafts.
F-32
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
Notes - endorsed promissory notes, discounted and purchased bills and
factored loans.
Mortgage loans - loans to purchase or improve real estate and
collateralized by such real estate or commercial loans secured by real
estate.
Pledge loans - loans where collateral is pledged as an integral part of
the loan document.
Credit card loans - loans to credit card holders.
Consumer loans - loans to individuals.
Others - includes mainly short-term placements in foreign banks.
Under Argentine Banking GAAP, the Group must disclose the breakdown of the loan
portfolio by non-financial public sector, financial sector and non-financial
private sector and residents abroad. Additionally, the type of guarantee on
non-financial private sector loans, which corresponds to the type of collateral,
pledged on the loans (preferred guarantees relate to a recorded right of first
lien), is also required to be disclosed. The classification of the loan
portfolio in this regard was as follows:
DECEMBER 31,
-----------------------------
2004 2003
------------ -------------
Non-financial public sector............................. Ps. 4,558,873 Ps. 4,323,279
Financial sector (Argentine) ........................... 150,530 194,692
Non-financial private sector and residents abroad 4,361,393 4,165,829
- With preferred guarantees......................... 1,190,024 1,228,811
- With oher guarantees.............................. 601,513 697,781
- Unsecured......................................... 2,569,856 2,239,237
------------- -------------
9,070,796 8,683,800
------------- -------------
Allowance for loan losses (See Note 7).................. (632,619) (1,177,315)
------------- -------------
Total................................................... Ps. 8,438,177 Ps. 7,506,485
============= =============
The Bank also records its loan portfolio by industry segment. The following
industry segments comprised the most significant loan concentrations at December
31, 2004 and 2003, respectively:
DECEMBER 31,
-------------
2004 2003
----- -----
Financial services industry........ 5,87% 4,12%
Public sector...................... 50,26% 49,79%
Agriculture and livestock.......... 5,72% 4,49%
Consumer........................... 15,82% 14,49%
The Bank granted loans to the Bank's related parties including related officers
and consolidated companies. Total loans outstanding at December 31, 2004 and
2003, amounted Ps.44,329 and Ps. 90,967 respectively, and the change from
December 31, 2003 to December 31, 2004 reflects payments amounting to Ps.43,041
and advances for Ps. 4,564. Furthermore, there were CER adjustments and foreign
exchange differences of Ps. 8,161 on the above-mentioned portfolio between those
dates.
On July 18, 2003, the Group granted Banco de Galicia (Cayman) Limited a loan for
US$1,200.
F-33
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
Such loans were made in the ordinary course of business at normal credit terms,
including interest rate and collateral requirements, and, in management's
opinion, such loans represent normal credit risk.
7.ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the fiscal years ended
December 31, 2004, 2003 and 2002, was as follows:
DECEMBER 31,
-------------------------------------------
2004 2003 2002
------------ ------------ ------------
Balance at beginning of year................................... Ps. 1,177,315 Ps. 1,681,836 Ps. 1,050,283
Provision charged to income.................................... 179,335 217,057 1,599,518
Prior allowances reverse ...................................... (210,284) (402,049) -
Inflation and foreign exchange effect and other adjustments.... 7,580 (52,230) (662,263)
Loans charged off.............................................. (521,327) (267,299) (305,702)
Balance at end of year......................................... Ps. 632,619 Ps. 1,177,315 Ps. 1,681,836
The inflation effect represents the monetary gain from incurring in an allowance
for loan losses restated in constant pesos of February 28, 2003.
Certain loans, principally small loans, are charged directly to income and are
not reflected in the activity in the allowance for loan losses. The "Loan loss
provision" in the accompanying statements of operations includes:
DECEMBER 31,
--------------------------------------
2004 2003 2002
----------- ----------- -------------
Provisions charged to income................. Ps. 179,335 Ps. 217,057 Ps. 1,599,518
Direct charge-offs........................... 8,951 14,020 16,123
Other receivables losses..................... 993 52,913 30,249
Financial leases............................. 953 2,438 2,686
----------- ----------- -------------
Ps. 190,232 Ps. 286,428 Ps. 1,648,576
=========== =========== =============
Prior year allowances that have been reversed in 2004 and 2003 in the amount of
Ps. 210,284 and 402,049 are included under the caption "Miscellaneous Income" in
the accompanying income statement.
The Bank has entered into certain troubled debt restructuring agreements with
customers. The Bank eliminates any differences between the principal and accrued
interest due under the original loan and the new loan amount through a charge
against the allowance for loan losses. Loans
F-34
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
under such agreements amounted to Ps. 231,855 , Ps. 92,148 and Ps.44,862 at
December 31, 2004, 2003 and 2002, respectively.
8. OTHER RECEIVABLES RESULTING FROM FINANCIAL BROKERAGE
The composition of other receivables from financial brokerage, by type of
guarantee, is as follows:
DECEMBER 31,
-----------------------------
2004 2003
------------- -------------
Preferred guarantees, including deposits with
The Argentine Central Bank.......................... Ps. 91,735 Ps. 72,847
Other guarantees.................................... 1,009 2,423
Unsecured (1) (2) .................................. 6,632,655 6,121,442
Less: Allowance for doubtful accounts.............. (27,711) (102,008)
------------- -------------
Ps. 6,697,688 Ps. 6,094,704
============= =============
(1) Includes Ps. 4,732,288 and Ps. 4,629,595 as of December 31, 2004 and 2003,
respectively, of "Compensation to be received from the National
Government".
(2) Includes Ps. 326,455 of reverse repos of Boden 2012.
As of December 31, 2004 and 2003 the Company did not have any outstanding
forward contracts.
The breakdown of the caption "other" included in the balance sheet was as
follows:
DECEMBER 31,
---------------------------
2004 2003
------------- -------------
Mutual funds......................................... Ps. 35,108 Ps. 24,052
Galtrust I .......................................... 665,102 646,143
Other financial trust participation certificates..... 492,434 430,703
Accrued commissions.................................. 14,411 12,441
Others............................................... 317,538 280,002
------------- -------------
Ps. 1,524,593 Ps. 1,393,341
============= =============
9. EQUITY INVESTMENTS IN OTHER COMPANIES
The Bank accounted for its investment in Banelco S.A under the equity method.
The remaining investments have been accounted for under the cost plus dividend
method.
Equity investments in other companies held by the Bank consisted of the
following at the respective balance sheet dates:
DECEMBER 31,
------------------------
2004 2003
----------- ----------
IN FINANCIAL INSTITUTIONS, SUPPLEMENTARY AND AUTHORIZED
ACTIVITIES
Banelco S.A............................................................... Ps. 4,972 Ps. 5,605
Visa Argentina S.A........................................................ 951 951
Mercado de Valores de Buenos Aires S.A.................................... 6,920 6,186
F-35
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
Banco Latinoamericano de Exportaciones S.A................................ 1,542 1,542
Other..................................................................... 2,255 2,260
----------- -----------
TOTAL FINANCIAL INSTITUTIONS, SUPPLEMENTARY AND
AUTHORIZED ACTIVITIES..................................................... Ps. 16,640 Ps. 16,544
----------- -----------
IN NON-FINANCIAL INSTITUTIONS
Aguas Argentinas S.A...................................................... Ps. 23,370 Ps. 23,370
Inversora Diamante S.A.................................................... 12,944 12,944
Inversora Nihuiles S.A.................................................... 15,750 15,750
Electrigal S.A............................................................ 5,455 5,455
Aguas Provinciales de Santa Fe S.A........................................ 10,771 10,771
A.E.C. S.A................................................................ 6,139 6,139
Aguas Cordobesas S.A...................................................... 8,911 8,911
Correo Argentino S.A...................................................... - 27,460
Caminos de la Sierra S.A.................................................. - 4,428
Tradecom International N.V................................................ 8,040 9,798
Other..................................................................... 3,723 3,355
----------- -----------
TOTAL IN NON-FINANCIAL INSTITUTIONS....................................... Ps. 95,103 Ps. 128,381
----------- -----------
ALLOWANCES................................................................ Ps. (28,924) Ps. (57,858)
----------- -----------
TOTAL EQUITY INVESTMENTS IN OTHER COMPANIES............................... Ps. 82,819 Ps. 87,067
=========== ===========
F-36
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
10. FIXED ASSETS AND INTANGIBLE ASSETS
The major categories of Grupo Galicia's premises and equipment and accumulated
depreciation, as of December 31, 2004 and 2003 were as follows:
DECEMBER 31,
-------------------------
2004 2003
----------- -----------
Land and buildings............. Ps. 553,384 Ps. 551,755
Furniture and fixtures......... 127,135 125,518
Machinery and equipment........ 198,091 195,029
Vehicles....................... 407 440
Others......................... 6,050 6,186
Accumulated depreciation....... (395,885) (361,396)
----------- -----------
Ps. 489,182 Ps. 517,532
=========== ===========
Depreciation expenses of the years ended December 31, 2004, 2003 and 2002, was
Ps.38,091, Ps. 50,542 and Ps. 63,357, respectively.
The major categories of intangible assets as of December 31, 2004 and 2003 were
as follows:
DECEMBER 31,
-----------------------
2004 2003
---------- ----------
Goodwill, net of accumulated amortization of Ps. 154,214 and Ps.135,718,
respectively.................................................................. Ps. 115,080 Ps. 139,681
Organization and development expenses, net of accumulated amortization
of Ps.239,402 and Ps.198,267 respectively..................................... 71,496 100,356
Legal actions related to the payment of deposits ("amparo claims"), net of
accumulated amortization of Ps.198,890 and Ps. 77,880 respectively (see
Note 2.9)..................................................................... 451,428 487,020
----------- -----------
Ps. 638,004 Ps. 727,057
=========== ===========
Total amortization expenses of the years ended December 31, 2004, 2003 and 2002,
was Ps.193,744, Ps.163,390 and Ps.168,622, respectively.
Organization and development expenses included software and the related
implementation services purchased from third parties, with a net book value of
Ps. 63,309 and Ps.86,055 at December 31, 2004 and 2003, respectively.
The table below shows the components of goodwill by type of activity for the
periods presented.
DECEMBER 31,
-----------------------
2004 2003
---------- -----------
Investment............................ Ps. 5,096 Ps. 9,153
Banking............................... 70,731 81,740
Regional Credit Card companies........ 39,253 48,788
----------- -----------
Ps. 115,080 Ps. 139,681
=========== ===========
F-37
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
11. MISCELLANEOUS ASSETS
Miscellaneous assets consisted of the following as of December 31, 2004 and
2003:
DECEMBER 31,
-----------------------
2004 2003
---------- ----------
Construction in progress.................. Ps. 77,088 Ps. 66,831
Deposits on fixed asset purchases......... 3,153 1,284
Stationery and supplies................... 2,654 2,254
Real estate held for sale................. 12,835 28,493
Assets acquired through foreclosures...... 5,020 -
Others.................................... 59,283 59,236
Ps. 160,033 Ps. 158,098
12. OTHER ALLOWANCES AND RESERVES
Allowances on other assets and reserves for contingencies were as follows:
DECEMBER 31,
------------------------
2004 2003
---------- ----------
Allowances against asset accounts:
Government and Corporate securities............................................ Ps. 618 Ps. 2,107
Other receivables resulting from financial brokerage, for collection risk (a).. 27,711 102,008
Assets under financial leases (a).............................................. 2,493 4,806
Equity investments in other companies (b)...................................... 28,924 57,858
Miscellaneous receivables, for collection risk (a)............................. 36,911 54,277
Reserves for contingencies:
For severance payments (c)..................................................... 2,551 1,413
Litigations (d)................................................................ 27,230 19,329
Related to commitments undertaken with public services companies (e)........... 83,909 92,000
Claims related to pesification disputes and other contingencies (f)............ 375,442 209,611
Sundry liabilities arising from credit card activities (g)..................... 8,543 20,542
Other commitments (h).......................................................... 20,131 46,066
----------- -----------
Total reserves for contingencies............................................... Ps. 517,806 Ps. 388,961
=========== ===========
(a) Based upon an assessment of debtors' performance, economic and financial
situation and the guarantees collateralizing their respective transactions.
(b) Includes the estimated losses due to the excess of the cost plus dividend
method over the equity method in non-majority owned equity investments.
(c) Estimated amounts payable under labor lawsuits filed against the Bank by
former employees.
(d) Litigation arising from different types of claims from customers (e.g.,
claims for thefts from safe deposit boxes, the cashing of checks that have been
fraudulently altered, discrepancies in deposits and payments services that the
Bank renders, etc).
(e) See note 3 - Restricted Assets.
(f) Includes allowances for Ps.230,944 and 180,000 as of December 2004 and 2003
respectively, to cover the probable effect of an unfavorable resolution of
matters challenged by the Argentine Central Bank related to the amounts due for
Compensatory and Hedge Bonds. In April 2005, the
F-38
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
Bank settleted the total amount of the bonds to be received of Compensation and
Hedge Bond for US$ 2,178,030.
(g) Reserves for rewards to be given under a credit card reward program, for a
guarantee of credit card receivables and for the estimated liability for the
insurance of the payment of credit card balances in the event of the death of
the credit card holder.
(h) Represents contingent commitments in connection with customers classified in
categories other than the "normal" categories under Argentine Banking GAAP.
13. OTHER LIABILITIES RESULTING FROM FINANCIAL BROKERAGE- ARGENTINE CENTRAL BANK
The Bank borrows funds under various credit facilities obtained from the
Argentine Central Bank for specific purposes as follows:
DECEMBER 31,
---------------------------
2004 2003
------------- -------------
DESCRIPTION
Contractual Long-term liabilities:
Advance for the acquisition of national government bonds in U.S. Dollars (*)... Ps. 2,571,125 Ps. 2,442,849
Argentine Central Bank's financial assistance (*).............................. 5,321,697 5,579,978
------------- -------------
Total long-term liabilities......................................................... Ps. 7,892,822 Ps. 8,022,827
Contractual Short-term liabilities:
Other Central Bank Obligations................................................. 986 777
------------- -------------
Total short-term liabilities........................................................ Ps. 986 Ps. 777
------------- -------------
Accrued interest(**)................................................................ 165,742 109,298
------------- -------------
Ps. 8,059,550 Ps. 8,132,902
============= =============
(*) See Note 1 "Treatment of extraordinary assistance to financial
institutions by the Argentine Central Bank"
(**) Advance for the purchase of the hedge bond accrued interest was Ps.149,618
and Ps.93,297 at December 31, 2004 and 2003, respectively. The maturity of
this advance will be determined when the Hedge Bond is received.
As of December 31, 2004, maturities of the Argentine Central Bank's liquidity
loans for each of the following five fiscal years and thereafter are as follows:
F-39
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
2005.............................................................. 339,991
2006.............................................................. 383,122
2007.............................................................. 431,718
2008.............................................................. 486,473
2009.............................................................. 2,233,669
Thereafter........................................................ 1,446,724
-------------
Ps. 5,321,697
=============
14. OTHER LIABILITIES RESULTING FROM FINANCIAL BROKERAGE- BANKS AND
INTERNATIONAL ENTITIES, AND LOANS FROM DOMESTIC FINANCIAL INSTITUTIONS
The Bank also borrows funds under different credit arrangements from local and
foreign banks and international lending agencies as follows:
DECEMBER 31,
--------------------------
2004 2003
----------- ------------
DESCRIPTION
BANK AND INTERNATIONAL ENTITIES
Contractual Long term liabilities:
Compania Interamericana de Inversiones.......................... Ps. - Ps. 203,844
International Finance Corporation (I.F.C.)...................... - 909,230
Nederlands Financierings Maatschappij Voor Ontwikkeling Slande
N.V (F.M.O.).................................................... - 56,588
Other foreign banks............................................. - 334,062
Restructure Loans
2010 floating rates bank loans (i).............................. 137,378
2014 floating rates bank loans (ii)............................. 256,181
2014 floating rates bank loans (iii)............................ 280,543
2019 floating rates bank loans (iv)............................. 35,279
Trade A(v)...................................................... 32,574 -
Ex New York Branch.............................................. 30,233 -
Other lines of foreign banks.................................... 205 -
----------- -------------
Total long-term liabilities.............................. Ps. 772,393 Ps. 1,503,724
Contractual Short-term liabilities:
Other lines of credit from foreign banks........................ - 1,231,756
----------- -------------
TOTAL BANKS AND INTERNATIONAL ENTITIES...................................... Ps. 772,393 Ps. 2,735,480
----------- -------------
DOMESTIC AND FINANCIAL INSTITUTIONS
Contractual Long term liabilities:
BICE (Banco de inversion y Comercio Exterior) .................. 75,978 106,404
Other lines of domestic banks................................... - 307
----------- -------------
Total long term liabilities ............................. Ps. 75,978 Ps. 106,711
Contractual Short-term liabilities:
BICE (Banco de inversion y Comercio Exterior)................... 38,586 -
Other lines of credit from domestic banks....................... 76,631 25,052
----------- -------------
TOTAL DOMESTIC AND FINANCIAL INSTITUTIONS................................... Ps. 191,195 Ps. 131,763
----------- -------------
TOTAL....................................................................... Ps. 963,588 Ps. 2,867,243
=========== =============
F-40
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
Accrued interest on the above liabilities was Ps. 27,372, and Ps.282,746 at
December 31, 2004 and 2003, respectively, which are included in "Others" under
the caption "Other Liabilities Resulting from Financial Brokerage" in the
accompanying balance sheet.
Loans from Banco de Inversion y Comercio Exterior (BICE) for financing
investment projects, increasing the export capacity and financing the Global
Multisectorial Credit Program carry interest at floating rates for approximately
6.3% for loans in dollars with maturity of 4 years and CER + 4% for borrowing in
pesos, with maturities ranging between 1 and 7 years.
The remaining long term debt of Ps. 772,393 corresonds mainly to the
restructured New York branch debt of Ps 30.233 and the foreign restructured debt
completed in May 2004. The restructuring exchanged previous loans with CII, IFC,
FMO and others foreign Banks, bearing between 4.25% and 6.12%, and maturities
mainly between 2002 and 2008 to the following obligations
(i) Ps. 137.378 Libor plus 350 basis points loans due in 2010 with
bianually payments, standing from July 1st. , 2006.
(ii) Ps. 256.181 Libor plus 85 basis points loans due in 2014 with
bianually payments starting from January 1, 2010.
(iii) Ps. 280.543 interest rate step up loans due in 2014 with bianually
payments, starting from July,1st, 2010. The interest rate will
increase 100 basis points annually starting with 3% in 2004, through
7% in 2008 and thereafter:
(iv) Ps. 35.279 Libor plus 578 basis points loans due in 2019 with a
bullet payment.
(v) Ps. 32,574 Trade "A" bearing interest at Libor plus 100 basis
points, due in May 2005 with monthly payments starting from June
2004.
Short term liabilities do not include repo with Boden 2012, face value of U$S
125.0 million, with a one year maturity, but with the option from the creditor
to renew for another year.
As of December 31, 2004, maturities of the above long-term loans for each of the
following five fiscal years and thereafter were as follows:
2005............... 70,997
2006............... 50,687
2007............... 61,417
2008............... 39,095
2009............... 36,057
Thereafter......... 590,118
-----------
Ps. 848,371
===========
As of December 31, 2004 and 2003, the Bank did not have any unused lines of
credit.
15. OTHER LIABILITIES RESULTING FROM FINANCIAL BROKERAGE - NEGOTIABLE
OBLIGATIONS
The Board of Directors is authorized to determine all of the conditions of each
issuance of negotiable obligations, including timing, currency, price, manner
and payment terms. The amounts outstanding and the terms corresponding to
outstanding negotiable obligations at the dates indicated were as follows:
F-41
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
DECEMBER 31, (1)
ANNUAL -----------------------------
INTEREST
MATURITY RATE 2004 2003
-------- -------- ------------- -------------
LONG-TERM LIABILITIES:
5th Series Floating Rate Notes Due 2005 - - Ps. - Ps. 31,213
(Semi-annual interest, principal payable every six
months)...................................................
4th Series Floating Rate Notes Due 2005 2005 4.00% 2,399 130,077
(Semi-annual interest, principal payable every six
months)...................................................
9% Notes Due 2003 2003 9.00% 34,649 565,987
(Semi-annual interest, principal payable at maturity).....
Step Up Floating Rate Notes Due 2002 - - - 413,846
(Semi-annual interest, principal payable every year
beginning in August, 2005)...................................
6th Series 7.875% Notes Due 2007 2007 7.88% 216,049 213,038
(Semi-annual interest, principal payable every year
beginning in August, 2005)...................................
7th Series Floating Rate Notes Due 2007 2007 5.15% 128,449 126,591
(Semi-annual interest, principal payable at maturity).....
Banco Galicia - Due 2010- Libor +350 PB 2010 5.44% 1,035,295 -
(Semi-annual interest payments)..............................
Banco Galicia Uruguay S.A. Unsubordinated Various Various 556,430 902,686
(restructure deposits).......................................
(Anual interest payments and year principal amortization)
Banco Galicia - Due 2014 2014 3.00% 1,361,999 -
(Semi - annual interest payments)............................
Banco Galicia - Subordinated Due 2019 2019 11.00% 380,077 -
(Semi-annual interest payments and a bullet principal
payment)
------------- -------------
Total long-term liabilities Ps. 3,715,347 Ps. 2,383,438
============= =============
F-42
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
SHORT-TERM LIABILITIES:
Tarjetas del Mar
(Fixed Interest, principal payable at
maturity)............. ................................ 2002 14.92% Ps. 10 Ps. 494
Tarjeta Naranja
(Fixed Interest, principal payable at
maturity)............. ................................ 2002 16.46% - 2,709
Tarjetas Cuyanas
(Fixed Interest, principal payable at
maturity)............. ................................ 2005 8.00% 13,372 6,268
------------- -------------
Total short-term liabilities........................... 13,382 9,471
------------- -------------
Ps. 3,728,729 Ps. 2,392,909
============= =============
(1) Only principal, except Subordinated Obligations including interests for Ps.
20,096
As of December 31, 2004, Interest and principal on all of the above debt
securities are payable in U.S. dollars except of Tarjetas del Mar and Tarjetas
Cuyanas which are payable in Pesos.
Accrued interest on the above liabilities for Ps. 73,783 and Ps.172,611 at
December 31, 2004 and 2003, respectively, was included in "Others" under the
caption "Other Liabilities Resulting from Financial Brokerage " in the
accompanying balance sheet.
Long term Negotiable Obligations are as follow:
(i) Ps. 216,049 of fixed rate debt and Ps. 128,449 of floating rate debt,
corresponding to the bank's former New York branch restructured debt
(ii) Ps. 37,048 of "hold out" debt corresponding to "9% notes due 2003" and
"4th series floating rate notes due 2005".
(iii) Ps. 556,430 of Uruguay negotiable obligations issued to restructure
deposits , due 2005, 2008 y 2011.
(iv) Ps. 1,035,295 and Ps. 1.361,999 of the Bank reestructured foreign debt,
due 2010 and 2014 respectively.
(v) Ps. 380.077 of debt issued as subordinated negotiable obligations, due
2019, corresponding to the Bank's restructured foreign debt.
The obligations assumed under conditions of above items (iv) and (v), correspond
to exchanged debt from International Entities (IFC, IIC and FMO), which original
range of interest rates were between 3.25% and 5.56%, and its maturity was
between 2002 and 2009, and holders of prior issues, with interest rates between
4% and 9%.
Long-term negotiable obligations as of December 31, 2004 mature as follows:
Hold Outs................................... 37,048
223,262
2005........................................
2006........................................ 312,834
2007........................................ 442,246
2008........................................ 328,005
2009........................................ 337,998
Thereafter.................................. 2,033,954
-------------
Total....................................... Ps. 3,715,347
=============
F-43
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
16. DIRECTORS' AND SYNDICS' FEES
The breakdown of the caption "Directors' and Syndics' Fees" in the income
statement is as follows:
DECEMBER 31,
----------------------------
2004 2003 2002
-------- -------- --------
GFG directors' fees.................................. Ps. 80 Ps. - Ps. 77
GFG syndics'fees..................................... 169 123 77
Banco Galicia directors' administrative fees......... 260 200 1,984
Banco Galicia syndics' fees.......................... 425 410 390
Subsidiary companies directors' and syndics' fees.... 3,106 1,184 708
--------- --------- ---------
Ps. 4,040 Ps. 1,917 Ps. 3,236
========= ========= =========
17. CONTRIBUTIONS TO THE SOCIAL SERVICES INSTITUTE FOR BANKING EMPLOYEES
Effective July 1, 1996, Decree No. 263/96 of the National Executive Power
reduced to 1% and effective July 1, 1997 Decree No. 915/96 eliminated the 2%
contribution on interest and fees that banks previously had to make to the ISSB,
pursuant to article 17 of Law No. 19,322. the Bank has calculated the
aforementioned contributions in accordance with these regulations. The bank
employee union (the "Banking Association") brought legal action calling for a
stay against the National Executive Power - Ministry of Public Works and
Services, with a view to having article 1 of Decree 263/96 declared null and
unconstitutional, and received a favorable ruling from the Federal Court dealing
with Administrative Litigation Matters, Panel I. The National Supreme Court of
Justice declared out of order an extraordinary appeal made by the National
Executive Branch on November 4, 1997, and the ruling in favor of the Banking
Association became firm.
Although in the opinion of the legal counsel of the financial institutions this
ruling is not enforceable against the banks because they were not a party to the
aforementioned legal action, uncertainty still exists. In April 1998, the Bank
Employees' Health Care System (OSBA) made a final claim, which was refuted from
the administrative angle before OSBA, the Federal Public Revenue Authority
(AFIP) and the National Social Security Administration.
Furthermore, the Banking Association brought a legal action calling for a stay
before the First Instance No. 5 Federal Social Security Court. A request for a
precautionary measure was granted, ordering the OSBA not to bring legal actions
for tax collection or make verifications on the grounds of article 17, clause f)
of Law No. 19,322 until a final judgment is issued about whether this supposed
claim is applicable. This latter measure is firm and was confirmed by the
National Social Security Court (Panel II). In this connection, OSBA filed an
extraordinary appeal with the National Supreme Court of Justice, which was
dismissed by the Court on November 21, 2000.
Furthermore, OSBA has brought a legal action against all institutions in the
financial system, before the Federal Court dealing with Administrative
Litigation Matters, and the complaint has already been answered. The trial of
the case has been ordered.
Considering that a risk exists as to the interpretations that courts may make of
this dispute, the
F-44
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
Bank has agreed to a settlement regarding those disputed or doubtful rights,
without this involving any recognition of rights. This settlement has been
approved by the Federal Court of First Instance on Administrative Litigation
Matters No. 4, in the case identified above, which will reduce the potential
risk to which the Bank would be exposed if an unfavorable resolution were to be
issued.
18. BALANCES IN FOREIGN CURRENCY
The balances of assets and liabilities denominated in foreign currencies
(principally in U.S. dollars) are as follows:
DECEMBER 31,
---------------------------
2004 2003
------------- -------------
ASSETS:
Cash and due from banks................................... Ps. 284,806 Ps. 379,903
Government and corporate securities....................... 1,397,351 2,470,971
Loans..................................................... 879,809 702,501
Other receivables resulting from financial brokerage...... 5,132,504 4,716,234
Equity investments in other companies..................... 3,072 3,047
Miscellaneous receivables................................. 76,639 15,760
Bank premises and equipment............................... 11,945 12,770
Intangible assets......................................... - 3
Miscellaneous assets...................................... 39 2,014
In process items.......................................... 80 1,331
------------- -------------
TOTAL ......................................................... Ps. 7,786,245 Ps. 8,304,534
============= =============
LIABILITIES:
Deposits................................................... Ps. 1,411,162 Ps. 1,656,541
Other liabilities resulting from financial brokerage....... 4,744,901 6,217,182
Sundry liabilities......................................... 1,512 18,278
Subordinated Negotiable Obligations........................ 380,077 -
In process items........................................... 5,893 -
------------- -------------
TOTAL.......................................................... Ps. 6,543,545 Ps. 7,892,001
============= =============
19. TRANSACTIONS WITH RELATED PARTIES
Grupo Galicia entered into certain transactions with controlled and
equity-method subsidiaries during the fiscal years ended December 31, 2004, 2003
and 2002, with the following revenues and expenses:
DECEMBER 31,
--------------------------------
2004 2003 2002
--------- -------- ---------
Revenues recognized(*)......... Ps. 34,162 Ps. 2,974 Ps. 14,513
Expenses incurred.............. 959 797 944
(*) Interests and adjustments from time deposits of Banco Galicia Ps. 171,
interests from negotiable obligations of Banco Galicia Ps. 32,584 and interest
from negotiable obligations of Galicia Uruguay Ps. 1,258.Additionally, the group
in accordance with resolution of our shareholders meeting held on April 22, 2004
has provissioned and paid the personal assets tax of the group's shareholders of
fiscal year 2004,2003 and 2002 amounted to Ps. 3,674, Ps. 3,583 and Ps. 1,756,
respectively.:
F-45
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
BREAKDOWN OF CAPTIONS INCLUDED IN THE INCOME STATEMENT
DECEMBER 31,
------------------------------------
2004 2003 2002
----------- ----------- -------------
FINANCIAL INCOME
Interest income from financial brokerage:
Interest on purchased certificates of deposits.................. 3,006 11,839 38,748
Compensatory Bond............................................... 69,541 70,340 132,691
Additional interest on current accounts and special accounts
with the Argentine Central Bank................................. 6,816 4,294 20,515
Other........................................................... 10,654 12,190 36,024
----------- ----------- -------------
Ps. 90,017 Ps. 98,663 Ps. 227,978
=========== =========== =============
OTHER
Difference in quotation of gold and foreign currency
transactions.................................................... 51,426 12,613 380,479
Premiums on foreign currency transactions....................... - - 2,420
Interest on pre-export and export financing..................... 12,514 7,580 22,988
Result from other credits by financial brokerage................ 62,876 - -
Other........................................................... 5,285 3,464 6,938
----------- ----------- -------------
Ps. 132,101 Ps. 23,657 Ps. 412,825
=========== =========== =============
FINANCIAL EXPENSES
Interest expense from financial brokerage:
Discounts on negotiable obligations............................. 352 672 4,152
Interest on negotiable obligations.............................. 38,956 139,595 234,177
Interest on other liabilities resulting from financial
brokerage from other banks and international entities........... 133,250 200,300 414,710
----------- ----------- -------------
Ps. 172,558 Ps. 340,567 Ps. 653,039
=========== =========== =============
OTHER INTEREST:
Interest on Argentine Central Bank loans........................ - 15 49,676
Interests on financial assistance............................... 199,079 336,305 1,377,069
CER adjustment on Argentine Central Bank
advances........................................................ 56,582 50,442 46,973
Other........................................................... 67,584 22,002 131,656
----------- ----------- -------------
Ps. 323,245 Ps. 408,764 Ps. 1,605,374
=========== =========== =============
OTHER:
Contributions to the deposit insurance system................... 15,176 12,715 20,398
Premiums on repo transactions................................... 4,423 - 141,478
Contributions and taxes on financial income..................... 33,656 18,939 30,046
Difference in quotation of gold and foreign currency............ - 111,182 -
Charge for impairment of loans.................................. 3,720 10,511 28,325
Other........................................................... 169 - 2,796
----------- ----------- -------------
Ps. 57,144 Ps. 153,347 Ps. 223,043
=========== =========== =============
F-46
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
INCOME FROM SERVICES
Others
Commissions on credit cards..................................... 167,831 126,441 142,258
Safety rental................................................... 6,230 5,111 5,079
Other........................................................... 49,497 38,618 61,994
------------ ----------- -------------
Ps. 223,558 Ps. 170,170 Ps. 209,331
============ =========== =============
EXPENSES FOR SERVICES
Others
Gross revenue taxes............................................. Ps. 23,960 Ps. 13,340 Ps. 17,794
Linked with credit cards........................................ 21,996 17,275 14,029
Other........................................................... 5,904 4,506 8,460
------------ ----------- -------------
Ps. 51,860 Ps. 35,121 Ps. 40,283
============ =========== =============
ADMINISTRATIVE EXPENSES
Other operating expenses
Rentals......................................................... 17,141 19,577 36,532
Electricity and communications.................................. 27,082 27,234 42,507
Amortization of organization and development
expenses........................................................ 47,235 59,547 85,025
Depreciation of bank premises and equipment..................... 38,091 50,542 63,357
Maintenance and repair expenses................................. 24,929 22,724 26,882
Other operating expenses........................................ 25,505 24,975 35,901
------------ ----------- -------------
Ps. 179,983 Ps. 204,599 Ps. 290,204
============ =========== =============
MISCELLANEOUS INCOME
Interest on miscellaneous receivables........................... 15,461 6,922 23,377
Premiums and commissions from insurance business................ 89,315 44,422 183,743
Other........................................................... 29,572 46,461 38,780
------------ ----------- -------------
Ps. 134,348 Ps. 97,805 Ps. 245,900
============ =========== =============
MISCELLANEOUS LOSSES
Claims.......................................................... 1,270 775 3,761
Amortization of goodwill........................................ 25,499 25,963 83,598
Commissions and expenses on insurance business ................. 78,511 52,367 96,321
Other........................................................... 51,839 76,206 87,226
------------ ----------- -------------
Ps. 157,119 Ps. 155,311 Ps. 270,906
============ =========== =============
21. INCOME TAXES
The income tax amounts estimated for the fiscal years ended December 31, 2004,
2003 and 2002, amounted to Ps.43,818, Ps.590 and Ps.66,421, respectively. The
statutory income tax rate at December 31, 2004, 2003 and 2002 was 35%. At
December 31, 2003 the Group had tax loss carryforwards in the approximate amount
of Ps. 3,485,806 that may reduce future year's taxable income for income tax
purposes. Such tax loss carryforwards expire over in the following five years.
At December 31, 2004 and 2003, PMIT available to credit future income tax amount
to Ps.115,912 and 50,467. Such PMIT expire over the following ten years.
22. SHAREHOLDERS' EQUITY AND RESTRICTIONS IMPOSED ON THE DISTRIBUTION OF PROFITS
The distribution of retained earnings in the form of dividends is governed by
the Corporations Law and Resolution 290/97 of the CNV. These rules oblige Grupo
Galicia to transfer 5% of its net income to a legal reserve until the reserve
reaches an amount equal to 20% of the company's capital stock.
F-47
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
In the case of Banco de Galicia y Buenos Aires, Argentine Central Bank rules
require 20% of the profits shown in the income statement plus (less) prior year
adjustments to be allocated to a legal reserve. This proportion applies
regardless of the ratio of the legal reserve to the capital stock.
According to Article 70, of Commercial Law 19550, in case Legal reserve decrease
for any reason dividends can not be distribute until its recovery.
Furthermore, as a result of the facts described in Note 1, through Resolution
81/02 dated February 8, 2002, the Argentine Central Bank established that for as
long as the financial assistance owed to the Argentine Central Bank is
outstanding, the Bank may not distribute dividends or any other return on
capital in cash, remit profits or make payments for fees, interests or
compensation related to results.
Communique "A" 3785 provides that financial institutions which receive national
government bonds in compensation within the framework of Sections 28 and 29 of
Decree 905/02, may record them at their technical value; while using this
procedure, financial institutions may not distribute cash dividends, except for
the amount of profits in excess of the difference between the carrying value and
the market value of those bonds, net of the pertinent appropriation to legal
reserve and to the reserve established by the bank's by-laws, and the same
treatment will be given to those institutions which decide to exchange the
compensating bonds for promissory notes issued by the national government.
The "Adjustments to Shareholders' Equity" caption in the statement of changes in
shareholders' equity represents:
- the inflation adjustment related to capital stock and to paid in capital
at the beginning of each period, restated in constant pesos of February
28, 2003. Capital stock maintains its nominal (par) value at each balance
sheet date; and
The composition of " Inflation adjustments Capital Stock and Paid in Capital" is
as follows:
DECEMBER DECEMBER
2004 2003
--------- ---------
Inflation to:
- capital stock 1,314,673 1,314,673
- paid-in-capital 95,375 95,375
--------- ---------
1,410,048 1,410,048
23. MINIMUM CAPITAL REQUIREMENTS
The capital adequacy of Grupo Galicia is not under the supervision of the
Argentine Central Bank. Grupo Galicia has a minimum capital requirement from the
Corporations Law of Ps.12.
F-48
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
Under Argentine Central Bank regulations, the Bank is required to maintain
minimum levels of capital, ("minimum capital"). The minimum capital, is based
upon risk-weighted assets, and the balances of Bank premises and equipment,
intangible assets and unlisted equity investments. The required minimum capital
and the Bank's capital calculated under Argentine Central Bank requirements were
as follows:
COMPUTABLE CAPITAL AS A %
MINIMUM CAPITAL. COMPUTABLE CAPITAL. OF MINIMUM CAPITAL.
---------------- ------------------- ------------------------
December 31, 2004.......................... Ps. 613,339 Ps. 1,746,553 284,76
December 31, 2003.......................... - - -
December 31, 2002.......................... - - -
As of December 31, 2003 and 2002, the Argentine Central Bank had suspended the
regulation requiring minimum levels of capital.
As called for by Argentine Central Bank Communique "A" 3986, effective January
2004, financial institutions were to comply with regulations on minimum capital
which had been suspended until that time.
24. EARNINGS PER SHARE
Earnings per share are based upon the weighted average of common shares
outstanding in the amount of 1,185,227 shares of Grupo Galicia common stock for
the year ended December 31, 2004 and 1,092,407 for the years ended December 31,
2003 and 2002 of Grupo Galicia.
Earnings per share for the 3 years ended December 31, 2004, 2003 and 2002 are
(0.093), (0.203) and (1.382) respectively.
At December 31, 2004, 2003 and 2002, there were no convertible negotiable
obligations outstanding and therefore for the purposes of calculating earnings
per share Grupo Galicia had a simple capital structure.
25. CONTRIBUTION TO THE DEPOSIT INSURANCE SYSTEM
Pursuant to its Communique "A" 2337, the Argentine Central Bank established
rules for applying the deposit insurance system and the way of settling the
related contributions. Furthermore, the National Executive Branch through Decree
No.1127/98 dated September 24, 1998, extended this insurance system to cover
demand deposits and time deposits of up to Ps.30 stated either in pesos or in
foreign currency. This system does not cover the deposits made by financial
institutions (including the time deposit certificates acquired through a
secondary transaction), the deposits made by persons related to the Bank, either
directly or indirectly, deposits of securities, acceptances or guarantees and
those set up after July 1, 1995 at an interest rate exceeding the one that the
Argentine Central Bank regularly establishes based on a daily survey conducted
by it. Nor does this system cover deposits whose ownership has been acquired
through endorsement and placement, which offer incentives in addition to the
interest rate. The system has been implemented through the creation of the
Deposit Insurance Fund, which is managed by a company called Seguros de
Depositos S.A. (SEDESA). The shareholders of SEDESA 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 said fund.
Through Communique "A" 3068, the Argentine Central Bank reduced the contribution
to the Deposit Insurance Fund, from 0.03%, to 0.015%, provided that the
financial institution arranges
F-49
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
with SEDESA 36-month loans, to be earmarked for the Deposit Insurance Fund.
Interest on these loans has been determined on the basis of the yield obtained
by the aforesaid Fund on its placements.
As of September 2000, Argentine Central Bank Communique "A" 3153 eliminated the
above-mentioned loan and the contribution of 0.015% on items comprised in the
calculation basis remained in force. As of December 2001, Argentine Central Bank
Communique "A" 3358 resolved to increase the contribution to 0.03%. As of
September 2004, Argentine Central Bank Communique "A" 4206 resolved to decrease
the contribution to 0,02 % and as of January 2005, Argentine Central Bank
Communique "A" 4271 resolved to decrease the contribution to 0.015 %.
The Bank recognized contributions amounting to Ps.15,176, Ps.12,715 and
Ps.20,398 for the fiscal years ended December 31, 2004, 2003 and 2002,
respectively, under the account captioned "Financial Expenses - Contribution to
the Deposit Insurance System".
F-50
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
26. EMPLOYEE BENEFIT PLANS
Neither the Bank nor its subsidiaries maintain pension plans for their
personnel. The Bank is obligated to pay employer contributions to the National
Pension Plan System, determined on the basis of the total monthly payroll.
These expenses amounted to Ps. 20,497, Ps.16,152 and Ps.17,021 for the fiscal
years ended December 31, 2004, 2003 and 2002, respectively.
On November 19, 2001, the beneficiaries of the Galicia 2004 Trust were
designated, as stipulated in the "Framework Trust Agreement" signed on November
4, 1999, to implement an incentive program in favor of certain executives of the
Bank and its controlled or related companies. Of the total amount of Ps.4,000
transferred to the trustee by the Galicia 2004 Trust, was used to purchase
855,442 shares and 189,116 ADSs of Grupo Galicia. The amount transferred has
been expensed as incurred.
855,442 shares and 28,046.60 ADSs, were awarded to certain executives. 3,400
ADSs that were not awarded returned to the trust. On June 15, 2003, the Galicia
2004 Trust was terminated in advance, the shares and ADSs having been delivered
to the beneficiaries designated.
The remaining balance of 157,669.40 ADSs was used to create the Galicia 2005
Trust.
27. STATEMENTS OF OPERATIONS AND BALANCE SHEETS
The presentation of financial statements according to the Argentine Central Bank
rules differs significantly from the format required by the Securities and
Exchange Commission under Rules 210.9 to 210.9-07 of Regulation S-X (Article 9).
The statements of operations presented below discloses the categories required
by Article 9 using Argentine GAAP:
F-51
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
DECEMBER 31,
---------------------------------------------
2004 2003 2002
------------- ----------- ------------
INTEREST INCOME:
Interest and fees on loans (*).................... Ps. 1,133,195 Ps. 968,086 Ps. 4,419,516
Interest and dividends on investment securities:
Tax-exempt........................................ (5,008) 32,504 (232)
Interest on interest bearing deposits with
other banks....................................... 44 68 2,370
Interest on other receivables from financial
brokerage......................................... 133,150 93,060 598,868
Interest on securities and foreign exchange
purchased under agreements to resell.............. - - -
Government securities and other trading gains,
net............................................... (4,337) 243,850 298,868
------------- ----------- -------------
Total interest income............................. 1,257,044 1,337,568 5,319,390
------------- ----------- -------------
INTEREST EXPENSE
Interest on deposits.............................. 143,533 263,760 1,361,237
Interest on securities sold under agreements
to repurchase..................................... 4,423 - 141,478
Interest on short-term liabilities from
financial intermediation ......................... 27,543 417,644 1,461,699
Interest on long-term liabilities from
financial intermediation.......................... 869,571 468,658 1,361,668
Monetary Loss from financial intermediation ...... - 14,157 1,437,745
------------- ----------- -------------
Total interest expense............................ 1,045,070 1,164,219 5,763,827
------------- ----------- -------------
Net interest income /(expense).................... 211,974 173,349 (444,437)
------------- ----------- -------------
Provision for loan losses Net..................... (130,651) (168,277) 1,615,246
------------- ----------- -------------
Net interest income /(expense) after provision
for loan losses................................... 342,625 341,626 (2,059,683)
------------- ----------- -------------
(*) Includes CER/CVS adjustments.
F-52
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
DECEMBER 31,
2004 2003 2002
------------- ------------- --------------
NON-INTEREST INCOME:
Service charges on deposit accounts.......... Ps. 80,364 Ps. 68,048 Ps. 91,257
Credit card service charges and fees......... 225,654 194,483 190,497
Other commissions............................ 250,134 206,327 240,418
Income from equity in other companies........ 2,990 - -
Premiums and commissions on insurance
business .................................... 91,776 44,422 183,743
Foreign currency position compensation ...... - - 1,370,034
Other........................................ 132,856 200,301 322,205
Monetary gain (loss) on other transactions... - (3,517) (163,090)
------------- ------------- --------------
Total non-interest income.................... Ps. 783,774 Ps. 710,064 Ps. 2,235,064
------------- ------------- --------------
NON-INTEREST EXPENSE:
Commissions.................................. 65,351 54,063 117,764
Salaries and social security charges......... 241,980 198,288 436,324
Fees and external administrative services.... 62,127 63,077 84,629
Depreciation of bank premises and equipment.. 38,091 50,542 63,357
Personnel services........................... 27,037 15,665 22,573
Rentals...................................... 17,141 19,577 36,532
Electricity and communications............... 27,082 27,234 42,507
Advertising and publicity.................... 37,796 20,020 15,369
Taxes........................................ 113,754 74,825 126,099
Amortization of organization and
development expenses ........................ 47,235 59,547 85,025
Loss from equity in other companies ......... - 22,570 51,971
Maintenance and repair expenses.............. 24,929 22,724 26,882
Minority interest ........................... 14,302 9,232 (272,163)
Commissions and expenses on insurance
business ................................... 80,939 59,725 103,391
Amortization of "Amparo
claims" .................................... 121,010 77,880 -
Other Provisions and
reserves .................................... 131,804 308,081 441,949
Other........................................ 141,874 190,354 257,056
Monetary result from operating expenses - (84) (21,001)
------------- ------------- --------------
Total non-interest expense................... Ps. 1,192,452 Ps. 1,273,320 Ps. 1,618,264
------------- ------------- --------------
Income before tax expense.................... (66,053) (221,630) (1,442,883)
Income tax expense........................... (43,818) (590) (66,421)
------------- ------------- --------------
Net Loss .................................... Ps. (109,871) Ps. (222,220) Ps. (1,509,304)
============= ============= ==============
Certain categories of income and expense maintained by the Group have been
presented in the Article 9 income statement in a manner which warrants further
discussion as follows:
-Provision for loan losses net: this balance includes direct charge offs plus
the provision for losses on loans and other receivable charged to the
provision for loan losses, less loan loss allowances reversed and bad debts
recovered.
F-53
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
Argentine Central Bank rules also require certain classifications of assets and
liabilities which are different from those required by Article 9. The following
balance sheet presents Grupo Galicia's balance sheet as of December 31, 2004 and
2003 as if they had followed Article 9 balance sheet disclosure requirements
using Argentine GAAP.
DECEMBER 31,
---------------------------------------
2004 2003
------------------ ----------------
ASSETS:
Cash and due from banks.......................... Ps. 996,600 Ps. 836,010
Interest-bearing deposits in other banks......... 379,192 172,360
Federal funds sold and securities purchased
under resale agreements or similar agreements.... 77,665 -
Trading account assets........................... 564,109 328,754
Available for sale securities.................... 6,339,961 7,121,385
Loans............................................ 8,915,248 8,562,699
Allowances for loan losses....................... (640,603) (1,183,726)
Fixed assets..................................... 489,182 517,532
Compensatory and Hedge Bonds to be received...... 4,732,288 4,629,595
Other assets..................................... 1,987,762 2,053,386
------------------ ----------------
Total assets................................ Ps. 23,841,404 Ps. 23,037,995
================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits......................................... Ps. 6,716,425 Ps. 5,520,610
Short-term borrowing............................. 295,327 1,376,354
Other liabilities................................ 2,222,301 2,222,993
Long-term debt................................... 12,456,540 12,016,700
Commitments and contingent liabilities........... 517,806 388,961
Minority interest in Consolidated Subsidiaries... 113,467 92,994
Common stock..................................... 1,241,407 1,092,407
Other shareholders' equity....................... 278,131 326,976
------------------ ----------------
Total liabilities and shareholders' equity.. Ps. 23,841,404 Ps. 23,037,995
================== ================
The carrying value and market value of each classification of available-for-sale
securities in the Article 9 balance sheet, were as follows.
DECEMBER 31, 2004 DECEMBER 31, 2003
------------------------------------------------ -----------------------------------------------
UNREALIZED UNREALIZED
CARRYING VALUE GAINS/(LOSSES)(2) MARKET VALUE CARRYING VALUE GAINS/(LOSSES)(2) MARKET VALUE
-------------- ----------------- ------------- -------------- ----------------- ------------
External Notes......... Ps. 749,729 Ps. - Ps. 207,389 Ps. 840,228 Ps. - Ps. 496,142
BODEN 2012 -
Compensatory Bond...... 976,056 269,009 814,764 1,609,982 113,076 1,036,640
Fiscal Credit
Certificate (1)........ 78,232 - 78,232 78,575 - 78,575
BOGAR.................. 3,543,751 1,010,200 2,822,668 3,543,074 244,724 2,116,497
GalTrust I............. 665,102 (7,335) 401,116 646,143 (134,657) 254,835
Other assets........... 327,091 - 327,091 403,383 - 403,383
-------------- ----------------- ------------- -------------- ----------------- -------------
TOTAL............. Ps. 6,339,961 Ps. 1,271,874 Ps. 4,651,260 Ps. 7,121,385 Ps. 223,143 Ps. 4,386,072
============== ================= ============= ============== ================= =============
(1) These instruments can be used to repay taxes, including the value-added
tax
(2) For U.S. GAAP purposes losses considered to be other than temporary
available for sale securities were charged to income and the quotation
differences in local currency were recognized as an unrealized gain /
(loss) in other comprehensive income.
F-54
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
The maturities at December 31, 2004 of the available-for-sale government
securities and the GalTrust I and other assets included in the Article 9 balance
sheet were as follows:
DECEMBER 31, 2004
-----------------------------------------------------------------------------------------------
MATURING AFTER 1 MATURING AFTER
PAST MATURING WITHIN YEAR BUT WITHIN 5 YEARS BUT WITHIN MATURING AFTER
CARRYING VALUE DUE/CALLABLE 1 YEAR 5 YEARS 10 YEARS 10 YEARS
-------------- ------------ ---------------- ---------------- ------------------ --------------
External Notes.................. Ps. 749,729 749,729 Ps. - Ps. - Ps. - Ps. -
BODEN 2012 - Compensatory
Bond............................ 976,056 - 122,007 488,028 366,021 -
Fiscal Credit Certificate....... 78,232 - 78,232 - - -
GalTrust I...................... 665,102 - 26,604 127,700 262,050 248,748
BOGAR........................... 3,543,751 - 147,180 679,320 1,394,000 1,323,251
Other assets.................... 327,091 327,091 - - -
-------------- ------------ ---------------- ---------------- ------------------ --------------
TOTAL........................... Ps. 6,339,961 749,729 Ps. 701,114 Ps. 1,295,048 Ps. 2,022,071 Ps. 1,571,999
============== ============ ================ ================ ================== ==============
28. OPERATIONS BY GEOGRAPHICAL SEGMENT
The main financial information, classified by country where transactions
originate, is shown below. Most of the transactions originated in the Republic
of Uruguay were with Argentine citizens and enterprises, and were denominated in
U.S. dollars. Transactions between different geographical segments have been
eliminated for the purposes of this note.
F-55
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31,2004,2003 AND 2002
(Expressed in thousands of Argentine pesos)
DECEMBER 31,
------------------------------------------------------------
2004 2003 2002
------------- ---------------- ---------------
Total revenues:(*)
Republic of Argentina............................ Ps. 2,313,069 Ps. 2,379,016 Ps. 6,041,701
Republic of Uruguay.............................. 119,812 213,318 355,327
U.S.A. .......................................... - - 173,887
Grand Cayman Island.............................. 2,362 10,704 (6,194)
Net income (loss), net of monetary effects allocable
to each country:
Republic of Argentina............................ (76,207) (142,995) (1,513,637)
Republic of Uruguay.............................. (33,953) (63,380) (75,584)
U.S.A............................................ - - 128,900
Grand Cayman Island.............................. 289 (15,845) (48,983)
Total assets:
Republic of Argentina............................ 22,927,642 21,859,395 22,361,855
Republic of Uruguay.............................. 707,252 908,137 1,302,557
U.S.A............................................ - - 15,724
Grand Cayman Island.............................. 15,660 55,322 184,000
Fixed assets
Republic of Argentina........................... 477,227 504,742 554,335
Republic of Uruguay............................. 11,955 12,790 16,140
Miscellaneous assets
Republic of Argentina........................... 159,994 156,084 182,367
Republic of Uruguay............................. 39 2,014 2,395
Goodwill
Republic of Argentina........................... 115,080 139,681 168,719
Republic of Uruguay............................. - - 1,665
Other intangible assets
Republic of Argentina........................... 522,924 587,373 151,235
Republic of Uruguay............................. - 3 329
Geographical segment assets as a percentage of
total assets
Republic of Argentina........................... 96.94% 95.78% 93.70%
Republic of Uruguay............................. 2.99% 3.98% 5.46%
U.S.A........................................... - - 0.07%
Grand Cayman Island............................. 0.07% 0.24% 0.77%
(*) The caption Revenues includes financial income, income from services and
miscellaneous income.
29. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank has been party to financial instruments with off-balance sheet risk in
the normal course of its business to meet the financing needs of its customers.
These instruments expose the Bank to credit risk above and beyond the amounts
recorded in the consolidated balance sheets. These financial instruments include
commitments to extend credit, standby letters of credit, guarantees granted and
acceptances.
The Bank uses the same credit policies in making commitments, conditional
obligations and guarantees as it does for granting loans. In management's
opinion, the Bank's outstanding commitments and guarantees do not represent
unusual credit risk.
The Bank's exposure to credit loss in the event of non-performance by the
counterparty 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.
F-56
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31,2004,2003 AND 2002
(Expressed in thousands of Argentine pesos)
A summary of the credit exposure related to these items is shown below:
DECEMBER 31,
-----------------------------------
2004 2003
----------------- --------------
Commitments to extend credit........................ Ps. 285,824 Ps. 220,913
Standby letters of credit........................... 38,140 10,925
Guarantees granted.................................. 122,539 234,416
Acceptances......................................... 18,967 22,354
Commitments to extend credit are agreements to lend to a customer at a future
date, subject to the meeting of the contractual terms. Commitments generally
have fixed expiration dates or other termination clauses and may require 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 of the Bank. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. In addition to the above commitments,
as of December 31, 2004 and 2003, the available purchase limits for credit card
holders amounted to Ps.3,703,120 and Ps.2,675,142, respectively.
Standby letters of credit and guarantees granted are conditional commitments
issued by the Bank to guarantee the performance of a customer to a third party.
Acceptances are conditional commitments for foreign trade transactions.
The credit risk involved in issuing letters of credit and granting guarantees is
essentially the same as that involved in extending loan facilities to customers.
In order to grant guarantees to its customers, the Bank may require counter
guarantees. These financial customer guarantees are classified, by type, as
follows:
DECEMBER 31,
--------------------------------
2004 2003
-------------- --------------
Preferred counter guarantees........................ Ps. 44,759 Ps. 53,563
Other counter guarantees............................ 17,676 97,676
The Bank accounts for checks drawn on it and other banks, as well as other items
in process of collection, such as notes, bills and miscellaneous items, in
memorandum accounts until such time when the related item clears or is accepted.
In management's opinion, the risk of loss on these clearing transactions is not
significant. The amounts of clearing items in process were as follows:
DECEMBER 31,
--------------------------------
2004 2003
-------------- -----------
Checks drawn on the Bank............................ Ps. 108,290 Ps. 109,164
Checks drawn on the other Bank...................... 172,296 162,396
Bills and other items for collection................ 519,222 326,994
As of December 31, 2004 and 2003, the trusts funds amounted to Ps. 5,194 and
Ps.72,832, respectively.
F-57
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
In addition, the Bank has securities in custody, which as at December 31, 2004
and 2003, amounted to Ps.6,283,546 and Ps.5,412,706, respectively.
30. DERIVATIVE FINANCIAL INSTRUMENTS
At December 31, 2004 and 2003 the options bought and sold were recorded at their
exercise price in memorandum accounts. The premiums collected and/or paid have
been accrued on a straight-line basis over the life of the contract.
MEMORANDUM ACCOUNTS FAIR VALUE
-------------------------- -----------------------
DECEMBER 31, DECEMBER 31,
-------------------------- -----------------------
2004 2003 2004 2003
----------- ------------ --------- -----------
Option contracts:
Written put options (1) Ps. 173,069 Ps. 165,411 Ps. 8,802 Ps. 69,668
(1) As established by Section 4, subsect. a and Section 6 of Decree 1836/02 and
Argentine Central Bank Communique "A" 3828, in connection with the "second
Exchange offered by the government to exchange restructured deposits for
government bonds" , the Bank granted an option to sell coupons to the holders of
restructured deposits certificates who had opted to receive BODEN 2013, BODEN
2006, BODEN 2012 or BODEN 2005 in exchange for their certificates.
The exercise price will be equal to that resulting from converting to pesos the
face value of each coupon in US dollars at a rate of Ps.1.40 per US dollar
adjusted by applying the CER, which arises from comparing the index at February
3, 2002 to that corresponding to the due date of the coupon. That value shall in
no case exceed the principal and interest amounts in pesos resulting from
applying the face value of the coupon in US dollars at the buying exchange rate
quoted by Banco de la Nacion Argentina (Banco Nacion) on the payment date of
that coupon.
31. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards No. 107 ("SFAS") "Disclosures about Fair Value of
Financial Instruments" requires disclosures of estimates of fair value of
financial instruments. These estimates were made at the end of December 2004 and
2003. Because some of the Bank's financial instruments do not have a ready
trading market from which to determine fair value, the disclosures are based
upon significant estimates regarding economic and current market conditions and
risk characteristics. Such estimates are subjective and involve matters of
judgment and, therefore, are not precise and may not be reasonably comparable to
estimates of fair value for similar instruments made by other financial
institutions.
The estimated fair values do not include the value of assets and liabilities not
considered financial instruments.
In order to determine the fair value, cash flows were discounted for each
category or group of loans having similar characteristics, based on their credit
risk, guarantees and/or maturities, using rates offered for similar loans by the
Bank as of December 31, 2004 and 2003, respectively.
Due to the uncertainties derived from the economic crisis existing in Argentina
at the end of 2001
F-58
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
and the economic policy measures taken by the government to confront this
crisis, the future actual results could differ from the evaluations and
estimates made at the date of the preparation of this quantitative analysis and
these differences could be significant. Therefore, the following fair values
estimated under FAS 107 must be considered in light of these circumstances.
2004 2003
----------------------------- -----------------------------
Book Value Fair Value Book Value Fair Value
------------- ------------ ------------- -------------
DERIVATIVE ACTIVITIES: (SEE NOTE 30)
Assets............................. Ps. - Ps. - Ps. - Ps. -
Liabilities........................ 173,069 8,802 165,411 69,668
NON DERIVATIVE ACTIVITIES:
Assets:
Cash and due from banks (1)........ Ps. 988,669 Ps. 988,669 Ps. 826,150 Ps. 826,150
Government securities (2)..........
Trading......................... 545,031 545,604 327,911 327,911
Unlisted Securities............. 4,371,716 3,180,905 86,227 86,227
Investment...................... 601,264 506,803 2,485,120 1,532,782
Loans (3).......................... 8,438,177 7,515,344 10,983,757 8,551,264
Compensatory and Hedge Bond to be
received (4) ...................... 4,732,288 4,011,265 4,629,595 2,980,996
Others (5)......................... 2,263,163 1,855,262 1,840,767 1,307,585
Liabilities:
Deposits (6)....................... Ps. 6,756,913 Ps. 6,614,881 Ps. 5,583,991 Ps. 5,183,739
Other liabilities resulting from
financial Intermediation :
Argentine Central Bank (7)......... 8,428,717 6,553,636 8,132,902 5,804,241
Banks and international entities
and Loans from Domestic Financial
Institutions (8) and Negotiable
obligations (9).................... 4,796,562 3,739,333 5,776,342 3,458,360
Others (10)........................ 1,211,365 1,207,227 1,190,177 1,123,042
The following is a description of the estimating techniques applied:
(1) CASH AND DUE FROM BANKS: By definition, cash and due from banks are
short-term and do not possess credit risk. The carrying values as of
December 31, 2004 and 2003 are a reasonable estimate of fair value.
(2) GOVERNMENT SECURITIES: Government securities held for trading purposes and
government securities available for sale are carried at fair value. The
fair value of the Bank's government securities held for investments
have been estimated using the quoted market value. The book values at
December 2004 and 2003 of bonds such as Fiscal Credit Certificate, are a
reasonable estimates their respective fair values. External Notes are
recognized at its fair value since were eligible for the Argentine Bank
debt restructuring.
(3) LOANS: In order to determine the fair value of loans, the portfolio was
segregated by loan type, repricing characteristics and credit quality. For
performing loans, contractual cash flows of loans were discounted at
estimated market rates. For non-performing loans, expected cash flows were
discounted using an estimated rate considering the time of collection. The
value of collateral was considered in the estimation of cash flows.
(4) COMPENSATORY AND HEDGE BONDS TO BE RECEIVED: in connection with estimating
the fair value of these bonds, the Bank used quoted market values.
(5) OTHERS: Includes other receivables from financial brokerage and equity
investments in other companies. A majority of the items included under
"Other Receivables from Financial Brokerage" are short-term in nature and
do not possess significant risk although the fair value of the forward
purchases of government securities held for investment purposes is the
quoted market value of the underlying government
F-59
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
securities. Also included under this caption are the Galtrust I debt
securities and trust certificates. Equity investments in companies where
significant influence is exercised are not within the scope of SFAS No.
107. Equity investments in other companies are carried at market value
less costs to sell. The book value of unquoted equity securities is
believed by management to approximate fair value. The fair value of the
bonds to be received have been estimated using the quoted market value.
(6) DEPOSITS: The fair value of deposit liabilities on demand and savings
account deposits is similar to its book value. The fair value of term
deposits was estimated at the expected future cash flows discounted at the
estimated market rates at year-end, following management's expectations.
(7) ARGENTINE CENTRAL BANK: At December 31, 2004 and 2003 "Argentine Central
Bank" includes the advance to be requested from the Argentine Central Bank
for the subscription of the Hedge Bond and short term loans for liquidity
support The fair value at December 2004, was estimated based on the fair
value of the Argentine Government portfolio that guarantee the debt. As of
December 2003, the fair value was estimated at the expected future cash
flows discounted at the estimated market rates at year-end.
(8) BANKS AND INTERNATIONAL ENTITIES AND LOANS FROM DOMESTIC FINANCIAL
INSTITUTIONS: Includes credit lines borrowed under different credit
arrangements from local and foreign entities. These lines of credit were
restructured as of May 18, 2004. The quoted market prices have been taken
as a best estimate of fair value. At December 31, 2003. when no quoted
market prices are available, the estimated fair value has been calculated
by discounting the contractual cash flows of these liabilities at
estimated market rates.
(9) NEGOTIABLE OBLIGATIONS: The fair value of the negotiable obligations were
determined based on quoted market prices. When no quoted market prices are
available, the estimated fair value has been calculated by discounting the
contractual cash flows of these liabilities at estimated market rates.
(10) OTHERS: Includes other liabilities resulting from financial brokerage.
Their fair value was estimated at the expected future cash flows
discounted at the estimated market rates at year-end.
32. CASH DIVIDENDS
Argentine Central Bank Communique "A" 3785 dated October 29, 2002 restricted the
distribution of cash dividends. Such rule establishes that the Bank should
adjust its earnings to be distributed as cash dividends with the difference
between the market value and the carrying value of the compensatory and hedge
bonds after netting the legal reserve and other reserves established by the
Bank's by-laws. (see note 22)
33. PREFERRED LIABILITIES OF THE FORMER BANCO ALMAFUERTE COOP. LTDO. AND BANCO
MERCOBANK S.A.
Former Banco Almafuerte Coop. Ltdo.
During the years ended June 30, 1999, 2000 and December 31, 2000 and 2001, the
Bank acquired certain interests in a trust sponsored by SEDESA, the Argentine
deposit insurance
F-60
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
authority. The trust holds the assets of three failed Argentine banks. The Bank
acquired the interests in exchange for the assumption of the deposit liabilities
of the failed banks. The Bank's interest in the trust consists of preferred
certificates A, and subordinated certificates C, whose payments are guaranteed
by SEDESA. At December 31, 2004 and 2003, trust certificates were recorded at an
amount of Ps.23,463 and Ps.20,144, respectively, in the consolidated financial
statements.
Furthermore, a fund was created for a total amount of US$266,667 to which the
Bank contributed 45%, US$120,000. This fund, was converted to pesos under Decree
471, may be computable for meeting the Minimum Liquidity Requirements, as
authorized by the Argentine Central Bank. At December 31, 2004 and 2003, it
amounted to Ps.259,065 and Ps.245,595, respectively.
Former Banco Mercobank S.A
On January 5, 2001, the Bank assumed certain preferred liabilities corresponding
to 3 (three) branches of the former Banco Mercobank S.A.
This transaction was conducted under the terms of the "Transfer Contract" and
the "DIAGONAL Trust Agreement" signed by and between the former Banco Mercobank
S.A., Banco de Galicia y Buenos Aires S.A. and other institutions which took
part in the process involving the assumption of the liabilities of the above
mentioned bank, as called for by resolution No. 19 adopted by the Board of
Directors of the Argentine Central Bank on January 5, 2001, within the framework
of article 35 bis, section II, clauses a) and b) of the Financial Institutions
Law. As a counterpart, the Bank has received an interest in the class A
certificate of the DIAGONAL Trust (consisting of certain assets pertaining to
the former Banco Mercobank S.A.) and payments from SEDESA. As of December 31,
2004 and 2003, the amount of that interest, net of provisions, was Ps.1,449.
F-61
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
34. TRUST ACTIVITIES
"GALTRUST I" INDIVIDUAL FINANCIAL TRUST
On October 20, 2000 the Bank securitized a group of loans that were granted to
the Argentine Provinces. The tax revenues from the local provinces collateralize
these loans. The Bank transferred the ownership of the loans to a the Galtrust I
Financial Trust. In turn the trust issued Class "A" Debt Securities with a face
value of Ps. 100,000, Class "B" Debt Securities with a face value of Ps. 200,000
and Financial Trust Participation Certificates with a face value of Ps. 200,000
Ps. 46,922 of the class B Debt Securities were sold to third party investors and
the remainder of the certificates was retained by the Bank.
Under this global program, the Bank transferred the trust ownership of loans
amounting Ps.1,070,855 granted to Argentine Provinces collateralized by the
federal tax sharing corresponding to those provinces and reserve investments for
Ps.16,953, to the GalTrust I Financial Trust in exchange for cash and retained
interest in the trust in the form of Class "A" Debt Securities, Class "B" Debt
Securities and Financial Trust Participation Certificates.
As of December 31, 2001 all class A debt securities were cancelled.
As of December 31, 2004 and 2003, those securities were held in the Bank's
portfolio for Ps.665,102 and Ps.646,143, respectively.
"GALTRUST II, III, IV AND V" INDIVIDUAL FINANCIAL TRUSTS
At the meeting held on December 6, 2001, the Board of Directors of the Bank
approved the creation of the Universal Program for the Securitization of Loans
for the issue of debt securities and/or certificates of participation in
Galtrust Financial Trusts. This program was approved by the National Securities
Commission ("the CNV") through its resolution No. 13,334 dated April 6, 2000,
for a face value of up to US$ 1,000,000 thousand (the "Program") which also
authorized the Bank's participation as originator, trustor and manager of that
program.
The trustee is First Trust of New York, National Association, through its
permanent representation in Argentina. Four financial trusts, "Galtrust II, III,
IV and V - Letras Hipotecarias", were set up under the above-mentioned program
and Certificates of Participation and Debt Securities were issued under those
trusts.
In December 2001, the Bank transferred the trust ownership of mortgage loans
amounting to Ps.525,839 to the Galtrust II, III, IV and V - Letras Hipotecarias.
The Bank subscribed Certificates of Participation for a face value of
Ps.136,839, in which it had a 100% interest and the remaining Class A and Class
B Debt Securities were subscribed for by the Bank .
As of December 26, 2002 the Galtrust III and IV financial trusts were
terminated.
As of December 31, 2004 and 2003, the Bank held Certificates of Participation
and Debt Securities in its portfolio for Ps. 61,588 and Ps. 68,772,
respectively.
F-62
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
GALICIA MORTGAGE LOANS AND SECURED LOANS TRUSTS
As part of the implementation of the Galicia Capitalization and Liquidity Plan,
during May 2002, the "Galicia Mortgage Loans Financial Trust" was created, under
which mortgage loans for Ps.312,774 were transferred, the Bank received in
exchange Ps.234,580 in cash and certificates of participation for Ps.78,194. The
trustee is ABN AMRO Bank Argentine Branch, along with thirteen domestic
financial institutions acting as subscribers. In addition, the Bank has
guaranteed the loans transfered to this trust.
With respect to the Secured Loans Trust the parties involved are Banco de la
Provincia de Buenos Aires as beneficiary and BAPRO Mandatos y Negocios S.A., as
trustee. Under this trust, secured loans for Ps.108,000 were transferred and
Ps.81,000 in cash and certificates of participation for Ps.27,000 were received
in exchange. As of December 31, 2004, the participation certificates in the
"Galicia Mortgage Loans Financial Trust" were recorded for Ps.170,495 and the
participation certificates of the "Secured Loans Trust" were Ps.44,294.
On January 10, 2005, the parties resolved to terminate the trust in advance and
redeem the outstanding securities, and all the trust assets were transferred to
the Bank. As a result, mortgage loans for Ps. 172,214 and Ps. 1,508 in cash were
consolidated into the Bank accounts.
35. REGIONAL CREDIT CARD COMPANIES
Tarjetas Regionales S.A. is a holding company, which as of December 31, 2001,
was wholly owned by Grupo Financiero Galicia S.A. through its subsidiaries
Galicia Uruguay and the Bank
The December 31, 2004 financial statements of Tarjetas Regionales S.A., which
were used for consolidation purposes, have in turn been consolidated on a
line-by-line basis with those of Tarjeta Naranja S.A., Tarjetas Cuyanas S.A.,.
and Tarjetas del Mar S.A., in which Tarjetas Regionales S.A. holds a controlling
interest.
Effective January 1, 2004 Tarjeta Naranja S.A. absorbed Tarjeta Comfiar S.A.,
which was dissolved without being liquidated to continue with the business
activities carried out by it under the name of Tarjeta Naranja S.A., assuming
all contingent rights and obligations of the merged company.
The percentages directly held in those companies' capital stock are as follows:
December 2004 December 2003
Tarjetas Cuyanas S.A. 60% 60%
Tarjetas del Mar S.A. 99.999% 100%
Tarjeta Naranja S.A. 80% 80%
Tarjeta Comfiar S.A. 0% 60%
The percentages indirectly held in those companies' capital stock through the
controlled entity Tarjeta Naranja S.A. are as follows:
Tarjeta Comfiar S.A. 0% 32%
In addition, Tarjeta Naranja S.A. financial statements have been consolidated
with the financial statements of Cobranzas Regionales S.A., in which it holds
87.7% of the voting stock. Furthermore, Tarjetas Cuyanas S.A. hold a 12.3%
interest in that company's capital stock and voting rights.
F-63
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
- Tarjetas Cuyanas S.A.:
On March 24, 2004, the Board of Directors of Tarjetas Cuyanas S.A. approved the
creation of one or more financial trusts for the securitization of receivables
arising from the use of credit cards issued by the Company, for which purpose
fiduciary securities would be issued to place on the market.
At December 31, 2004 authorization was obtained from the National Securities
Commission (CNV) to issue certificates of participation in the "Tarjeta Nevada I
and II Financial Trusts" for a face value of Ps.15,000 and Ps. 16,000,
respectively. As established in that Trust's offering circular supplement, the
Issuing Trustee is Banco Patagonia Sudameris S.A., the Trustor, Manager and
Trust Beneficiary, Tarjetas Cuyanas S.A., and the Underwriters, Banco Patagonia
Sudameris S.A. and Banco Regional de Cuyo S.A.
The result of the placement was the following:
-"Tarjeta Nevada I Financial Trust": Class "A" Certificates of Participation for
Ps. 12,000; Class B Certificates of Participation for Ps. 1,500 which were fully
placed and Class "C" Certificates of Participation for Ps. 1,500 held by
Tarjetas Cuyanas S.A. At the end of the fiscal year 2004, the Class "A"
Certificates of Participation had been fully redeemed and the balance of Classes
"B" and "C" was Ps. 2,802.
-"Tarjeta Nevada II Financial Trust": Class "A" Certificates of Participation
for Ps. 12.000, fully placed; Class "B" Certificates of Participation for Ps.
2,400, partially placed in the amount of Ps. 1,850, the remainder for Ps. 550
being held by Tarjetas Cuyanas S.A. and Class "C" Certificates of Participation
for Ps. 1,600, held by Tarjetas Cuyanas S.A
Tarjeta Nevada II Financial Trust:
On December 6, 2004, the Tarjeta Nevada Financial Trust publicly offered
securities for a total amount of Ps.16 million, the underlying assets of which
are receivables arising from the use of the credit cards issued by Tarjetas
Cuyanas S.A. The class A certificates of participation had a face value of Ps.12
million, with a CER plus 3% interest rate (with a minimum of 8% and a maximum of
15%) and a 17-month term, and were fully subscribed. Of the class B certificates
of participation for a face value of Ps.2.4 million, with a CER plus 5% interest
rate (with a minimum of 10% and a maximum of 20%) and a 23-month term, Ps.0.55
million were unsubscribed. The latter, as well as class C certificates of
participation for Ps. 1.6 million, that will receive the remaining profit
generated by the Trust, were kept by Tarjetas Cuyanas.
- Tarjeta Naranja S.A.:
Tarjeta Naranja I-Financial Trust
In accordance with Law 24,441, on August 2, 2004 a financial trust agreement was
entered into by and between Tarjeta Naranja S.A., as trustor and Banco Patagonia
Sudameris S.A., as trustee, whereby the "Tarjeta Naranja I Financial Trust" was
created. This trust is composed of receivables arising for the use of credit
cards issued by Tarjeta Naranja S.A. for a trust amount of Ps.40,000.
The Trustor fully adhered to the Framework Agreement formulated by the Trustee
under the Program, which had been authorized by National Securities Commission
Resolution No. 13573 dated October 6, 2000.
F-64
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
The Trust shall expire on the servicing date of all Trust Securities, which
shall be redeemed exclusively with the trust assets, pursuant to issue
conditions.
The Trust issued the following classes of trust securities for a face value of
Ps.1: (a) Class A Participation Certificates for a face value equivalent to 80%
of the total face value, that is, Ps.32,000, accruing interest at an annual
nominal rate of 8%; (b) partially subordinated Class B Participation
Certificates for a face value equivalent to 10% of the total face value, that
is, Ps.4,000, accruing interest at an annual nominal rate of 11%; and (c) Class
C Participation Certificates, for a face value equivalent to 10% of the total
face value, that is, Ps. 4,000, and accruing the Trust's remaining interest.
A public offering was made to investors of the Classes A and B Participation
Certificates, which were fully subscribed on August 26, 2004, while the Class C
Certificates of Participation were acquired by Tarjeta Naranja S.A.
Tarjeta Naranja II-Financial Trust
On November 1, 2004, the Tarjeta Naranja II-Financial Trust publicly offered
securities for a total amount of Ps. 50 million, the underlying assets of which
are receivables arising from the use of the credit cards issued by Tarjeta
Naranja S.A. The Trust issued : (i) class A debt securities for a face value of
Ps.40 million, with a CER plus 3% interest rate (with a minimum of 8% and a
maximum of 15% annual interest rate) and a 15-month term; (ii) class B debt
securities for a face value of Ps.5 million, with a CER plus 5% interest rate
(with a minimum of 11% and a maximum of 20% annual interest rate) and a 17-month
average term; and (iii) certificates of participation for a face value of Ps.5
million, that will receive the remaining profit generated by the Trust. The debt
securities were fully subscribed and the certificates were acquired by Tarjeta
Naranja.
TARJETA NARANJA S.A. TARJETAS CUYANAS S.A.
------------------------- -------------------------
TARJETA NARANJA FINANCIAL TARJETA NEVADA FINANCIAL
TRUST TRUST
------------------------- -------------------------
Trust (1) I (2) II (3) I(4) II (5)
--------- ----------- ---------- ---------- ---------
Underlying asset................................. Credit-card receivables
Date of issue of the trusts' securities......... 08-26-2004 11-03-2004 07-01-2004 12-01-2004
Maturity date of the trusts' securities.......... 08-01-2005 04-22-2006 01-15-2006 12-22-2006
---------- ---------- ---------- ----------
Interest Rate
- Class "A" securities........................ - CER+3% - -
- Class "B" securities........................ - CER+5% - -
- Class A certificates of participation....... 8% - 7% CER+3%
- Class B certificates of participation....... 11% - 10% CER+5%
---------- ---------- ---------- ----------
(in millions of pesos)
Assets transferred to the trusts................. Ps. 40.0 Ps. 50.0 Ps. 16.9 Ps. 16.4
Securities issued
- Debt securities - Class A................... 40.0
- Debt securities - Class B................... 5.0
- Class A certificates of participation....... 32.0 12.0 12.0
- Class B certificates of participation....... 4.0 1.5 2.4
- Certificates of participation or class "C"
certificates of
participation.............................. 4.0 5.0 1.5 1.6
(1) All of them were authorized by the CNV.
(2) The classes A and B certificates of participation were fully subscribed.
Tarjetas Naranja S.A. received the class C
F-65
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
certificates of participation.
(3) The classes A and B debt securities were fully subscribed and the
certificates were received by Tarjeta Naranja S.A. The Class A debt
securities interest rate has a floor of 8% and a cap of 15%, and the Class
B debt securities interest rate has a floor of 11% and a cap of 20%.
(4) The classes A and B certificates of participation were fully subscribed.
Tarjetas Cuyanas S.A. received the class C certificates of participation.
At the end of fiscal year 2004, the Class A certificates of participation
had been fully redeemed and the balance of classes B and C certificates of
participation totaled Ps.2.8 million.
(5) Ps.0.55 million of class B certificates of participation that were not
subscribed as well as class C certificates of participation for Ps. 1.6
million, that will receive the remaining profit generated by the trust,
were kept by Tarjetas Cuyanas S.A. The Class A certificates interest rate
has a floor of 8% and a cap of 15%, and the Class B certificates interest
rate has a floor of 10% and a cap of 20%.
36.SEGMENT REPORTING
The Bank has disclosed its segment information in accordance with the Statement
of Financial Accounting Standards 131, "Disclosures about Segments of an
Enterprise and Related Information". Operating segments are defined as
components of an enterprise about which separate financial information is
available and which is regularly reviewed by the chief operating decision maker
in deciding how to allocate resources and in assessing performance. Reportable
segments consist of one or more operating segments with similar economic
characteristics, distribution systems and regulatory environment. The
information provided for Segment Reporting is based on internal reports used by
management.
The following summarizes the aggregation of Grupo Galicia's operating segments
into reportable segments:
Grupo Galicia: this segment includes the income and expenses of the Holding
Company, not attributable to its investments.
Insurance: includes the results of Grupo Galicia's equity interest in insurance
companies. At December 31, 2004 and 2003, Grupo Galicia maintained, through its
subsidiary Sudamericana Holding S.A., controlling interests in Galicia Vida
Compania de Seguros S.A., Galicia Retiro Compania de Seguros S.A., Instituto de
Salta Seguros de Vida S.A., Galicia Patrimoniales Compania de Seguros S.A.,
Sudamericana Asesores de Seguros S.A. and Medigap Salud S.A.
Other Group's Businesses: this segment includes the results of the business of
Galicia Warrants S.A. and Net Investment S.A. and its subsidiaries.
Buenos Aires Metropolitan branches: corresponds to the results of the Bank's
operations conducted with large corporations, small and medium-sized companies
and individuals in branches located in the Federal Capital and Greater Buenos
Aires (where the relatively greater economic activity occurs).
Branches throughout the rest of the country: this segment includes the results
of the Bank's operations with large corporations, small and medium-sized
companies and individuals in the branches located in the rest of the country.
Head office: includes the results of the Bank's operations with customers (large
corporations, small and medium-sized companies and individuals) located in it,
as well as the results of operations with the national and provincial public
sectors.
Regional credit card companies: includes the results of the regional credit card
companies. At December 31, 2004 and 2003, the Bank maintained, through its
subsidiary Tarjetas Regionales S.A., controlling interests in Tarjeta Naranja
S.A. (80%) in the province of Cordoba, Tarjetas
F-66
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
Cuyanas S.A. (60%) in the province of Mendoza, Tarjeta Comfiar (92% in 2003) in
the Province of Santa Fe, and Tarjetas del Mar (100% in 2003 and 2002,
respectively) in the Province of Buenos Aires.
International: the results of operations conducted through Galicia Uruguay Banco
de Galicia (Cayman) Ltd., the New York as of January 2003 and the Cayman
branches, except for the operations carried out with customers located in some
of the regions mentioned above.
Other financial businesses: This segment mainly includes the results of the
business of Galicia Capital Markets S.A., Galicia Valores S.A. Sociedad de
Bolsa, Agro Galicia S.A. and Galicia Factoring y Leasing S.A.
Other equity investments: Includes the results of the investments made by the
Bank as minority interest in a variety of infrastructure and utilities, such as
Aguas Argentinas S.A., Correo Argentino S.A., Inversora Nihuiles S.A., Inversora
Diamante S.A., etc.
Overhead and corporate adjustments: Includes the results of the operations that
can not be allocated to the segments above and the results of the operations
conducted between the aforementioned segments.
F-67
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
The Group evaluates segment performance based on net income. The table below
shows the segment information for continuing operations for the fiscal years
ended December 31, 2004, 2003 and 2002:
GRUPO GALICIA
--------------------------------------------------------------------------------------------------------
Buenos Rest of
Aires the Regional Other Other
YEAR ENDED DECEMBER Grupo Metropolitan Country Head Credit Interna- Financial Equity Insurance
31, 2004: Galicia Branches Branches Office Cards Tional Businesses Investments Business
------- ------------ --------- ---------- -------- --------- ---------- ----------- ---------
Net Financial Income 13,085 93,812 75,320 (158,612) 93,752 190,407 24 - 11,889
Net Income from
Services - 159,087 85,641 54,156 188,783 761 2,751 - (4,697)
Provision for Loan
Losses - (24,872) (22,889) 130,659 20,515 86,748 71 - -
Monetary Results - - - - - - - - -
Operating Income 13,085 277,771 183,850 (235,115) 262,020 104,420 2,704 - 7,192
Operating Expenses 13,462 224,267 150,609 74,719 125,430 20,491 3,442 - 13,535
Monetary results of
operating expenses - - - - - - - - -
Other Income (Loss) (3,174) 22,930 25,681 65,565 11,982 95,116 8,459 154 11,154
Monetary results of
other income - - - - - - - - -
Minority Interest - - - - (22,893) (16,099) 3 - -
Pre-tax Income (3,551) 76,434 58,922 (244,269) 125,679 162,946 7,724 154 4,811
Income tax provision 12,973 - - - 29,589 - 215 - 565
Net Income (16,524) 76,434 58,922 (244,269) 96,090 162,946 7,509 154 4,246
Net Income as a
Percentage of
Consolidated Net
Income 15% (70%) (54%) 222% (87%) (148%) (7%) - (4%)
Average Loans of
private sector. - 1,000,728 1,009,655 718,201 574,293 818,296 - - -
Average Deposits - 2,383,718 1,657,770 1,284,934 - 538,327 - - -
Overhead
Other and
YEAR ENDED DECEMBER Group's Corporate Consolidated
31, 2004: Businesses Adjustments Total
----------- ----------- ------------
Net Financial Income 275 (95,811) 224,141
Net Income from
Services 4,176 (54,365) 436,293
Provision for Loan
Losses - - 190,232
Monetary Results - - -
Operating Income 4,451 (150,176) 470,202
Operating Expenses 5,626 (7,641) 623,940
Monetary results of
operating expenses - - -
Other Income (Loss) (424) (135,456) 101,987
Monetary results of
other income - - -
Minority Interest - 24,687 (14,302)
Pre-tax Income (1,599) (253,304) (66,053)
Income tax provision 476 - 43,818
Net Income (2,075) (253,304) (109,871)
Net Income as a
Percentage of
Consolidated Net
Income 2% 231% 100%
Average Loans of
private sector. - - 4,121,173
Average Deposits - (6,399) 5,858,350
F-68
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
GRUPO GALICIA
-----------------------------------------------------------------------------------------------------------
Buenos Rest of
YEAR ENDED DECEMBER Aires the Regional Other Other
31, 2003: Grupo Metropolitan Country Head Credit Interna- Financial Equity Insurance
Galicia Branches Branches Office Cards tional Businesses Investments Business
-------- ------------ ---------- ---------- --------- --------- ----------- ----------- ---------
Net Financial Income (18,124) 60,872 49,962 (373,175) 55,456 186,504 (3,313) - 33,226
Net Income from
Services - 135,074 73,412 48,472 159,514 482 2,053 - (3,103)
Provision for Loan
Losses - 55,148 48,268 (40,434) 35,954 186,100 1,392 - -
Monetary Results (1,126) - - (12,908) - - (123) - -
Operating Income (19,250) 140,798 75,106 (297,177) 179,016 886 (2,775) - 30,123
Operating Expenses 4,766 192,973 133,007 81,445 102,301 30,971 4,529 - 15,564
Monetary results of
operating expenses 1 - - 83 - - - - -
Other Income (Loss) 3,887 12,858 13,079 292,937 (4,467) 65,707 (23,378) (11,958) (10,203)
Monetary results of
other income 8 - - 9,103 (592) (16) (376) - (11,673)
Minority Interest - - - - (22,219) 1,162 34 - 1
Pre-tax Income (20,120) (39,317) (44,822) (76,499) 49,437 36,768 (31,024) (11,958) (7,316)
Income tax provision 17 - - - - - - - 573
Net Income (20,137) (39,317) (44,822) (76,499) 49,437 36,768 (31,024) (11,958) (7,889)
Net Income as a
Percentage of
Consolidated Net
Income 9% 18% 20% 34% (22%) (17%) 14% 5% 4%
Average Loans of
private sector. - 941,002 976,312 488,360 429,504 1,132,046 - - -
Average Deposits - 1,805,663 1,286,810 1,321,546 - 806,981 - - -
Overhead
YEAR ENDED DECEMBER Other and
31, 2003: Group's Corporate Consolidated
Businesses Adjustments Total
----------- ----------- ------------
Net Financial Income (672) 156,522 147,258
Net Income from
Services 3,985 (58,490) 361,399
Provision for Loan
Losses - - 286,428
Monetary Results - - (14,157)
Operating Income 3,313 98,032 208.072
Operating Expenses 5,226 (7,418) 563,364
Monetary results of
operating expenses - - 84
Other Income (Loss) (3,632) (188,503) 146,327
Monetary results of
other income 29 - (3,517)
Minority Interest - 11,790 (9,232)
Pre-tax Income (5,516) (71,263) (221,630)
Income tax provision - - 590
Net Income (5,516) (71,263) (222,220)
Net Income as a
Percentage of
Consolidated Net
Income 2% 33% 100%
Average Loans of
private sector. - - 3,967,224
Average Deposits - (11,268) 5,209,732
F-69
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
Buenos Rest of
Aires the Regional Other Other
YEAR ENDED DECEMBER Grupo Metropolitan Country Head Credit Interna- Financial Equity Insurance
31, 2002: Galicia Branches Branches Office Cards tional Businesses Investments Business
-------- ------------ --------- ---------- --------- ----------- ---------- ----------- ---------
Net Financial Income 206,275 69,959 80,291 1,923,805 (17,248) (1,521,688) 7,379 - (45,179)
Net Income from
Services (2) 149,467 83,456 (3,341) 143,045 (2,485) 8,294 - (5,639)
Provision for Loan
Losses - 238,834 249,845 822,151 105,770 231,942 34 - -
Monetary Results (168,482) - - (1,252,484) - - (16,779) - -
Operating Income 37,791 (19,408) (86,098) (154,171) 20,027 (1,756,115) (1,140) - (50,818)
Operating Expenses 7,130 198,983 140,679 380,298 113,537 74,834 10,614 - 23,093
Monetary results of
operating Expenses 229 5,608 3,964 11,200 - - - - -
Other Income (Loss) (2,819) 6,972 7,586 (607,376) (57,631) (88,348) 12,413 (51,143) 86,400
Monetary Results of
other
Income 403 1,579 1,479 115,919 (261,875) (2,128) (1,336) - (14,703)
Minority Interest - - - - 77,089 73,033 (133) - 19
Pre-tax Income 28,474 (204,232) (213,748) (1,014,726) (335,927) (1,848,392) (810) (51,143) (2,195)
Income tax provision 59,244 - - - 397 685 5,448 - -
Net Income (30,770) (204,232) (213,748) (1,014,726) (336,324) (1,849,077) (6,258) (51,143) (2,195)
Absorption of Losses - - - - - - - - -
Net Income (30,770) (204,232) (213,748) (1,014,726) (336,324) (1,849,077) (6,258) (51,143) (2,195)
Net Income as a
percentage of
Consolidated Net
Income 1% 7% 8% 35% 12% 64% - 2% -
Average Loans of
private sector. - 1,825,997 1,698,762 9,186,731 315,175 2,235,743 - - -
Average Deposits - 2,068,766 1,399,324 3,200,220 - 2,289,351 - - -
Overhead
Other and
YEAR ENDED DECEMBER Group's Corporate Consolidated
31, 2002: Businesses Adjustments Total
---------- ----------- -------------
Net Financial Income 1,338 491,952 1,196,884
Net Income from
Services 5,308 (2,717) 375,386
Provision for Loan
Losses - - 1,648,576
Monetary Results - - (1,437,745)
Operating Income 6,646 489,235 (1,514,051)
Operating Expenses 7,452 (9,106) 947,514
Monetary results of
operating Expenses - - 21,001
Other Income (Loss) (4,636) 217,156 (481,426)
Monetary Results of
other
Income (2,428) - (163,090)
Minority Interest - 122,155 272,163
Pre-tax Income (7,870) 837,652 (2,812,917)
Income tax provision 647 - 66,421
Net Income (8,517) 837,652 (2,879,338)
Absorption of Losses - 1,370,034 1,370,034
Net Income (8,517) 2,207,686 (1,509,304)
Net Income as a
percentage of
Consolidated Net
Income - (29%) 100%
Average Loans of
private sector. - - 15,262,408
Average Deposits - (84,856) 8,872,805
F-70
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
37.CAPITAL INCREASE
On January 2, 2004, we held an extraordinary shareholders' meeting during which
our shareholders approved a capital increase (that would increase our capital up
to Ps. 1,241,407,017), through the issuance of up Ps. 149.0 million preferred
shares, each of them mandatorily convertible into one of our class B shares on
the first anniversary date of issuance (or, if earlier, on the occurrence of a
change in control ) to be exchanged for up to U$S 100.0 million of face value of
subordinated notes to be issued by the Bank to its creditors in the
restructuring of the foreign debt of its Head Office in Argentina and Cayman
Branch, or cash from a preemptive and accretion rights offering to our share
holders. On May 13, we issued 149,000,000 preferred non-voting shares, with
preference over the ordinary shares in the event of our liquidation, each with a
face value of one peso.The preferred shares were converted into Class B shares
on May 13, 2005.( See Note 1 "Restructuring of the Bank's foreign debt".)
38.PRIOR YEAR ADJUSTMENTS
On January 30, 2004, the Argentine Central Bank released Communique "A" 4084
establishing a change of criterion for the valuation of assets delivered to the
public sector. The effect of this change was recorded by the Bank as a contra
equity adjustment under the Prior year adjustments caption, as established by
Argentine Central Bank Communique "A" 4095.
The most significant changes include the treatment applicable to assets
delivered as collateral for advances granted by the Argentine Central Bank for
the subscription of the bonds envisaged in Sections 10, 11 and 12 of Decree No.
905/02. At the option of the Bank, these assets could be excluded from the
treatment foreseen in Communique "A" 3911. In this case, those assets were to be
recorded at the value admitted for purposes of the creation of guarantees, under
the terms of Section 15 of the above-mentioned Decree and Argentine Central Bank
Communiques "A" 3717 and "A" 3756.
Communique "A" 4084 also contemplates that effective January 2004 past due and
unpaid instruments issued by the public sector are to be recorded at the lower
of the carrying value at December 31, 2003 or the value resulting from applying
to the face value of those instruments, net of retirements or of those converted
into tax options, as the case may be, the lower percentage resulting from
applying the net present value method to Promissory Notes and Bonds issued by
the Trust Fund for Provincial Development.
It has also been established that interest accrued since December 2001 on the
public debt instruments eligible for the sovereign debt restructuring agreement
is to be recognized as a counterpart under an adjustment account.
The Bank had opted to value the assets offered as collateral detailed below at
the value admitted for purposes of providing the collateral.
1) 502,876 Bonds (face value) secured by the Argentine Government, issued within
the framework of Decree No. 1579/02 as collateral for the advance to be
requested from the Argentine Central Bank for the subscription of the Hedge bond
and the exchange of deposits with the financial system, as established by Decree
No. 1836/2002;
2) 153,331 Series 75 (VBY4) Argentine Republic External Notes (face value) at
Badlar rate, and 127,141 Series 74 (VEY4) Argentine Republic External Notes
(face value) at Survey rate, as collateral for the
F-71
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
advance to be requested from the Argentine Central Bank for the subscription of
the Hedge Bond. The reason for the adoption of this valuation criterion is to
get authorization to use these securities, under the terms of Sections 15 and 29
of Decree 905/02.
Given that the Argentine Government has established that External Notes are
eligible for the external sovereign debt swap, and that the Bank has decided to
accept that offer, as of December 31, 2004, those Bills have been valued as
indicated in Note 2.3 "Unpaid and past due medium-term US dollar External
Notes".
At the end of the previous year, in accordance with regulations in force at that
date the Bank. had capitalized the difference arising from application of the
CVS index instead of the CER to certain financing for Ps. 102,705.
As of December 31, 2004, in view of the lack of resolution on this issue, such
asset was written off by the Bank, and charged to prior year results, according
to the criterion established by Argentine Central Bank Communique "A" 4202, and
using allowances previously set up to cover the difference.
The figures for the previous year have been modified by Banco de Galicia y
Buenos Aires S.A. and Grupo Galicia for comparative purposes.
The prior year adjustment disclosed in the Statement of Changes in Shareholders'
Equity for comparative purposes is composed of a gain adjustment of Ps. 40,758
derived from the application of the deferred tax method for calculating income
tax and a loss of Ps. 37,792.
During 2004, the Bank recorded prior year adjustments. The consolidated Grupo
Galicia's above mentioned prior adjustments due to the following changes in
accounting criterion established by the Argentine Central Bank are as follow:
Adjustment to prior year
Assets results
------ ------------------------
BOGAR 61,588
External Notes (32,673)
CER/CVS compensation (71,869)
Total (42,954)
39. SUBSEQUENT EVENTS
Galicia Consumer Loan Financial Trust
At the meeting held on October 21, 2004, the Board of Directors of the Bank
authorized the creation of Galicia Consumer Loan Financial Trust. This trust has
been set up under the "Universal Loan Securitization Program for the Issuance of
Debt Securities and/or Certificates of Participation in Financial Trusts"
approved by the CNV through Resolution 13334 dated April 6, 2000, Deutsche Bank
S.A. acting as financial trustee. The Bank has transferred to the Trust its
consumer loan portfolio for a total amount of up to Ps. 41,529, Class A
financial debt securities for a face value of Ps. 33,223, Class B financial debt
securities for a face value of Ps. 5,191 and Certificates of Participation for a
face value of Ps. 3,115 having been issued.
On January 11, 2005, the term for placing those securities expired. The Bank
received Ps. 34,611 in cash, Class B financial debt securities for a face value
of Ps. 2,927 and Certificates of Participation for a face value of Ps. 3,115.
F-72
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
Galicia Commercial Mortgages Trust
On October 28, 2004, the Board of Directors of the Bank authorized the creation
of a denominated trust "Financial Trust Galicia Commercial Mortgages". This
trust has been set up under the "Universal Loan Securitization Program for the
Issuance of Debt Securities and/or Certificates of Participation in Financial
Trusts" approved by the National Securities Commission (CNV) through Resolution
No. 13334 dated April 6, 2000, acting Deutsche Bank S.A. as financial fiduciary.
On February 21, 2005, the Bank has transferred to the Trust portfolio
constituted by commercial mortgage loans amounted to Ps. 29,059, Class A
financial debt securities for a face value of Ps. 24,119 and Certificates of
Participation for a face value of Ps. 4,940 having been issued.
On April 5, 2005, the term for placing those securities expired. The Bank
received Ps. 23,969 in cash, and Certificates of Participation for a face value
of Ps. 4,940.
40. DIFFERENCES BETWEEN ARGENTINE CENTRAL BANK RULES AND PROFESSIONAL ACCOUNTING
STANDARDS
Grupo Galicia's accounting policies and financial statement presentation
generally conform to the rules prescribed by the Argentine Central Bank which
prescribes the reporting and disclosure policies for all banks in Argentina.
These rules differ in certain respects from generally accepted accounting
principles in Argentina ("Argentine GAAP"). The rules of the Argentine Central
Bank allow for certain of the Bank's investments in government securities to be
carried at amortized cost, whereas Argentine GAAP, applicable to enterprises in
general, requires such securities to be accounted for at market value.
Effective January 1, 2003 the Consejo Profesional de Ciencias Economicas de la
Ciudad Autonoma de Buenos Aires (CPCECABA) issued Technical Pronouncements No.
16 to 21 and amended Technical Pronouncements No. 4 to 11 and No. 14. Those new
and amended pronouncements resulted in new differences between Argentine Central
Bank accounting rules and Argentine GAAP.
INVESTMENT SECURITIES
As of December 31, 2004 and 2003, Grupo Galicia's had classified as investment
securities, the portion of its BODEN 2012, received in compensation from the
Argentine Central Bank. These securities are recorded at technical value and
increased on the basis of interest accrued under the relative terms and
conditions, and the balance in foreign currency is converted into pesos at the
reference exchange rate published by the Argentine Central Bank on the last
business day of the fiscal year. Under Argentine GAAP applicable to enterprises
in general, these securities should be marked to market with the resulting gain
or loss reflected in the income statement.
COMPENSATION TO BE RECEIVED FROM THE NATIONAL GOVERNMENT
As of December 31, 2004 and 2003, the Group has accounted for BODEN 2012,
recognizing the right to receive in compensation from the Argentine Central
Bank, as "Compensation to be Received from the National Government," under
"Other Receivables Resulting from Financial Brokerage". These assets are
recorded at technical value increased on the basis of interest accrued under the
relative terms and conditions, and the balance in foreign currency is converted
into pesos at the exchange rate published by the Argentine Central Bank on the
last business day of the fiscal year. Under Argentine GAAP, these assets should
be accounted for at the market value of the securities to be received with the
resulting gain or loss reflected in the income statement.
F-73
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
The Bank has written off the compensation amount for asymmetric indexation
through a prior year adjustment, according to the criterion established by the
Argentine Central Bank Communique "A" 4202 (see note 38). Under professional
accounting standards, that compensation amount should be written off against the
results for the year.
SECURED LOANS
On November 6, 2001, Grupo Galicia presented its offer in connection with the
exchange of Argentine government securities for secured loans, as established by
Decree No. 1387/01 issued by the Argentine government. The inception value of
the secured loans was determined taking into account the exchange ratio
established by the Ministry of Economy (face value plus interest accrued until
November 6, 2001, less coupons receivable until November 30, 2001), whereas the
securities delivered in exchange were written off at their book value, net of
the servicing of principal and interest receivable between November 6 and 30,
2001. Under Argentine GAAP, that exchange should be accounted for at the market
value of the securities exchanged with the resulting gain or loss reflected in
the income statement. (see desciption in note 2.3).
Furthermore, as established by Decree 1579/02 the Bank and the FFDP exchanged
loans to the provincial governments for Provincial Secured Loans (BOGAR) which
as of December 31, 2004 and 2003 have been disclosed under Unlisted Government
Securities. The Bank valued those assets at the lower of present or technical
value, as established by Argentine Central Bank Communique "A" 3911, except for
those used as collateral for advances granted by the Argentine Central Bank for
the subscription of the bonds foreseen in Sections 10, 11 and 12 of Decree
905/02.
Under Argentine GAAP, the Provincial bonds should be valued at market value. No
significant volumes of these securities have been traded on the market. The
known market values may not be representative of the realizable value of those
assets.
ACCOUNTING DISCLOSURE OF EFFECTS GENERATED BY COURT DECISIONS ON DEPOSITS
As of December 31, 2004, the Group carries an asset for Ps. 451,428 ( original
value of Ps. 650,318 net of accumulated amortization of Ps.198,890) under
"Intangible assets - Organization and development expenses", for the differences
resulting from compliance with court decisions on reimbursement of deposits
within the framework of Law No. 25,561, Decree No. 214/02 and complementary
rules, as established by Argentine Central Bank Communique "A" 3916, which is
being amortized over 60 months. Under professional accounting standards, such
asset is to be recorded as a receivable and valued on the basis of the best
estimate of the recoverable amounts and recovery terms.
CONVERSION OF FINANCIAL STATEMENTS
The conversion to pesos of the financial statements of foreign branches for
purposes of consolidation with the Bank's financial statements differs from
applicable professional accounting standards (Technical Pronouncement No. 18).
These standards require that:
(a) the measurements in the financial statements to be converted to pesos that
are stated in year-end foreign currency (current values, recoverable values) be
converted at the balance sheet date exchange rate; and that
(b) the measurements in the financial statements to be converted to pesos that
are stated in foreign currency of periods predating the closing date (for
example: those which represent historical costs, income, expenses) be converted
at the pertinent historical exchange rates, restated in year-end
F-74
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
currency, when it is so required due to the application of Technical
Pronouncement No. 17. Exchange differences arising from conversion of the
financial statements will be treated as financial income or expence, as the case
may be.
The application of this criterion, with the exception of point (a) above does
not have a significant impact on the Bank's financial statements.
ALLOWANCE FOR LOAN LOSSES - NON-FINANCIAL PUBLIC SECTOR
Under Argentine Central Bank rules, banks must maintain reserves for loan losses
in an amount appropriate to cover the risks underlying each bank, with exception
to the public sector. Under Argentine GAAP, these loans should be provisioned
according to the risk underlying this portfolio.
ACCOUNTING FOR INCOME TAX ACCORDING TO THE DEFERRED TAX METHOD
The Bank determines income tax at the statutory rate applicable to the estimated
taxable income, without considering the effect of any timing differences between
the accounting and taxable results.
Under Argentine GAAP applicable in the Autonomous City of Buenos Aires, income
tax must be recognized according to the deferred tax method and, therefore,
deferred tax assets or liabilities calculated on those timing differences must
be recognized. In addition, unused tax loss carry-forwards or fiscal credits
subject to deduction from taxable income in future fiscal years should be
recognized as deferred assets, provided that taxable income is likely to be
generated. Application of this criterion would lead to an increase of
approximately Ps. 300,000 in assets.
RESTATEMENT TO CONSTANT CURRENCY
The financial statements of the Bank have given recognition to the effects of
the variations in the purchasing power of the currency until February 28, 2003,
following the restatement method established by Technical Pronouncement No. 6
(as amended by Technical Pronouncement No. 19) of the FACPCE. As provided for by
National Executive Branch Decree 664/2003, Argentine Central Bank Communique "A"
3921 and CNV Resolution No. 441/03, the Bank discontinued the application of
that method and, therefore, did not recognize the effects of the variations in
the purchasing power of the currency as from March 1, 2003.
As established by MD Resolution No. 41/2003 of the CPCECABA, under Argentine
GAAP the application of this method has been discontinued since October 1, 2003.
Nevertheless, taking into account that the variation in the IPIM was a deflation
rate of approximately 2% during the March-September 2003 period, the effects
derived from failure to recognize those variations in the financial statements
of Banco the Bank have not been significant.
41. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ARGENTINE CENTRAL BANK RULES AND
UNITED STATES ACCOUNTING PRINCIPLES
The following is a description of the significant differences between Argentine
Banking GAAP and those applicable in the United States under generally accepted
accounting principles ("U.S. GAAP"). References below to "SFAS" are to United
States Statements of Financial Accounting Standards.
F-75
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
The differences below do not include the reversal of the adjustments to the
financial statements for the effects of inflation required under Argentine
Banking GAAP, as the application of inflation accounting represents a
comprehensive measure of the effects of price level changes in the Argentine
economy and as such, is considered a more meaningful presentation than
historical-based financial reporting for U.S. GAAP purposes.( See note 2.1 "Unit
of Measurement")
a. INCOME TAX
Argentine Central Bank regulations do not require the recognition of deferred
tax assets and liabilities and therefore income taxes for Banco Galicia are
recognized on the basis of amounts due in accordance with Argentine tax
regulations. However, Grupo Galicia and Grupo Galicia's non-bank subsidiaries
apply the net deferred income tax method. As a result, the Grupo Galicia's
non-bank subsidiaries have recognized a deferred tax asset at December 31, 2004
and 2003.
For the purposes of U.S. GAAP reporting, Grupo Galicia applies SFAS No. 109
"Accounting for Income Taxes". Under this method, income taxes are recognized
based on the assets and liability method whereby deferred tax assets and
liabilities are established for temporary differences between the financial
reporting and tax bases of the Grupo Galicia's assets and liabilities. Deferred
tax assets are recognized if it is more likely than not that such assets will be
realized.
Deferred tax assets (liabilities) are summarized as follows:
DECEMBER 31, 2004
------------------------------------------------
SFAS 109 SFAS 109
applied to applied to
Argentine GAAP U.,S. GAAP
balances adjustments SFAS 109
-------------- -------------- -------------
Deferred tax assets
Allowance for loan losses - private sector.......... 127,416 (14,124) 113,292
Allowance for loan losses - public sector........... - 344,773 344,773
Compesation and Hedge Bond.......................... (480,009) 633,076 153,067
Amortization of intangible assets................... - - -
Impairment of intangible assets..................... - 2,508 2,508
Allowance for equity in other companies............. 20,317 - 20,317
Impairment of fixes assets and forecloses assets.... - 22,528 22,528
Liabilities......................................... (27,981) (27,981)
Provision for contingencies......................... 151,154 - 151,154
Others.............................................. 12,237 295,373 307,610
Loss carry forward.................................. 383,519 - 383,519
----------- ------------- -------------
Total gross deferred tax assets..................... Ps. 186,653 Ps. 1,284,134 Ps. 1,470,787
Deferred tax liabilities:
Investments......................................... Ps. Ps. Ps.
Amortization of intangible assets................... 69,611 (10,121) 59,490
Depreciation of fixed assets........................ 9,956 - 9,956
----------- ------------- -------------
Total gross deferred tax liabilities................ Ps. 79,567 Ps. (10,121) Ps. 69,446
----------- ------------- -------------
Net deferred income tax asset before valuation
allowance........................................... Ps. 266,220 Ps. 1,274,013 Ps. 1,540,233
----------- ------------- -------------
Valuation allowance................................. (249,469) (1,274,013) (1,523,482)
----------- ------------- -------------
Net deferred income tax............................. Ps. 16,751 Ps. - Ps. 16,751
----------- ------------- -------------
F-76
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
DECEMBER 31, 2003
-------------------------------------------------
SFAS 109
applied to SFAS 109
Argentine GAAP applied to U.S.
balances GAAP adjustments SFAS 109
-------------- ---------------- --------------
Deferred tax assets
Allowance for loan losses - private sector........ 3,526 (21,029) (17,503)
Allowance for loan losses - public sector......... - 611,965 611,965
Compensation and hedge bonds...................... (881,190) 892,732 11,542
Impairment of intangible assets................... - 3,773 3,773
Liabilities....................................... (7,911) - (7,911)
Impairment of real estate properties.............. - 23,016 23,016
Loss carry forward................................ 886,519 - 886,519
Provision for contingencies....................... 161,210 - 161,210
Other............................................. (11,756) 149,214 137,458
----------- ------------- -------------
Total gross deferred tax assets................... Ps. 150,398 Ps. 1,659,671 Ps. 1,810,069
Deferred tax liabilities:
Depreciation of fixed assets...................... Ps. 18,891 Ps. - Ps. 18,891
Amortization of intangible assets................. 25,508 (2,776) 22,732
----------- ------------- -------------
Total gross deferred tax liabilities.............. Ps. 44,399 Ps. (2,776) Ps. 41,623
----------- ------------- -------------
Net deferred income tax asset before valuation
allowance......................................... Ps. 194,797 Ps. 1,656,895 Ps. 1,851,692
----------- ------------- -------------
Valuation allowance............................... (156,445) (1,656,895) (1,813,340)
----------- ------------- -------------
Net deferred income tax........................... Ps. 38,352 Ps. - Ps. 38,352
----------- ------------- -------------
DECEMBER 31, 2002
-----------------------------------------------
SFAS 109 SFAS 109
applied to applied to
Argentine GAAP U.S. GAAP
balances adjustments SFAS 109
-------------- -------------- -------------
Deferred tax assets
Allowance for loan losses - private sector........ 294,369 (16,728) 277,641
Allowance for loan losses - public sector......... - 527,363 527,363
Compensation and hedge bonds...................... (1,271,222) 1,472,173 200,951
Impairment of intangible assets................... - 10,888 10,888
Impairment of fixed assets and foreclosed assets.. - 23,504 23,504
Liabilities....................................... 35,291 - 35,291
Provision for contingencies....................... 128,941 - 128,941
Other............................................. (9,321) 15,561 6,240
Loss carry forward................................ 1,230,668 - 1,230,668
----------- -------------
Total gross deferred tax assets................... Ps. 408,726 Ps. 2,032,761 Ps. 2,441,487
Deferred tax liabilities:
Depreciation of fixed assets...................... Ps. (1,612) Ps. - Ps. (1,612)
Amortization of intangible assets................. (2,657) (78) (2,735)
Foreign exchange.................................. (54,132) - (54,132)
----------- -------------
Total gross deferred tax liabilities ............. Ps. (58,401) Ps. (78) Ps. (58,479)
----------- -------------
Net deferred income tax asset before valuation
allowance......................................... Ps. 350,325 Ps. 2,032,683 Ps. 2,383,008
----------- -------------
Valuation allowance............................... (404,457) (2,032,683) (2,437,140)
----------- -------------
Net deferred income tax........................... Ps. (54,132) Ps. - Ps. (54,132)
----------- -------------- -------------
The following table accounts for the difference between the actual tax provision
and the amounts obtained by applying the statutory income tax rate in Argentina
to income before income tax, calculated on the basis of U.S. GAAP for the years
ended December 31, 2004, 2003 and 2002:
F-77
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
DECEMBER 31,
-----------------------------------------
2004 2003 2002
------------ ------------ -------------
Statutory income tax rate............................................. 35% 35% 35%
Tax provision computed by applying the statutory rate to
the income before taxation calculated in accordance with U.S. GAAP.... Ps. 12,018 Ps. 242,530 Ps. 171,120
Tax exempt income..................................................... (266,452) (827,978) (1,249,801)
Reversal of deferred income taxes under U.S. GAAP..................... - - -
Reversal of deferred tax set-up under Argentine GAAP.................. - - -
Valuation allowance (1)............................................... 289,858 623,800 1,145,103
Other................................................................. - - -
------------ ----------- -------------
Actual tax provision under U.S. GAAP.................................. Ps. 35,424 Ps. 38,352 Ps. 66,422
============ =========== =============
Valuation Allowance: For 2004 and 2003 the Group had significant accumulated tax
loss and uncertainties with respect to the generation of taxable income
sufficient enough to absorb such deferred tax assets. This situation constitutes
significant negative evidence under FAS 109 as to the realizability of deferred
tax assets and thus, a valuation allowance would be required for all deferred
tax assets that are not assured of realization by either (1) carryback to prior
years or (2) reversal of existing taxable temporary differences.
For the three years ended December 31, 2004, the Bank provided a full reserve of
its deferred tax assets after netting the reversal of temporary deferred tax
liabilities. Based on the Argentine Income Tax Law there are no provisions that
allow the Company to carryback tax losses to prior years. In addition and
following the principle above, the Bank fully reserved its Presumptive Minimum
Income Tax ("PMIT") carryforwad.
The Group has recognized deferred tax assets related to its non-bank
subsidiaries due to the fact that such subsidiaries generated separate return
taxable income for the years ended December 31, 2004 and 2003.
b. COMMISSIONS ON LOANS
Under Argentine Banking GAAP, the Bank does not defer certain loan origination
costs relating to credit cards. In accordance with U.S. GAAP under SFAS 91, loan
origination fees net of certain direct loan origination costs should be
recognized over the life of the loan as an adjustment of yield.
c. INTANGIBLE ASSETS
AMORTIZATION OF DEFERRED EXPENSES FOR SETTING UP BRANCHES
Included in organization and development costs of the Bank are costs for
compensation and severance payments to Bank employees as part of restructurings.
These items are being amortized over 60 months. For U.S. GAAP purposes, these
costs are expensed as incurred.
The Bank amortizes deferred expenses for setting up branches over the related
lease agreements, a maximum of 60 months. Subsequent to the year ended June 30,
1999, in accordance with SOP 98-5 effective for fiscal years beginning after
December 15, 1998, such start-up costs should be expensed as incurred.
GOODWILL
Goodwill recorded on the purchase of regional credit card companies is being
amortized in 10 years for Argentine Banking GAAP purposes. Before the issuance
of SFAS 142 under U.S. GAAP, a 5 year
F-78
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
amortization period was elected to represent the period benefited by the
intangible asset in accordance with APB 17. For the purposes of U.S. GAAP,
goodwill is not amortized. Furthermore, goodwill is reviewed annually for
impairment or whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For U.S. GAAP, Grupo Galicia
has recorded an impairment of goodwill in its financial statements as of
December 31, 2001.
Subsequent to the impairment recorded under U.S. GAAP in 2001, the Group has
written off different goodwill amounts under Argentine Banking GAAP that has
been reversed for U.S. GAAP purposes since such written offs were considered in
the impairment charge.
Amortization expenses, under Argentine Banking GAAP have been reversed for
U.S.GAAP purposes.
SOFTWARE COSTS
Under U.S. GAAP SOP 98-1, effective for fiscal years beginning after December
15,1998, defines three stages for the costs of computer software developed or
obtained for internal use: the preliminary project stage, the application
development stage and the post-implementation operation stage. Only the second
stage costs should be capitalized. Under Argentine Banking GAAP, the Bank
capitalized costs relating to all three of the stages of software development.
Before the issuance of SAB 103, Grupo Galicia, following the guidelines
established by article 202 of the Commercial Companies Law, has deducted from
the Share Issuance Premiums the organizational costs related to the exchange
offer and the issuance of shares conducted in July 2000. Under U.S. GAAP and
following the guidelines established by SAB 50, organizational costs such as
legal, printing and other costs related to the exchange offer and the issuance
of shares are considered to be an intangible asset and a 5 year amortization
period was elected to represent the period benefited by the intangible asset.
The audit fees related to this these transactions have been expensed, in
accordance with U.S. GAAP.
In May 2003, the SEC issued SAB 103 related to the accounting treatment for
costs incurred to register securities issued for the formation of one-bank
holding companies which supersedes SAB 50. Under SAB 103 exchange offer costs
should be expensed as incurred as mentioned in SOP 98-5 "Reporting on the Costs
of Start-Up Activities". Therefore the remaining outstanding balance related to
the Exchange Offer costs have been expensed for US GAAP purposes in the fiscal
year ended December 31, 2003.
d. LOAN LOSS RESERVES
The Bank's accounting for its loan loss reserve differs in some respects with
practices of U.S. based banks. The most significant differences follow:
(i) LOAN CHARGE OFFS AND RECOVERIES
The Bank records recoveries on previously charged-off loans directly to income
and records the amount of charged-off loans in excess of amounts specifically
allocated as a direct charge to the income statement. The Bank does not
partially charge off troubled loans until final disposition of the loan, rather,
the allowance is maintained on a loan-by-loan basis for its estimated settlement
value. The banking industry practice in the United States is to account for all
charge off and recovery activity through the allowance for loan loss account.
Further, loans are generally charged to the allowance account when all or part
of the loan is considered uncollectible. In connection with loans in judicial
proceedings, resolution through the judicial system may span several years.
Loans in judicial proceedings, greater than three years at December 31, 2004,
2003 and 2002, amounted to Ps. 63,397, Ps.195,003 and Ps. 323,104, respectively.
Under US GAAP purposes these loans were completely provisioned. The Bank also
classified loans, many of which are in judicial proceedings, which amounted
approximately Ps.85,500, Ps.324,900 and Ps. 198,200 as of December 31, 2004,
2003 and 2002, respectively, as uncollectible,
F-79
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
although the Bank may hold preferred guarantees. Under U.S. GAAP these loans
would have been charged off. Therefore the balance of loans and allowance for
loan losses would be decreased by these amounts. The Bank's practice does not
affect the accompanying Statements of Operations as the Bank's reserve
contemplates all losses inherent in those troubled loans.
(ii) LOANS - NON-FINANCIAL NATIONAL PUBLIC SECTOR
During the fiscal year ended December 31, 2001, and as a consequence of Decree
No. 1387/01, effective as of November 6, 2001, the Bank swapped part of its
Argentine public-sector debt instruments, under the Promissory Note/Bond
program, for secured loans.
As established by article 20 of the above mentioned decree, the conversion was
made at the nominal value, at a rate of exchange of Ps. 1.0 = US$ 1.0 and in the
same currency as that of the converted obligation.
The Argentine Central Bank provided that the gain arising from the difference
between the carrying value of the secured loans and the book value of the
securities exchanged must be recorded in an asset adjustment account and charged
to income on a monthly basis, in proportion to the term of each of the secured
loans received.
Subsequently, Decree No. 644 dated April 18, 2002 established the conversion to
pesos of the Secured Loans originally denominated in US dollars at the exchange
rate of Ps. 1.40 per US dollar, pursuant to Section 1 of Decree No. 471/02,
setting new interest rates to be accrued by those secured loans, as established
by Section 3 of Decree No. 471/02.
In accordance with U.S.GAAP, specifically the Emerging Issues Task Force No.
01-07 ("EITF 01-07"), satisfaction of one monetary asset (in this case a loan or
debt security) by the receipt of another monetary asset (in the case a secured
loan) for the creditor is generally based on the market value of the asset
received in satisfaction of the debt (an extinguishment). In this particular
case, the secured loan being received is significantly different in structure
and in interest rates than the debt securities swapped. Therefore, the fair
value of the loans was determined on the balance sheet date based on the
contractual cash flows of the loan received discounted at an estimated market
rate. The estimated fair value of the loan received will constitute the cost
basis of the asset. Any difference between the old asset and the fair value of
the new asset is recognized as a gain or loss. The difference between the cost
basis and amounts expected to be collected will be amortized on an effective
yield basis over the life on the loan.
(iii) LOANS / BONDS - NON-FINANCIAL PROVINCIAL PUBLIC SECTOR
As of December 31, 2002, the Group offered to exchange certain loans to
Argentine provincial governments for loans or securities of the Argentine
national government, however the exchange was finalized in 2003. As of December
31, 2001 these loans were considered to be impaired under U.S. GAAP in
accordance with Statement of Financial Accounting Standards No. 114.
Accordingly, the Group established an allowance for loan losses on loans to
Argentine provinces as of December 31, 2002.
In 2003, the Bank tendered in the exchange under Decree No.1579/02 its portfolio
of loans to provincial governments and pursuant to the option provided by
section 3, subsection k of the Decree, opted to receive promissory notes, valued
in accordance with Argentine Central Bank Communique "A" 3911. The Bank received
BOGAR for the provincial loan for which the exchange had been completed at the
close of the fiscal year, despite having opted to receive promissory notes.
F-80
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
For U.S. GAAP purposes, since December 31, 2003 and in accordance with EITF
01-07, satisfaction of one monetary asset of the creditor (in this case a loan)
by the receipt of another monetary asset (in this case BOGAR) is generally based
on the market value of the asset received in satisfaction of the loan. In this
particular case, the BOGAR being received is significantly different in
structure and in interest rates than the loans swapped. Therefore, such amounts
should initially be recognized at their market value. The estimated fair value
of the securities received will constitute the cost basis of the asset. Any
difference between the old asset and the fair value of the new asset is
recognized as a gain or loss. The difference between the cost basis and the
amount expected to be collected will be amortized on an effective yield basis
over the life of the bond.
These BOGAR are classified by the Bank for U.S. GAAP purposes, as available for
sale securities and subsequently recognized at market with the unrealized gain
or loss recognized as a charge or credit to equity through other comprehensive
income. In connection with estimating the fair value of the BOGAR, the Bank used
quoted market values. Because of the low trading volume of these securities and
as such, the quoted market values may not represent the actual price in a sale
between a willing buyer and a willing seller.
In 2004 BOGAR securities were offered by the Bank to guarantee hedge bonds.
Pursuant to Comunique "4084" securities offered to guarantee hedge bonds should
be recorded at the value allowed for purposes of the creation of guarantees.
Following the same rule the Central Bank required all banks in Argentina to
reflect the change in the BOGAR value as an adjustment to prior year retained
earnings.
For US GAAP purposes the adjustment to retained earnings was reversed pursuant
to ABP 20. (See Note 41 (h) "Prior year adjustments")
(iv) IMPAIRED LOANS - NON-FINANCIAL PRIVATE SECTOR AND RESIDENTS ABROAD
For the purposes of reporting under U.S. GAAP, the Bank adopts Statement of
Accounting Standards No. 114, "Accounting for Creditors for Impairment of a
Loan" ("SFAS 114") as amended by Statement of Financial Accounting Standards No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" ("SFAS 118"). SFAS 114, as amended, requires that the allowance of
an impaired loan be based on the present value of expected future cash flows
discounted at the loan's effective interest rate fair value of the loan or the
fair value of the collateral, if the loan is collateral dependent. Under SFAS
114, a loan is considered impaired when, based on current information, it is
probable that the borrower will be unable to pay contractual interest or
principal payments as scheduled in the loan agreement. SFAS 114 applies to all
loans except smaller-balance homogeneous consumer loans, loans carried at the
lower of cost or fair value, debt securities, and leases.
The Bank applies SFAS 114 to all commercial loans classified as " With
problems", "Insolvency Risks" and "Uncollectible" or commercial loans more than
90 days past due. The Bank specifically calculates the present value of
estimated cash flows for commercial loans in excess of Ps.200,000 and more than
90 days past due. For commercial and other loans in legal proceedings, loans in
excess of Ps.200,000 are specifically reviewed either on a cash-flow or
collateral-value basis, both considering the estimated time to settle the
proceedings.
The following information relates to the Bank's impaired loans:
F-81
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(Expressed in thousands of Argentine pesos)
DECEMBER 31,
------------------------------------------------
2004 2003 2002
------------- -------------- ---------------
Total impaired loans........................................... Ps. 776,973 Ps. 1,852,711 Ps. 2,231,097
Average impaired loans during the year......................... 1,421,478 2,110,583 2,991,688
Total impaired loans with no allowance under US GAAP........... 35,051 49,492 104,244
Cash payments received for interest on impaired loans,
Recognized as income........................................... 4,341 3,339 1,660
Allowance for impaired loans under SFAS 114.................... 379,484 953,767 1,031,492
In addition, the Bank has performed a migration analysis for consumer loans and
all performing commercial loans following the SFAS 5 considerations.
As of December 2002, the result of the migration analysis, showed that the Bank
has provided for loan losses in excess of this analysis for Ps.112,976. For U.S.
GAAP purposes, this amount of provision has been reversed.
As of December 31, 2004 and 2003, the result of the migration analysis, shows
that the bank provided for loan in the range established by the analysis
described above.
(v) CREDIT CARD LOANS
Grupo Galicia establishes its reserve for credit card loans based on the past
due status of the loan. All loans greater than 180 days have been reserved at
50%, in accordance with the rules established by the Argentine Central Bank.
Under U.S. GAAP, loans greater than 180 days past due should be charged off. As
a result, under U.S. GAAP the charge offs of the credit card portfolio has been
increased as of December 31, 2004, 2003, and 2002, by Ps. 4,590, Ps. 4,985 and
Ps. 31,928, respectively.
e. GOVERNMENT SECURITIES AND OTHER INVESTMENTS
(i) INVESTMENT SECURITIES
The Bank's government securities and certain other securities that are included
under the caption "investment accounts" under Argentine Banking GAAP, are
considered as "available for sale" under U.S. GAAP.
Under Argentine Banking GAAP, such securities are valued at cost plus accrued
interest where as under US GAAP, these securities are valued at its market
value. Unrealized gains and losses are included in other comprehensive income
net of taxes.
(ii) HEDGE BONDS ISSUED IN CONNECTION WITH THE COMPENSATION FOR FOREIGN
CURRENCY POSITION, COMPENSATORY BONDS RECEIVED AND TO BE RECEIVED IN
CONNECTION WITH THE COMPENSATION FOR "ASYMMETRIC PESIFICATION".
Argentine Central Bank's Communique "A" 3650 established the regulations
necessary to implement the provisions of Decree No. 905/02 in connection with
the compensation of the negative effects of the conversion into pesos at
different exchange rates of financial institutions' assets and liabilities and
the resulting foreign currency mismatches left in their respective balance
sheets.
As of December 31, 2004 the Compensatory Bond and Hedge Bond to be received,
subject to the final resolution of unresolved matters with the Argentine Central
Bank amounted to U$S 2.189,7 million (Compensatory Bond and Hedge Bond amounting
to U$S 994.6 million and 1,195.1 respectively). In March 2005, the Bank agreed
with the Argentine Central Bank the amount of the compensatory and
F-82
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(Expressed in thousands of Argentine pesos)
hedge bond to be received in the amount of US$ 2,178.0 million (compensation
bond US$ 906.3 million and hedge bond US$ 1271.7 million). The difference in the
agreed amount and the carrying value of the compensatory Bonds at December 31,
2004 did not impact the U.S. GAAP financial results of the Bank.
At December 31, 2004 and 2003, the amount of Ps. 4,732,288 and Ps. 4,629,595,
respectively for the compensatory and the hedge bond to be received from the
National Government was recorded in Other receivables resulting from financial
brokerage under the caption "Compensation to be received from the National
Government", while at December 31, 2004, Ps. 601,264 for the securities received
for the compensation, were recorded in Government securities - Holdings in
investment accounts. Furthermore during 2004 the Bank entered into repurchase
transaction amounting to Ps. 374,793 that has been recorded under Other
receivables resulting from financial brokerage under the caption - Forward
purchases of securities under repo transactions and under Miscellaneous
Receivables.( See Note 41 (s) " Repos and Reverse Repos").
In order to purchase the subscribed Hedge Bond, the Bank may enter into a credit
agreement with the Argentine Central Bank, with interest payable at CER plus 2%.
In the case of the Hedge Bond and the related financing to be obtained from the
Argentine Central Bank, the transaction is retroactive to February 3, 2002. The
Bank can withdraw its request to purchase the Hedge Bonds prior to the approval
of the Argentine Central Bank and prior to the execution of the transaction.
In connection with the Bank's right (but not the obligation) to purchase the
Hedge Bond, the Bank has recognized the right to purchase the Hedge Bond at
their equivalent value as if the Bank had the associated bonds in their
possession, and recognized the associated liability to fund the Hedge Bonds as
if the Bank had executed the debt agreement with the Argentine Central Bank. The
receivable is denominated in U.S. dollars bearing interest at Libor whereas the
liability to the Argentine Central Bank is denominated in pesos with interest
being accrued at CER plus 2%, each retroactive to February 3, 2002.
Under U.S. GAAP, the right to purchase the Hedge Bond is not considered an asset
under Financial Accounting Standards Board Statement of Concepts No, 6 Elements
of Financial Statements (CON 6). Under CON 6, assets are defined as "...probable
future economic benefits obtained or controlled by an entity as a result of past
transactions or events". In addition, one of the three essential characteristics
of an asset includes that an entity can obtain the benefit and controls others'
access to it. As of December 31, 2004 and 2003, the Bank cannot obtain the
benefit of the Hedge Bond to be purchased until such time as the transaction
becomes approved by the Argentine Central Bank and the Bank remits funds to the
Argentine Central Bank. The liability under U.S. GAAP would be recognized when
the Bank enters into the financing arrangement.
In connection with the compensatory bonds received or receivable by the Bank,
such amounts should initially be recognized at their market value.
Compensatory Bonds received by the Bank are classified as available for sale and
are carried at estimated market value with the unrealized gain or loss
recognized as a charge or credit to equity through other comprehensive income.
In connection with estimating the fair value of the Compensatory Bonds, the Bank
used quoted market values.
Under US GAAP, the activity of the compensation bonds received or receivable
have been reflected in the income statement considering that the compensation
bonds were adjusted to its market value. The activity includes (1) the effect of
the exchange rate between the argentine pesos and the US dollars for the
Compensation Bond to be received, (2) the cancellation of certain amounts
related to the disputes
F-83
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(Expressed in thousands of Argentine pesos)
with the Central Bank and (3) the payments made in satisfaction to the deposits
held in Uruguay, and foreign debt restructuring.
(iii) EXTERNAL NOTES
Under US GAAP, Argentine Republic External Notes are classified as available for
sale securities and recorded at market value, with the respective gain or loss
being charged to the results for the year or to equity through "Other
Comprehensive Income" unless any declines are considered "other than temporary
decline" where such decreases in values are charged to income. The Bank
determined that the carrying values as of December 31, 2002 was a reasonable
estimate of their market values primarily from their ability and practice of
offsetting amounts against taxes, including value-added taxes.
Subsequently, during the fiscal year ended December 31, 2003, the national
government suspended the abbility offset tax obligations with public debt
securities. The Bank concluded that these obligations were impaired for US GAAP
purposes and an other than temporary loss amounting to Ps. 378,996 was
recognized.
As of December 31, 2003, in order to estimate fair value of these securities the
Bank considered the collateral value assigned to Argentine Republic External
Notes by the Argentine Central Bank for purposes of extending credit for the
purchase of BODEN 2012.
On November 4, 2004 the Superintendence of Financial Institutions informed the
Bank that External Notes cannot be used as collateral for the advance to
subscribe the Hedge Bond, and they have to be valued pursuant to Communiques "A"
3911 and "A" 4084 as fully described in Note 2.3 "Government and Corporate
Securities - Unpaid and past due medium-term US dollar External Notes" .
On January 2005, the Bank accepted the offer to exchange its External Notes, for
"Discount Bonds in pesos" and "GDP-linked marketable securities" issued under
Argentine debt restructuring. The Bank will receive the new instrument for an
original principal amount equal to 33.7% for the External Notes carrying value
at December 31, 2004.
Under US GAAP, the change in estimated fair value of the External Notes for the
year ending December 31, 2004 was considered an other than temporary decline in
available-for-sale securities pursuant to EITF 03-01. Therefore, the Bank
recorded an impairment charge of Ps.163,344.
f. ITEMS IN PROCESS OF COLLECTION
The Bank does not give accounting recognition to checks drawn on the Bank or
other banks, or other items to be collected until such time as the related item
clears or is accepted. Such items are recorded by the Bank in memorandum
accounts. U.S. banks, however, account for such items through balance sheet
clearing accounts at the time the items are presented to the Bank.
Grupo Galicia's assets and liabilities would be increased by approximately Ps.
799,808, Ps.598,544, and Ps.480,774, had U.S. GAAP been applied at December 31,
2004, 2003 and 2002, respectively.
g. DERIVATIVE INSTRUMENTS
Under Argentine Central Bank rules, the Bank accounts for derivatives in
memorandum accounts off the balance sheet.
F-84
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(Expressed in thousands of Argentine pesos)
Under U.S. GAAP, the Bank accounts for derivative financial instruments in
accordance with SFAS 133 as amended by SFAS 137, SFAS 138 and SFAS 149.
SFAS No. 133 establishes the standards of accounting and reporting derivative
instruments, including certain derivative instruments embedded within contracts
(collectively referred to as derivatives) and hedging activities. This statement
requires institutions to recognize all derivatives in the balance sheet, whether
as assets or liabilities, and to measure those instruments at their fair value.
If certain conditions are met, a derivative may be specifically designated as
(a) a hedge for the exposure to changes in the fair value of a recorded asset or
liability or unrecorded firm commitment, (b) a hedge for the exposure of future
cash flows and (c) a hedge for the exposure of foreign currency. If such a hedge
designation is achieved then special hedge accounting can be applied for the
hedged transactions, that will reduce the volatility in the income statement to
the extent that the hedge is effective. In order for hedge accounting to be
applied the derivative and the hedged item must meet strict designation and
effectiveness tests.
As of December 31, 2004 and 2003, Grupo Galicia has no derivative contracts
under U.S. GAAP. The written put options mentioned in note 30 to these financial
statements are considered financial guarantees for U.S. GAAP purposes and it had
been valuated under FIN 45. (See note 30 and 41.p.)
h. ADJUSTMENT TO PRIOR YEAR RESULTS
As fully described in Note 38, under Argentine Banking GAAP, the Group recorded
adjustments to prior year results as contra equity adjustments. Under US GAAP,
APB 20 generally prohibits retroactive restatement of prior year financial
statements to reflect accounting changes. As a result, the Group recorded
through the year results the amounts reflected as restatement of prior year
results.
i. COMPENSATION RELATED TO THE PAYMENT OF DEPOSITS
Financial institutions have asked to the government that they be compensated for
the losses generated from the payment of deposits pursuant to judicial orders at
the free market exchange rate, which was greater than that established by the
government for conversion into pesos the financial institutions' assets and
liabilities.
Through Communique "A" 3916, the Argentine Central Bank allowed the recording of
an intangible asset for the difference between the amount paid by financial
institutions pursuant to judicial orders and the amount resulting from the
conversion into pesos of the dollar balance of the deposits reimbursed at the
Ps.1.40 per US dollar exchange rate (adjusted by CER and interest accrued until
the date of the reimbursement). The corresponding amount must be amortized over
60 months beginning April 2003. As of December 31, 2004 and 2003, the amount
recorded under "Intangible Assets", net of accumulated amortization, was Ps.
451,428 and Ps.487,020 respectively. As of December 31, 2002, this difference
has been recorded under "Other Receivables resulting from Financial Brokerage
amounting to Ps.446,756.
As of the date of preparation of these financial statements, the Supreme Court
has not taken any measures to compensate for the relative issues.
Under U.S. GAAP, the right to obtain this compensation is not considered an
asset under Financial Accounting Standards Board Statement of Concepts No. 6
Elements of Financial Statements (CON 6).
j. TRANSFERS OF FINANCIAL ASSETS
Financial trust "Galtrust I"
F-85
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(Expressed in thousands of Argentine pesos)
The financial trust "Galtrust I" was created in October 2000 in connection with
the securitization of provincial loans for a total amount of Ps.1,102 million.
The securitized loans were from the portfolio of loans granted to provincial
governments, guaranteed by the federal tax revenues shared with the provincial
governments. This trust was recorded under Argentine Central Bank rules in the
"Other Receivables from Financial Brokerage", account in the financial
statements and its balance as of December 31, 2004, 2003 and 2002, was Ps. 665
million, Ps.646 million and Ps.686 million, respectively. The Bank considers
this transaction as a sale under U.S. GAAP, in accordance with FAS 140. Galtrust
I debt securities and certificates retained by the Bank are considered as
"available for sale securities" under U.S. GAAP and the unrealized gains
(losses) on these securities are reported as an adjustment to shareholders'
equity, unless unrealized losses are deemed to be other than temporary in
accordance with Emerging Issues Task Force No. 99-20. The unrealized loss on the
retained interests at December 31, 2001 has been deemed to be other than
temporary and such loss has been charged to income. The retained interests were
initially recorded based on their allocated book value using the relative
fairvalue allocation method.
During 2002, the portfolio of loans included and the related retained interest
in Galtrust I were subject to the pesification. As a result the retained
interest in the trust was converted to pesos at an exchange rate of 1.40 to 1
and the interest rate for their debt securities changed to CER plus 2%. During
2003 Galtrust I had swapped its provincial loans for Secured Bonds (BOGAR). (See
Note 41 d. (iii))
For purposes of estimating the fair value of the retained interests in the
securitization trusts valuation models were used which consider certain
assumptions in estimating future cash flows and a rate under which the cash
flows are discounted.
The credit risk reflected by the subordination of the B and C note was taken
into account in the discount rate applied by the Bank. The discount rates used
as of December 31, 2004, 2003 and 2002 were as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2002
------------ ------------ ------------
DISCOUNT RATE FOR:
Galtrust I Class B Debt Securities 6%(b) 11%(b) 7%(a)
Galtrust I Participation Certificates 7%(b) 11,5%(b) 7%(a)
(a) As of December 31, 2002, the discount real rate used is based on CER plus
700 basis points (no similar bonds existed at December 31, 2002).
(b) As of December 31, 2004 and 2003, the rate is based upon the Bank's estimate
of comparable internal rates of return of other CER-adjusted bonds.
Financial trust "Galtrust II, III, IV, V" and "Galicia Mortgage Loans"
As described in Note 34 of the Group's financial statements, on December 17,
2001 and April 2002, the Bank entered into securitization transactions where the
Bank established five different trusts and transferred to the trusts ownership
of mortgage loans in exchange for debt securities and residual interests in the
trusts.
F-86
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(Expressed in thousands of Argentine pesos)
These transfers would not be considered as a sale for U.S. GAAP purposes.
Therefore, the Bank reconsolidated the loans transferred to the financial trust.
Accordingly, the Group valued these loans under SFAS 5, for purposes of
determining its loan loss reserve. For Argentine Banking GAAP purposes, the debt
securities and certificates retained by the Bank are accounted for at cost plus
accrued interest for the debt securities, and the equity method is used to
account for the residual interest in the trusts.
On December 26, 2002 the "Galtrust III and IV" financial trusts were terminated,
and the loan portfolio of those trusts had been incorporated to the Bank's loan
portfolio.
On January 10, 2005, the parties resolved to terminate Galicia Mortgage Loans
trust in advance and redeem the outstanding securities, and all the trust assets
were transferred back to the Bank. As a result, mortgage loans for $172,214 and
$ 1,508 in cash will be reconsolidated into the Bank accounts at that time.
Financial Trust "Secured Loans"
As part of the implementation of the Galicia Capitalization and Liquidity Plan,
these "Secured Loans" trust was created. Under this trust, secured loans for Ps.
108,000 were transferred, and Ps.81,000 in cash and certificate of participation
for Ps. 27,000 were received in exchange.
This transfer would not be considered as a sale for U.S. GAAP purposes.
Therefore, the Bank reconsolidated the loans transferred to the financial trust.
Accordingly, the Group valued these loans at its book value before the transfer
to the trust (See Note 41d.(ii)). For Argentine Banking GAAP purposes, the debt
securities and certificates retained by the Bank are accounted for at cost plus
accrued interest for the debt securities, and the equity method is used to
account for the residual interest in the trusts
FINANCIAL TRUSTS "REGIONAL CREDIT CARD COMPANIES TRUSTS - TARJETA NEVADA I AND
II AND TARJETA NARANJA I AND II"
As described in Note 35 of the Group's financial statements Regional Credit
Cards a subsidiary of the Group entered into securitization transactions where
Regional Credit Cards established four different financial trusts and transfer
to such trusts ownership of credit card loans in exchange for cash, debt
securities and residual interests in the trusts.
Transfers of credit card loans to financial trusts Tarjeta Nevada I and Tarjeta
Naranja I were considered sales under U.S. GAAP in accordance with FAS 140. Debt
securities and certificates retained by the bank are considered as "
available-for-sales" securities. Unrealized gains or losses on these securities
are reported as an adjustment to shareholders' equity, unless unrealized losses
are deemed to be other-than-temporary in accordance with Emerging Issues Task
Force No. 99-20. The beneficial interest were initially recorded based on their
allocated book value using the fair value allocation method. The fair value of
the allocation approximates the carrying value of the loans transferred to the
financial trusts due to its short-term maturity. Therefore, no gain or loss was
recorded at the date of the transfer.
For Argentine Banking GAAP Regional Credit Card trusts debt securities and
certificates retained by the Bank are accounted for at cost plus accrued
interest for the debt securities, and the equity method is used to account for
the residual interest in the trusts.
Transfers of credit card loans to financial trusts Tarjeta Nevada II and
Tarjeta Naranja II would not be considered as a sale for U.S. GAAP purposes in
accordance with FAS 140. Therefore, the Bank
F-87
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(Expressed in thousands of Argentine pesos)
reconsolidated the loans transferred to these financial trusts. Accordingly, the
Group valued these loans under SFAS 5, for purposes of determining its loan loss
reserve. For Argentine Banking GAAP, Regional Credit Cards trusts certificates
retained by the Bank are accounted at the equity method.
GALICIA CONSUMER LOAN FINANCIAL TRUST
As described in Note 39 of the Group's financial statements the Group entered
into a securitization transaction with consumer loans that was completed in
January , 2005. The Group recorded an account receivable for the cash received
in 2005 as a consideration of the assets transferred to the financial trust. For
US GAAP purposes the transfer of the financial assets has not occurred at
December 31, 2004. Therefore the Group reconsolidated the consumer loans
transferred to the financial trust. Accordingly, the Group valued these loans
under SFAS 5, for purposes of determining its loan loss reserve.
k. ACCEPTANCES
Under Argentine Banking GAAP, acceptances are accounted for in memorandum
accounts. Under U.S. GAAP, third party liability for acceptances should be
included in "Other Receivables Resulting from Financial Brokerage" representing
Bank customers' liabilities on outstanding drafts or bills of exchange that have
been accepted by the Bank. Acceptances should be included in "Other Liabilities
Resulting from Financial Brokerage" representing the Bank's liability to remit
payment upon the presentation of the accepted drafts or bills of exchange.
The Group's assets and liabilities would be increased by approximately Ps.
18,967, Ps. 22,354 and Ps.105,760, had U.S. GAAP been applied as of December 31,
2004, 2003 and 2002, respectively.
l. YEAR 2000 COSTS
Under Argentine Banking GAAP, costs related to the Year 2000 project have been
capitalized. Under U.S. GAAP costs relating to the Year 2000 project arising
from the modification of existing systems are expensed as incurred.
m. FOREIGN EXCHANGE DIFFERENCE
At December 31, 2001, the official exchange rate between the U.S. dollar and the
Argentine peso was 1 to 1 and for Argentine Banking GAAP purposes, this rate was
used to translate all U.S. dollar denominated assets and liabilities at December
31, 2001.
For U.S. GAAP purposes, foreign currency transactions should be translated at
the applicable rate at which those particular transactions could be settled at
the balance sheet date. In anticipation of an announced devaluation, "exchange
houses" in Argentina (used for limited personal transactions and not for
settling business transactions) started exchanging dollars at 1.4 or more pesos
to the dollar prior to December 31, 2001. Such exchange houses were closed at
December 31, 2001. Through January 10, 2002, no transactions were conducted in
U.S. dollars and there was no exchangeability between the peso and the dollar.
Under Statement of Accounting Standards No. 52, if the exchangeability between
two currencies is temporarily lacking at the balance sheet date, the first
subsequent rate at which exchanges could be made is used for translating foreign
currency transactions. In this case, the January 11, 2002, exchange rate of
Ps.1.6 = US$ 1.0 was the first available rate after year end and thus that rate
was used for U.S. GAAP purposes to translate U.S. dollar denominated assets and
liabilities at December 31, 2001.
F-88
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(Expressed in thousands of Argentine pesos)
In addition, the Group's equity holdings in Argentine companies were similarly
adjusted for its proportional effect of applying the Ps.1.6 = US$ 1 exchange
rate to the U.S. dollar denominated assets and liabilities of such companies at
December 31, 2001.
As of December 31, 2004, 2003 and 2002 under Argentine Banking GAAP, foreign
currency assets and liabilities are stated in pesos, using the U.S. dollar rate
of exchange set by the Argentine Central Bank prevailing at the close of
operations on the last business day of each month.
n. IMPAIRMENT OF REAL ESTATE PROPERTIES AND FORECLOSED ASSETS
In accordance with Statement of Accounting Standards No. 144, "Impairment of
Long-lived Assets", such assets are subject to: recognition of an impairment
loss if the carrying amounts of those assets are not recoverable from their
undiscounted cash flows and an impairment loss measured as the difference
between the carrying amount and fair value of the assets.
The Group evaluates potential impairment loss relating to long-lived assets by
comparing their unamortized carrying amounts with the undiscounted future
expected cash flows generated by the assets over the remaining life of the
assets. If the sum of the expected future undiscounted cash flows is less than
the carrying amount of the asset, a loss is recognized for the difference
between the fair value and carrying value of the assets. Testing whether an
asset is impaired, and measuring the impairment loss is performed for asset
groupings at the lowest level for which there are identifiable cash flow that
are largely independent of the cash flows generated by other asset groups.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. In 2002,
the Group determined that the uncertainty of the Argentine economic situation
had a significant impact on the recoverability of its long-live assets and
evaluated its properties for impairment. An impairment loss was recorded in
2002.
Foreclosed assets are carried at the lower of cost or market. In 2002, the Group
recorded a valuation allowance reflecting a decrease in the market values of its
foreclosed properties.
In 2004 and 2003, no additional impairment was recorded in real estate
properties and foreclosed assets. The Argentine Banking GAAP amortizations for
2004 and 2003 of these assets impaired in 2002 have been reversed for U.S. GAAP
purposes.
o. EQUITY INVESTMENTS IN OTHER COMPANIES
Under Argentine Banking GAAP, the equity investments in controlled companies are
accounted for under the equity method. The remaining investments have been
accounted for under the cost method, taking their equity method value as a limit
in book value.
For U.S. GAAP purposes, under SAB 59, the Group should determine if any
indicators are present that may indicate the fair value of the investment has
been negatively impacted during the fiscal year. If it is determined that the
fair value of an investment is less than the related company's value, an
impairment of the investment must be recognized.
As of December 31, 2003, the Group evaluated their investments and determined
that the estimated fair value of certain investments was lower than the
respective book value. Furthermore, based on all available evidence the Group
concluded that the carrying amount of the investment will not be recoverable
within a reasonable period of time. As a consequence, the impairment was deemed
other
F-89
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(Expressed in thousands of Argentine pesos)
than temporary. As of December 31, 2004 no additional impairment has been
determined for US GAAP purposes.
p. GUARANTEES
Financial guarantee - Exchange of deposits with the financial system II
Pursuant to the decree 1836/02 and the Argentine Central Bank communique "A"
3828, the Bank entered into and exchange offer to exchange restructured deposit
certificates ("CEDROS") for BODEN 2005, 2006, 2012 and 2013. The BODEN offered
to the holders of CEDROS are unsecured government bonds denominated in US
dollars. As a part of the restructuring, the Bank was required to guarantee the
payment of the BODEN to the holders of CEDROS at a price equal to Ps 1.40 per US
dollar adjusted by applying the accumulated CER from February 3, 2002 to the
expiration date of the BODEN. The price cannot exceed the Argentine pesos per US
dollar free exchange rate at the expiration date of the BODEN.
Other Financial Guarantees
During 2004 and 2003 the Company entered into different agreements to guarantee
lines of credit of customers amounting to Ps. 286,668 and Ps. 222,324
respectively. As of December 31, 2004 and 2003 guarantees granted by the Bank
amounted to Ps. 34,712 and Ps. 44,395 respectively.
As of December 31, 2004 and 2003, the Group maintains the following guarantees:
ESTIMATED
MAXIMUM PROCEEDS CARRYING
POTENTIAL FROM COLLATERAL AMOUNT
2004 PAYMENTS (*) RECOURSE LIABILITY
----------- --------------- ----------
Exchange of deposits with the financial system II Ps. 173,069 - Ps. 8,802
Other Financial guarantees Ps. 34,712 Ps. 5,844 Ps. 6,661
----------- --------------- ----------
Ps. 207,781 Ps. 5,844 Ps. 15.463
=========== =============== ==========
ESTIMATED
MAXIMUM PROCEEDS CARRYING
POTENTIAL FROM COLLATERAL AMOUNT
2003 PAYMENTS (*) RECOURSE LIABILITY
----------- --------------- ----------
Exchange of deposits with the financial system II Ps. 165,411 - Ps. 69,668
Other Financial guarantees Ps. 44,395 Ps. 3,040 Ps. 11,742
----------- --------------- ----------
Ps. 209,806 Ps. 3,040 Ps. 81,410
=========== =============== ==========
(*) The maximum potential payments represent a "worse-case scenario", and do not
necessarily reflect expected results. Estimated proceeds from collateral and
recourse represent the anticipated value of assets that could be liquidated or
received from other parties to offset the Company's payments under guarantees.
F-90
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(Expressed in thousands of Argentine pesos)
Under Argentine Banking GAAP, the Bank provisioned the guarantees that are
probable to be honored. The amount provided under Argentine GAAP amounted to Ps.
6,550 and Ps. 9,651 as of December 31, 2004 and 2003 respectively.
Under US GAAP, effective January 1, 2003 the Bank adopted FASB interpretation
No. 45 "Guarantor's Accounting and Disclosures Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others". As of December 31,
2004 and 2003, the Bank recognized a liability for the fair value of the
obligations assumed. The additional amount to be recognized for US GAAP amounted
to Ps. 8,913 and Ps.71,759, as of December 31, 2004 and 2003 respectively.
q. MINORITY INTEREST
The minority interest represents the effect of the US GAAP adjustments in the
Group's consolidated subsidiaries. For US GAAP purposes the shareholders' equity
is negative. Therefore, the effect of the US GAAP adjustments related to the
minority interest is recognized up to the amount reflected in minority interest
for Argentine Banking GAAP.
r. FOREIGN DEBT RESTRUCTURING
As fully described in Note 1 "Foreign Debt Restructuring", on May 18, 2004, the
Group completed the restructuring of its foreign debt. As a result of this
restructuring, the Group recorded a Ps.142.5 million gain under Argentine
Banking GAAP.
For U.S. GAAP purposes, the restructuring is accounted for in each of two steps.
The first step of the restructuring required the holders of the Group's debt to
exchange its old debt for new debt in two tranches. Pursuant to EITF 02-04
"Determining Whether a Debtor's Modification or Exchange of Debt Instruments is
within the scope of FASB Statement No. 15", the Group did not receive any
concession from the holders of the debt and therefore, the first step
restructuring was not considered a trouble debt restructuring. Pursuant to EITF
96-19 "Debtors Accounting for a Modification or Exchange of Debt Instruments",
the first step restructuring was accounted as a modification of the old debt and
therefore the Group did not recognize any gain or loss. The second step
restructuring offers the holders of the Group's debt issued in the first step
explained above to exchange it for new securities including cash, Boden 2012 and
equity shares of the Group. Pursuant to US GAAP this second step restructuring
was accounted in accordance with FAS 15 "Accounting by Debtors and Creditors for
Trouble Debt Restructurings" as a partial settlement of the debt through the
transfer of certain assets and equity at its fair value. After deducting the
considerations used to repay the debt, FAS 15 requires the comparison of the
future cash outflows of the restructured debt and the carrying of the debt at
the restructuring date.
Gain on trouble debt restructuring is only recognized when the remaining
carrying value of the debt at the date of the restructuring exceeds the total
future cash payments of the restructure debt reduced by the fair value of the
assets and equity given as payment of the debt. Since the total future cash
outflows of the restructured debt exceeds the carrying value of the old debt, no
gain on restructuring was recorded under US GAAP.
F-91
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(Expressed in thousands of Argentine pesos)
As a result, under US GAAP, the carrying amount of the restructured debt is
greater than the amount recorded under Argentine Banking GAAP. Therefore, under
US GAAP a new effective interest rate was determined to reflect the present
value of the future cash payments of the restructured debt.
Furthermore, under US GAAP, expenses incurred in a trouble debt restructuring
are expensed as incurred. Expenses related to the issuance of equity was
deducted directly form the shareholder's equity.
s. REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS ("REPOS AND REVERSE
REPOS")
During 2004, the Bank enters into Repos and Reverse Repos agreements of
financial instruments. Under Argentine Banking GAAP, initial measurement of such
agreements implies sale or purchase accounting together with the recognition of
an asset and liability due to the investing or financing transaction entered
into. For U.S. GAAP purposes, at December 31, 2004 assets and liabilities should
decrease approximately by Ps. 50,462.
F-92
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(Expressed in thousands of Argentine pesos)
CONSOLIDATED NET INCOME
DECEMBER 31,
--------------------------------------------------
2004 2003 2002
------------- ------------- --------------
Net income as stated............................................... Ps. (109,871) Ps. (222,220) Ps. (1,509,304)
Prior years adjustments recorded under Argentine GAAP (Note 41h) .. (42,954) 5,161 37,793
Loan origination fees and costs:
Credit card costs (Note 41b.)................................... 1,092 (46) (11,257)
Intangible assets (Note 41c.):
Amortization of deferred expenses for setting up of branches.... 4,827 9,290 31,747
Goodwill amortization........................................... 20,988 32,701 34,108
Goodwill impairment............................................. 3,613 4,705 67,443
Software costs (Note 41c.)...................................... (350) 2,285 6,709
Equity investments in other companies - Impairment (Note 41o.)..... - (37,879) -
Loss on exchange of National Public Debt (Note 41d(ii))............ 129,200 176,778 2,040,693
Provincial Public Debt (Note 41d(iii))............................ (129,396) (344,900) 986,584
Loan impairment - private sector (Note 41d(iv)).................... (20,122) (14,652) 973,665
Loan impairment - credit cards (Note 41d(v)) ...................... 395 26,943 39,685
Derivative instruments (Note 41g).................................. - - (945)
Amortization of organization costs on exchange offer (Note 41c )... - 15,433 (4,687)
Organization costs related to the exchange offer (Note 41c)........ - (24,804) -
Impairment / loss on available for Sale securities (Note 41j) ..... - - 303,983
Government Securities:
Compensatory Bond received (Note 41e (ii))....................... 256,117 (305,832) (381,716)
Compensatory Bond to be received (Note 41e (ii))................. 176,796 1,250,872 (1,587,482)
Hedge Bond (Note 41e(ii))........................................ 117,435 616,258 (1,769,948)
Compensation related to the payment of deposits (Note 41i) ...... 35,592 (40,264) (446,756)
Impairment of other available for sale Securities (Note 41e(iii)).. (162,771) (377,867) -
Foreign exchange difference (Note 41m)............................. - - 1,709,414
Foreign exchange difference in equity investments in other
companies (Note 41m.).............................................. - - 67,472
Impairment of real estate properties and foreclosed assets (Note
41n.).............................................................. - - (67,155)
Real estate properties asset amortization (Note 41n.).............. 1,395 1,395 -
Recognition for the fair value of obligations assumed under
Financial guarantees issued (Note 41p)............................. 62,846 (71,759) -
Year 2000 costs (Note 41l.)........................................ 3,005 17,288 3,006
Troubled Debt restructuring (Note 41r)............................. (287,304) - -
Reversal of deferred taxes under Argentine GAAP (Note 41a)......... 8,394 38,942 -
Presumptive minimum income tax (Note 41a ) ........................ (87,543) (38,663) (11,804)
Minority interest (Note 41q)....................................... 17,530 12,131 (88,756)
------------- ------------- --------------
Net income (loss) in accordance with U.S. GAAP..................... (1,086) 731,296 422,492
Basic net income (loss) per share in accordance with U.S. GAAP
(Note 24).......................................................... (0.001) 0.669 0.387
Average number of shares outstanding (in thousands) (Note 24)...... 1,185,227 1,092,407 1,092,407
Diluted net income (loss) per share in accordance with U.S. GAAP
(Note 24).......................................................... (0.001) 0.669 0.387
------------- ------------- --------------
F-93
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(Expressed in thousands of Argentine pesos)
CONSOLIDATED SHAREHOLDERS' EQUITY
DECEMBER 31,
-------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
Shareholders' equity as stated.............................................. Ps 1,519,538 Ps. 1,419,383 Ps. 1,600,844
Prior years adjustments recorded under Argentine GAAP (Note 41h)............ - 42,954 37,793
Loan origination fees and costs (Note 41b.)................................. 2,847 1,755 1,801
Intangible assets (Note 41c.):
Amortization of deferred expenses for setting up of branches.............. (8,295) (13,122) (22,412)
Goodwill amortization..................................................... 28,918 7,930 (24,771)
Goodwill impairment....................................................... (7,166) (10,779) (15,484)
Software costs............................................................ (491) (141) (2,426)
Equity investments in other companies - Impairment (Note 41o.).............. (37,879) (37,879) -
Loss on exchange of National Public Debt(Note 41d(ii))...................... (1,012,743) (1,141,943) (1,318,721)
Provincial Public Debt (Note 41d(iii))..................................... (721,083) (1,357,163) (1,256,987)
Loan impairment - private sector (Note 41d(iv))............................. 44,946 65,068 79,720
Loan impairment - credit cards (Note 41d(v))................................ (4,590) (4,985) (31,928)
Government securities:
Compensatory Bond received (Note 41e(ii))................................. (161,292) (573,342) (402,021)
Compensatory Bond to be received (Note 41e(ii))........................... (159,814) (336,610) (1,587,482)
Hedge Bond (Note 41e(ii))................................................. (1,036,255) (1,153,690) (1,769,948)
Compensation related to the payment of deposits (Note 41 i.).............. (451,428) (487,020) (446,756)
Impairment of available-for-sale securities (Note 41e(iii))............... (541,767) (378,996) (1,129)
Amortization of organization costs related to the exchange offer
(Note 41c) ................................................................. - - (15,433)
Organization costs related to the exchange offer (Note 41c)................. - - 24,804
Unrealized gain or loss on Galtrust I securities (Note 41j)................. (263,985) (391,308) (249,764)
Minority interest (Note 41q)................................................ 113,467 95,937 83,806
Year 2000 costs (Note 41l).................................................. - (3,005) (20,293)
Impairment of real estate properties and foreclosed assets (Note 41n)....... (67,155) (67,155) (67,155)
Real Estate properties amortization (Note41(n))............................. 2,790 1,395 -
Presumptive minimum income tax (Note 41a) .................................. (138,010) (50,467) (11,804)
Recognition for the fair value of obligations assumed under
Financial guarantees issued (Note 41p) ..................................... (8,913) (71,759) -
Prior income tax adjustments (Note 41a)..................................... - (8,394) (6,577)
Troubled debt restructuring (Note 41 r) .................................... (287,304) - -
-------------- -------------- --------------
Consolidated shareholders' equity (deficit) in accordance with U.S. GAAP.... Ps. (3,195,665) Ps. (4,453,336) Ps. (5,422,323)
============== ============== ==============
F-94
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
Roll forward analysis of shareholders' equity under U.S. GAAP at December 31,
2004, 2003 and 2002:
GRUPO GALICIA
------------------------------------------------------------------------
ADJUSTMENTS
TO PROFIT RESERVES
CAPITAL PAID SHAREHOLDERS' -------------------------
STOCK IN CAPITAL EQUITY LEGAL OTHER
------------- ----------- ------------- ---------- -----------
Balance at December 31, 2001...... Ps. 1,092,407 Ps. 86,568 Ps. 1,418,854 Ps. 16,266 Ps. 238,941
============= =========== ============= ========== ===========
Distribution of retained earnings:
Legal reserve..................... - - - 13,227 -
Reserve provided by the By-Laws... - - - - 253,398
Unrealized appreciation of
available-for-sale securities,
net of tax and minority interest.. - - - - -
Net loss for the year under
U.S. GAAP......................... - - - - -
------------- ----------- ------------- ---------- -----------
Balance at December 31, 2002...... Ps. 1,092,407 Ps. 86,568 Ps. 1,418,854 Ps. 29,493 Ps. 492,339
============= =========== ============= ========== ===========
Distribution of retained earnings:
Unrealized appreciation of
available-for-sale securities,
net of minority interest.......... - - - - -
Absorption approved by the
shareholders meeting on April
23 ,2003.......................... (492,339)
Net income for the year under
U.S. GAAP......................... - - - - -
------------- ----------- ------------- ---------- -----------
Balance at December 31, 2003...... Ps. 1,092,407 Ps. 86,568 Ps. 1,418,854 Ps. 29,493 Ps. -
============= =========== ============= ========== ===========
Distribution of retained earnings:
Unrealized appreciation of
available-for-sale securities,
net of tax and minority interest.. - - - - -
Capital Increase.................. 149,000 61,026 - - -
Net income for the year under
U.S. GAAP......................... - - - - -
------------- ----------- ------------- ---------- -----------
Balance at December 31, 2004...... Ps. 1,241,407 Ps. 147,594 Ps. 1,418,854 Ps. 29,493 Ps. -
============= =========== ============= ========== ===========
GRUPO GALICIA
--------------------------------------------------
OTHER TOTAL
COMPREHENSIVE RETAINED SHAREHOLDERS'
INCOME (LOSS) EARNINGS EQUITY
-------------- -------------- ---------------
Balance at December 31, 2001...... Ps. (57,536) Ps. (8,683,303) Ps. (5,887,803)
============= ============== ==============
Distribution of retained earnings:
Legal reserve..................... - (13,227) -
Reserve provided by the By-Laws... - (253,398) -
Unrealized appreciation of
available-for-sale securities,
net of tax and minority interest.. 42,988 - 42,988
Net loss for the year under
U.S. GAAP......................... - 422,492 422,492
------------- -------------- --------------
Balance at December 31, 2002...... Ps. (14,548) Ps. (8,527,436) Ps. (5,422,323)
============= ============== ==============
Distribution of retained earnings:
Unrealized appreciation of
available-for-sale securities,
net of minority interest.......... 237,691 - 237,691
Absorption approved by the
shareholders meeting on April
23 ,2003.......................... - 492,339 -
Net income for the year under
U.S. GAAP......................... - 731,296 731,296
------------- -------------- --------------
Balance at December 31, 2003...... Ps. 223,143 Ps. (7,303,801) Ps. (4,453,336)
============= ============== ==============
Distribution of retained earnings:
Unrealized appreciation of
available-for-sale securities,
net of tax and minority interest.. 1,048,731 - 1,048,731
Capital Increase.................. - - 210,026
Net income for the year under
U.S. GAAP......................... - (1,086) (1,086)
------------- -------------- --------------
Balance at December 31, 2004...... Ps. 1,271,874 Ps. (7,304,887) Ps. (3,195,665)
============= ============== ==============
COMPREHENSIVE INCOME
SFAS 130 "Reporting Comprehensive Income" establishes standards for reporting
and the display of comprehensive income and its components (revenues, expenses,
gains and losses) in the financial statements. Comprehensive income is the total
of net income and all transactions, and other events and circumstances from
nonowner sources.
The following disclosure presented for the fiscal years ended December 31, 2004,
2003 and 2002, shows all periods restated to conform SFAS 130:
F-95
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
DECEMBER 31,
---------------------------------------------
2004 2003 2002
------------- ------------- -------------
INCOME STATEMENT
Financial Income..................................... Ps. 1,448,708 Ps. 2,752,014 Ps. 3,983,096
Financial Expenditures............................... 1,167,444 1,502,904 4,560,405
Net Financial Income................................. 281,264 1,249,110 (577,309)
Provision for Loan Losses............................ 209,959 274,550 928,855
Income from Services................................. 530,144 431,695 511,848
Expenditures from Services........................... 92,759 70,358 140,640
Monetary result of financial brokerage............... - (68,840) 2,887,239
Administrative Expenses.............................. 615,063 541,954 1,017,223
Monetary result of operating expenses................ - (439) 60,331
Net Income (Loss) from Financial Brokerage........... (106,373) 724,664 795,391
Minority Interests................................... 3,228 2,545 180,815
Miscellaneous Income................................. 514,606 719,207 291,407
Miscellaneous Losses................................. 377,123 745,644 729,082
Monetary results of other operations................. - (7,828) (49,617)
Net Income (Loss) before Income tax.................. 34,338 692,944 488,914
Income Tax........................................... (35,424) 38,352 (66,422)
------------- ------------- -------------
NET INCOME (LOSS) UNDER U.S. GAAP.................... (1,086) 731,296 422,492
------------- ------------- -------------
Other comprehensive income (loss):
Unrealized gains (losses) on securities........... 1,048,731 237,691 42,988
------------- ------------- -------------
OTHER COMPREHENSIVE INCOME (LOSS) ................... 1,048,731 237,691 42,988
------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS).......................... Ps. 1,047,645 Ps. 968,987 Ps. 465,480
============= ============= =============
CONCENTRATION OF RISK - TOTAL EXPOSURE TO THE PUBLIC SECTOR - ARGENTINE
GOVERNMENT AND PROVINCES
The Group has significant exposure to the Argentine national government and
provinces in the form of government securities, secured loans and other debt
obligations. As of December 31, 2004 and 2003, the Group had the following loans
outstanding:
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------------------- -----------------------------
ARGENTINE ARGENTINE
BANKING BANKING
GAAP U.S. GAAP GAAP U.S. GAAP
-------------- ------------- -------------- -------------
Argentine national government loans Ps. 4,682,654 Ps. 3,703,633 Ps. 4,517,328 Ps. 3,472,063
Argentine provincial debt 3,543,751 2,822,668 3,543,074 2,116,498
Other Argentine public-sector receivables 486,875 453,153 471,844 375,166
Galtrust I (securitization of Provincial
Loans) 665,102 401,116 646,143 254,835
Compensatory bond received 976,056 814,764 1,609,982 1,036,640
Bonds to be received (1) (2) 4,732,288 656,148 4,732,300 525,854
Compensation to be received related to
the payment of deposits 451,428 - 487,020 -
Other (3) 1,318,692 776,925 1,288,375 909,379
-------------- ------------- -------------- -------------
Total Ps. 16,856,846 Ps. 9,628,407 Ps. 17,296,066 Ps. 8,690,435
============== ============= ============== =============
F-96
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
(1) The advance to be requested from the Argentine Central Bank for the
subscription of the hedge bond, was recorded in "Other Liabilities
Resulting from Financial Brokerage - Other", for Ps. 2,720,743 plus the
contingent liability mentioned in Note 12(e) as of December 31, 2004. The
above mentioned advance was Ps. 2,536,146 as of December 31, 2003. Under
U.S.GAAP, the hedge bond and that advance have been eliminated.
(2) Includes the compensatory bond to be received related to the asymmetric
pesification and indexation and the hedge bond, net of unfavorable effects
on resolution of matters challenged by the Argentine Central Bank, which
are in process.
(3) Includes bonds such as Fiscal Credit Certificates, Argentine Republic
External Notes and other national government bonds.
RISKS AND UNCERTAINTIES
During 2001 and 2002, Argentina went through a period of great political,
economic and social instability, which led to the early resignation of the
President in office in December 2001, a significant fall in economic activity, a
banking crisis, the default on part of Argentina's sovereign debt, the
devaluation of the Argentine peso in January 2002 and high inflation. In early
2002, the Argentine government undertook a number of far-reaching initiatives
that radically changed the monetary and foreign exchange regime of the country
and the regulatory environment for doing business in Argentina for all sectors
of activity, including the financial sector. The impact of the crisis and these
measures on the Argentine economy was significant and remains uncertain in the
long run.
After the worst moment of the 2001-2002 crisis, the government succeeded in
stabilizing the main macroeconomic variables in the second half of 2002 and,
since then Argentina's GDP has grown significantly while macroeconomic stability
was preserved. Currently Argentina is undergoing its 12th quarter of consecutive
GDP growth. In addition, in January 2005 the government launched the exchange
offer for the restructuring of its foreign debt with private creditors, which
closed on February 25, 2005, with 76% creditor participation.
While the economic policy of the government has been successful, it did not
include certain structural reforms that would be supportive of long-term
economic growth. Also, in 2005, inflation began to accelerate, however, to
levels still well below historical highs. If the current administration is not
capable of implementing economic policies needed to turn the economic growth
Argentina is experiencing into a sustainable development in the long run, or if
it is not capable of keeping inflation under control, there is considerable risk
that political and economic instability will increase. This would likely have a
negative impact on the Argentine economy and on the financial system, including
us and Banco Galicia. In addition, we cannot assure you that the economy will
not suffer additional shocks, especially if political pressure in Argentina
inhibits the implementation of economic policies designed to generate growth and
enhance consumer and investor confidence, while keeping inflation under control.
The resulting government actions, include the fact that a majority of the Bank's
assets are concentrated in Argentine public-sector debt instruments.
As of December 31, 2004, the Bank's exposure to the Argentine public sector,
including the compensatory and hedge bonds represented approximately 71.2% of
total of the Group assets. Although the Bank's exposure to the Argentine public
sector consists mostly of performing assets, the realization of the Bank's
assets, its income and cash flow generation capacity and future financial
condition may be dependent on the Argentine government's to complies with its
payments obligations arising due to the finalization of the restructuring
process ended during the 1st quarter of 2005 of its foreign debt (as mentioned
in note 1 to the financial statements), and on its ability to establish an
economic policy that is
F-97
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
successful in promoting sustainable economic growth in the long run.
Argentine Central Bank's Communique "A" 3911, dated March 28, 2003, established,
among others, that a bank's total exposure to Argentine public-sector debt
instruments as of January 1, 2006 must not exceed 40% of its total assets as of
such date. Any excess over the established limit requires an additional minimum
capital requirement for an amount equal to the excess. The Communique does not
specify which assets are included in determining compliance with the rule.
Currently, the Bank's exposure to Argentine public-sector assets exceeds the
maximum percentage established for a bank's total exposure to such risk as of
January 1, 2006, under the general guidance of Communique "A" 3911. Once the
Argentine Central Bank sets specific guidelines for determining compliance with
the rule, it is possible that the Bank's excess over 40% may be even greater and
the Bank could be forced to dispose of certain of its public-sector assets or
significantly increase its capitalization, in order to comply with such rule by
January 1, 2006.
U.S. GAAP ESTIMATES
Valuation reserves, impairment charges and estimates of market values on assets
and step up bonds discounting, as established by the Group for U.S. GAAP
purposes are subject to significant assumptions of future cash flows and
interest rates for discounting such cash flows. Losses on the exchange of
government and provincial bonds and on retained interests in securitization
trusts were significantly affected by higher discount rates at December 31, 2003
and 2002 . However discount rates at December 31, 2004 decrease. Should the
discount rates change in the future years, the carrying amounts and charges to
income and shareholders' equity will also change. In addition, as estimates to
future cash flows change, so to will the carrying amounts which are dependent on
such cash flows. It is possible that changes to the carrying amounts of loans,
investments and other assets will be adjusted in the near term in amounts that
are material to the Group's financial position and results of operations.
42.PARENT ONLY FINANCIAL STATEMENTS
The following are the unconsolidated balance sheets of Grupo Financiero Galicia
S.A. at December 31, 2004 and 2003 and the related unconsolidated statements of
income, and cash flows for the fiscal years ended December 31, 2004, 2003 and
2002.
F-98
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
BALANCE SHEET (PARENT COMPANY ONLY)
DECEMBER 31,
-----------------------------
2004 2003
------------- -------------
ASSETS
A. Cash and due from banks
Cash........................................................... Ps. 463 Ps. 932
Banks and correspondents....................................... 77 231
Other.......................................................... - 1
------------- -------------
540 1,164
B. Government and corporate securities
Holdings of trading securities................................. 2,148 -
Investments in listed corporate securities..................... 14,666 -
------------- -------------
16,814 -
D. Other receivables resulting from financial brokerage
Unlisted negotiable obligations................................ 358,841 126,792
Other receivables not included in the debtor classification
Regulations.................................................... 265 190
Other receivables included in the debtor classification
Regulations.................................................... 20,043 21,338
Accrued interest receivable included in the debtor
Classification regulations..................................... 112 19
------------- -------------
379,261 148,339
F. Equity investment in other companies
In financial institutions...................................... 1,138,210 1,263,443
Other.......................................................... 33,090 30,962
Allowances..................................................... (585) -
------------- -------------
1,170,715 1,294,405
G. Miscellaneous receivables
Other accrued interest receivables............................. 102 94
Other.......................................................... 4,767 10,089
------------- -------------
4,869 10,183
H. Fixed assets................................................ 3,229 3,339
J. Intangible assets
Goodwill....................................................... 3,745 6,947
Organization and development expenses.......................... 54 92
------------- -------------
3,799 7,039
------------- -------------
TOTAL ASSETS................................. Ps. 1,579,227 Ps. 1,464,469
============= =============
DECEMBER 31,
-----------------------------
2004 2003
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
M. Miscellaneous liabilities
Directors and syndics fees payable............................. Ps. 140 Ps. 60
Other.......................................................... 59,549 45,026
------------- -------------
59,689 45,086
------------- -------------
TOTAL LIABILITIES..................................... Ps. 59,689 Ps. 45,086
SHAREHOLDERS' EQUITY........................................... Ps. 1,519,538 Ps. 1,419,383
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. Ps. 1,579,227 Ps. 1,464,469
============= =============
F-99
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
STATEMENT OF INCOME (PARENT COMPANY ONLY)
DECEMBER 31,
-------------------------------------------
2004 2003 2002
------------- -------- --------------
A. Financial income
Interest on Notes.............................................. Ps. Ps. 75
Interest income from other receivables resulting from
financial brokerage............................................ 6,911 2,338 7,096
Net income from government and corporate securities............ - 11
Adjustment by application of adjusting index................... 9 - 446
Other.......................................................... 6,548 126 198,649
------------- -------- --------------
Ps. 13,468 2,464 Ps. 206,277
B. Financial expenses
Interest on current accounts................................... Ps. 1
Net income from government and corporate securities............ Ps. 383 1,367 -
Other.......................................................... 19,221 -
------------- -------- --------------
Ps. 383 20,588 Ps. 1
Gross brokerage margin......................................... 13,085 (18,124) 206,276
Expenses for servicies
Commissions.................................................... - - 2
Monetary loss from financial intermediation.................... Ps. - (1,126) Ps. (168,482)
G. Administrative expenses
Personnel expenses............................................. Ps. 998 754 Ps. 1,128
Directors and syndics fees..................................... 249 123 153
Other fees..................................................... 1,059 2,181 3,085
Taxes.......................................................... 9,392 693 649
Other operating expenses....................................... 1,384 369 1,865
Other.......................................................... 380 646 250
------------- -------- --------------
Ps. 13,462 4,766 Ps. 7,130
Monetary gain from operating expenses.......................... Ps. - 1 Ps. 229
Net income from financial brokerage............................ Ps. (377) (24,015) Ps. 30,891
H. Miscellaneous income
Loans recovered and allowances reversed........................ 811 - -
Other.......................................................... 991 8,935 598
------------- -------- --------------
Ps. 1,802 8,935 Ps. 598
I. Miscellaneous losses
Net income on long term investments (1)........................ Ps. 93,617 200,108 Ps. 1,477,707
Other.......................................................... 4,706 7,023 4,245
------------- -------- --------------
Ps. 98,323 207,131 Ps. 1,481,952
Monetary gain (loss) on other transactions..................... Ps. - 8 Ps. 403
Income tax..................................................... Ps. 12,973 17 Ps. 59,244
------------- -------- --------------
Net income for the period...................................... Ps. (109,871) (222,220) Ps. (1,509,304)
============= ======== ==============
(1) Includes the foreign currency position compensation.
STATEMENT OF CASH FLOWS (PARENT COMPANY ONLY)
F-100
GRUPO FINANCIERO GALICIA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Argentine pesos)
DECEMBER 31,
-------------------------------------
2004 2003 2002
----------- ------- -----------
CHANGES IN CASH
Cash at the beginning of the period............................ Ps. 1,164 1,293 Ps. 357
Increase / (decrease) in cash.................................. (624) (129) 936
----------- ------- -----------
CASH AT END OF PERIOD 540 1,164 1,293
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Less:
Operating expenses paid........................................ (9,347) (7,118) (8,430)
Plus:
Other operating income received................................ 10,301 3,382 7,000
----------- ------- -----------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................ 954 (3,736) (1,430)
OTHER SOURCES OF CASH
Dividends...................................................... 438 -
Increase in short-term debts................................... - - 399
Increase in short-term investment.............................. 1,030 17,104 162,558
Other sources of cash.......................................... 32 357 4,509
----------- ------- -----------
OTHER SOURCES OF CASH.......................................... 1,500 17,461 167,466
OTHER USES OF CASH
Increase in short-term loans................................... (2,223) - (1,452)
Increase in fixed assets....................................... (65) - (20)
Increase in long-term investments.............................. (790) (11,096) (4,220)
Other uses of cash............................................. - (2,758) (159,408)
----------- ------- -----------
TOTAL OTHER USES OF CASH....................................... (3,078) (13,854) (165,100)
----------- ------- -----------
INCREASE / (DECREASE) IN CASH.................................. Ps. (624) (129) Ps. 936
=========== ======= ===========
NEW AUTHORITATIVE PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets an Amendment of APB Opinion No. 29" ("SFAS 153"). APB Opinion No. 129
"Accounting for Non-monetary Transactions" ("APB29"), is based on the opinion
that exchanges of non-monetary assets should be measured based on the fair value
of the assets exchanged. SFAS 153 amends APB 29 to eliminate the exception for
non-monetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of non-monetary assets whose results are not
expected to significantly change the future cash flows of the entity. The
adoption of SFAS 153 will be effective for non monetary assets exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company does not
expect that the adoption of SFAS 153 will have a material impact on the
consolidated financial statements.
F-101
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- ------------
1.1 Unofficial English language translation of the Amended By-laws (estatutos
sociales).
2.1 Form of Deposit Agreement between The Bank of New York and the
registrant, including the form of American Depositary Receipt.*
2.2 Indenture, dated as of May 18, 2004, among the Bank, The Bank of New
York and Banco Rio de la Plata S.A.**
4.1 English translation of form of Financial Trust Contract, dated April
16, 2002, among the Bank, Banco Provincia de Buenos Aires and BAPRO Mandatos y
Negocios S.A.***
4.2 English translation of form of Loan Agreement, dated March 21, 2002, by
and between Seguro de Depositos S.A. and the Bank.***
4.3 English translation of form of Loan Agreement, dated April 30, 2002,
between Banco de la Nacisn Argentina, in its capacity as trustee of the Trust
Fund for Assistance to Financial Institutions and Insurance Companies
Fiduciary Fund for the Assistance to Financial Institutions and Insurance
Companies and the Bank.***
4.4 Form of restructured loan facility (as evidenced by the note purchase
agreement, dated as of April 27, 2004, among the Bank, Barclays Bank PLC, the
holders party thereto and Deutsche Bank Trust Company Americas).**
4.5 Form of Amendment No. 1 and Waiver to Restructured Loan Facility (as
evidenced by the Amendment No. 1 and Waiver to Note Purchase Agreement, dated
as of December 20, 2004, among Banco de Galicia y Buenos Aires S.A., the
holders party thereto and Deutsche Bank Trust Company Americas).
8.1 For a list of our subsidiaries as of the end of the fiscal year covered
by this annual report, please see Item 4. "Information on the Company --
Organizational Structure."
12.1 Certification of the principal executive officer required under Rule
13a-14(a) or Rule 15d-14(a), pursuant to Section 302 of the Sarbanes Oxley Act
of 2002.
12.2 Certification of the principal financial officer required under Rule
13a-14(a) or Rule 15d-14(a), pursuant to Section 302 of the Sarbanes Oxley Act
of 2002.
13.1 Certification of the principal executive officer required pursuant to
18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes Oxley Act of
2002.
13.2 Certification of the principal financial officer required pursuant to
18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes Oxley Act of
2002.
* Incorporated by reference from our Registration Statement on Form F-4
(333-11960).
** Incorporated by reference from our Annual Report on Form 20-F for the
year ended December 31, 2003.
*** Incorporated by reference from our Annual Report on Form 20-F for the
year ended December 31, 2002.