Banco Mercantil, C.A. - Mercantil Servicios Financieros

Transcription

Mercantil, C.A. Banco Universal
and its Subsidiaries
(Subsidiary of Mercantil Servicios Financieros, C.A.)
Report of Independent Accountants and Consolidated
Financial Statements
December 31, 2015 and 2014
Mercantil, C.A. Banco Universal and its Subsidiaries
Index to the consolidated financial statements
Pages
I-
Report of independent accountants
1-2
II -
Consolidated financial statements
1-5
III -
Notes to the consolidated financial statements
1 - Operations and regulatory environment
2 - Basis of preparation
3 - Cash and due from banks
4 - Investment securities
5 - Loan portfolio
6 - Investments in affiliates
7 - Available-for-sale assets
8 - Property and equipment
9 - Other assets
10 - Deposits
11 - Deposits and liabilities with Banco Nacional de Vivienda y Hábitat
(BANAVIH)
12 - Borrowings
13 - Other liabilities from financial intermediation
14 - Accruals and other liabilities
15 - Taxes
16 - Employee benefits and employee benefit plans
17 - General and administrative expenses
18 - Other operating income
19 - Other operating expenses
20 - Extraordinary expenses
21 - Equity
22.- Net income per share
23 - Financial assets and liabilities in foreign currency
24 - Memorandum accounts
25.- Credit-related commitments
26 - Balances and transactions with related companies
27 - Fundación Mercantil
28 - Maturity of financial assets and liabilities
29 - Fair value of financial instruments
30 - Risk management
31 - Liabilities and contingencies
32 - Money laundering prevention
6-8
8 - 16
16
16 - 20
20 - 22
22
22 - 23
23
24
24 - 25
25
25 - 26
26
26
27 - 28
28 - 31
32
32
32
33
33 - 34
34
34 - 36
36 - 37
38
39 - 40
40
40
41 - 42
42 - 43
43 - 44
44 - 45
Report of Independent Accountants
To the Shareholders and Board of Directors of
Mercantil, C.A. Banco Universal
Report on the consolidated financial statements
We have audited the accompanying consolidated financial statements of Mercantil, C.A., Banco Universal
(the Bank), which comprise the consolidated balance sheet at December 31, 2015 and 2014, and the
related consolidated statements of income, changes in equity and cash flows for the years then ended, and
a summary of significant accounting policies and other explanatory notes.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of consolidated financial statements
in accordance with the accounting rules and instructions of the Superintendency of Banking Sector
Institutions (SUDEBAN), which are of mandatory use for the Venezuelan banking system. As described in
Note 2, these rules differ in certain significant respects from accounting principles generally accepted in
Venezuela. This responsibility includes: designing, implementing and maintaining internal control
relevant to the preparation and fair presentation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error; selecting and applying appropriate accounting
policies and; making accounting estimates that are reasonable in the circumstances.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Venezuela. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation of consolidated financial statements that give a true and fair view in
order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
of accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Espiñeira, Pacheco y Asociados (PricewaterhouseCoopers) Contadores Públicos. Av. Principal de Chuao, Edificio PwC
Apartado 1789. Caracas 1010-A, Venezuela • Teléfono: (0212) 700 6666. Fax: (0212) 991 5210. www.pwc.com/ve
©2015 Espiñeira, Pacheco y Asociados (PricewaterhouseCoopers). Todos los derechos reservados. "PwC" se refiere a la firma venezolana Espiñeira, Pacheco y Asociados
(PricewaterhouseCoopers), o según el contexto, a la red de firmas miembro de PricewaterhouseCoopers International Limited, cada una de las cuales es una entidad legal separada e
independiente • R.I.F: J-00029977-3.
Opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,
the financial position of Mercantil, C.A., Banco Universal at December 31, 2015 and 2014, and the results of
its operations and its cash flows for the years then ended, in conformity with the accounting rules and
instructions of the Superintendency of Banking Sector Institutions (SUDEBAN).
Espiñeira, Pacheco y Asociados
(PricewaterhouseCoopers)
Pedro Pacheco Rodríguez
CPC 27599
CP 431
CNV P-810
Caracas, Venezuela
February 22, 2016
2 de 2
Consolidated balance sheet
2015
2014
(Thousands of bolivars)
Assets
Cash and due from banks (Note 3)
154,144,732
74,866,697
8,491,608
137,641,397
342
507,295
7,504,090
4,323,074
66,235,157
293
603,069
3,705,104
69,286,892
44,523,248
2,100,000
18,982,404
12,291,413
659,097
35,253,978
1,188,775
17,081,145
5,755,357
289,558
20,208,413
307,411,936
162,619,332
Current
Rescheduled
Overdue
In litigation
(Allowance for losses on loan portfolio)
316,170,494
510,653
627,457
50,640
(9,947,308)
167,580,574
500,986
435,910
56
(5,898,194)
Interest and commissions receivable
3,990,894
2,174,876
Interest receivable on cash and due from banks
Interest receivable on investment securities
Interest receivable on loan portfolio
Commissions receivable
Interest and commissions receivable on other accounts receivable
(Provision for interest receivable and other)
1,013,356
2,894,615
121,604
3
(38,684)
2
615,519
1,495,187
88,417
31
(24,280)
Investments in affiliates (Note 6)
1,296,267
199,098
Available-for-sale assets (Note 7)
597
22,636
Property and equipment (Note 8)
2,968,794
920,305
11,955,324
2,566,782
551,055,436
287,892,974
2,573,472
28,110,445
7,707
759,338,795
7,704
2,619,615
20,688,549
12,527
429,295,678
9,832
790,038,123
452,626,201
Cash
Central Bank of Venezuela
Venezuelan banks and other financial institutions
Foreign and correspondent banks
Pending cash items
Investment securities (Note 4)
Deposits with the Central Bank of Venezuela and overnight deposits
Investments in available-for-sale securities
Investments in held-to-maturity securities
Restricted investments
Investments in other securities
Loan portfolio (Note 5)
Other assets (Note 9)
Total assets
Memorandum accounts (Note 24)
Contingent debtor accounts
Assets received in trust
Other special trust services
Other debtor memorandum accounts
Other debtor control accounts
The accompanying notes are an integral part of the consolidated financial statements
1
Consolidated balance sheet
2015
2014
Liabilities and Equity
Deposits (Note 10)
497,091,668
258,083,275
Demand deposits
349,420,391
174,734,430
181,422,138
126,057,606
66,362
41,874,285
83,655,412
77,386,303
227,562
13,465,153
4,215,562
142,548,766
530,236
376,713
4,432,223
78,120,226
522,884
273,512
Non-interest-bearing checking accounts
Interest-bearing checking accounts
Checking accounts under Exchange Agreement No. 20
Demand deposits and certificates
Other demand deposits
Savings deposits
Time deposits
Restricted deposits
Deposits and liabilities with Banco Nacional de Vivienda y Hábitat (Note 11)
1,312
375
69,842
268,164
43,800
26,042
116,741
151,423
4,137
4,061
Interest and commissions payable
104,454
63,195
Expenses payable on deposits
Expenses payable on borrowings
104,410
44
62,813
382
16,444,993
5,218,099
513,716,406
263,637,169
268,060
2,890,221
281,463
(1,426)
33,017,542
883,170
268,060
36
278,782
(1,036)
22,869,098
840,865
37,339,030
24,255,805
551,055,436
287,892,974
Borrowings (Note 12)
Venezuelan financial institutions, up to one year
Foreign financial institutions, up to one year
Other liabilities from financial intermediation (Note 13)
Accruals and other liabilities (Note 14)
Total liabilities
Equity (Note 21)
Capital stock
Contributions pending capitalization
Capital reserves
Equity adjustments
Retained earnings
Unrealized gain on investments (Note 4)
Total equity
Total liabilities and equity
2
Consolidated income statement
Years ended December 31, 2015 and 2014
2015
2014
Interest income (Note 2)
Income from cash and due from banks
Income from investment securities
Income from loan portfolio (Note 5)
Income from other accounts receivable (Note 25)
Other interest income
Interest expense (Note 2)
Expenses from deposits
Expenses from borrowings
Expenses from other liabilities from financial intermediation (Note 25)
Other interest expense
Gross financial margin
Income from financial assets recovered (Note 5)
56,151,013
28,191,405
601
4,153,422
51,872,534
42,852
81,604
999
3,751,552
24,302,434
43,436
92,984
(16,622,690)
(9,057,578)
(16,479,934)
(1,036)
(136,335)
(5,385)
(8,889,692)
(2,267)
(158,951)
(6,668)
39,528,323
19,133,827
518,845
297,461
(4,836,208)
(2,796,003)
(4,836,208)
(2,796,003)
35,210,960
16,635,285
12,208,251
(5,152,807)
6,598,506
(2,541,281)
42,266,404
20,692,510
(22,039,775)
(10,549,964)
(7,185,532)
(10,050,280)
(4,331,536)
(472,427)
(4,127,807)
(3,562,357)
(2,640,937)
(218,863)
20,226,629
10,142,546
232,946
279,782
(260)
(2,081,915)
89,762
300,292
(3,685)
(1,027,212)
18,657,182
9,501,703
(114,977)
(70,229)
18,542,205
9,431,474
(6,380,627)
(814)
Net income
12,161,578
9,430,660
Appropriation of net income
Retained earnings
12,161,578
9,430,660
188,443
96,482
45,36
35,18
2,010,453
1,099,047
Expenses from uncollectible accounts and write-down of financial assets (Notes 2 and 5)
Uncollectible loans and other accounts receivable
Net financial margin
Other operating income (Note 18)
Other operating expenses (Note 19)
Financial intermediation margin
Operating expenses
Salaries and employee benefits
General and administrative expenses (Note 17)
Fees paid to the Social Bank Deposit Protection Fund
Fees paid to the Superintendency of Banking Sector Institutions
Gross operating margin
Income from available-for-sale assets (Note 7)
Sundry operating income
Expenses from available-for-sale assets (Note 7)
Sundry operating expenses (Notes 9 and 14)
Net operating margin
Extraordinary expenses (Note 20)
Gross income before tax
Income tax (Note 15)
Provision for the Antidrug Law (Notes 14 and 32)
Supplementary information
Net income per common share (in bolivars) (Note 22)
Dividends paid
3
Consolidated statement of changes in equity
Capital
stock
Contributions
pending
capitalization
Capital reserves
Other
mandatory
Capital
reserves
Equity
adjustments
Restricted
surplus
Retained earnings
Unappropriated surplus
Pension plan
Unappropriated
remeasurement
earnings
(Note 2-l)
Unrealized
gain on
investments
Total
equity
Balances at December 31, 2013
Net income
Cash dividends (Note 21)
Reserve for the Social Contingency Fund
Adjustment from exchange differences, net (Note 23)
Adjustment of investments to market value (Note 4)
Restricted surplus from participation in
the results of subsidiaries and equity
in affiliates (Note 21)
Pension plan remeasurement (Note 16)
Reclassification of 50% of net income
to restricted surplus (Note 21)
Net income
Contributions pending capitalization (Note 21)
Cash dividends (Note 21)
Reserve for the Social Contingency Fund
Adjustment from exchange differences, net (Note 23)
Adjustment of investments to market value (Note 4)
Restricted surplus from participation in
the results of subsidiaries and equity
in affiliates (Note 21)
Pension plan remeasurement (Note 16)
Reclassification of 50% of net income
to restricted surplus (Note 21)
268,060
36
268,060
8,042
(774)
8,219,671
6,320,494
-
1,473,460
16,557,049
-
-
-
2,681
-
(262)
-
-
9,430,660
(1,099,047)
(2,681)
-
-
(632,595)
9,430,660
(1,099,047)
(262)
(632,595)
-
-
-
-
-
36,456
-
(36,456)
91,367
(91,367)
-
-
-
-
-
-
-
4,715,330
(4,715,330)
-
-
-
268,060
36
268,060
10,723
(1,036)
12,971,457
9,989,007
(91,367)
840,865
24,255,805
-
2,890,185
-
-
2,680
-
(390)
-
-
12,161,578
(2,010,453)
(2,680)
-
-
42,305
12,161,578
2,890,185
(2,010,453)
(390)
42,305
-
-
-
-
-
70,961
-
(70,961)
407,612
(407,612)
-
-
-
-
-
-
268,060
2,890,221
268,060
13,403
(1,426)
6,080,789
(6,080,789)
-
-
-
19,123,207
14,393,314
(498,979)
883,170
37,339,030
4
Consolidated cash flow statement
2015
2014
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in affiliates
Allowance for losses on loan portfolio
Provision for interest receivable
Provision for contingent loans
Write-offs of uncollectible accounts and decrease in branch provision
for doubtful accounts
Income tax provision
Deferred income tax
Provision for other assets
Release of provision for other assets
Write-offs against the provision for other assets
Other provisions
Depreciation of property and equipment
Amortization of deferred expenses and goodwill
Amortization of available-for-sale assets
Accrual for length-of-service benefits
Payment of length-of-service benefits
Net change in
Other assets
Accruals and other liabilities
Net cash provided by operating activities
Cash flows from financing activities
Net change in
Deposits
Deposits and liabilities with Banco Nacional de Vivienda y Hábitat
Borrowings
Other liabilities from financial intermediation
Contributions pending capitalization
Dividends paid
Net cash provided by financing activities
Cash flows from investing activities
Loans granted during the year
Loans collected during the year
Net change in
Available-for-sale investments
Held-to-maturity investments
Investments in other securities
Investments in subsidiaries and affiliates
Available-for-sale assets
Property and equipment
Net cash used in investing activities
12,161,578
9,430,660
62,447
4,803,366
32,609
-
(17,725)
2,779,329
12,565
3,893
(770,178)
6,934,605
(553,978)
4,324
(1,858)
(3,326)
751,361
395,418
385,190
260
1,621,521
(1,182,283)
(502,106)
814
3,843
(1,079)
(2,259)
495,718
198,669
192,655
3,685
1,022,553
(650,391)
(911,225)
(1,832,700)
(9,218,894)
41,259
3,101,690
8,564,910
(749,313)
(1,282,597)
39,927
843,756
15,821,186
20,387,507
239,008,393
937
(198,322)
76
2,890,185
(2,010,453)
95,326,351
353
96,583
(15,865)
(1,099,047)
239,690,816
94,308,375
(410,674,926)
261,833,207
(216,853,870)
141,756,007
(1,858,954)
(6,536,056)
(369,539)
(15,045,565)
(1,160,006)
21,779
(2,443,907)
1,167,217
11,314
(242,898)
(9,588,885)
(2,111)
(25,624)
(594,255)
(176,233,967)
(84,373,105)
Cash and due from banks
Net change
79,278,035
30,322,777
At the beginning of the year
74,866,697
44,543,920
154,144,732
74,866,697
42,305
(632,595)
(390)
(262)
At the end of the year
Supplementary information on non-cash activities
Adjustment of available-for-sale investments to market value
Equity adjustments from exchange differences (Note 23)
Taxes paid
Interest paid
Reclassification of
Interest and commissions receivable to allowance for losses on loan portfolio (Note 5)
2,842
-
16,581,430
9,017,652
15,926
(10,587)
5
1.
Operations and regulatory environment
Reporting entity
Mercantil, C.A. Banco Universal (the Bank), founded in 1925 in the Bolivarian Republic of Venezuela,
and its subsidiaries operate in the financial services sector in Venezuela and abroad. The Bank’s primary
activities consist in providing financial intermediation services to individuals and corporations through its
main office in Caracas, agencies throughout the country, its agency in the United States of America
(Coral Gables, FL), and its branch in Curacao.
Most of the Bank’s assets are located in Venezuela. At December 31, 2015, the Bank, its agency, branch
and subsidiaries have 7,229 employees.
The Bank’s consolidated financial statements at December 31, 2015 and 2014 were approved for issue
by the Board of Directors on January 12, 2016 and January 12, 2015, respectively.
Regulatory environment
Law of the National Financial System
This Law aims to supervise and coordinate the National Financial System, which is formed by the group
of public, private and communal financial institutions and any other form of organization operating in the
banking sector, the insurance sector, the stock market and any other sector or group of financial
institutions that the policy-making body deems should form part of the system in order to ensure that
financial resources are used and invested for the public interest and for economic and social
development.
The Law prohibits institutions belonging to the National Financial System from forming financial groups
with each other or with companies from other sectors of the national economy or to associate with
international financial groups for purposes other than those defined in the Law.
Law on Banking Sector Institutions
This Law, among other things, considers banking as a public service; defines financial intermediation as
fundraising for investment in loan portfolios and securities issued or guaranteed by the Venezuelan
government or government agencies; limits the bank’s assets and transactions with a single debtor and
defines “debtor” in relation to this limitation; establishes disqualification instances to act as directors;
establishes a social contribution to finance projects developed by communal councils and establishes
prohibitions. The Law on Banking Sector Institutions was published in December 2014, which repealed
the previous Law. This Law introduces changes regarding the formation of the Board of Directors and
its functions; regulates the formation of financial groups and increases the maximum limit of contributions
to the Superintendency of Banking Sector Institutions (SUDEBAN).
In January 2015, management submitted to SUDEBAN the Adjustment Plan set out in this Law, which
establishes actions to be taken to form the Board of Directors; as well as the new connecting
assumptions and indicated for consideration the structure of the Banks’s investments in shares. During
the year ended December 31, 2015, SUDEBAN approved the Adjustment Plan.
Income Tax Law
The Income Tax Law issued in November 2014 establishes that net operating losses may be carried
forward for three years and offset up to a maximum of 25% of annual income, whereas net
uncompensated losses arising from the annual inflation adjustment may not be carried forward to future
years. In addition, the Law requires institutions engaged in banking, financial, insurance and reinsurance
activities to be excluded from the inflation adjustment for tax purposes as from the 2015 tax year
(Note 15).
6
In December 2015 a new Partial Reform of the Income Tax Law was published establishing a 40%
proportional tax (previously 34%) for net income derived from banking, financial, insurance or
reinsurance activities as from the 2016 tax year. In addition, taxpayers qualified by the Tax
Administration as special taxpayers as from the 2016 tax year are excluded from the inflation adjustment
for tax purposes.
Law on Tax on Large Financial Transactions
In December 2015 the Venezuelan government enacted the Decree Law on Tax on Large Financial
Transactions applicable to incorporated and unincorporated entities qualified by the Tax Administration
as special taxpayers. The tax rate is equivalent to 0.75% applicable to debits made from bank accounts
and operations without the mediation of financial institutions. This Decree became effective as from
February 1, 2016.
Sports and Physical Education Law
Companies subject to this Law must contribute 1% of their net or accounting profit to the activities
contemplated therein. This Law seeks to regulate physical education and the sponsorship, organization
and management of sporting activities as public services.
New Labor Law (LOTTT)
The new Labor Law extends job security, establishes the retrospective accrual of length-of-service
benefits, and improves the indemnity for termination of employment. Based on actuarial studies, the
impact of these changes has been estimated and recorded (Note 16).
In addition, the LOTTT regulates certain legal benefits such as working hours, rest days, holidays,
vacation, profit sharing, absences and leave. The Bank’s collective labor agreement also establishes
the legal benefits that match or exceed benefits established in the Law.
Branch and agency
The Bank’s branch and agency abroad, which have not been incorporated separately from the Bank, are
subject to specific requirements of regulatory agencies in the countries where they operate regarding
prior consultation for certain transactions, quality of assets, and capital and liquidity levels, as explained
below:
Mercantil, C.A. Banco Universal - Curacao Branch
This branch operates in Curacao. It is supervised and controlled by the Central Bank of Curacao and
Saint Marteen and SUDEBAN in Venezuela.
Mercantil, C.A. Banco Universal - Coral Gables, FL agency (United States of America)
This agency is subject to banking regulations in the State of Florida. In addition, it is supervised and
regulated by the Federal Reserve Bank and SUDEBAN in Venezuela.
Central Bank of Venezuela (BCV)
Deposit and lending rates are regulated by the BCV. The BCV sets maximum and minimum interest
rates for deposits and credit operations based on reference rates. In this regard, at December 31, 2015
and 2014, the annual interest rate for lending operations may not exceed 24% and 29% for credit card
transactions.
Financial institutions may only charge an additional 3% per annum on amounts overdue from clients.
7
The maximum interest rates for directed loan portfolios at December 31 are as follows:
2015
2014
Agriculture
13%
13%
Microcredits
24%
24%
Tourism
7.73% or 10.73%
6.84% or 10.84%
Mortgages
4.66% to 10.66%
4.66% to 10.66%
i) 18% as the maximum interest rate for
credit operations for this sector; and ii) an
annual interest rate not greater than 16.20%
of the previous rate for loans earmarked for
small and medium industries, state-owned
industries, community industries, as well as
joint ventures for manufacturing.
i) 18% as the maximum interest rate for
credit operations for this sector; and ii) an
annual interest rate not greater than
16.20% of the previous rate for loans
earmarked for small and medium
industries,
state-owned
industries,
community industries, as well as joint
ventures for manufacturing.
Manufacturing
The annual interest rates on savings deposits may not fall below 16% calculated on daily balances up to
Bs 20,000 and 12.50% on daily balances greater than Bs 20,000. Annual interest rates on time deposits
may not fall below 14.50%.
The annual interest rate to be charged by the BCV on discount, rediscount and advance operations,
except as regards those conducted under special regimes, was set at 29.50%.
The BCV has regulated service fees charged by banks to customers in respect of savings and current
accounts, and leasing, international, and credit and debit card transactions.
2.
Basis of preparation
The accompanying consolidated financial statements include the accounts of the Bank and its
subsidiaries and have been prepared based on the Accounting Manual for Banks, Other Financial
Institutions and Savings and Loan Entities (Accounting Manual) and the accounting rules and instructions
of SUDEBAN, which differ in certain significant respects from accounting principles generally accepted
in Venezuela (VEN NIF).
The Venezuelan Federation of Public Accountants (FCCPV) approved the adoption of VEN NIF as the
accounting principles of mandatory application in Venezuela as from January 1, 2008. These standards
are mainly based on International Financial Reporting Standards (IFRS) and their interpretations issued
by the International Accounting Standards Board (IASB), except for certain criteria concerning
adjustments for inflation, among others.
The main differences with VEN NIF applicable to the Bank are:
1) Consolidation
The accompanying consolidated financial statements show investments in over 50%-owned subsidiaries
under the equity method. In accordance with VEN NIF, these subsidiaries controlled by the Bank or of
which the Bank is considered the main beneficiary of their income must be consolidated.
2) Inflation-adjusted consolidated financial statements
VEN NIF require that the effects of inflation on the financial statements be recognized provided that
inflation for the year exceeds one digit. SUDEBAN has stipulated that inflation-adjusted financial
statements must be provided as supplementary information. At December 31, 2015, the inflation rates
for that month end are not available. SUDEBAN deferred the presentation of this information in
December and June 2015. At December 31, 2014, the Bank has prepared inflation-adjusted
8
consolidated financial statements using the National Consumer Price Index (NCPI) published by the
BCV, based on the methodology established in VEN NIF.
3) Foreign currency
Foreign currency transactions, mainly in U.S. dollars, are recorded at the official exchange rate in effect
at the transaction date and adjusted to the official rate prevailing at year end. The assets, liabilities and
equity of the branch and agency abroad are translated at the prevailing official exchange rate. Income
accounts are translated at the average official exchange rate for the year. VEN NIF establish two options
to measure transactions and balances in foreign currency: a) at the official exchange rates established
in the exchange agreements issued by the BCV or b) on the basis of best estimates of future cash flows
in bolivars expected to be obtained using the exchange or settlement mechanisms permitted under
Venezuelan law. VEN NIF establish that exchange gains and losses on available-for-sale or held-tomaturity securities must be included in the income statement.
4) Investments in trading and available-for-sale securities
According to SUDEBAN rules, investments in trading securities may remain in this category for only 90
days from the date they were classified as held for trading and investments in available-for-sale securities
may not remain in this category for more than one year as from the date they were classified as available
for sale, except for securities issued and guaranteed by the Venezuelan government and investments in
shares of mutual guarantee companies. Under VEN NIF, they may remain in these categories
indefinitely.
5) Discounts or premiums on held-to-maturity investments
Discounts or premiums on held-to-maturity investments are amortized over the term of the security with
a debit or credit to gain or loss on investment securities under other operating income or other operating
expenses, respectively. Under VEN NIF, they are accounted for as part of the security’s yield and,
therefore, must be recognized under interest income.
6) Permanent losses on investment securities
When permanent losses arising from impairment in the fair value of investment securities are recorded,
any subsequent recovery in fair value does not affect the new cost basis. Under VEN NIF, any recovery
of previously expensed impairment losses on debt securities may be recognized as income.
7) Valuation of reclassified securities
a) Reclassification of held-to-maturity securities to available-for-sale securities
According to VEN NIF, when held-to-maturity securities for significant amounts are reclassified to
available-for-sale securities and such transfer is due to a change in their original intended use not
qualified as an isolated, external, nonrecurring or unusual event affecting the Bank and its subsidiaries,
all investments remaining in this category must be reclassified to available-for-sale securities. According
to SUDEBAN rules, reclassifications of held-to-maturity securities must be approved by SUDEBAN.
b) Reclassification of available-for-sale securities to held-to-maturity securities
SUDEBAN rules establish that available-for-sale investments reclassified to the held-to-maturity
category must be recorded at their fair value at the reclassification date. Unrealized gains or losses are
maintained separately in equity and are amortized over the investment’s remaining life as an adjustment
to yield. Under VEN NIF, the fair value of the investment at the reclassification date becomes the new
amortized cost basis, and any gain or loss previously recognized in equity is accounted for as follows:
a) gains or losses on fixed maturity investments, as well as any difference between the new amortized
cost and value at maturity, are taken to profit and loss and amortized over the investment’s remaining
life and; b) gains or losses on non-maturity investments will remain in equity until the asset is sold or
otherwise disposed of, when they shall be recognized in profit or loss.
9
8) Investments in other securities
Investments in other securities include investment trusts, as well as investments not classified under any
of the other categories defined by the Accounting Manual. According to VEN NIF, investments in other
securities are recorded under three categories: at fair value through profit or loss, available for sale and
held to maturity.
9) Rescheduled loans
The Accounting Manual establishes that loans whose original payment schedule, term or other
conditions have been modified at the request of the debtor must be reclassified within rescheduled loans.
VEN NIF provide no specific guidance. However, they do state that impairment losses on financial assets
carried at amortized cost shall be charged to the results for the year in which they are incurred.
10) Overdue and in-litigation loans
Loans classified as overdue must be written off within 24 months after inclusion in this category.
In-litigation loans are those in the legal collection process. Loans in litigation must be fully provided for
after 24 months in the in-litigation category. In addition, overdue monthly loan installments that have
been repaid must be reclassified to the category to which they pertained before being classified as
overdue. Likewise, when a debtor repays pending loan installments of a loan in litigation, thereby
terminating the lawsuit, the Bank and its subsidiaries must reclassify the loan to the category to which it
pertained before being classified as in litigation. Under VEN NIF, they are recorded based on
collectibility.
11) Allowance for losses on loan portfolio
Allowances for losses on the loan portfolio are determined based on a collectibility assessment for
individual loans, a global risk assessment for loans not assessed individually and a general allowance
of 1% over loan balances at month end, except for microcredits, which are subject to a general 2%
allowance. In addition to the minimum general and specific allowances required for the loan portfolio,
SUDEBAN established a general countercyclical allowance equivalent to 0.75% of the gross loan
portfolio balance. VEN NIF require the allowance for losses on the loan portfolio to be determined based
on asset recoverability, considering the fair value of guarantees, and do not provide for a general
provision, which would have to be accounted for as a reduction of retained earnings in the statement of
changes in equity.
12) Assets received as payment and idle assets
Assets received as payment must be recorded at the lower of assigned value, book value, market value
or appraisal value not older than one year, and are amortized using the straight-line method over 1 to 3
years. Assets idle for more than 24 months are written out of asset accounts. In accordance with
VEN NIF, assets received as payment are recorded at the lower of cost and market value and are
classified as property and equipment or non-current assets held for sale depending on their use.
13) Property and equipment
The Accounting Manual establishes that these assets shall be initially recorded at acquisition or
construction cost, as applicable. VEN NIF allow revaluation of property and equipment, and any increase
in value is credited to equity under revaluation surplus.
The Bank assesses possible impairment in the value of its long-lived assets when events or changes in
circumstances indicate that their carrying amount may not be recoverable. An impairment loss is
recognized in the results for the year for the amount by which the asset’s carrying amount exceeds fair
value. According to VEN NIF, the recoverable amount of an asset or group of assets to be held and
used is the higher of fair value less costs to sell and value in use (value in use is the present value of
estimated future cash flows to be obtained from an asset or Cash Generating Unit (CGU)).
The CGU represents the lowest level within the entity that generates cash inflows that are largely
independent of the cash inflows from other assets or groups of assets.
10
14) Leasehold improvements
Significant leasehold improvements are recorded as amortizable expenses and included under other
assets. According to VEN NIF, leasehold improvements are recorded within property and equipment.
15) Goodwill
Goodwill relates to the excess of cost over book value of shares at the date of acquisition and is being
amortized using the straight-line method over 20 years (Note 9). As from 2008, goodwill must be
amortized over no more than 5 years. According to VEN NIF, goodwill should not be amortized but
tested for impairment annually or sooner whenever events or circumstances indicate that the value of
the respective reporting unit may be impaired. Impairment is determined comparing the book value to
the recoverable amount of the CGU, and if the carrying amount exceeds the recoverable amount, an
impairment loss is recognized in the consolidated income statement.
16) Provisions
The Accounting Manual establishes timeframes to record provisions for bank reconciling items, pending
items and accounts receivable forming part of other assets, interest receivable and disposal of certain
assets, among others.
According to VEN NIF, provisions are recorded based on the probability of collection or recovery. No
timeframes are established for creating provisions for these items.
17) Deferred tax
The Bank recognizes a deferred tax asset or liability in respect of temporary differences between the tax
and the book balance sheets, except for provisions for losses on other than unrecoverable loans. A
deferred tax asset is not recognized for any amount exceeding future taxable income. In accordance
with VEN NIF, a deferred tax asset or liability is calculated in respect of all temporary differences between
the tax balance sheet and the accounting balance sheet (Note 15).
18) Employee stock option plan
The Bank has a long-term stock option plan allowing certain key officers to purchase shares of Mercantil
Servicios Financieros, C.A. (MERCANTIL) (Note 16). The Bank makes contributions to Fundación BMA
for share purchases and records them in the results for the year in which they are made. According to
VEN NIF, the related expense is recorded at the fair value of options granted to employees and amortized
over the vesting period. The effect of shares purchased for the stock option plan on the financial
statements is also recognized.
19) Transactions with derivative instruments
Contracted amounts in transactions with derivative instruments, mainly for futures trading, are shown
under memorandum accounts instead of in the consolidated balance sheet as required by VEN NIF
(Note 24).
20) Commissions collected
Commissions collected on loans granted are shown as income when collected, whereas under VEN NIF,
they are deferred and shown as income over the term of the loan.
21) Interest income
Interest on loans, investments and accounts receivable is recorded as income when earned, except:
a) interest receivable on loans more than 30 days overdue; b) interest on overdue or in-litigation loans,
or other loans classified as real risk, high risk or unrecoverable; c) interest on current and rescheduled
loans expected to be collected in 6 months or more and; d) overdue interest, which is recorded as income
when collected. According to VEN NIF, interest is recorded as income when earned using the effective
interest method.
11
In addition, interest accrued but not collected in respect of overdue loans is fully provided for. Interest
on loan installments is fully provided for if repayment is more than 30 days past due. According to
VEN NIF, interest is provided for based on collectibility.
22) Cash flows
For purposes of the consolidated cash flow statement, the Bank considers cash and due from banks as
cash equivalents. Under VEN NIF, investments and deposits maturing within 90 days are considered
cash equivalents.
23) Pension plan remeasurement and other post-retirement benefits
Pension plan remeasurement and other post-retirement benefits are recorded in the consolidated income
statement and are subsequently reclassified in equity, whereas under VEN NIF the effect due to
experience and changes in actuarial assumptions of the retirement and post-retirement benefit plans
must be recorded directly in equity.
Below is a summary of SUDEBAN rules and instructions that do not differ from VEN NIF:
a) Consolidation
The consolidated financial statements include the accounts of the Bank, its Curacao branch and the
agency in Coral Gables, FL, as well as the wholly owned subsidiary Inversiones y Valores
Mercantil V, C.A. and its subsidiaries, domiciled in Venezuela.
The Bank’s agency, branch and subsidiaries are regulated by different accounting rules. The agency is
regulated by accounting principles generally accepted in the United States of America and the branch
by IFRS. They also follow bank practices generally used in the countries where they operate.
Subsidiaries are mainly regulated by accounting principles generally accepted in Venezuela. However,
necessary adjustments and groupings have been made to present the consolidated financial statements
in accordance with the rules and instructions of SUDEBAN.
b) Investment securities
Investment securities are classified upon acquisition, based on their nature and intended use, as deposits
with the BCV and overnight deposits, investments in trading securities, investments in available-for-sale
securities, investments in held-to-maturity securities, investments in other securities and restricted
investments. They are accounted for as described below:
Deposits with the Central Bank of Venezuela (BCV) and overnight deposits
Excess liquidity deposited at the BCV, overnight deposits and debt securities issued by Venezuelan
financial institutions are included in this category. These investments are recorded at realizable value,
representing cost or par value. In addition, this category includes securities acquired under repurchase
agreements, which are recorded at the agreed value.
Investments in available-for-sale debt and equity securities are recorded at fair value. Unrealized gains
or losses, net of tax, resulting from differences in fair values are included in equity under unrealized gain
(loss) on investments until they are sold. Investments in available-for-sale debt securities not listed on
stock exchanges are recorded at fair value based principally on the present value of future cash flows of
the securities.
Investments in held-to-maturity securities
Investments in debt securities that the Bank has the firm intention and ability to hold until maturity are
recorded at cost, which should not differ significantly from fair value at purchase, and are subsequently
adjusted for amortization of discounts or premiums. Discounts or premiums are amortized over the term
of the securities as a credit or debit to income from investment securities.
12
The Bank assesses at each balance sheet date, or sooner if circumstances require it, whether there is
objective evidence that financial assets are impaired. An impairment in the fair value of held-to-maturity
and available-for-sale securities is charged to the results for the year when management considers that
it is other than temporary. Certain factors identified as indicators of impairment are, among others: 1) a
prolonged period where fair value remains substantially below cost, 2) the financial difficulty and liquidity
of the issuer, 3) a fall in the issuer’s credit rating, 4) the disappearance of an active market for the security,
and 5) the Bank’s inability to hold the investment long enough to allow for recovery of fair value. For the
years ended December 31, 2015 and 2014, the Bank has identified no other-than-temporary impairments
in the value of its investments.
Restricted investments originating from other investment categories are measured using the same
criteria used to record those investments from which they are derived.
c) Investments in subsidiaries and affiliates
Investments in shares of 20% to 50%-owned affiliates are shown using the equity method and are
recorded in investments in affiliates (Note 6).
Investments in companies less than 20% owned that the Bank has the intention of holding, and over
whose administration it has significant influence, are recorded under the equity method or at cost.
d) Investment securities acquired under resale agreements
Securities acquired under resale agreements are recorded as deposits with the BCV and overnight
deposits for the amount of funds transacted. The difference with respect to the resale price is recorded
within interest income on an accrual basis (Note 4).
e) Loan portfolio
As required by SUDEBAN, commercial loans and term, mortgage and credit card loan installments are
classified as overdue if repayment is more than 30 days past due. Advances on negotiated letters of
credit are classified as overdue if not repaid within 270 days after their due date. Furthermore, the entire
principal balance of term, mortgage or credit card loans is classified as overdue if repayment of any
installment is more than 90 days late. In addition, the entire balance of loans granted to small businesses
is considered past due if repayment of at least one monthly installment is 60 days overdue or one weekly
installment is 14 days overdue.
f) Available-for-sale assets
Available-for-sale assets other than personal and real property received as payment are recorded at the
lower of cost and market value. Gains or losses from the sale of available-for-sale assets are included
in income accounts.
g) Property and equipment
Property and equipment is shown net of accumulated depreciation. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets. Gains or losses on the sale of personal
and real property are shown in income accounts.
h) Deferred expenses
Deferred expenses are mainly in respect of office setup, office improvement and software expenses.
These expenses are recorded at cost, net of accumulated amortization. Amortization is calculated using
the straight-line method over 4 years.
13
i) Use of estimates in the preparation of consolidated financial statements
The preparation of consolidated financial statements and their notes requires management to make
reasonable estimates that affect the reported amounts of assets and liabilities, the amounts of gains and
losses recorded during the year, and the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements.
The areas involving a higher degree of judgment or complexity, or areas where management’s
assumptions or estimates are significant to the consolidated financial statements are the allowance for
losses on the loan portfolio (Note 5), the income tax provision (Note 15) and the determination of fair
values (Note 29).
Below is a summary of the main bases used in the preparation of the consolidated financial statements:
Contingent loans
The provision for contingent loans is determined based on a collectibility assessment aimed at
quantifying the specific allowance for possible losses on each loan considering, among other things,
economic conditions, client credit risk, credit history and the fair value of guarantees received. The Bank
performs its review on a quarterly basis in accordance with SUDEBAN rules.
Loans of a similar nature are assessed as a whole to determine any applicable allowances.
Other assets
The Bank assesses the collectibility of items recorded under other assets using the same criteria, where
applicable, as those applied to the loan portfolio. Furthermore, the Bank sets aside provisions for those
items that require them due to their nature or aging, or following SUDEBAN requirements.
Provision for legal and tax claims
The Bank sets aside a provision for legal and tax contingencies considered probable and reasonably
quantifiable based on the opinion of its legal advisors and facts known at the assessment date
(Notes 14 and 31).
j) Income tax
The tax provision is based on management’s projection of tax results. The Bank records a deferred tax
asset (liability) when, in the opinion of management, there is reasonable expectation that future tax
results will allow its realization. Deferred tax asset (liability) must always be recognized (Note 15).
k) Employee benefits
Accrual for length-of-service benefits
Based on the provisions of the LOTTT and the Bank’s collective labor agreement, length-of-service
benefits are a vested right of employees. Under the LOTTT, the Bank transfers guaranteed length-ofservice benefits quarterly and annually to a trust fund on behalf of each employee. In addition, the LOTTT
establishes that length-of-service benefits will be calculated retrospectively upon termination of
employment considering the last salary earned by the employee and length of service. The LOTTT
requires the payment to employees at employment termination of the higher of retrospective length-ofservice benefits and total amounts accrued in the employee’s trust fund.
Due to the uncertainty involved in estimating an employee’s last salary, termination date and total
amounts to be accrued in the employee’s trust fund at year end, the Bank uses actuarial methods to
measure and record its obligation for length-of-service benefits based on assumptions that include
discount rates, salary increase rates and employee turnover rates. These assumptions are reviewed
annually and changes may affect the amount of the obligation.
14
Indemnity
Under the LOTTT, if an employee is terminated for reasons other than justified dismissal, the employee
will be entitled to receive an additional indemnity equal to his or her accrued length-of-service benefits.
This amount is recorded within salaries and employee benefits upon termination of employment.
Profit-sharing bonus and vacation leave
As established in its collective labor agreement, the Bank grants profit-sharing bonuses and vacation
leave to its employees that match or exceed the legal minimums, and accrues the related liabilities as
incurred (Note 14).
l) Employee benefit plans
Retirement pension plan
The Bank has a long-term defined benefit plan covering all eligible employees which is managed by
Fundación BMA. Fundación BMA has assets and liabilities representing this benefit. Related costs and
liabilities are calculated using actuarial methods and are recorded in the consolidated results for the year.
The net costs of the retirement pension plan are based on actuarial assumptions that are revised
annually, such as the discount rate of the obligation, the inflation rate and salary increases, and include
service costs, interest expense and returns on plan assets. Important changes in assumptions may
affect the amount of future contributions.
The Bank uses the projected unit credit method to calculate the present value of the Defined Benefit
Obligation (DBO). The Bank makes annual contributions to the plan, except when the DBO is already
covered by plan assets. Plan assets are recorded at fair value.
Post-retirement benefits
The Supplementary Defined Benefit Plan and the Supplementary Savings Plan include certain additional
post-retirement benefits for the Bank’s employees meeting certain conditions in respect of age and length
of service, mainly medical insurance. The related costs and liabilities are determined based on actuarial
methods.
Past service costs of the pension plan are recorded in the consolidated income statement in the year in
which the change occurs.
Defined contribution scheme
The Bank maintains a defined contribution scheme called MERCANTIL Supplementary Savings Plan
(Plan de Ahorro Previsional Complementario MERCANTIL) to replace the Supplementary Defined
Benefit Plan (Plan Complementario de Pensiones de Jubilación). Contributions to the plan are recorded
in the results for the year in which they are incurred. This Plan is a voluntary programmed savings
scheme in the form of individual capitalization accounts that is managed by the Savings and Loan Fund
of employees of Mercantil Servicios Financieros, C.A. Under this Plan, employees contribute between
1% and 5% of their basic monthly salary and the Bank doubles the employee’s contribution up to a
maximum of 10% of said salary.
m) Stock option plan
The Bank has a long-term stock option plan of MERCANTIL shares for certain key officers. Stock options
are recorded as equity. The Bank determines the fair value of these options and amortizes the related
expense over the vesting period. The fair value of each option is determined at the option grant date
using the Black-Scholes-Merton valuation model and does not take into consideration cash dividends
that will not be received by the participants.
n) Recognition of revenue, costs and expenses
Income, costs and expenses are recorded as earned or incurred. Interest collected in advance is
included within accruals and other liabilities as deferred income and recorded as income when earned
(Note 14).
15
Interest on deposits, liabilities and borrowings is recorded as interest expense when incurred.
Income from financial leases and amortization costs of leased property are shown net in the consolidated
income statement within income from the loan portfolio.
o) Assets received in trust
The Bank acts as custodian, administrator and manager of third-party investments. Assets received in
trust, shown under memorandum accounts, are measured using the same parameters used by the Bank
to measure its own assets, except investment securities, which are measured as described below:
Investments in debt securities are recorded at cost, which should not differ significantly from fair value
at purchase. Discounts or premiums are amortized over the term of the securities as a credit or debit to
interest income, resulting in a lower or greater effective yield on investments. Debt securities in foreign
currency are adjusted to the prevailing official exchange rate. Investments in equity securities in bolivars
and foreign currency are recorded at cost. In accordance with certain trust agreements, investments in
debt or equity securities included in these trusts are maintained at cost or market values.
p) Dividends
Cash dividends are recorded as liabilities when approved at a Shareholders’ Meeting.
q) Net income per share
Basic net income per share has been determined by dividing net income for the year by the weighted
average of outstanding common shares during the year (Note 22).
3.
The balances with the BCV included in cash and due from banks at December 31 comprise the following:
2015
2014
Legal reserve
Demand deposits
113,169,364
24,472,033
55,043,613
11,191,544
137,641,397
66,235,157
At December 31, 2015 and 2014, the legal reserve is 18.50% of all deposits. The legal reserve for
marginal increases in deposits was 27% until March 2014 and 28% as from that date. Legal reserve
funds do not earn interest for the Bank and are not available for use.
Pending cash items relate mainly to clearinghouse operations conducted by the BCV and other banks.
4.
Investment securities
Investment securities at December 31 comprise the following:
2015
2014
Investments
Available-for-sale securities
Held-to-maturity securities
Other securities
16
2,100,000
18,982,404
12,291,413
1,188,775
17,081,145
5,755,357
33,373,817
24,025,277
659,097
35,253,978
289,558
20,208,413
69,286,892
44,523,248
a) Deposits with the Central Bank of Venezuela (BCV) and overnight deposits
Deposits with the BCV and overnight deposits at December 31 comprise the following:
Book value
2014
2015
Deposits with the BCV, maturing in January 2016
(January 2015 at December 31, 2014)
2,100,000 (1)
1,188,775 (1)
(1) Shown at par value, which is considered as fair value.
b) Investments in available-for-sale securities
Investments in available-for-sale securities at December 31 comprise the following:
2015
Unrealized
gain
Cost
2014
Unrealized
loss
Book value
(equivalent
to market
value)
Unrealized
gain
Cost
Unrealized
loss
Book value
(equivalent
to market
value)
Investment securities issued by
Venezuelan entities
Securities issued or guaranteed by the
Bolivarian Republic of Venezuela
In local currency (1)
In foreign currency
Equity in non-financial private-sector
companies
Sociedad de Garantías Recíprocas
para la Pequeña y Mediana
Empresa del Sector Turismo, S.A.
(SOGATUR)
Sociedad Nacional de Garantías
Recíprocas para la Pequeña y
Mediana Industria, S.A. (SOGAMPI)
Investment securities issued by entities
of the United States of America
Debt securities with companies
sponsored and supervised by
the government of the United
States of America (2)
Securities issued or guaranteed by
the government of the United
Other investments
17,151,192
705,315
1,014,270
1,535
(115,253)
(7,368)
18,050,209
699,482
15,269,533
684,590
948,251
17
(70,581)
(15,407)
16,147,203
669,200
17,856,507
1,015,805
(122,621)
18,749,691
15,954,123
948,268
(85,988)
16,816,403
207,025
-
-
207,025
207,025
-
-
207,025
1
-
-
1
1
-
-
1
207,026
-
-
207,026
207,026
-
-
207,026
-
-
-
-
22,135
31
(183)
21,983
26,773
-
-
(1,086)
-
25,687
-
21,510
14,027
277
-
(24)
(57)
21,763
13,970
26,773
-
(1,086)
25,687
57,672
308
(264)
57,716
18,090,306
1,015,805
(123,707)
18,982,404
16,218,821
948,576
(86,252)
17,081,145
(1) Includes Principal and Interest Covered Bonds (TICC) with a reference par value of US$111,199,613 at December 31, 2015 (US$169,910,000 at December 31, 2014),
payable in bolivars at the official exchange rate (Note 23).
(2) Includes securities of the Government National Mortgage Association and the Small Business Administration.
(3) Includes shares of the Federal National Mortgage Association and the Federal Home Loan Bank
The equity account unrealized gain (loss) on investments at December 31 comprises the following:
2015
2014
Investments in held-to-maturity securities, reclassified
from investments in available-for-sale securities
17
892,098
862,324
(7,993)
(516)
(419)
(21,924)
127
338
883,170
840,865
At December 31, 2015, the market value of securities owned by the Bank and its subsidiaries is lower
than cost by Bs 123,707,000 (Bs 86,252,000 at December 31, 2014). This loss is included in equity as
an unrealized gain (loss) on investments. The Bank believes that these losses arise from normal stock
market fluctuations and, consequently, are temporary. Management does not expect to realize these
securities at a price below their book value. The Bank and its subsidiaries have the ability to hold these
securities for a sufficient period of time to recover unrealized losses.
During the year ended December 31, 2015, the Bank and its subsidiaries recorded gains and losses on
sale of investment securities of Bs 1,482,990,000 and Bs 762,063,000, respectively (Bs 1,187,719,000
and Bs 512,523,000, respectively, during the year ended December 31, 2014), which are shown under
other operating income and other operating expenses, respectively (Notes 18 and 19). The Bank
received cash payments of Bs 136,445,281,000 for the aforementioned sales (Bs 203,679,728,000
during the year ended December 31, 2014).
During the years ended December 31, 2012 and 2007, the Bank transferred investment securities at
market value of Bs 1,135,003,000 and Bs 749,155,000, respectively, from the available-for-sale
investment portfolio to the held-to-maturity investment portfolio, of which Bs 821,170,000 and
Bs 172,183,000, respectively, will mature shortly. The net unrealized loss of Bs 52,420,000 and
Bs 9,573,000, respectively, associated with these investments, recorded in equity at the date of their
respective transfers, will be amortized until the maturity date of the securities as an adjustment to yield.
During the years ended December 31, 2015 and 2014, Bs 13,931,000 and Bs 15,868,000 have been
amortized in this connection, and are shown under other operating expenses (Note 19).
c) Investments in held-to-maturity securities
Investments in held-to-maturity securities at December 31 comprise the following:
Cost
2015
Amortized
cost
Cost
2014
Amortized
cost
Securities issued or guaranteed by the Venezuelan government
12,299,406
12,291,413
5,777,280
5,755,357
(1) Includes Principal and Interest Covered Bonds (TICC), with a reference par value of US$76,641,000 at December 31, 2014, payable
in bolivars at the official exchange rate (Note 23).
During the year ended December 31, 2015, the Bank transferred investment securities at their amortized
cost of Bs 478,251,000 from the held-to-maturity investment portfolio to the available-for-sale investment
portfolio, resulting in a loss from valuation of Bs 6,182,000, recorded in equity under unrealized gain on
investments.
18
d) Restricted investments
Restricted investments at December 31 comprise the following:
2015
Book value
(equivalent
to market
value)
Amortized
cost
2014
Book value
(equivalent
Amortized
to market
cost
value)
Other investments
605,684
605,684
189,502
189,502
Debt securities of companies sponsored and
supervised by the government of the United
-
-
58,149
58,276
Investment securities issued by entities in the United
States of America
Securities issued or guaranteed by the government
of the United States of America (2)
20,779
20,263
870
870
Time deposits (3)
33,150
33,150
63
63
-
-
40,847
40,847
659,613
659,097
289,431
289,558
Investments in other countries (1)
(1) Trust funds maintained with Banco Provincial, S.A. Banco Universal.
(2) Based on the present value of estimated future cash flows.
(3) Shown at par value, which is considered as fair value.
At December 31, 2015 and 2014, restricted investments include securities of the Coral Gables agency
with a market value of US$3,225,000 and US$9,412,000, respectively, pledged to regulatory agencies
in compliance with state requirements in the United States of America.
In addition, at December 31, 2014, the Curacao branch had a certificate of deposit of US$6,500,000 as
a guarantee for the use of the MasterCard International trademark.
e) Investments in other securities
As required by the Venezuelan government, at December 31 the Bank has investment securities issued
by the Bolivarian Republic of Venezuela, public companies and decentralized entities to finance social
projects for agricultural development and housing construction, as follows:
2015
Issuer
Guarantee
Maturity
Yield
%
2014
Weighted
average
maturity
(months)
Book
value
Book
value
Weighted
average
maturity
(months)
Characteristics
Investments in other
securities
Fondo Simón
Bolívar para la
Reconstrucción, S.A.
Banco Nacional de
Vivienda y
Hábitat
(BANAVIH)
Bolivarian
Republic
of Venezuela
2020 - 2027
4.66 - 6.48
33,242,489
205
18,080,954
85
(1)
2017
4.66
1,315,669
18
1,315,669
31
(2 and 5)
BANAVIH
current loan
portfolio
2021
2.00
695,820
Total investments in other securities
Available-for-sale
investments
Petróleos de Venezuela,
S.A. (PDVSA)
Sociedad de Garantías
Recíprocas para la
Pequeña y Mediana
Empresa del Sector
Turismo, S.A.
(SOGATUR)
Debenture bonds
People’s
Power
Ministry for
Tourism
71
35,253,978
811,790
85
9.10
378,230
12
473,137
21
-
-
207,025
-
207,025
-
585,255
19
(2)
Imputable to
mortgage portfolio
compliance for 2011
(Note 5)
(2 and 3)
Imputable to
agricultural loan
portfolio compliance
(Notes 4-b and 5)
(4)
Imputable to
tourism loan
20,208,413
2016-2017
Total available-for-sale investments
Imputable to
mortgage portfolio
compliance
(Note 5)
Reduces the legal
reserve (Note 3)
680,162
2015
Issuer
Guarantee
Yield
%
Maturity
2014
Weighted
average
maturity
(months)
Book
value
Weighted
average
maturity
(months)
Book
value
Characteristics
Held-to-maturity
investments
Fondo Simón Bolívar para
la Reconstrucción S.A.
Fondo de Desarrollo
Nacional FONDEN, S.A.
Bolivarian
Republic
of Venezuela
Debenture bonds
2016
3.75
2016-2017
10,524,703
9.10
879,145
66
4,171,422
10
14
1,107,289
Total held-to-maturity investments
11,403,848
5,278,711
Total investments required
47,243,081
26,167,286
(2 and 5)
19
(2)
Reduces the legal
reserve (Note 3)
Imputable to
agricultural loan
(Notes 4-b and 5)
(1) At December 31, 2015, the Bank maintains Bs 33,242,488,767 in Bolivarian Housing Securities issued by Fondo Simón Bolívar para la Reconstrucción, S.A., of which Bs 15,161,534,576 is imputable to
the mortgage portfolio for 2015, to finance Venezuela’s Great Housing Mission (Bs 18,080,954,217 at December 31, 2014, of which Bs 7,974,653,799 was imputable to the mortgage portfolio for 2014).
(2) These securities may be traded with the BCV at 100% of their par value for purposes of liquidity injection and credit assista nce. The Bank has the intention to hold them until maturity. These securities
are recorded at cost. These securities are not currently traded on the Stock Exchange.
(3) These securities may be traded on the Bicentennial Public Stock Exchange at market value. They are available for sale and are recorded at the price quoted on the Bicentennial Public Stock Exchange.
(4) At December 31, 2015 and 2014, the Bank maintains Bs 207,025,000 in Class “B” shares of Sociedad de Garantías Recíprocas para la Pequeña y Mediana Empresa del Sector Turismo, S.A. (SOGATUR)
imputable to tourism loan portfolio compliance.
(5) At December 31, 2015, reduces the legal reserve by 3% and Bs 10,524,702,714 (3% and Bs 4,171,422,167 at December 31, 2014).
Below is the classification of investments according to maturity at December 31, 2015:
Available for sale
Book value
(equivalent
to market
Cost
value)
Held to maturity
Yield
%
Fair
value
Amortized
cost
Yield
%
Less than 1 year
1 to 5 years
More than 5 years
4,327,346
2,679,270
11,083,695
4,394,209
2,681,307
11,906,888
18,090,311
18,982,404
2
1
8
3,645,486
460,025
8,356,528
3,632,314
442,563
8,216,536
12,462,039
12,291,413
4
1
7
The control environment of the Bank and its subsidiaries includes policies and procedures to determine
investment risks by type of issuer and economic sector. At December 31, 2015, the Bank and its
subsidiaries have investment securities issued by the Venezuelan government and public entities,
deposits with the BCV maturing within 30 days, securities issued by the government of the United States
of America and government agencies and securities issued by the Venezuelan and international private
sector, among others, representing 95.68%, 3.03%, 0.04% and 1.25%, respectively, of their investment
securities portfolio (96.54%, 2.68%, 0.23% and 0.55%, respectively, at December 31, 2014).
5.
Loan portfolio
The loan portfolio at December 31 is classified as follows:
Current
%
Rescheduled
%
2015
Overdue
%
In litigation
%
Total
2014
Total
%
%
Economic activity
Commercial
Credit cards
Agriculture
Industrial
Services
Home purchases and
improvements
Car loans
Construction
Foreign trade
Other
128,314,022
71,446,213
48,856,332
19,162,944
14,979,589
41
23
15
5
5
182,699
74,797
18,722
11,442
35
15
4
2
365,466
18,487
31,312
24,730
27,458
58
3
6
4
4
43,301
7,320
86
14
128,905,488
71,464,700
48,962,441
19,206,396
15,025,809
41
23
15
6
5
59,281,444
38,680,339
27,602,484
17,650,555
8,162,206
35
23
16
10
5
8,793,876
3,219,409
3,610,974
2,934
17,784,201
3
1
1
6
245
222,748
44
55,141
2,869
14,322
6,567
81,105
9
2
1
13
13
6
-
8,849,275
3,222,278
3,625,296
9,501
18,088,060
3
1
1
5
6,085,166
1,783,621
2,300,504
8,968
6,962,239
4
1
1
5
316,170,494
100
510,653
100
627,457
100
50,640
100
317,359,244
100
168,517,526
100
20
Below is the loan portfolio by geographic location at December 31:
2015
Total
2014
Total
%
%
Geographic location
Venezuela
United States of America
317,323,405
35,839
100
-
168,461,495
56,031
100
-
317,359,244
100
168,517,526
100
At December 31, 2015 and 2014, regulations require universal banks to earmark a minimum nominal
percentage of 62.25% of their gross loan portfolio to finance loans for agriculture, small businesses,
tourism, mortgages and manufacturing as follows:
2015
2014
-Regulatory portfolios
Regulatory portfolios
Agriculture (Note 4)
Manufacturing
Small businesses
Mortgages (Note 4)
Tourism (Note 4)
48,962,441
19,206,396
10,857,878
9,366,727
6,979,686
27,602,484
17,650,615
5,195,148
6,116,783
3,660,742
95,373,128
60,225,772
The Bank has allowances for losses on the loan portfolio exceeding the minimum requirements set by
SUDEBAN. Below is the movement in the allowance for losses on the loan portfolio at December 31:
2015
2014
Balance at the beginning of the year
Provided in the year, including the branch (Note 2.11)
Write-offs of uncollectible accounts
Decrease in branch allowance
Reclassification to the provision for interest receivable
5,898,194
4,803,366
(769,824)
(354)
15,926
3,610,384
2,779,329
(499,141)
(2,965)
10,587
Balance at the end of the year
9,947,308
5,898,194
During the year ended December 31, 2015, the Bank wrote off unrecoverable loans of Bs 769,824,000
(Bs 499,141,000 during the year ended December 31, 2014), against the allowance for losses on loan
portfolio. The Bank and its subsidiaries also collected loans written off as uncollectible in previous years
for Bs 518,845,000 (Bs 297,461,000 during the year ended December 31, 2014), included in the
consolidated income statement under income from financial assets recovered.
Below is a breakdown of certain balances and transactions of the overdue and in-litigation loan portfolio
at December 31:
2015
2014
No earning interest (1)
Interest accrued but not recorded as income
Uncollectible loans written off in previous years
(1)
1,134,233
1,223,461
1,103,246
435,966
2,175,922
2,296,743
At December 31, 2015, Bs 6,567,000 corresponds to overdue letters of credit (Bs 442,000 at December 31, 2014).
21
The control environment of the Bank and its subsidiaries includes policies and procedures to determine
credit risks by client and economic sector. Concentration of risk is limited since loans are granted to a
variety of economic sectors and a large number of clients. At December 31, 2015 and 2014, the loan
portfolio of the Bank and its subsidiaries does not have significant risk concentrations in terms of
individual clients, groups of related companies and economic sectors.
6.
Investments in affiliates
Investments in subsidiaries and affiliates at December 31 recorded at cost by the equity method comprise
the following:
Number of
shares
2015
Equity
participation
%
Thousands
of bolivars
Number of
shares
2014
Equity
participation
%
Bs 100.00
Bs 0.133
Bs 1.00
US$5,000,00
573,985
16,730,462
500,000
24
50.000
19.490
33.333
0.003
1,193,571
98,456
2,915
638
573,985
16,730,462
500,000
24
50.000
19.490
33.333
0.003
92,575
98,456
6,628
637
€ 125
Bs 1.00
Bs 3.00
Bs 1.00
US$1.00
27
28,862
1,298,412
84,800
1,214
0.010
7.400
18.010
2.000
0.150
369
167
128
17
16
32
28,862
1,298,406
84,800
1,214
0,010
7.400
18.010
2.000
0.150
486
167
128
16
15
US$1.00
32,376
0.190
7
(17)
32,376
0,190
Par
value
Inversiones Platco, C.A.
Servicios Pan Americano de Protección, C.A.
Proyecto Conexus, C.A.
Corporación Andina de Fomento (CAF)
Society for Worldwide Interbank Financial
Telecommunication (SWIFT)
Inmobiliaria Asociación Bancaria, C.A.
Caja Venezolana de Valores, S.A.
Super Octanos, C.A.
Banco Interamericano de Ahorro y Préstamo (BIAPE)
Banco Latinoamericano de Comercio
Exterior, S.A. (BLADEX)
Provision for investments in affiliates
1,296,267
Thousands
of bolivars
7
(17)
199,098
During the year ended December 31, 2015, the Bank and its subsidiaries recorded net losses in respect
of their equity in the results of subsidiaries and affiliates of Bs 62,447,000 (gains of Bs 17,725,000 during
the year ended December 31, 2014), shown under other operating income and other operating
expenses, respectively (Notes 18 and 19).
During the year ended December 31, 2015, the Bank made a contribution for future capital increases of
Bs 216,135,000 to its affiliate Inversiones Platco, C.A., by assigning points of sale (POS) at their book
value of Bs 497,634,000, which generated goodwill of Bs 281,499,000, included under other assets. In
addition, the Bank made a cash contribution of Bs 945,164,000.
7.
Available-for-sale assets
Available-for-sale assets at December 31 comprise the following:
2014
Additions
Disposals
2015
Idle assets
Amortization
25,666
(3,030)
549
(260)
Net
22,636
289
(25,476)
3,148
(22,328)
739
(142)
597
During the year ended December 31, 2015, the Bank sold fully amortized assets received as payment
that had been recorded under memorandum accounts at a gain of Bs 18,392,000 (Bs 45,562,000 during
the year ended December 31, 2014) and Bs 214,554,000 from the sale of idle assets (Bs 44,200,000
during the year ended December 31, 2014). Gains are shown in the consolidated income statement
under income from available-for-sale assets.
During the year ended December 31, 2015, the Bank recorded amortization expense in respect of
available-for-sale assets of Bs 260,000 (Bs 3,685,000 during the year ended December 31, 2014),
included in the consolidated income statement under expenses from available-for-sale assets.
22
Fully amortized available-for-sale assets are recorded under memorandum accounts (Note 24).
8.
Property and equipment
Property and equipment at December 31 comprises the following:
2014
Additions
Disposals
Other
2015
Cost
Furniture and equipment
Work in progress
Buildings
Equipment for Chip project
Vehicles
Land
Other assets
Total
Accumulated depreciation
Buildings
Equipment for Chip project
Vehicles
Total
Net
1,258,429
42,476
223,097
14,157
1,698
2,209
31
1,908,307
371,053
535,215
341
-
(1,666)
(371,053)
(851)
-
(91)
(54)
(107)
(10)
3,164,979
42,476
757,407
14,157
1,591
2,550
21
1,542,097
2,814,916
(373,570)
(262)
3,983,181
(572,781)
(33,741)
(14,050)
(1,220)
(388,338)
(6,886)
(108)
(86)
1,835
851
-
94
53
(10)
(989,190)
(39,723)
(14,158)
(1,316)
(621,792)
(395,418)
2,686
137
(1,014,387)
920,305
2,419,498
(370,884)
(125)
2,968,794
During the year ended December 31, 2015, the Bank recorded depreciation expense of Bs 395,418,000
(Bs 198,669,000 during year ended December 31, 2014), included in the consolidated income statement
under general and administrative expenses (Note 17).
Work in progress is mainly in respect of the construction or remodeling of Bank offices.
Below are the original useful lives and average remaining useful lives by type of asset at December 31,
2015:
Useful
life
Average
remaining
useful life
(Years)
Buildings
40
4-10
23
26
3
9.
Other assets
Other assets at December 31 comprise the following:
2015
2014
Accounts receivable from other credit card companies
Deferred expenses of office facilities, leasehold improvements and other,
net of accumulated amortization of Bs 397,031,225 (Bs 172,119,000 at
December 31, 2014) (Notes 2 and 8)
Advances to technology vendors, construction contractors and other
Other prepaid expenses
Stationery and office supplies
Deferred income tax (Note 15)
Software, net of accumulated amortization of Bs 219,311,307
(Bs 91,856,000 at December 31, 2014)
Prepaid taxes
Pending items and main office, branches and agencies
Advances and guarantee deposits
Other accounts receivable
Goodwill on acquisition of bank shareholding, net of accumulated amortization
of Bs 117,183,403 (Bs 91,856,000 at December 31, 2014) (Note 2)
Prepaid advertising
Other
Provision for other assets
681,772
279,627
3,023,786
4,609,571
780,441
1,074,796
553,978
511,563
607,957
97,493
291,256
-
348,809
189,655
205,406
86,213
53,959
191,901
203,038
188,644
74,983
26,720
295,539
33,255
38,276
(20,132)
39,367
7,968
53,828
(7,563)
11,955,324
2,566,782
The balance of pending items and main office, branches and agencies mainly comprises operations that,
due to their nature, cannot be immediately imputed to a definitive account, as well as lending operations
between Bank offices that are being identified and have not yet been definitively recorded at monthly
cutoff. Most of these operations clear during the first few days of the following month. Debit transactions
with these same characteristics are included under accruals and other liabilities (Note 14).
In addition, at December 31, 2015, pending items and main office, branches and agencies also comprise
spot transactions not yet cleared for Bs 1,443,000 (Bs 26,379,000 at December 31, 2014).
Prepaid taxes mainly include payment of income tax, withholding tax and municipal taxes.
Amortization of deferred expenses and goodwill during the year ended December 31, 2015 amounted to
Bs 385,190,000 (Bs 192,655,000 during the year ended December 31, 2014) and is shown under
general and administrative expenses (Note 17).
During the year ended December 31, 2015, the Bank recorded expenses from the provision for other
assets of Bs 4,324,000 (Bs 3,843,000 during the year ended December 31, 2014), shown in the
consolidated income statement under sundry operating expenses.
10.
Deposits
Deposits at December 31 comprise the following:
2015
2014
Demand deposits
Savings deposits
Other demand deposits
Time deposits
349,420,391
142,548,766
4,215,562
530,236
24
174,734,430
78,120,226
4,432,223
522,884
Deposits at December 31 bear interest at the rates shown below:
2015
Deposits
Deposits
in bolivars
in U.S. dollars
Minimum Maximum Minimum
Maximum
rate
rate
rate
rate
%
%
%
%
Type of deposit
Interest-bearing checking accounts
Savings deposits
Time deposits
Restricted deposits
0.05
12.50
14.50
0.05
2.00
16.00
14.50
16.00
0.02
0.01
0.10
0.10
0.02
0.03
0.15
0.77
2014
Deposits
in bolivars
Minimum
Maximum
rate
rate
%
%
0.05
14.50
0.05
12.50
16.00
14.50
2.00
16.00
Deposits
in U.S. dollars
Minimum Maximum
rate
rate
%
%
0.03
0.01
0.01
0.01
0.76
0.59
0.02
0.03
Below is the classification of time deposits by maturity at December 31:
Up to 30 days
31 to 60 days
61 to 90 days
91 to 180 days
181 to 360 days
Over 360 days
2015
Thousands
of bolivars
%
2014
Thousands
of bolivars
%
103,077
58,942
71,310
131,136
164,068
1,703
19
11
13
25
32
-
112,715
71,404
64,552
139,735
132,819
1,659
22
14
12
27
25
-
530,236
100
522,884
100
At December 31, 2015, deposits include Bs 6,437,814,000 from the Venezuelan government and other
government agencies, equivalent to 1.29% of total deposits (Bs 3,664,734,000 equivalent to 1.42% at
December 31, 2014).
11.
Deposits and liabilities with Banco Nacional de Vivienda y Hábitat (BANAVIH)
Deposits and liabilities with BANAVIH at December 31 comprise the following:
2015
2014
Interest-free demand deposits with BANAVIH
1,312
375
Funds received from BANAVIH are used to finance loans. Other liabilities with BANAVIH are in respect
of funds received to subsidize the initial installment of loans granted. Demand deposits are in respect of
funds received to be assigned by BANAVIH (Note 24).
12.
Borrowings
Borrowings at December 31 comprise the following:
2015
2014
x
Borrowings with Venezuelan
financial institutions
Demand deposits
Credit balances with correspondent banks
25
43,800
-
116,615
126
43,800
116,741
2015
2014
x
Borrowings with foreign financial institutions
Borrowings
Demand deposits
25,137
905
150,820
603
26,042
151,423
69,842
268,164
2015
2014
Maturities of borrowings at December 31, up to one year, are as follows:
Up to 6 months
13.
69,842
268,164
Other liabilities from financial intermediation at December 31 comprise the following:
2015
2014
Liabilities with credit card merchants
Other
Liabilities from letters of credit issued and negotiated
14.
4,089
48
-
336
47
3,678
4,137
4,061
Accruals and other liabilities at December 31 comprise the following:
2015
2014
Taxes (Note 15)
Suppliers and other accounts payable
Provision for contingencies and other (Note 31)
Employee profit sharing, vacation and bonuses
Interest collected in advance on loan portfolio and commissions
Collected and withheld taxes
Provision for the Antidrug Law (Note 32)
Labor contributions
Deferred income from loan portfolio
Pending items and main office, branches and agencies (Note 9)
Deferred gain on rights and sale of property and other (Notes 5, 6 and 8)
Accounts payable to Inversiones Platco, C.A. (Note 26)
Commissions payable
Other accounts payable to clients
26
6,934,278
3,082,391
2,368,843
1,562,471
1,156,734
829,648
188,444
102,445
88,077
52,709
49,293
22,993
6,020
647
2,515
1,447,752
938,341
964,014
842,371
477,854
96,483
55,949
90,071
42,827
49,343
1,036
1,959
207,584
16,444,993
5,218,099
15.
Taxes
a) Tax expense
The tax expense at December 31 comprises the following:
2015
2014
Income tax
Current
In Venezuela
Abroad
Deferred
In Venezuela
(6,933,331)
(1,274)
(814)
(6,934,605)
(814)
553,978
-
(6,380,627)
(814)
Venezuelan Income Tax Law
This Law establishes, among other things, regulations concerning a proportional tax on dividends, the
annual inflation adjustment, worldwide income taxation, international fiscal transparency regulations and
transfer pricing.
The Bank’s tax year ends on December 31. For the year ended December 31, 2015, the main differences
between income/loss recognized for accounting and tax purposes arise from the net effect of the annual
inflation adjustment, shareholdings, provisions and accruals that are normally tax deductible in
subsequent periods, nontaxable income and tax-exempt income from National Public Debt Bonds and
other securities issued by the Bolivarian Republic of Venezuela.
For the year ended December 31, 2015, the Bank estimated an income tax expense of Bs 6,933,331,000.
At December 31, 2015, the Bank has extraterritorial tax losses of up to 25% of annual income amounting
to Bs 160,265,000, of which Bs 60,075,000 may be carried forward until December 31, 2016,
Bs 75,982,000 until December 31, 2017 and Bs 24,208,000 until December 31, 2018.
Statutory tax rate
34%
(Thousands
of bolivars)
Book income before income tax
18,542,205
Notional tax expense based on territorial book income computed at the effective tax rate
Differences between notional tax expense and actual tax expense
Net effect of shareholdings
Effect of the annual inflation adjustment
Net effect of exemption of securities issued or guaranteed by the Venezuelan government
Nondeductible provisions
Loan portfolio, net
Other provisions
Other effects, net
6,304,350
18,346
(886,361)
1,374,249
237,646
(114,899)
6,933,331
27
Transfer pricing
Venezuelan Income Tax Law establishes transfer-pricing regulations. According to these regulations,
taxpayers that conduct transactions with related parties abroad are required to calculate income, costs
and deductions applying the methodologies set out in the Law, report results obtained through a special
return, and keep supporting documentation and information related to transfer-pricing calculation for
these transactions. Accordingly, the Bank filed transfer-pricing returns for information purposes.
b) Deferred tax asset
The deferred income tax at December 31, 2015 comprises the following:
(Thousands
of bolivars)
Other provisions
Loan portfolio
Income collected in advance
Labor-related accruals
490,021
45,541
18,356
60
Deferred tax asset (Note 10)
553,978
The Bank assesses the recoverability of deferred tax assets using a model which considers the historic
financial performance, taxable income projections and the future realization of existing temporary
differences, among others. This assessment is based on approved business plans, among others, and
includes management’s judgment on assumptions used, which may vary from one year to the next. The
Bank, based on its assessment, believes that the net deferred tax asset at December 31, 2015 is
realizable.
16.
Employee benefits and employee benefit plans
a) Length-of-service benefits
In accordance with the LOTTT, the Bank calculates length-of-service benefits based on the last salary
earned by the employee upon employment termination using actuarial methods.
At December 31, 2015, the Bank’s obligation in connection with length-of-service benefits amounts to
Bs 204,479,000 (Bs 235,793,000 at December 31, 2014).
The long-term assumptions used to determine the length-of-service benefit obligations at December 31
are as follows:
x
Financial
Discount rate (%)
Salary increase rate (%)
Long-term projected inflation rate (%)
Demographic
Mortality table for active employees
Disability table
2015
2014
7
58
1
(6)
29
GAM (1971)
PDT (1985)
GAM (1971)
PDT (1985)
The estimated net cost of the retrospective length-of-service benefits for 2016 is Bs 282,246,000.
b) Supplementary Savings Plan
Since 2006, the Bank maintains a plan for its employees and those of its Venezuelan subsidiaries entitled
“Plan de Ahorro Previsional Complementario Mercantil” (Supplementary Savings Plan), which replaced
the defined benefit plan entitled “Plan Complementario de Pensiones de Jubilación” (Supplementary
Defined Benefit Plan). Only active employees have the option of subscribing to the new plan or remaining
in the Supplementary Defined Benefit Plan.
28
For the year ended December 31, 2015, expenses in connection with this plan amount to
Bs 135,816,000 (Bs 77,928,000 for the year ended December 31, 2014).
c) Supplementary Defined Benefit Plan and post-retirement benefits
The Supplementary Defined Benefit Plan and post-retirement benefits for eligible employees are based
on a minimum 10-year length-of-service period and a minimum retirement age. The retirement pension
is based on the employee’s average annual salary over the last three years of employment preceding
retirement and is payable at a maximum of 60% of this average salary.
For the year ended December 31, 2015, expenses in connection with the Supplementary Defined Benefit
Plan and post-retirement benefits amounted to Bs 45,600,000 (Bs 28,000,000 for the year ended
December 31, 2014).
The assets, obligations and results of the Supplementary Defined Benefit Plan and post-retirement
benefits for both plans at December 31 are as follows:
Supplementary
Defined Benefit Plan
2015
2014
Postretirement benefits
2015
2014
Annual variation in projected benefit obligation (1)
Benefit obligation
Service cost
Interest cost
Remeasurement
Benefits paid
90,222
65
27,087
355,209
(32,007)
67,248
47
17,496
36,227
(30,796)
131,653
8,574
42,069
374,160
(21,335)
119,540
7,782
33,099
(13,139)
(15,629)
Projected benefit obligation
440,576
90,222
535,121
131,653
132,906
(124,908)
832
105,680
(32,006)
141,805
(72,672)
26,846
67,723
(30,796)
69,095
156,374
(105,680)
(21,335)
71,604
80,843
(67,723)
(15,629)
82,504
132,906
98,454
69,095
65
27,087
(110,967)
47
17,496
(36,889)
8,574
42,069
(20,728)
7,782
33,099
(18,617)
Net benefit cost
(83,815)
19,346)
29,915
22,264
Components in equity for the year
Remeasurement of actuarial loss
355,209
36,227
374,160
(13,139)
Annual variation in restricted plan assets (2)
Opening fair value of assets
Remeasurement and yield on assets
Bank contribution
Transfer between plans
Benefits paid
Closing fair market value of assets
Components of net benefit cost for the year
Service cost
Interest cost
Yield from plan assets
(1)
The obligation is recorded under other liabilities (Note 14).
(2)
The breakdown of plan assets is shown according to the accounting bases described in Note 2.
29
Financial position balances at December 31 are shown below:
2015
Supplementary Defined Benefit Plan
2014
2013
2012
2011
Financial position at year end
Present value of obligations (DBO)
Assets of external fund supporting the plan
(440,576)
82,504
(90,222)
132,906
(67,248)
141,805
(Projected obligation) (1)/excess of assets
(358,072)
42,684
74,557
2015
(137,616)
137,616
(95,649)
95,649
-
2014
2013
2012
-
2011
Financial position at year end
Present value of obligations (DBO)
Assets of external fund supporting the plan
(535,121)
98,454
(Projected obligation) (1)/excess of assets
(436,667)
(1)
(131,653) (119,540)
69,095
71,604
(62,558)
(47,936)
(75,717)
40,900
(55,063)
34,298
(34,817)
(20,765)
The obligation is recorded under other liabilities (Note 14).
The following are the long-term assumptions used to determine benefit obligations at December 31:
Supplementary
2015
2014
Discount rate (%)
Salary increase (%)
Increase in medical expenses (1) (%)
(1)
7
-
2015
2014
1
(6)
-
7
10
1
(6)
5,5
This assumption only applies to the post-retirement benefit plan.
At December 31, 2015, a hypothetical increase or decrease of 1% in the main actuarial assumptions
would impact the value of the projected obligations of the plans as follows:
Supplementary
Increase
Decrease
Increase Decrease
Discount rate
Increase in medical expenses
28,923
-
52,418
-
123,023
158,884
172,283
117,560
Below is a breakdown of the assets supporting the plans of MERCANTIL and its subsidiaries at
December 31, shown in conformity with the accounting bases described in Note 2:
2015
2014
Investments in available-for-sale securities (1)
Interest receivable
Other assets
Total assets
(1) Securities quoted in an active market.
30
43,752
138,682
2,378
185,264
50,992
145,544
3,848
4,567
370,076
204,951
At December 31, 2015, the fair value of these assets, in conformity with accounting standards applicable
to Fundación BMA (VEN-NIF), is Bs 1,430,174,000.
The Bank through its employee benefit plans is exposed to a variety of risks (market, credit and
operational risks), which are minimized by applying risk management policies and procedures (Note 30).
The Bank’s policy to determine investment assets includes regular consultation with its internal advisors.
The expected long-term rate of return on plan assets is updated periodically, taking into consideration
asset allocations, historic returns and current economic conditions. The fair value of plan assets is
affected by general market conditions. If actual returns on plan assets differ from expected returns,
actual results may differ from initial estimates.
The average length of the Supplementary Defined Benefit Plan and post-retirement benefits is 9.6 and
28.9 years, respectively.
At December 31, 2015, the projection of future undiscounted payments of the post-retirement benefit
plans are as follows:
1 year
2 to 5
years
Over 5
years
Total
Supplementary Defined Benefit Plan
Total
45,608
298,530
178,779
1,855,624
541,125
248,790,387
765,512
250,944,541
344,138
2,034,403
249,331,512
251,710,053
d) Long-term stock option plan
MERCANTIL and certain subsidiaries in Venezuela and abroad offer a long-term stock option plan to
eligible officers approved by the Board of Directors’ Compensation Committee. These shares are allotted
over three-year periods and awarded annually. Fundación BMA manages the plan and sets up trust
funds with the shares on behalf of members once these shares have been assigned and subsequently
awarded to eligible officers based on individual allotments approved in accordance with plan regulations.
During each administrative phase and until the shares are actually acquired by officers, cash dividends
declared in respect of these shares are received by Fundación BMA and stock dividends by the
participants.
According to the long-term nature of the plan, officers must be active employees of the Bank in order for
shares to be awarded to them. At December 31, 2015 and 2014, the plan has no current phases. Plan
restructuring is currently being analyzed for continuity purposes.
In March 2015, the Board of Directors’ Compensation Committee approved the Special Plan of
Extraordinary Stock Recognition for MERCANTIL Employees to grant employees in Venezuela up to a
maximum of 90 MERCANTIL shares. Fundación BMA will manage the plan. Sale of shares transferred
to employees will be partially restricted for four years and employees may annually dispose of 25%. The
transfer of shares ended on November 2015. Total shares of Fundación BMA to be allocated to this Plan
is estimated at 318,677 Class “A” common shares and 237,013 Class “B” common shares.
At December 31, 2015, all program shares are available and deposited in the trust fund with Mercantil
Seguros, C.A. that Fundación BMA set up for such purpose. A breakdown of these shares is shown
below:
Number of shares
Class “A”
Class “B”
Total
Trust fund
1,369,674
31
1,025,791
2,395,465
17.
General and administrative expenses
General and administrative expenses at December 31 comprise the following:
2015
2014
Maintenance of property and equipment
Software licenses and maintenance
Taxes and contributions (Note 15)
Transportation and surveillance
Services and supplies
Outsourcing, fees and other
Sundry general expenses
Transportation of valuables and communications
Depreciation of property and equipment (Note 8)
Amortization of deferred expenses (Note 9)
Advertising
Leases
Insurance for property and equipment
Amortization of goodwill (Note 9)
Other
Legal
18.
2,557,658
1,179,110
1,134,802
1,085,992
873,736
781,342
719,735
410,942
395,418
359,862
259,243
208,863
40,669
25,328
10,092
7,488
631,016
207,457
549,522
326,534
387,437
320,395
306,184
244,156
198,669
186,093
65,109
91,889
34,674
6,562
4,499
2,161
10,050,280
3,562,357
Other operating income
Other operating income at December 31 comprises the following:
2015
2014
Commissions on services (Note 24)
Gain on sale of investment securities (Note 4)
Trust fund commissions (Note 24)
Exchange gain (Note 23)
Income from equity in subsidiaries and affiliates (Note 6)
Discount amortization obtained from investment securities
19.
10,472,446
1,482,990
218,200
27,523
5,484
1,608
5,199,250
1,186,719
154,245
37,441
18,944
1,907
12,208,251
6,598,506
2015
2014
Other operating expenses
Other operating expenses at December 31 comprise the following:
Service commissions
Loss on sale of investment securities (Note 4)
Loss from equity in subsidiaries and affiliates (Note 6)
Exchange loss (Note 23)
Amortization of premium on investment securities
32
4,254,511
762,063
67,931
44,745
23,557
1,895,966
511,523
1,219
103,482
29,091
5,152,807
2,541,281
20.
Extraordinary expenses
Extraordinary expenses at December 31 comprise the following:
2015
2014
Donations made by the Bank (Note 27)
Loss from claims
Loss from theft, robbery and fraud
Other
21.
80,000
17,077
11,714
6,186
42,314
4,934
17,982
4,999
114,977
70,229
Equity
a) Capital stock
At December 31, 2015 and 2014, the Bank’s paid-in capital amounts to Bs 268,060,233 and is
represented by 146,198,516 Class “A” common shares and 121,861,717 Class “B” common shares with
limited voting rights, all with a par value of Bs 1. At December 31, 2015 and 2014, Mercantil Servicios
Financieros, C.A. has 146,093,038 Class “A” common shares and 121,802,877 Class “B” common
shares, representing 99.94% of the Bank’s capital stock.
At December 31, 2015 and 2014, the Bank complies with minimum paid-in capital requirements for
universal banks of Bs 170,000,000.
At December 31, 2015, the Bank resolved to increase its capital stock by Bs 2,890,184,709, of which
Bs 24,354,805 is for the payment of the par value of the new Class “A” and Class “B” shares, and
Bs 2,865,829,904 is for the premium of the aforementioned shares. This balance is recorded under
contributions pending capitalization until approval from the regulatory entity has been obtained.
b) Retained earnings and dividends on common shares
Below is a summary of cash dividends declared and paid on common shares for the years reported:
Type of dividend
Ordinary
Ordinary
Date of approval by
Board of Directors
Amount
per share
Bs
Frequency or
payment date
January 2015
January 2014
7.50
4.10
February 2015
February 2014
Contributions pending capitalization mainly include share premiums. This amount may not be distributed
to the shareholders as cash dividends and may only be used for stock dividends.
SUDEBAN established a requirement to set aside an equity reserve of 50% of income for each period
to restricted surplus, exclusively for capital increase purposes. In February 2015, the concepts for which
SUDEBAN could authorize the use of this reserve were expanded to include covering deficit or equity
losses, creating provisions, offsetting deferred expenses, as well as costs and goodwill generated by
mergers. During the year ended December 31, 2015, the Bank reclassified to restricted surplus
Bs 6,080,789,000 (Bs 4,715,330,000 during the year ended December 31, 2014), equivalent to 50% of
net income at that date.
At December 31, 2015, restricted surplus of Bs 19,123,207,000 (Bs 12,971,457,000 at December 31,
2014) includes Bs 234,275,000, in respect of income from subsidiaries and affiliates (Bs 163,314,000 at
December 31, 2014), which will only be available when these subsidiaries and affiliates declare and
distribute the related dividends or the investment is sold. During the year ended December 31, 2015,
the Bank recorded Bs 70,961,000 in this connection (Bs 36,456,000 at December 31, 2014).
33
c) Capital reserve
Appropriation to legal reserve
In accordance with its bylaws and the Law on Banking Sector Institutions, the Bank records annually an
appropriation to the legal reserve equivalent to 20% of net income for the year until the reserve reaches
50% of its capital stock. When the legal reserve has reached this amount, the Bank’s appropriation to
the legal reserve will be 10% of net income for each six-month period until the reserve reaches 100% of
its capital stock.
Appropriation to other mandatory reserves
SUDEBAN establishes a requirement for banks to set aside 0.5% of their capital stock biannually to the
Social Contingency Fund, with a charge to unappropriated surplus, until the reserve reaches 10% of
such capital (Note 4).
d) Risk-based capital ratios
Ratios required and maintained by the Bank, calculated based on its published financial statements in
accordance with the rules of SUDEBAN at December 31, are shown below:
Equity to risk-weighted assets and
contingent operations
Equity to total assets
2015
Maintained
%
2014
Maintained
%
Required
%
12.69
9.96
16.52
9.74
12.00
9.00
In September 2013, SUDEBAN established that banking institutions should adapt the capital to risk asset
ratio of 10% at December 31, 2014. In October 2014, SUDEBAN deferred compliance with this
percentage, keeping it at 9%. In April 2015, SUDEBAN granted an exception in the calculation of this
rate, allowing the exclusion from assets of 50% of the balance maintained at each month closing as legal
reserve with the BCV. In October 2015, this percentage was increased to 100%.
22.
Net income per share
Calculation of net income per common share for each year at December 31 is shown below:
2014
2013
(Thousands of bolivar)
Net income per common share
Net income
Common shares issued
Weighted average of outstanding common shares
Basic net income per share
Diluted net income per share
23.
12,161,578
268,060,233
268,060,233
45.37
45.37
9,430,660
268,060,233
268,060,233
35.18
35.18
Financial assets and liabilities in foreign currency
a) Exchange control regime
Since February 2003, the Venezuelan government established an exchange control regime managed by
the Commission for the Administration of Foreign Currency (CADIVI), currently National Foreign Trade
Center (CENCOEX).
In March 2013, the Venezuelan government established the Supplementary Foreign Currency
Administration System (SICAD), a foreign currency auction system through which individuals and
companies may offer and purchase foreign currency when convened by the BCV, taking into
consideration the Nation’s objectives and economic needs.
34
In March 2014, the Venezuelan government created the Alternative Currency Exchange System
(SICAD II), a system in which individuals and private companies may trade foreign currency in cash, as
well as securities denominated in foreign currency issued by the Bolivarian Republic of Venezuela, its
decentralized agencies or any other issuer, whether public or private, foreign or local, quoted on the
international markets.
SICAD II was eliminated in February 2015. A new exchange system, called the Marginal Foreign
Exchange System (SIMADI), was established in which universal banks and exchange offices may trade
foreign currency in cash. In addition, universal banks and exchange offices, through the Bicentennial
Public Stock Exchange, may negotiate in local currency securities denominated in foreign currency
issued by the Bolivarian Republic of Venezuela, its decentralized agencies or any other issuer, whether
public or private, foreign or local, quoted on the international markets. Purchase and sale exchange
rates of foreign currency on this market will be freely agreed upon by the parties.
As from March 2015 the public banking is the only one authorized to process before CENCOEX foreign
currency requests for travelling abroad and e-commerce purchases.
Subsequent event
In February 2016, the Venezuelan government announced the implementation of two foreign currency
exchange rate systems: 1) Bs 10/US$1 (previously Bs 6.30/US$1) for priority areas, and 2) a
supplementary floating foreign exchange system that will be based on the last exchange rate defined
through SIMADI. The Bank is waiting for the regulations that will govern this new system.
b) Applicable exchange rates
The prevailing exchange rate since February 2013 is Bs 6.2842/US$1 (purchase) and Bs 6.30/US$1
(sale) for all transactions, except for purchases of currency for travelling abroad, remittances to relatives
residing abroad and insurance sector operations, among others, that are calculated at the exchange rate
resulting from the most recent SICAD auction.
At December 31, 2015 and 2014, the exchange rate resulting from the last SICAD auction was
Bs 13.50/US$1 and Bs 12.00/US$1, respectively.
At December 31, 2014, the exchange rate resulting from the last SICAD II auction was Bs 49.9883/US$1,
applicable to purchases made in Venezuela by individuals using debit and credit cards with a charge to
accounts or lines of credit in foreign currency.
At December 31, 2015, the daily variable average exchange rate based on supply and demand in
SIMADI was Bs 198.2018/US$1.
c) Net global position in foreign currency
The Bank’s consolidated balance sheet at December 31, 2015 includes the following balances of
financial assets and liabilities in foreign currency, denominated mainly in U.S. dollars, stated at the
exchange rates described in Note 2:
2015
Equivalent
in bolivars
US$
2014
Equivalent
in bolivars
US$
(In millions)
Assets
Loan portfolio
Other assets
Total assets
35
522
82
44
94
83
13
7
15
666
660
63
13
75
106
105
10
2
12
742
118
1,477
235
2015
Equivalent
in bolivars
US$
2014
Equivalent
in bolivars
US$
(In millions)
Liabilities
Customer deposits
Total liabilities
13
25
44
2
4
7
63
157
94
10
25
15
82
13
314
50
The estimated effect of every Bs 1/US$1 increase in the exchange rate of Bs 6.2842/US$1 at December
31, 2015 would be an increase in assets and equity of Bs 118,000,000 and Bs 105,000,000, respectively
(an increase in assets and equity of Bs 235,000,000 and Bs 185,000,000, respectively, at December 31,
2014).
The BCV excludes from the maximum limit that may be maintained by banks in foreign currency (30%
of equity of the previous month), a portion of capital and income of the agency and branch abroad of
US$62,284,000, as well as securities issued by the Bolivarian Republic of Venezuela, with a reference
value in foreign currency and payable in bolivars (TICC) for Bs 4,641,000 (Bs 538,774,000 at December
31, 2014).
During the year ended December 31, 2015, net exchange loss from revaluation of the foreign currency
position amounted to Bs 17,223,000 (net loss of Bs 66,041,000 during the year ended December 31,
2014) (Notes 18 and 19).
24.
Memorandum accounts
Memorandum accounts at December 31 comprise the following:
2015
2014
Other contingencies (Note 29)
Tourism loan commitments (Note 29)
Guarantees granted (Note 29)
Letters of credit (Note 29)
Assets received in trust
Other special trust services
Other debtor memorandum accounts
Guarantees received
Other control accounts
Unused lines of credit (Note 29)
Valuables received in custody
Collections
Other debtor control accounts
36
1,078,516
764,824
584,119
146,013
684,210
480,436
1,072,992
381,977
2,573,472
2,619,615
28.110.445
20,688,549
7.707
12,527
367,590,961
326,425,343
47,462,490
17,589,551
270,450
186,141,386
191,398,042
36,771,461
14,275,901
708,888
759,338,795
429,295,678
7,704
9,832
a) Assets received in trust
Trust fund accounts at December 31 include the following balances according to the trust’s combined
financial statements:
2015
2014
Assets
Investments securities
Loan portfolio
Assets received for administration
Other assets
Total assets
Liabilities and Equity
Liabilities
Fees and other accounts payable
Other liabilities
Total liabilities
Equity
Total liabilities and equity
1,129,044
13,056,209
13,679,767
156,609
7,234
81,582
1,812,064
9,044,504
9,626,152
136,074
7,500
62,255
28,110,445
20,688,549
121,769
454
180,027
44
122,223
180,071
27,988,222
20,508,478
28,110,445
20,688,549
b) Financial instruments with off-balance sheet risks
Transactions with derivative instruments
The Bank enters into futures hedges for the purchase and sale of securities at a fixed price based on
interest rates. Gains and losses resulting from these contracts for the year ended December 31, 2015
amounted to Bs 74,755,000 and Bs 136,335,000, respectively (Bs 90,428,000 and Bs 158,952,000,
respectively, during the year ended December 31, 2014), shown in the consolidated income statement
under other interest income and other liabilities from financial intermediation, respectively.
c) Debtor accounts from other special trust services (Venezuelan Housing Law)
The Venezuelan Housing Policy Law appointed Banco Nacional de la Vivienda y Hábitat (BANAVIH) as
the sole administrator of public and private funds to finance housing. Therefore, the financial institutions
regulated by the General Law of Banks and Other Financial Institutions shall only act as financial
operators, that is, they shall collect contributions made to the Mandatory Housing Savings Fund and pay
them to the sole administrator, and grant loans after the required financial resources have been
approved.
Assets, liabilities and results associated with resources from the Mandatory Housing Savings Fund are
recorded under memorandum accounts.
During the year ended December 31, 2015, the Bank recorded income from financial transactions of
Bs 25,606,000, shown under income from other accounts receivable (Bs 20,694,000 during the year
ended December 31, 2014).
d) Other control accounts
Other control accounts are mainly in respect of returned checks and guarantees pending release. At
December 31, 2015, these accounts also include US$5,401,000, equivalent to Bs 42,118,000
(US$43,667,000, equivalent to Bs 501,165,000, at December 31, 2014) in respect of the balance
receivable from exchange authorities for payments in foreign currency made by the Bank on behalf of
the customers for credit card use abroad.
37
25.
Credit-related commitments
The Bank has significant outstanding commitments related to letters of credit, guarantees granted, lines
of credit and credit card limits to meet the needs of its customers and to manage its own risk resulting
from interest rate variations. Since many of its credit limits may expire without being used, aggregate
liabilities do not necessarily represent future cash requirements. Commitments to extend credit, letters
of credit and guarantees granted by the Bank are recorded under memorandum accounts.
Guarantees granted
After conducting a credit risk analysis, the Bank provides guarantees to certain customers within their
line of credit. These guarantees are issued to a beneficiary and may be executed if the customer fails to
comply with the terms of the agreement. These guarantees mature after more than one year and earn
annual commissions between 0.50% and 5% of their value. Commissions are recorded monthly while
the guarantees are in force.
Letters of credit
Letters of credit usually mature within 90 days and are renewable. They are generally issued to finance
a trade agreement for the shipment of goods from a seller to a buyer. The Bank charges a fee of 0.50%
of the amount of the letter of credit and records the latter under assets once it is used by the customer.
Unused letters of credit and other similar liabilities are included under memorandum accounts.
The Bank has trademark license agreements for the use of Visa, MasterCard and Diners Club
International credit cards. Visa and MasterCard agreements require the Bank to deposit collateral in
foreign financial institutions. In addition, at December 31, 2015 and 2014, stand-by letters of credit were
pledged for MasterCard International and Visa International transactions amounting to US$7,300,000
and US$5,075,000, respectively (US$24,901,000 y US$6,934,000 at December, 31, 2014) recorded
under other control accounts (Note 24).
Lines of credit granted
The Bank grants lines of credit to customers subject to prior credit risk assessment and obtention of any
guarantees required by the Bank. These agreements are for a specific period, provided that the clients
do not fail to comply with the terms set forth therein. However, the Bank may exercise its option to cancel
a credit commitment with a particular customer at any time.
Credit cards are issued for three years and are renewable. However, the Bank reserves the right to
cancel a credit commitment with a particular customer at any time. The nominal credit card interest rate
is variable and for the years ended December 31, 2015 and 2014 was 29% per annum (Note 1).
The Bank’s exposure to credit loss in the event of noncompliance by customers with terms for credit
extension, letters of credit and guarantees is represented by the notional contractual amounts of these
credit-related instruments.
The Bank evaluates customer eligibility before granting credit. The amount of collateral provided, if
required by the Bank, is based on customer credit assessment. The type of collateral varies, but may
include accounts receivable, inventories, property and equipment, and investment securities.
At December 31, 2015, in accordance with the Accounting Manual, the Bank has set aside general and
specific provisions for contingent debtor accounts amounting to Bs 10,747,000 (Bs 10,747,000 at
December 31, 2014) (Note 14).
38
26.
Balances and transactions with related companies
In the ordinary course of business, the Bank conducts commercial transactions with its shareholder,
affiliates and related companies, the effects of which are included in the consolidated financial
statements. Certain transactions may have taken place on terms other than those that would characterize
transactions between unrelated companies.
Below is a breakdown of the Bank’s balances and transactions with related companies at December 31:
a) Balance sheet
2015
2014
Assets
Other assets
373,505
1,328,092
138,709
351,833
197,719
96,546
1,840,306
646,098
Liabilities
Deposits
Interest-bearing
Non-interest-bearing borrowings
Borrowings
Other liabilities
1,890,322
2,526,895
25,137
1,729
1,970,726
1,356,155
12,568
47,054
Total liabilities
4,444,083
3,386,503
Total assets
b) Income statement
2015
2014
Interest income
2,181
13,636
Interest expense
22,387
9,291
Other operating income
182,313
223,710
Other operating expenses
732,423
409,710
-
22,000
Extraordinary expenses
c) Transactions
The Bank’s significant transactions with related companies are described below:
-
Cash and due from banks, deposits and other liabilities from financial intermediation are mainly in
respect of debit or credit balances of checking accounts at the Bank’s agencies or related banks
abroad.
-
Other assets include interest receivable and other accounts receivable.
-
Expenses payable to Mercantil Commercebank, N.A. are mainly in respect of data processing,
personnel administration and consulting services, and were incurred by the Bank’s offices abroad.
39
Mercantil Servicios de Inversión, C.A. (MSI), subsidiary of MERCANTIL, is authorized by the Venezuelan
Securities Superintendency (SNV) to provide investment services and manage investment portfolios.
The trust fund has engaged MSI as a specialist to optimize yields on investments of trustors. For the
provision of this service, the trust fund (principal), grants MSI (agent) special powers for portfolio
management and disposal. Trustee responsibility is not delegated as part of the service for which MSI
charges an annual commission on the portfolio collections. During the year ended December 31, 2015,
the Bank paid MSI Bs 16,687,000 in this connection (Bs 12,344,000 during the year ended December
31, 2014).
At December 31, 2015 and 2014, fees payable include commissions payable to the Bank as set out in
trust fund agreements signed by trustors and the trust fund. This commission is calculated on funds
deposited in fiduciary funds and is deducted from each trustor’s individual investment; therefore, it is
shown net of interest income. During the year ended December 31, 2015, the Bank recorded income of
Bs 218,199,000 and has Bs 121,324,000 receivable in respect of these commissions (Bs 154,245,000
and Bs 87,780,000, respectively, at December 31, 2014).
27.
Fundación Mercantil
The Bank and other subsidiaries of MERCANTIL sponsor “Fundación Mercantil” founded in December
1988 to promote educational, cultural, artistic, social, religious and scientific programs, either directly or
through donations and contributions to third parties. During the year ended December 31, 2015, the
Bank made contributions of Bs 80,000,000 (Bs 42,314,000 during the year ended December 31, 2014),
shown under extraordinary expenses.
28.
Maturity of financial assets and liabilities
At December 31, 2015, financial assets and liabilities are classified according to maturity as follows:
June 30,
2016
December 31,
2016
June 30,
2017
December 31,
2017
June 30,
2018
December 31,
2018
June 30,
2019
Beyond
2019
Total
Assets
Loan portfolio
Interest and commissions
receivable
Total financial
assets
Liabilities
Deposits
Liabilities with BANAVIH
Borrowings
Other liabilities from financial
intermediation
Interest and commissions
payable
Total financial
liabilities
154,144,732
9,554,991
99,579,923
1,210,365
96,049,655
2,459,883
14,365,301
493,205
16,056,638
474,263
13,108,973
23,971,120
352,178
3,723,944
54,742,007
50,503,690
154,144,732
69,286,892
317,359,244
4,029,578
-
-
-
-
-
-
-
4,029,578
267,309,224
97,260,020
16,825,184
16,549,843
13,583,236
23,971,120
4,076,122
105,245,697
544,820,446
496,925,897
1,312
69,842
164,068
-
1,703
-
-
-
-
-
-
497,091,668
1,312
69,842
4,137
-
-
-
-
-
-
-
4,137
104,454
-
-
-
-
-
-
-
104,454
497,105,642
164,068
1,703
-
-
-
-
-
497,271,413
40
29.
Fair value of financial instruments
Below are the book values and fair values of financial instruments maintained by the Bank at December
31:
2015
Book
value
2014
Fair
value
Book
value
Fair
value
Assets
Loan portfolio, net of provision
Interest and commissions receivable, net of provision
Liabilities
Deposits
Deposits and liabilities with BANAVIH
Borrowings
Memorandum accounts
154,144,732
69,286,892
307,411,936
3,990,894
154,144,732
69,457,518
307,411,936
3,990,894
74,866,697
44,523,248
162,619,332
2,174,876
74,866,697
44,546,385
162,619,332
2,174,876
534,834,454
535,005,080
284,184,153
284,207,290
497,091,668
1,312
69,842
4,137
104,454
497,091,668
1,312
69,842
4,137
104,454
258,083,275
375
268,164
4,061
63,195
258,083,275
375
268,164
4,061
63,195
497,271,413
497,271,413
258,419,070
258,419,070
2,573,472
2,573,472
2,619,615
2,619,615
In the ordinary course of business, the Bank maintains financial instruments with off-balance sheet risks
to meet the financial needs of its customers. At December 31, the Bank’s main exposure is represented
by the following commitments (Note 25):
2015
2014
Unused lines of credit
Guarantees granted
Tourism loan commitments
Other contingencies
Letters of credit
47,462,491
1,078,516
764,823
584,120
146,013
36,771,461
1,072,992
480,436
684,210
381,977
50,035,963
39,391,076
The fair value of a financial instrument is defined as the amount for which the instrument could be
exchanged between two knowledgeable, willing parties, other than in a forced transaction, involuntary
liquidation or distress sale. Fair values for financial instruments with no available quoted market prices
have been estimated using the present value of future cash flows of these financial instruments, based
on the official exchange rate, or other valuation techniques and assumptions. These techniques are
significantly affected by the assumptions used, including the discount rates, estimates of future cash
flows, and the expectation of payments in advance. In addition, fair values presented do not purport to
estimate the value of other income-generating activities or future business activities; that is, they do not
represent the Bank’s value as a going concern.
41
Below is a summary of the most significant methods and assumptions used in estimating the fair values
of financial instruments:
Short-term financial instruments
Financial instruments, including derivatives, are recorded in the consolidated balance sheet under assets
or liabilities at their respective market value. Short-term financial instruments, both assets and liabilities,
are shown in the consolidated balance sheet at book value, which does not significantly differ from fair
value due to their short-term maturity. These instruments include cash and due from banks, deposits
with no fixed maturity and short-term maturity, other liabilities from financial intermediation with shortterm maturity, and commissions and interest receivable and payable.
The fair value of investment securities was determined using the present value of future cash flows of
investment securities, quoted market prices, reference prices determined from trading operations on the
secondary market and quoted market prices of financial instruments with similar characteristics. The
equivalent in bolivars of the fair value of securities denominated in foreign currency was determined
using the official exchange rate of Bs 6.2842/US$1.
Loan portfolio
Most of the Bank’s loan portfolio earns interest at variable rates that are revised frequently, generally
between 30 and 90 days for most of the short-term portfolio. Allowances are made for loans with some
risk of recovery. Therefore, in management’s opinion, the net book value of this loan portfolio
approximates its fair value.
Deposits and long-term liabilities
Deposits and long-term liabilities earn interest at variable rates. Therefore, Bank management considers
fair value to be equivalent to book value.
30.
Risk management
The Bank is mainly exposed to credit, market and operational risks. Below is the risk policy used by the
Bank for each type of risk:
Credit risk
Credit risk is the risk that a counterparty will default on its debts at maturity. The Bank monitors credit
risk exposure by regularly analyzing the payment capabilities of its borrowers. The Bank structures the
level of credit risk by establishing limits for individual or group borrowers. The Bank classifies risk
exposure by risk category into direct, contingent and issuer risks.
Market risk
Financial institutions encounter market risks when market conditions show adverse changes that affect
the liquidity and value of financial instruments included in investment portfolios or contingent positions,
including transactions with derivative instruments, and result in a loss for these financial institutions.
Market risks mainly comprise two types of risk: price risk (including interest rate, foreign exchange and
share price risks) and liquidity risk.
a) Price risk
Price risk includes interest rate, foreign exchange and share price risks.
Interest rate risk is represented by changes in market interest rates with a potential impact on the Bank’s
financial margin or equity.
To measure interest rate risk, the Bank monitors the variables affecting interest rate movements and
financial assets and liabilities. The Bank regularly controls and mitigates existing exposure to risks.
42
Foreign exchange risk arises from fluctuations in the interest rates of international financial markets and
variations in the exchange rates of other currencies with respect to the Venezuelan bolivar. The Bank
sets limits on its individual currency and overall foreign exchange exposure, and on maximum and
minimum positions.
b) Liquidity risk
Liquidity risk is the risk that the Bank may not be able to meet its obligations with clients and financial
market counterparties at any time or in any place or currency. To avoid this risk, the Bank conducts a
daily review of its available resources.
To mitigate liquidity risk, the Bank sets limits as to the minimum funds that must be maintained in highly
liquid instruments and interbank and financing facilities.
The Bank also conducts stress simulation tests to assess the behavior of assets and liabilities under
different scenarios.
The Bank’s investment strategy is aimed at guaranteeing adequate liquidity levels. A significant portion
of cash is invested in short-term instruments such as certificates of deposit with the BCV, debt securities
issued by the Bolivarian Republic of Venezuela and other highly liquid financial obligations, within
regulatory regulations.
Operational risk
The Bank considers operational risk as the possibility of incurring direct or indirect losses as a result of
inadequate or defective internal processes, deficient internal controls, human error, system failures or
external events.
The operational risk management structure established by the Bank enables it to conduct internal
processes for identification, assessment, quantification, monitoring and mitigation of operational risks
across the organization. This structure also provides management with the information required to set
priorities and aid the decision-making process.
Operational risk management at the Bank is a dynamic process conducted from a qualitative
standpoint-by identifying risks and analyzing trigger factors-and from a quantitative standpoint-by
identifying events, measuring their impact, monitoring the behavior of key risk indicators and analyzing
scenarios. The information gathered from these processes serves as the basis to define and implement
actions aimed at controlling and mitigating risks within the Bank.
31.
Liabilities and contingencies
In the ordinary course of business, the Bank is defendant in various legal proceedings. The Bank is not
aware of any other pending legal proceedings which could have a significant effect on its financial
position or the results of its operations.
In tax matters, the Bank and its merged financial institutions have received additional income tax
assessments from the Tax Authorities amounting to Bs 25,094,000, mostly resulting from disallowance
of certain income claimed as nontaxable, expenses related to tax-exempt income, expenses for unpaid
or late payment of withholdings, nondeductible expenses for uncollectible accounts and rejection of tax
loss carryforwards, and the calculation of inflation adjustment for tax purposes. The Bank also received
additional tax assessments of Bs 3,341,000 in respect of withheld and late payments of value added tax
(VAT). The Bank appealed alleging most of these assessments are not well grounded in law. The tax
courts have not ruled on some of these assessments; those that went in favor of the Bank were appealed
by the National Treasury and rulings are pending.
43
The Bank also received additional bank debit tax assessments amounting to Bs 23,508,000, which were
appealed. In the opinion of Bank management and its legal advisors, these assessments are not well
grounded in law.
In April 2008, the Bank was subject to a tax assessment of Bs 62,679,000 in respect of the proportional
tax on dividends. In June 2008, the Bank filed a discharge claim with the Tax Authorities stating its legal
arguments against this assessment. In December 2008, the National Integrated Customs and Tax
Administration Service (SENIAT) confirmed this tax assessment and in January 2009 the Bank filed an
appeal against the payment forms issued. In June 2011, SENIAT confirmed the tax assessment, which
was appealed by the Bank in July 2011. In the opinion of Bank management and its legal advisors, there
are legal grounds to uphold the inadmissibility of the assessment.
Bank management identified a maximum risk of Bs 50,636,000 in connection with the aforementioned
assessments based on inadmissibility of monetary restatement and interest charges; hence a provision
has been set aside to cover this amount (Note 24).
In June 2008, the Bank was notified by BANAVIH, ascribed to the People’s Power Ministry for Housing,
of an assessment of Bs 25,364,000 in respect of alleged differences in the contributions made under the
Housing Loan Law. The Bank appealed this assessment in July 2008. In August 2008, BANAVIH ruled
partially in favor of the Bank and reduced the assessment to Bs 11,647,000. However, in September
2008, the Bank appealed this decision. Simultaneously, since BANAVIH arrived at the ruling following
procedures established in the Law on Administrative Proceedings instead of applying the procedures set
out in the Master Tax Code, as required by the Instance Courts and the Supreme Tribunal of Justice, the
Bank filed for and was awarded constitutional protection in December 2008 and February 2009,
respectively. BANAVIH was ordered to follow the Master Tax Code to rule on the appeal filed by the
Bank in September 2008, according to which the effects of the tax assessment would be suspended. In
the opinion of Bank management and its legal advisors, there are legal grounds to uphold the
inadmissibility of the assessment.
In October 2012, the Bank was notified of a ruling ordering it to return an asset valued at Bs 8,436,600.
The Bank took the corresponding actions against this ruling, obtaining a favorable ruling from the
Supreme Tribunal of Justice in December 2014. It is possible that an appeal would be filed for
constitutional review against this decision. In the opinion of Bank management and its legal advisors,
there are legal grounds to uphold the inapplicability of the ruling.
In December 2012, the Bank was notified of two proceedings as joint guarantor filed in October 2011. In
March 2013, the Supreme Tribunal of Justice annulled one of the proceedings for Bs 13,919,000. The
Bank has sufficient collateral over the second proceeding for Bs 3,338,000. In the opinion of Bank
management and its legal advisors, the ruling on the latter proceeding should be favorable to the Bank.
Bank management and its legal advisors believe that there are favorable expectations about the future
resolution of these contingencies, which they believe will not significantly change next semester.
32.
Money laundering prevention
To comply with the Antidrug Law (formerly the Law on Narcotic and Psychotropic Substances), the Bank
makes a contribution to the National Antidrug Fund (FONA) and develops programs and projects for
employees and their families, approved by the National Antidrug Office (ONA), for the prevention of legal
and illegal drug use (Note 14).
44
In addition, in compliance with SUDEBAN resolutions, the Bank has a Unit for the Prevention of Money
Laundering and Terrorism Financing, and has appointed an Enforcement Officer for the Prevention and
Control of Money Laundering and Terrorism Financing. This Unit is responsible for analyzing, monitoring
and informing the Committee for the Prevention and Control of Money Laundering appointed by the
Board of Directors of any possible money laundering and terrorism financing activities. Furthermore, the
Bank has also appointed compliance officers for the different areas of the Bank exposed to risk, who are
responsible for enforcing and supervising money laundering and terrorism financing prevention and
monitoring regulations. Also, the Bank has an annual training program on money laundering and
terrorism financing prevention for its employees.
45

Banco Mercantil, C.A. - Mercantil Servicios Financieros

Transcription

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