UPDATED OFFERING MEMORANDUM BANCO HIPOTECARIO SA
Transcription
UPDATED OFFERING MEMORANDUM BANCO HIPOTECARIO SA
UPDATED OFFERING MEMORANDUM BANCO HIPOTECARIO S.A. Global Program for the Issue of Simple, Non-Convertible, Secured or Unsecured, Subordinated Or Unsubordinated Notes for a principal amount of up to US$ 500,000,000 (or its equivalent in pesos) Under its Global Program for the Issue of Simple, Non-Convertible, Secured or Unsecured, Subordinated or Unsubordinated Notes for a principal amount of up to US$ 500,000,000 (or its equivalent in pesos), (hereinafter referred to as the “Program”), Banco Hipotecario S.A. (hereinafter “BHSA” or the “Bank” or the “Issuer”, indistinctly) may from time to time issue notes denominated in U.S. Dollars or their equivalent in Pesos (hereinafter, indistinctly, the “Notes” and/or the “Securities”). Such Notes under the Program will be issued in series (each, a “Series”) and each Series may include one or more Tranches (each, a “Tranche”). The notes issued under the Program may (i) bear interest at a fixed rate; (ii) bear interest at a variable rate; or (iii) be issued at a discount and not bear interest. The principal amount, maturity, interest rate and interest payment dates of each Series of notes issued under the Program will be described in a pricing supplement to this offering memorandum (“Offering Memorandum”) relating to such series. Specific terms and conditions applicable to the notes that supplement, modify or amend the general terms and conditions of the notes described in this Offering Memorandum will be described in the pricing supplement applicable to such series. The Bank may offer and distribute the notes issued under the Program directly or through dealers and agents that the Bank may designate from time to time. Any such dealers and agents will be set forth in the applicable pricing supplement. This Offering Memorandum may not be used to consummate sales of notes issued under the Program unless accompanied by the applicable pricing supplement. The Bank reserves the right to withdraw, cancel or modify any offering of notes contemplated by this Offering Memorandum or any pricing supplement with prior notice. Unless otherwise specified in the applicable pricing supplement, the notes will be secured or unsecured and will qualify pari passu without any preference among them, except with respect to certain obligations that are granted preferential treatment by the Argentine laws and except for any notes issued with special, fixed or floating guarantee. In addition, the Bank may issue subordinated Notes in accordance with the regulations issued by the Central Bank of the Republic of Argentina (hereinafter, the “BCRA” or the “Central Bank” indistinctly) in effect at such time. The notes issued under this Program will qualify as non-convertible notes (obligaciones negociables no convertibles) pursuant to Law No. 23,576, as amended (the “Negotiable Obligations Law”), will be issued in accordance with such law and Law No. 19,550 of the Republic of Argentina, as amended (the “Argentine Companies Law”) and will be publicly placed in Argentina in accordance with the provisions of Law No. 26,831 on Capital Markets (the “Capital Markets Law”) and the Argentine Securities Commission Rules in force until the Capital Markets Law is regulated by the Argentine Securities Commission pursuant to Section 155 of such law and General Resolution 615/13 of the Argentine Securities Commission, and in particular, pursuant to Resolution 597/11 (the “Resolution 597/2011”) of the Argentine Securities Commission, as amended and supplemented, and any other applicable laws and/or regulations. The notes issued under the Program may be listed or not in one or more stock exchanges, securities markets or self-regulated entities of Argentina or abroad, as set forth in the applicable pricing supplement relating to each Series and/or Tranche. The creation of the Program was approved by resolution of the Bank’s shareholders’ meeting dated May 23, 2008 and resolutions of the Bank’s board of directors dated February 9, 2011, March 14, 2012, and February 15, 2013 Public Offering authorized by Resolution No. 16,573 dated May 24, 2011 of the Argentine Securities Commission. This authorization means only that the reporting requirements have been satisfied. The Argentine Securities Commission (the “Argentine Securities Commission” or “CNV”, indistinctly) has not rendered any opinion in respect of the information contained in this Offering Memorandum. The accuracy of the accounting, financial, economic and all other information contained in this Offering Memorandum is the sole responsibility of the company’s board of directors and, to the extent applicable, its supervisory committee and the auditors who signed their reports on the financial statements attached hereto. The Bank’s Board of Directors hereby represents and warrants that, as of the date hereof, this Offering Memorandum contains true and complete information regarding any material fact that may affect the company’s equity, economic and financial condition, as well as all other information that is required to be furnished to investors in respect of this issue in accordance with applicable laws and regulations. In addition, in accordance with the provisions of the Capital Markets Law (i) the intermediary entities and agents acting in the market as arrangers and/or dealers of securities will be liable to the extent they have not diligently reviewed the information contained in the Offering Memorandum; (ii) the individuals who sign the Offering Memorandum will be liable for all the information included in it; and (iii) the experts or third parties who pass upon certain parts of the Offering Memorandum will be liable for the information on which they have rendered an opinion. See “Risk Factors” on page 26 of this Offering Memorandum for a description of certain material risks related to an investment in the notes. The notes issued under the Program are excluded from the deposit insurance system established pursuant to Argentine Law No. 24,485, as amended, and will not benefit from the exclusive priority right granted to depositors pursuant to Section 49(e) of Financial Institutions Law No. 21.526 (the “FIL”), as amended. The notes are not secured by any floating security interest or special guarantee or guaranteed by any other means or by any other financial entity. THIS PROGRAM HAS NO CREDIT RATING. IF IT WERE DECIDED TO RATE THE NOTES ISSUED UNDER THE PROGRAM, THE CREDIT RATINGS ASSIGNED AND RELATED INFORMATION WILL BE DISCLOSED IN THE PRICING SUPPLEMENT APPLICABLE TO SUCH NOTES. No action has been (or will be) taken to permit a public offer of the notes issued under the program in any jurisdiction outside the Republic of Argentina (“Argentina”). The notes have not been registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”), any state’s securities laws or the securities laws of any other jurisdiction (other than Argentina) and may not be offered or sold in the United States or to U.S. persons (as defined in Regulation S of the Securities Act, or “Regulation S”), except in transactions exempt from, or not subject to, the registration requirements of the Securities Act. Accordingly, the Bank will only offer and sell notes registered under the Securities Act or in transactions exempt from registration under the Securities Act to “qualified institutional buyers” (as defined in Rule 144A under the Securities Act) (“QIBs”) or outside the United States to non-U.S. persons in compliance with Regulation S under the Securities Act. Pursuant to Law No. 24,587 (“Law on Corporate Notes’ Mandatory Registered Form”), Argentine companies are not authorized to issue certificated securities in bearer form unless they are authorized by the Argentine Securities Commission to be placed by means of a public offering in Argentina and are represented by global or individual securities, registered or deposited with common depositary systems authorized by the Argentine Securities Commission. Therefore, for as long as the provisions of the Law on Corporate Notes’ Mandatory Registered Form are in effect, the Bank will only issue registered, non-endorsable notes (“registered notes”) or notes deposited with a custodian or clearing system, not exchangeable for bearer certificated notes, as agreed by the Bank with the arrangers and dealers. This Offering Memorandum should be read together with all the documents incorporated herein by reference and the information contained herein should be construed considering that such documents form part of this Offering Memorandum. We, having made all reasonable inquiries, confirm that this Offering Memorandum contains or incorporates all information regarding the Bank and the notes that is material in the context of the issuance and offering of the notes, that the information contained in or incorporated by reference to this Offering Memorandum is true and accurate in all material respects and is not misleading and that there are no other facts the omission of which would make this Offering Memorandum as a whole or any of such information misleading in any material respect. Notwithstanding the foregoing, the information provided in this Offering Memorandum or in any pricing supplement that relates to Argentina and its economy is based upon publicly available information, and the Bank does not make any representation or warranty with respect thereto. Neither Argentina, nor any governmental agency or political subdivision thereof, in any way guarantees or otherwise backs, the Bank’s obligations in respect of the notes. The Bank does not intend either this Offering Memorandum or any other information supplied in connection with the program to provide the basis of any credit or other evaluation, nor should it be considered as a recommendation by the Bank or the dealers that any recipient of this Offering Memorandum or any other such information should purchase any of the notes. You are advised to make, and shall be deemed to have made, your own independent investigation of the Bank’s financial condition and affairs and your own appraisal of the Bank’s creditworthiness. The dealers expressly do not undertake to review the Bank’s financial condition or affairs during the life of the program or the notes of any particular series or to advise any investor in the notes of any information coming to their attention. Potential investors should rely only on the information contained in this Offering Memorandum. The Bank has not, and the relevant dealers have not, authorized any other person to provide you with different information. No reliance should be placed on any other or inconsistent information provided by any person. You should assume that the information contained in this Offering Memorandum is accurate only as of the date on the front cover of this Offering Memorandum. The Bank’s business, financial condition, results of operations and prospects may have changed since such date. This Offering Memorandum does not constitute an offer to sell or a solicitation of an offer to buy any notes in any jurisdiction to any person to whom it is unlawful to make the offer or solicitation in such jurisdiction, nor does this Offering Memorandum constitute an invitation to subscribe for or purchase any notes. The distribution of this Offering Memorandum or any part of it, including any pricing supplement, and the offering, sale and delivery of the notes in certain jurisdictions may be restricted by law. The Bank and the dealers require persons into whose possession this Offering Memorandum comes to inform themselves about and to observe any such restrictions. For a description of certain further restrictions on offers, sales and deliveries of notes and on the distribution of this Offering Memorandum and other offering material relating to the notes, see “Transfer Restrictions.” The accuracy of the accounting, financial, economic and all other information contained in the Offering Memorandum is the sole responsibility of the Bank’s board of directors, members of its supervisory committee, all the persons signing the Offering Memorandum and any applicable pricing supplement registered by the Bank before the Argentine Securities Commission, and to the extent applicable, the arranger, dealers, and other agents pursuant to the Capital Markets Law. Upon adopting an investment decision in connection with the notes, investors should rely on their own analysis of the Bank, the terms and conditions of the notes and the benefits and risks involved. The contents of this Offering Memorandum and/or the applicable pricing supplement should not be construed as legal, business, financial, tax or other advice. Potential investors are advised to consult their own attorney, accountant and business adviser as to legal, tax, business, financial and related matters concerning an investment in the Bank’s notes. This Offering Memorandum and any pricing supplement applicable to a Series and/or Tranche will be valid only for the purpose of listing the notes on the Buenos Aires Stock Exchange (the “BCBA” or the “Buenos Aires Stock Exchange”, indistinctly) and trading them in Argentina through Mercado Abierto Electrónico (“MAE”) for a total principal amount which, added to the total principal amount of all the notes issued previously or simultaneously under the Program which are outstanding at such time shall not exceed US$ 500,000,000 or its equivalent in pesos. The Bank is a corporation (sociedad anónima) organized under the laws of Argentina in accordance with the Argentine Companies Law. Therefore, the liability of the Bank’s shareholders is limited to the shares subscribed by each of them. The date of this Offering Memorandum is April 12, 2013. TABLE OF CONTENTS PAGE GENERAL INVESTMENT CONSIDERATIONS 5 INCORPORATION BY REFERENCE 5 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS 6 AVAILABLE INFORMATION 7 OFFERING MEMORANDUM SUMMARY 8 INFORMATION ABOUT DIRECTORS, SENIOR MANAGEMENT, LEGAL COUNSEL AND MEMBERS OF THE SUPERVISORY COMMITTEE 10 PROGRAM SUMMARY 18 KEY INFORMATION ABOUT THE ISSUER 22 SUMMARY OF FINANCIAL INFORMATION AND INDICATORS 22 CAPITALIZATION AND INDEBTEDNESS 25 USE OF PROCEEDS 25 RISK FACTORS 26 INFORMATION ABOUT THE ISSUER 38 HISTORY AND DESCRIPTION OF THE BANK’S BUSINESSES 38 ARGENTINE BANKING REGULATION 52 CERTAIN LEGAL ASPECTS OF MORTGAGES IN ARGENTINA 77 STRUCTURE AND ORGANIZATION OF THE BANK AND ITS ECONOMIC GROUP 81 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 84 OPERATIONS DIRECTORS, SENIOR MANAGEMENT AND MEMBERS OF THE SUPERVISORY COMMITTEE 98 PRINCIPAL SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 116 OFFERING AND LISTING 120 DESCRIPTION OF THE NOTES 120 PLAN OF DISTRIBUTION 135 ADDITIONAL INFORMATION 138 EXCHANGE CONTROLS 149 TAXATION 158 LEGAL MATTERS 168 ADVISORS AND AUDITORS 168 SUPPLEMENTARY INFORMATION 168 GENERAL INVESTMENT CONSIDERATIONS The terms “Argentine Government” or the “Government” or the “Federal Government” refer to the federal government of the Republic of Argentina. The terms “U.S. Dollar” and “U.S. Dollars” and the symbol “US$” refer to the legal tender of the United States. The terms “Argentine Pesos”, “Ps.”, “Peso” and “Pesos” and the symbol “$” refer to the legal tender of Argentina. References to the “Argentine Banking GAAP” refer to the Central Bank’s accounting rules. The term “GDP” refers to gross domestic product and all references in this Offering Memorandum to GDP growth are to real GDP growth. INCORPORATION BY REFERENCE The following documents published or issued from time to time after the date of this Offering Memorandum and prior to the termination of the offering of a particular series of notes in respect of which this Offering Memorandum is delivered shall be deemed to be incorporated by reference into this Offering Memorandum and to be a part hereof from the date of publication or issuance of such documents: • the Bank’s most recently published audited annual financial statements and the Bank’s published unaudited quarterly or semiannual financial statements; • any amendment or supplement to this Offering Memorandum that the Bank prepares from time to time; and • with respect to any series of notes, any pricing supplement in respect of such notes. Any statement contained in this Offering Memorandum or in a document that is incorporated by reference shall be deemed modified or superseded to the extent a statement contained in any subsequent document that is also incorporated by reference modifies or supersedes any such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Offering Memorandum. References to this Offering Memorandum shall be taken to mean this document and all the documents from time to time incorporated by reference herein and forming a part hereof including any pricing supplement in respect of a particular series of notes. The Bank will make available, free of charge, a copy of any or all the documents incorporated by reference herein at the Bank’s domicile, located at Reconquista 101 – C1003ABC, City of Buenos Aires, Argentina, and in the Bank’s web page, www.hipotecario.com.ar. In addition, any inquiries may be addressed to Investor Relations by calling (+5411) 4347-5122 or by sending an e-mail to [email protected]. Finally, this Offering Memorandum and the notices related to the issuance and the financial statements therein mentioned are available on the Argentine Securities Commission’s web site, www.cnv.gob.ar, under the item “Financial Information”. 5 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Offering Memorandum includes forward-looking statements, principally under the captions “Offering Memorandum Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These forward-looking statements are based largely on current beliefs, expectations and projections about future events and financial trends affecting the Bank’s business. Many important factors, in addition to those discussed elsewhere in this Offering Memorandum, could cause our actual results to differ substantially from those anticipated in our forward-looking statements, including, among other things: • changes in general economic, financial, business, political, legal, social or other conditions in Argentina or elsewhere in Latin America or changes in either developed or emerging markets; • changes in capital markets in general that may affect policies or attitudes toward lending to or investing in Argentina or Argentine companies; • inflation; • changes in interest rates and the cost of deposits; • unanticipated increases in financing or other costs or the inability to obtain additional debt or equity financing on attractive terms; • government regulation; • adverse legal or regulatory disputes or proceedings; • risks of lending, such as increases in defaults by borrowers; • fluctuations and declines in the value of Argentine public debt; • increased competition in the banking, financial services, and related industries, and loss of market share; • increase in the allowances for loan losses; • technological changes or an inability to implement new technologies; • changes in consumer spending and saving habits; • deterioration of the business and financial conditions in the regional and national sphere; • fluctuations in the exchange rate of the Peso; and • the risk factors discussed under “Risk Factors”. The words “believe,” “may,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “forecast” and similar words are intended to identify forward-looking statements. Forwardlooking statements include information concerning possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation and the effects of competition. Forward-looking statements speak only as of the date they were made, and the Bank undertakes no obligation to update publicly or to revise any forward-looking statements after the distribution of this Offering Memorandum because of new information, future events or other factors. In light of the risks and uncertainties described above, the 6 forward-looking events and circumstances discussed in this Offering Memorandum might not occur and do not constitute guarantees of future performance. AVAILABLE INFORMATION This Offering Memorandum and the financial statements to which reference is made herein are available to the interested parties at the Bank’s offices, located at Reconquista 101 - C1003ABC, City of Buenos Aires, Argentina and in the Bank’s web page www.hipotecario.com.ar. In addition, any inquiries may be addressed to Investor Relations by calling (+5411) 4347-5122 or by sending an e-mail to [email protected]. Finally, this Offering Memorandum, the notices related to the issuance and the financial statements therein mentioned are available on the Argentine Securities Commission’s web site, www.cnv.gob.ar, under the item “Financial Information”. 7 OFFERING MEMORANDUM SUMMARY The Bank was created in 1886 by the Argentine Government and privatized in 1999. Historically, the Bank has led the Argentine mortgage loan market and has been ranked as the largest supplier of insurance products and services in the field of mortgages and mortgage loans in Argentina. All of the Bank’s transactions and customers are located in Argentina, where the Bank runs a national network spanning 54 branches throughout the Argentine territory and an additional 16 points of sales. The Bank is a commercial bank that provides universal banking services and offers a broad range of banking activities and related financial services to individuals, small and medium enterprises and large companies. The Bank seeks differentiation through its focus on home mortgages and consumer loans as it considers that these products offer attractive continued growth opportunities. The Bank considers that it tops the ranking of mortgage lenders in Argentina and it also offers its customers a wide array of personal and corporate loans, deposits, credit and debit cards and additional financial services. As of December 31, 2012, the Bank ranked tenth amongst Argentine banks in terms of net shareholders’ equity, with net shareholders’ equity of Ps. 3,456.0 million and thirteenth in terms of total assets, with assets for Ps. 16,003.7 million. The Bank’s net income for the fiscal years ended December 31, 2010, 2011 and 2012 was Ps. 195.3 million, Ps. 251.5 million, and Ps. 343.6 million, respectively, which stands for an average return on equity of 6.7%, 8.1% and 10.2%, respectively and a return on average assets of 1.7%, 2.2% and 2.5%, respectively. The Bank’s shares have been listed on the Buenos Aires Stock Exchange since 1999. Since 2006 the Bank carries a Level I ADR Program. Strategy In the last years the Bank has materialized a change in its universal banking-based business structure. Such change implied the release of various products, making necessary changes in the systems, processes and strengthening its market positioning. Therefore, the Bank has changed from a financial intermediary focused on trading mortgage loans to a commercial Bank offering a wide range of products and services. Banco Hipotecario adopted a new vision as a contemporaneous, straightforward and inclusive Bank. In particular, actions were taken to reduce costs, make changes in the volumes of loan origination so that they can fit in the new context of lower liquidity, give priority to deposit attraction efforts, design programs together with governmental agencies and diversified growth. For 2013, the main actions will be focused on: • Universal banking related to housing solutions: To bring into the consumers’ mind the slogan “Everything for your home (Todo para tu casa)” basing the Bank products on such concept; • Making changes in the levels of Liquidity: Aim at maintaining an adequate level of liquid resources to ensure a proper development of the Bank's business cycles and to enable placement of liquid resources surplus in more profitable transactions; • Improving diversity of short-term funding and maximizing long-term funding: To obtain a more balanced structure in line with the guidelines laid down by the financial system and take advantage of capital market opportunities. Accordingly, special emphasis will be placed on attracting demand deposits while continuing to work on the scope of the loan securitization program by issuing new series of Argentine mortgage-backed securities (Cédulas Hipotecarias), and evaluating the possibility of issuing debt securities as long as it is possible under market conditions; • Improved focus on the interaction between the Bank and customers, employees and suppliers: Achievement of synergies in the interaction between the Bank and its domestic and foreign clients and suppliers; • Laying down the foundations for greater operating efficiency and transaction automation: Continued search for improvements in quality and productivity through the systematization of processes and systems. Continuous technology innovation. Strong change in process engineering paving the way 8 towards minimization of waste and process-associated costs. The “industrial metaphor” has a leading role in the Institution's operating organization system; • Maintaining portfolio quality: To maintain the credit quality of new loans; to perform segmented actions on the retail banking portfolio; to encourage the atomization of the corporate banking portfolio; • Seeking greater profitability per client: Continuous search for portfolio loyalty generation, taking actions on key variables in order to increase income from commissions, contributing multiproduct offers and giving priority to cross-selling. Therefore, there will be an increase in operating income and the share in the Bank's total income; • Continuing to boost the Corporate Banking business: To maintain a balance between individual and commercial loans. The Bank will seek to identify entrepreneurs with a high potential to support them in developing their projects, for which purpose greater support will be given to small and mediumsized companies (PyME) banking. The Bank's contribution in relation to corporate funding will not only be limited to loan granting but it will also continue to play an active role so that the companies may obtain access to the capital markets; • Improving risk management: To set out the process for continued improvement in global risk management towards implementing the best practices; Program intended to further develop the cultural insertion on risk management in the organization; • Implementing a model of leadership and assessment of potential at all management levels: To encourage management of knowledge and intellectual capital of all collaborators to increase their strengths in critical aspects through greater involvement and motivation; • Branding reinforcing: Continuous actions intended to further promote the concept of a contemporaneous, straightforward and inclusive bank. Establishing a comprehensive communication plan through the Internet to lead the Internet 2.0 channel (Facebook, Twitter, Google+, and other social networks). • Maintaining the dynamism displayed in the previous year in relation loan granting, paying continuous attention to changes in the local market conditions in a global scenario of crisis; • Furthering the use of tools enabling better management and business development control. For such purpose, a comprehensive management scheme consisting of five strategic environments (Business, Employees, Clients, Sustainability and Organizational Intelligence) will continue to be used. Together with the analysis of profitability by Business Unit, it will be aimed at monitoring and controlling the organizational strategy by measuring strategic goals, which enables to make the corporate vision more clear and align business units with resources under a consistent strategy; • Furthering the comprehensive program for quality and process reengineering in order to identify the “client’s opinion”, aligning their expectations with those of the Bank, and further increasing profitability and reducing costs from waste or “no quality”; • Encouraging leadership and communication, mainly in relation to middle management and further improving coordination between different areas upon planning and executing different projects. 9 INFORMATION ABOUT DIRECTORS, SENIOR MANAGEMENT, LEGAL COUNSEL AND MEMBERS OF THE SUPERVISORY COMMITTEE a) Directors, Senior Management and Members of the Supervisory Committee Board of Directors The Bank is managed by a board of directors, which is currently composed of thirteen directors and eight alternate directors. The members of the board of directors are elected to hold office for two-year terms by the Bank's shareholders at their annual general meeting, and may be reelected indefinitely. The directors are in charge of the administration of the Bank. The Executive Committee conducts the ordinary business of the Bank and is supervised by the board of directors. The board of directors is composed of: two members representing Class A shares; one member representing Class B shares; one member representing Class C shares; and nine members representing Class D shares; and their respective alternates. Members of the Board of Directors The following table sets forth the current members of the Bank's board of directors: Date of birth Position Beginning of current term Expiration of current term Class Elsztain, Eduardo Sergio 01-26-60 Chairman 03-27-12 12-31-13 D Blejer, Mario 06-11-48 Vice Chairman 03-14-11 12-31-12 D Bossio, Diego Luis Cufre, Marcelo Gustavo Vergara del Carril, Pablo Daniel Reznik, Gabriel Adolfo Gregorio Zang, Saúl Viñes, Ernesto Manuel Dreizzen, Jacobo Julio Wior, Mauricio Elías Písula, Carlos Bernardo Fornero, Edgardo Luis José Maza, Ada Mercedes(1) 09-09-79 06-26-58 10-03-65 Director Director Director 03-14-11 03-14-11 12-31-12 12-31-12 A A 03-27-12 12-31-13 D 11-18-58 Director 03-14-11 12-31-12 D 12-30-45 02-05-44 10-13-55 10-23-56 12-16-48 10-14-51 Director Director Director Director Director Director 03-27-12 03-14-11 03-14-11 03-27-12 03-27-12 12-31-13 12-31-12 12-31-12 12-31-13 12-31-13 04-30-10 12-31-11 D D D D D B 09-17-58 Director 03-27-12 12-31-13 C Elsztain, Daniel Ricardo Efkhanian, Gustavo Daniel Elsztain, Alejandro Gustavo Ocampo, Andrés Fabián 12-22-72 Alternate Director 03-27-12 12-31-13 D 10-28-64 Alternate Director 03-27-12 12-31-13 D 03-31-66 11-09-56 Alternate Director Alternate Director 03-14-11 03-14-11 12-31-12 12-31-12 D D Parrado, Mario César Blasi, Gabriel Pablo Alvarez Jorge Augusto Bensadón, Federico León 04-11-59 11-22-60 01-11-60 01-17-33 Alternate Director Alternate Director Alternate Director Alternate Director 03-27-12 03-27-12 04-30-10 03-27-12 12-31-13 12-31-13 12-31-11 12-31-13 D D B D Last and first name (1) Class C Regular Director took office on an interim basis until the BCRA issues a formal authorization (pursuant to Communication “A” 4490) . Below is a summarized biography of the Bank’s directors and alternate directors: 10 Eduardo Sergio Elsztain. Mr. Elsztain studied Economics at Universidad de Buenos Aires. He has been engaged in the real estate business for more than 20 years and has been Chairman of the Board of Directors and CEO of IRSA Inversiones y Representaciones Sociedad Anónima since 1991. He founded Consultores Assets Management S.A. and has served as its President since 1989. He is also Chairman of the Board of Cresud S.A.C.I.F. y A., Alto Palermo S.A. (APSA) and BrasilAgro Companhia Brasilera de Propiedades Agricolas, among other companies. Eduardo Sergio Elsztain is the brother of Alternate Directors Daniel R. Elsztain and Alejandro G. Elsztain. Mario Blejer. Mr. Blejer obtained a PhD in Economics from the University of Chicago. From 1980 to 2001, he served as a senior consultant to the IMF in its European and Asia Departments. He was Vice Chairman and subsequently Chairman of the Central Bank from 2001 to 2002. He served as Director of the Center for Central Banking Studies of the Bank of England from 2003 to 2008 and as Advisor to the Governor of the Bank of England during the same period. He is Director of IRSA Inversiones y Representaciones Sociedad Anónima, Gems Investments and MAG Macroeconomic Advisory Group. He is also an external advisor to the Monetary Policy Board of the Central Bank of Mauritius and professor of post-graduate courses at Universidad Torcuato Di Tella. Diego L. Bossio. Mr. Bossio joined the Bank in January 2009. He obtained a degree in Economics from Universidad de Buenos Aires and a Master’s degree in Economics from Universidad de San Andrés. Before joining the Bank, Mr. Bossio served as Undersecretary of Public Administration under the jurisdiction of the General Secretariat of the Government of Mendoza, and as a coordinator of the International Financing Unit (UFI) under the Treasury Department. Prior to that, he served as Head of advisors to national senator Celso Alejandro Jaque. He also provided advice and coordinated the senator’s work in the Federal Revenue Sharing Committee and the Budget and Treasury and Infrastructure, Housing and Transportation Committees. He also served as junior economist at Exante Consultora Económica’s International Economy division. In July 2009, President Cristina Fernández de Kirchner appointed Mr. Bossio as Executive Director of ANSES (Federal Social Security Agency). Marcelo Gustavo Cufre. Mr. Cufre joined the Bank in April 2009. He has a degree in Architecture from Universidad de La Plata (UNLP). Mr. Cufre served as National Director of the Architecture Division of the Ministry of Federal Planning, Public Investment and Services. Formerly, Mr. Cufre served as Chairman of the Institute for Urban Development and Housing and as general Director of the Housing Program in the Province of Santa Cruz. He also served as advisor in the Ministry of Federal Planning, Public Investment and Services and as executive coordinator in the Ministry of Economy and Public Works. Pablo Daniel Vergara del Carril. Mr. Vergara del Carril obtained a degree in Law from Universidad Católica de Argentina, where he teaches Commercial Law and Contract Law. He also teaches Corporate Law, Contracts and Capital Markets in post-graduate courses. Mr. Vergara del Carril is a member of the Legal Advisory Committee of the Argentine Chamber of Corporations (Cámara de Sociedades Anónimas) as well as Vice President of the Competition Law Committee of the Colegio de Abogados de la Ciudad de Buenos Aires. He is a member of the board of directors of Emprendimiento Recoleta S.A. and Nuevas Fronteras S.A. and alternate director of Alto Palermo S.A. (APSA). He is one of the partners at Zang, Bergel & Viñes Abogados law firm. Gabriel Adolfo Gregorio Reznik. Mr. Reznik has been a Director of Banco Hipotecario since June 2002. He has served as Director and Manager of the Technology Department of IRSA Inversiones y Representaciones Sociedad Anónima. He currently serves as Director of Cresud S.A.C.I.F. y A., Emprendimiento Recoleta S.A. and IRSA Inversiones y Representaciones Sociedad Anónima. Mr. Reznik has been responsible for the control over the execution of engineering works for IRSA Inversiones y Representaciones Sociedad Anónima and Alto Palermo S.A. (APSA), and for the Office Building Operation and Maintenance areas. He has a degree in Civil Engineering from Universidad de Buenos Aires and a Master’s degree in Administration of Real Estate and Construction Businesses from Escuela Politécnica de Madrid, Spain. Saúl Zang. Mr. Zang obtained a Law degree from Universidad de Buenos Aires. He is a member of the International Bar Association and the Interamerican Federation of Lawyers. He is a founding partner of the law firm Zang, Bergel & Viñes Abogados. He is also Vice Chairman of IRSA Inversiones y Representaciones Sociedad Anónima and Alto Palermo S.A. (APSA), Puerto Retiro and Fibesa, and first 11 Vice Chairman of Cresud S.A.C.I.F. y A. He is also a member of the board of directors of Nuevas Fronteras S.A., Tarshop, Palermo Invest S.A. and BrasilAgro Companhia Brasilera de Propiedades Agricolas, among other companies. Ernesto Manuel Viñes. Mr. Viñes graduated in Law from Universidad de Buenos Aires where he took post-graduate courses. He has been a court officer and Subsecretary of State. He has been a university professor and has worked on a self-employed basis. He is a founding partner of the law firm Zang, Bergel & Viñes Abogados. Jacobo Julio Dreizzen. Mr. Dreizzen holds a degree in Economics from Universidad de Buenos Aires and a Master’s degree in Economics from the Catholic University of Río de Janeiro. In 1986, he was Deputy Executive Director of the IMF. In 1987, Mr. Dreizzen acted as advisor to the Presidency of the Central Bank and in the period from 1987 to 1989, he was Director of that institution. From 1990 to 1999 he served as executive Director of the Investment Banking Division of Banco Galicia. Also, he served as alternate Director at Banco de Inversión y Comercio Exterior S.A. (BICE). From 2000 to 2001, he was Undersecretary of Finance for the Ministry of Economy. He served as a consultant to the IADB (2002), UNDP (2005) and CAF (2005). From 2002 to 2005 he was President of Constellation, an investment trust. He is currently IMPSA S.A.’s CFO and Director of Banco Hipotecario. Mr. Dreizzen has been professor of Corporate Finance at the Universidad de Buenos Aires Capital Markets Graduate Program since 1993. Mauricio Elías Wior. Mr. Wior obtained a bachelor’s degree in Economics and Accounting from Tel Aviv University in Israel and a Master’s degree in Business Administration from the same university. Mr. Wior served as President of Radio Comunicaciones Móviles (Movicom) and as regional Vice President for the Southern Cone for Bell until 2004. Carlos Bernardo Písula. Mr. Písula obtained a degree in Accounting from Universidad de Buenos Aires in 1973, where he subsequently completed various professional development and specialization courses. Mr. Písula is a Class D Director of the Bank. During the period from 1996 through 1999 he acted as advisor to the Bank’s vice-presidency. Mr. Písula is the President of the Finance Commission and Vice President of the Housing Commission of the Cámara Argentina de la Construcción (CAC). He is also a board member of various private construction and real estate companies. Edgardo Luis José Fornero. Mr. Fornero has studied Law at Universidad de Lomas de Zamora. He has been a Class B Director of the Bank since September 1997. Mr. Fornero currently serves as Housing Secretary for La Bancaria banking association and as representative of the Bank's employee union. Ada Mercedes Maza. Mrs. Maza completed the Technical Degree in Legislative Administration at the Legislative Power of the Province of La Rioja. She worked for 3 years at Compañía Financiera Condecor and subsequently took office as Municipal Councilor in the Province of La Rioja for four years. She later served as Private Secretary of the Vice Governor. In 1995 she took office as Operating Manager of the Governor of La Rioja and later served as National Senator of such province for 10 years. She also participated as member of the Latin Parliament. Daniel R. Elsztain. Mr. Elsztain graduated with a major in Economic Sciences from Universidad Torcuato Di Tella and has a Master’s degree in Business Administration from the same university. He currently serves as Chief Operating Officer of IRSA Inversiones y Representaciones Sociedad Anónima, and as Director at Alto Palermo S.A. (APSA) and Supertel Hospitality Inc., among other companies. Mr. Daniel R. Elsztain is the brother of the Bank President Eduardo S. Elsztain and of the Alternate Director Alejandro G. Elsztain. Gustavo Daniel Efkhanian. Mr. Efkhanian served as Executive Director of the Bank from 1997 to 1999, Director since 1993 and has held various positions at the Bank since 1991. Mr. Efkhanian supervises corporate business-related issues. He had formerly served as a government-appointed advisor to the Bank in connection with the 1989-1993 Restructuring. Mr. Efkhanian has also served as an alternate Director of Banco de Inversión y Comercio Exterior S.A. (BICE). From 1988 to 1991, he was an economist for the Instituto de Estudios Económicos de la Realidad Argentina y Latinoamericana 12 (IEERAL). Mr. Efkhanian obtained a degree in Economics from Universidad de Córdoba. He currently serves as alternate Director and Manager of the Bank’s Risk and Controlling division. Alejandro G. Elsztain. Mr. Elsztain obtained a degree in Agricultural Engineering from Universidad de Buenos Aires. He currently serves as General Manager and Second Vice Chairman of Cresud S.A.C.I.F. y A. He also serves as Second Vice Chairman of IRSA Inversiones y Representaciones Sociedad Anónima, Executive Vice Chairman of Alto Palermo S.A. (APSA), Vice Chairman of Nuevas Fronteras and Hoteles Argentinos and Regular Director of Inversora Bolivar S.A. Mr. Alejandro G. Elsztain is the brother of the Bank President Eduardo S. Elsztain and of the Alternate Director Daniel R. Elsztain. Andrés Fabián Ocampo. Mr. Ocampo obtained a law degree from the School of Law and Political Sciences of Universidad Católica Argentina. He completed post-graduate studies at the Instituto de Altos Estudios Empresariales of Universidad Austral under the Senior Management Program and in Operating Finance, and in Banking Law at Universidad Argentina de la Empresa. Mario César Parrado. Mr. Parrado obtained a degree in Business Administration from Universidad Argentina de la Empresa (UADE). He has more than twenty years of experience in finance, having served as President of The Boston Investment Group, Director of BankBoston Argentina and Director of Fleet International Advisors S.A. Gabriel P. Blasi. Mr. Blasi obtained a degree in Business Administration and carried out postgraduate studies in Finance at Universidad del CEMA—Centro de Estudios Macroeconómicos Argentinos and in the IAE (Universidad Austral). He held several management positions in the areas of Investment Banking and Capital Markets at Citibank and Banco Río (BSCH). Prior to joining IRSA Inversiones y Representaciones Sociedad Anónima, he served as Financial Director of the Argentine Carrefour Group and Goyaique SACIFIA (Pérez Companc Group). Until 2011, he was Financial Manager of IRSA Inversiones y Representaciones Sociedad Anónima, Cresud S.A.C.I.F. y A. and Alto Palermo S.A. (APSA). Currently, he is the Bank’s Chief Financial Officer. Jorge Augusto Álvarez. Mr. Álvarez studied Systems Programming at Universidad de Champagnat in Mendoza. He has been Head of Division at Banco Hipotecario S.A. since 1979. Federico León Bensadón. Mr. Bensadon graduated as civil engineer from Universidad de Buenos Aires in 1957. He has been Class C Director of the Bank since September 2002. He is a member of the board of directors of Telemetrix S.A. (Costa Salguero), Emaco S.A., Edilcenter S.A., Rafoy S.A., and DR S.A., among other companies. He is also Treasurer of the Cámara Argentina de la Construcción and Secretary of the Unión Argentina de la Construcción. Employment Contracts with Directors The Bank has entered into employment contracts with some of its Directors. Ernesto Manuel Viñes and Edgardo Fornero perform executive and/or administrative functions at the Bank and, therefore, they are considered as Bank’s employees. 13 Senior Management As of December 31, 2012, the Bank’s senior management consists of the following officers: Name Position Fernando Rubín Gerardo Rovner Ernesto Manuel Viñes Gustavo Daniel Efkhanian Manuel Herrera Esteban Guillermo Vainer Roland Costa Picazo Favio Gabriel Podjarny Gabriel Pablo Blasi Javier Varani General Manager Auditing Manager Legal Department Manager Risk and Controlling Manager Corporate Banking Manager Retail Banking Manager Organizational and Quality Development Manager Corporate Services Manager Finance Manager Institutional Relations Manager Below is a summarized biography of the Bank’s senior managers: Fernando Rubín. Mr. Rubín joined the Bank as Organization Development manager in July 2001. He obtained a degree in Psychology from Universidad de Buenos Aires and a post-graduate degree in Human Resources and Organizational Analysis in E.P.S.O. (Organizations Social Psychology School). Prior to joining the Bank, he served as Human Resources Corporate Manager for IRSA Group. He worked as Human Resources Director of LVMH (Louis Vuitton Moet Hennessy) and Chandon Wineries in Argentina and Brazil. He also served as Human Resources Manager for Roland Berger & PartnerInternational Management Consultant. Gerardo Rovner. Mr. Rovner holds a degree in Economics from Universidad de Buenos Aires. He has been working at Banco Hipotecario for sixteen years, acting as Manager of the Risk Policy, Collections Management and Operating Risks divisions. In February 2012, he was appointed Internal Audit Manager. He has specialized in statistics and has been teaching that subject at the School of Economic Sciences since 1994. Ernesto Manuel Viñes. Mr. Viñes graduated in Law from Universidad de Buenos Aires where he took post-graduate courses. He has been a court officer and Subsecretary of State. He has been a university professor and has worked on a self-employed basis. He is a founding partner of the law firm Zang, Bergel & Viñes. Gustavo Daniel Efkhanian. Mr. Efkhanian served as Executive Director of the Bank from 1997 to 1999, Director since 1993 and has held various positions at the Bank since 1991. Mr. Efkhanian supervises corporate business-related issues. He had formerly served as a government-appointed advisor to the Bank in connection with the 1989-1993 Restructuring. Mr. Efkhanian has also served as an alternate Director of Banco de Inversión y Comercio Exterior S.A. (BICE). From 1988 to 1991, he was an economist for the Instituto de Estudios Económicos de la Realidad Argentina y Latinoamericana (IEERAL). Mr. Efkhanian obtained a degree in Economics from Universidad de Córdoba. Manuel Herrera. Mr. Herrera joined the Bank in 2009. He holds a degree in Business Administration from Universidad Católica de Argentina. He carried out post-graduate studies at Harvard University. Mr. Herrera has sixteen years of experience in the Argentine and US financial systems. Prior to joining the Bank, he headed various areas within the Corporate Banking and Investment Banking units at BankBoston Argentina, subsequently acquired by StandardBank South Africa and US. Esteban Guillermo Vainer. Mr. Vainer joined the Bank on August 17, 2004. He obtained a degree in Business Administration from Universidad Argentina de la Empresa and a Master’s degree in Business Administration from the IAE. He was Head of Banco Galicia’s Insurance Banking Division for nine years. 14 Roland Costa Picazo. Mr. Costa Picazo holds a degree in Employment Relationships from Universidad de Buenos Aires. He has taken different updating courses and programs both in Argentina and abroad. He gained professional experience at IRSA Inversiones y Representaciones Sociedad Anónima, CRESUD S.A.C.I.F. y A. and Alto Palermo S.A. (APSA) as Human Resources Manager and at Bodegas Chandon and LVMH Argentina as Head of Recruitment and Development. Favio Gabriel Podjarny. Mr. Podjarny joined the Bank in December 2005. He is the Manager of the Administration, Logistics and Collections division. He served as representative of the Board of Directors of IRSA Inversiones y Representaciones S.A., being in charge of the Abril Club de Campo Project. Formerly, he had been Director of the Centro de Empleo y Emprendimientos Ariel Job Center, being in charge of the overall administration and management of the organization. He was also in charge of the overall management of Sociedad Hebraica Argentina in the capacity as the entity’s Executive Director. Gabriel P. Blasi. Mr. Blasi obtained a degree in Business Administration and carried out postgraduate studies in Finance at Universidad del CEMA—Centro de Estudios Macroeconómicos Argentinos and in the IAE (Universidad Austral). He held several management positions in the areas of Investment Banking and Capital Markets at Citibank and Banco Río (BSCH). Prior to joining IRSA Inversiones y Representaciones Sociedad Anónima, he served as Financial Director of the Argentine Carrefour Group and Goyaique SACIFIA (Pérez Companc Group). Until 2011, he was Financial Manager of IRSA Inversiones y Representaciones Sociedad Anónima, Cresud S.A.C.I.F. y A. and Alto Palermo S.A. (APSA). Currently, he is the Bank’s Chief Financial Officer. Javier Varani. Mr. Varani joined the Bank in June 2005 as Institutional Relations Manager. He had formerly worked in the Media and Institutional Affairs divisions of Telecom Argentina and Telecom Personal. From 1995 to 1999, Mr. Varani was city councilor for Vicente López (Province of Buenos Aires). He is a university professor specialized in municipal matters. b) Supervisory Committee Article 20 of the bylaws of the Bank provides for a Supervisory Committee consisting of five members (“Syndics”) and five alternate members. Pursuant to Article 20 (b) of the bylaws, the members of the Supervisory Committee are elected as follows: three members of the Supervisory Committee and three alternates are elected jointly by the Class C and Class D Shares, one member and one alternate are elected by the Class B Shares (to the extent such shares represent more than 2.0% of the Bank’s outstanding capital stock) and one member and one alternate are elected by the Class A Shares. Syndics and alternate syndics are appointed for a two-year period. Pursuant to Argentine law, only lawyers and accountants admitted to practice in Argentina may serve as syndics of an Argentine sociedad anónima. If Class B Shares do not represent 2.0% of the Bank’s capital stock and the Class C Shares do not represent 3.0% of the Bank’s capital stock, the Supervisory Committee will be reduced to three members and three alternates. Two members and two alternate members will be elected jointly by the Class B, C and D Shares and one member and one alternate member will be elected by the Class A Shares. Meetings may be called by any of the syndics and shall be held with the presence of the absolute majority of its members, and resolutions shall be adopted by a majority of votes. Pursuant to article 294 of the Corporate Law 19.550, as amended, the primary duties and powers of the Supervisory Committee are to: (i) supervise and inspect the corporate books and records whenever necessary, but at least quarterly; (ii) attend meetings of the directors, executive committee and shareholders; (iii) prepare an annual report concerning the Bank’s financial condition and submit it to the shareholders at the ordinary meeting; (iv) provide certain information concerning the Bank upon written request of any shareholder holding at least 2.0% of the Bank’s outstanding capital; (v) call an extraordinary shareholders’ meeting when necessary, on its own initiative or at the request of the shareholders, or an ordinary one when the board of directors fails to do so; (vi) include matters for the agendas of any meeting the Supervisory Committee must attend; (vii) supervise and monitor the Bank’s compliance with laws and regulations, the bylaws and the shareholders’ decisions; (viii) investigate written complaints submitted by holders of at least 2.0% of the Bank’s capital; (ix) request judicial dissolution of the Bank and supervise the process; (x) designate directors when there are none remaining on the board of directors and the shareholders have failed to appoint replacements; and (xi) request judicial intervention in extraordinary circumstances, such 15 as executive officer malfeasance threatening the Bank’s condition. In performing these duties, the Supervisory Committee does not control the operation of the Bank. On April 29, 2009, Class A, B, C and D shareholders held extraordinary shareholders’ meetings. At those meetings: a) Class D and C shareholders appointed José Daniel Abelovich, Marcelo Héctor Fuxman and Ricardo Flammini as syndics to hold office for two-year terms and Roberto Murmis, Noemí Cohn and Silvana Cecilia de Feo as alternate syndics; b) Class A shareholders appointed Alfredo Groppo as syndic and Silvana Gentile as alternate syndic; and c) Class B shareholders appointed Martín Scotto as syndic and Nora Tibis as alternate syndic. Currently the Supervisory Committee is composed of five syndics and five alternate syndics: Name Martin Scotto Alfredo Groppo José Daniel Abelovich Marcelo Héctor Fuxman Ricardo Flammini Nora Tibis Silvana Gentile Roberto Murmis Noemí Cohn Silvia Cecilia De Feo Position Class Expiration of Term Syndic Syndic Syndic Syndic Syndic Alternate Syndic Alternate Syndic Alternate Syndic Alternate Syndic Alternate Syndic B A C and D C and D C and D B A C and D C and D C and D December 31, 2012 December 31, 2012 December 31, 2012 December 31, 2012 December 31, 2012 December 31, 2012 December 31, 2012 December 31, 2012 December 31, 2012 December 31, 2012 Below is a summarized biography of the members of the Bank’s Supervisory Committee: Martín Esteban Scotto. Mr. Scotto holds a degree in Law from Universidad de Buenos Aires (1996) and works for the Sindicatura General de la Nación. Mr. Scotto has been Syndic of Banco de Inversión y Comercio Exterior S.A. (BICE) and Nación Seguros de Vida S.A since 2001. Since 2002, Mr. Scotto is a member of the supervisory committee of Nuevo Banco Bisel S.A., Nuevo Banco Suquía S.A. and Bisel Servicios S.A. Alfredo Héctor Groppo. Mr. Groppo holds a degree in Accounting from Universidad de Buenos Aires (1977) and works of the Sindicatura General de la Nación (SIGEN). He has been Syndic of Nación Factoring S.A., Nación Bursátil S.A., Nación Servicios S.A. and Polo Tecnológico Constituyentes S.A. since 2006. José D. Abelovich. Mr. Abelovich obtained a degree in Accounting from Universidad de Buenos Aires. He is a founding member and partner of Abelovich, Polano & Asociados S.R.L., a member firm of Nexia International, an accounting firm in Argentina. Formerly, he had been Manager of Harteneck, López y Cía/Coopers & Lybrand, and served as a senior advisor in Argentina for the United Nations and the World Bank. He is a member of the Supervisory Committees of Cresud S.A.C.I.F. y A., IRSA Inversiones y Representaciones Sociedad Anónima, Alto Palermo S.A. (APSA), Hoteles Argentinos e Inversora Bolívar S.A., among other companies. Marcelo H. Fuxman. Mr. Fuxman obtained a degree in Accounting from Universidad de Buenos Aires. He is a partner of Abelovich, Polano & Asociados S.R.L., a member firm of Nexia International, an accounting firm in Argentina. He is also a member of the Supervisory Committee of Cresud S.A.C.I.F. y A., IRSA Inversiones y Representaciones Sociedad Anónima and Alto Palermo S.A. (APSA), among other companies. Ricardo Flammini. Mr. Flammini holds a degree in Accounting from Universidad Nacional de La Plata. Mr. Flammini acted as syndic of the Bank from September 1997 until August 2001 and on May 30, 2003 he was elected for a two-year term. Mr. Flammini worked as auditor for the Tribunal de Cuentas de la Nación from 1957 to 1976 and was a member of the former Corporación de Empresas Nacionales (ex SIGEP and SIGEN) from 1976 until August 2001. Formerly, he had acted as syndic of Segba S.A., Hidronor S.A., YPF S.A., YCF S.E., Encotesa, Intercargo S.A., Banco Caja de Ahorro S.A., Pellegrini S.A. Gerente de Fondos Comunes de Inversión, Nación Bursátil Sociedad de Bolsa S.A., Garantizar S.G.R. and Nación AFJP. He currently serves as syndic of BACS Banco de Crédito y Securitización S.A., BHN Sociedad de Inversión S.A., BHN Vida S.A., BHN Seguros Generales S.A. and ACH S.A. 16 Nora Lía Tibis. Ms. Tibis holds a Law degree from Universidad de Buenos Aires and works for the Sindicatura General de la Nación (SIGEN). She is a Syndic in Banco de Inversión y Comercio Exterior S.A. (BICE), AFJP Nación, Nación Leasing S.A., Nación Factoring S.A. and Dioxitek S.A. Silvana María Gentile. Ms. Gentile has been a member of the Supervisory Committee of the Bank since 1997. She has served as a member of Sindicatura General de la Nación (SIGEN) since 1979 and currently serves as a Syndic of Pellegrini S.A. and Nación AFJP S.A. Ms. Gentile holds degrees in Accounting and Business Administration from Universidad de Lomas de Zamora. Roberto Murmis. Mr. Murmis holds a degree in Accounting from Universidad de Buenos Aires. Mr. Murmis is a partner at Abelovich, Polano y Asociados S.R.L., a member firm of Nexia International. Mr. Murmis worked as an advisor to the Secretariat of Federal Revenue under the Ministry of Economy. Furthermore, he is a member of the supervisory committee of Cresud S.A.C.I.F. y A., IRSA Inversiones y Representaciones Sociedad Anónima, Futuros y Opciones S.A and Llao Llao Resorts S.A. Noemí Cohn. Ms. Cohn graduated as an Accountant from Universidad de Buenos Aires. She is a partner of Abelovich, Polano & Asociados S.R.L./Nexia International, an accounting firm in Argentina, and serves in the Auditing division. She worked at the auditing firm Harteneck, López and Company, Coopers & Lybrand in Argentina and in Los Angeles, California. Mrs. Cohn is a member of the Supervisory Committees of Cresud S.A.C.I.F. y A., IRSA Inversiones y Representaciones Sociedad Anónima and Alto Palermo S.A. (APSA), among other companies. Silvia De Feo. Ms. De Feo holds a degree in Accounting from Universidad de Belgrano. She is a manager at Abelovich, Polano & Asociados S.R.L, a member firm of Nexia International, an accounting firm in Argentina, and acted as manager at Harteneck, López & Cía/Coopers & Lybrand. c) Legal counsel Unless otherwise specified in the applicable pricing supplement, the validity of the creation of the Program and the issuance of each Series of Notes thereunder and certain matters in connection with Argentine law will be passed upon by Zang, Bergel & Viñes Abogados, legal counsel to the Bank domiciled at Florida 537, 18th floor of the City of Buenos Aires. Saúl Zang, Ernesto Viñes and Pablo Vergara del Carril, directors of the Bank, are also partners of Zang, Bergel & Viñes Abogados. d) Auditors The Bank’s audited financial statements included in this offering memorandum have been audited by Price Waterhouse & Co. S.R.L., member firm of PricewaterhouseCoopers, an accounting firm of certified independent public accountants, as stated in their reports appearing herein, registered with the Professional Council in Economic Sciences (CPCE) of the Autonomous City of Buenos Aires, Volume 1, Folio 17, and domiciled at Bouchard 557 7th floor (C1106ABG), in the Autonomous City of Buenos Aires, Argentina. Certified public accountants Norberto F. Montero (CPCE Autonomous City of Buenos Aires Volume 167 – Folio 179) and Carlos Horacio Rivarola (CPCE Autonomous City of Buenos Aires Volume 124 – Folio 225) were designated as external auditor and alternate external auditor, respectively, by the Shareholders' Meetings held on May 23, 2008, April 29, 2009 and April 30, 2010. At the General Ordinary Shareholders' Meeting dated March 27, 2012 Accountant Marcelo Alejandro Trama (CPCE Autonomous City of Buenos Aires Volume 252 – Folio 159) was designated as regular external auditor and Accountant Carlos Horacio Rivarola was reelected as alternate external auditor. 17 PROGRAM SUMMARY This summary highlights important information regarding this program. We urge you to read the entire Offering Memorandum. The terms and conditions contained in this section will govern the notes to be issued under the Program, but the applicable pricing supplements will contain the specific terms and conditions of the particular notes to be issued, which will supersede, supplement and/or modify these general terms and conditions, always safeguarding the investors’ interests. In this offering memorandum, references to “notes” are to any notes that the Bank may issue under the Program, unless the context otherwise requires. Issuer Banco Hipotecario S.A. Dealers The notes issued under the Program may be offered directly by the Bank or through such dealers and/or agents as appointed by it from time to time in each applicable pricing supplement. This Offering Memorandum may not be used to make sales of notes issued under the Program unless it is accompanied by the applicable pricing supplement. Program amount The Bank may issue notes provided that the outstanding amount under the Program does not exceed at any time the aggregate principal amount of US$ 500,000,000 (or its equivalent in Pesos). Program duration Five years since the approval of this Program by the Argentine Securities Commission. Issuance in series The Bank may issue notes in series. Within each series, the Bank may issue classes and/or tranches of notes that will be repaid within the terms set forth in the applicable laws, always provided that the outstanding amount under the Program does not exceed the maximum principal amount of US$ 500,000,000 (or its equivalent in Pesos). The Bank will set out the specific terms of each series and/or tranche in a pricing supplement to this Offering Memorandum. Further Issues of notes If permitted by applicable Argentine banking regulations and the rules issued by the Argentine Securities Commission, the Bank may, from time to time, without the consent of, and/or notice to, the holders of any outstanding notes, create and issue further notes of the same or a new series. Ranking The notes issued under this Program will qualify as obligaciones negociables simples no convertibles en acciones (simple, non-convertible notes) under Argentine law and will be issued pursuant to, and in compliance with, all of the requirements of the Negotiable Obligations Law and any other applicable Argentine laws and regulations. As specified in the applicable pricing supplement, the notes will constitute direct, unconditional, simple, unsecured, subordinated or unsubordinated obligations of the Bank and will rank at least pari passu in right of payment with all its other existing and future unsecured and unsubordinated indebtedness (other than obligations preferred by statute or by operation of law). If so specified in the applicable pricing supplement, the Bank may issue subordinated notes, which will be junior in right of payment to the Bank’s unsubordinated indebtedness, in accordance with the applicable laws. 18 Placement of the Notes The public offering and in particular the placement of the notes to be issued under this Program will be made in accordance with the provisions of Law No. 26,831 on Capital Markets and the CNV Rules in effect until the Capital Markets Law is regulated by the CNV –pursuant to the provisions of Section 155 of such Law and General Resolution No. 615/2013 of the CNV, and in particular, pursuant to Resolution 597/2011 of the CNV, as amended and supplemented, and any other applicable law and/or regulations. This Offering Memorandum will be available to the general public in Argentina. Placement of the notes in Argentina will be made in accordance with the provisions of Section 16 of the Argentine Public Offering Law and the applicable CNV Rules. The notes have not been registered under the Securities Act, any state’s securities laws or the securities laws of any other jurisdiction (other than Argentina) and may not be offered or sold in the United States or to U.S. persons (as defined in Regulation S), except in transactions exempt from, or not subject to, the registration requirements of the Securities Act. Accordingly, the Bank will only offer and sell notes registered under the Securities Act or in transactions exempt from registration under the Securities Act to QIBs or outside the United States to non-U.S. persons in compliance with Regulation S under the Securities Act. Notwithstanding the foregoing, each pricing supplement will detail the placement efforts to be undertaken pursuant to the applicable jurisdictions. Repayment The Bank may issue notes that are fully repayable upon maturity or with periodical repayment terms, such as annual, semi-annual, quarterly, etc. Issue Price The Bank may issue notes at their principal amount or at a discount or premium to their principal amount as specified in the applicable pricing supplement. Currencies The Bank may issue notes in U.S. dollars or their equivalent in Pesos, as specified by the Bank in the applicable pricing supplement. Maturities The notes will be issued subject to such terms and with such maturities as specified by the Bank in the applicable pricing supplement relating to each series and/or tranche, all subject to compliance with the laws and regulations that may be applicable from time to time. Interest Notes may bear interest at a fixed rate or at a margin above or below a floating rate based on LIBOR, U.S. Treasury rates or any other base rate, as the Bank will specify in the applicable pricing supplement to the extent permitted by the applicable Argentine regulations including but not limited to the BADLAR rate and the Reference Stabilization Index (Coeficiente de Estabilización de Referencia or “CER”). The Bank may also issue notes on a non-interest bearing basis, as may be specified in the applicable pricing supplement. Redemption The applicable pricing supplement may provide that a series of notes will be redeemable (i) at the option of the Bank and/or (ii) at the option of the holders, in whole or in part, at a price or prices as set forth in the applicable pricing supplement. Partial redemption will be made on a pro rata basis, by lot or otherwise, provided that the applicable pricing supplements will establish the specific procedures for redemption of the particular notes that may be issued, which shall supersede, supplement 19 and/or modify these general terms and conditions, always safeguarding the investors’ interests. In addition, any notices by the Bank to the holders will be made through the CNV’s Financial Information Highway (www.cnv.gob.ar) as a “Material Event”. Redemption for tax reasons Notes may be redeemed at the Bank’s option, in whole but not in part, at a price equal to 100% of the principal amount plus accrued and unpaid interest upon the occurrence of specified Argentine tax events. See “Description of the Notes—Redemption and Repurchase—Redemption for Taxation Reasons.” Any notices by the Bank to the holders will be made through the CNV’s Financial Information Highway (www.cnv.gob.ar) as a “Material Event”. Covenants The Bank may assume covenants in connection with each series and/or tranche of notes to be issued, which will be specified in the applicable pricing supplement relating to each series and/or tranche. Use of proceeds The Bank will use the net proceeds from the issuance of notes under this Program in compliance with the requirements set forth in Article 36 of the Negotiable Obligations Law, Communication “A” 3046, as amended, of the Central Bank and other applicable regulations, as specified in the applicable pricing supplement. Under such law and regulations, the use of proceeds is restricted to certain purposes, including working capital in Argentina, investment in tangible assets located in Argentina, refinancing of debt, contributions to the capital of a controlled or related corporation, provided that such corporation uses the proceeds of such contribution for the purposes specified above, or making loans in accordance with the Argentine Banking GAAP, provided that the use of proceeds of such loans is one of the aforementioned purposes. See “Use of Proceeds.” Withholding Taxes; The Bank will make payments in respect of the notes without withholding or deduction for any taxes or other governmental charges Additional Amounts imposed by Argentina, or any political subdivision or any taxing authority thereof. In the event that such withholdings or deductions are required by law, the Bank will, subject to certain exceptions, pay such additional amounts to ensure that the holders receive the same amount as the holders would otherwise have received in respect of payments on the notes in the absence of such withholdings or deductions. See “Description of the Notes—Additional Amounts.” Denominations The Bank will issue notes in the minimum denominations and other denominations specified in the applicable pricing supplement. Form Unless otherwise permitted by applicable law and specified in the applicable pricing supplement, notes will be issued in registered form without interest coupons. Unless otherwise permitted by applicable law, the Bank will only issue notes in registered non-endorsable form or deposited with a custodian or a clearing system, not exchangeable for certificated bearer notes, as determined in the applicable pricing supplement. In the event that the notes were offered in the United States to qualified institutional buyers in reliance on Rule 144A under the Securities Act, they will be represented by one or more Rule 144A global notes. See “Description of the Notes – Form and Denomination.” Transfer Restrictions The Bank has not registered the notes under the Securities Act; therefore, the notes may not be transferred except in compliance with certain transfer restrictions. Registration Rights If so specified in the applicable pricing supplement, the Bank may provide holders of a series of notes registration rights. 20 Listing The Bank may apply to have the notes of any series listed on the Luxembourg stock exchange for trading on the EuroMTF and/or the BCBA, which circumstance will be specified in the applicable pricing supplement. However, no assurance may be given that these applications will be accepted. In addition, notes may be issued under this Program that are not listed on any stock exchange, and the applicable pricing supplement relating to a series of notes will specify whether the notes of such series will be listed or not on the Luxembourg stock exchange for trading on the EuroMTF, on the BCBA or on any other securities exchange. The Bank expects that certain series of notes, as described in the applicable pricing supplement, will be eligible for trading on the MAE. Summary Action Pursuant to Section 29 of the Negotiable Obligations Law, the notes that qualify as obligaciones negociables entitle their holders to file a summary action (“acción ejecutiva”); therefore, in accordance with the Capital Markets Law, any depositary is entitled to issue certificates evidencing the notes represented by global securities to any beneficial holder. These certificates entitle their beneficial holders to file a legal action before any competent court of Argentina, including a summary action, to enforce collection of any sums outstanding under the notes. Governing Law The Negotiable Obligations Law establishes the requirements for the notes to qualify as obligaciones negociables thereunder, and such law, together with the Argentine Companies Law, as amended, and other Argentine laws and regulations will govern the Bank’s capacity and corporate authorization to issue and deliver the notes and the Argentine Securities Commission’s authorization for the creation of the Program and the offer of the notes. All matters with respect to the notes will be exclusively governed by, and construed in accordance with, the laws of Argentina. However, such matters with respect to the notes may be governed by, and construed in accordance with, the laws of the State of New York or the Argentine laws, or the laws of any other jurisdiction if so specified in the applicable pricing supplement. Clearing systems If applicable, the clearing systems will be those specified in the applicable pricing supplement relating to each series and/or tranche. Trustees and agents The notes may or not be issued under indentures and/or agency agreements entered into from time to time by the Bank with entities acting as trustees and/or agents. Such trustees and/or agents will perform their duties only with respect to the series specified in the applicable pricing supplements and will have such rights and obligations as therein specified. The appointment of trustees and agents will be set out in the applicable pricing supplements. Risk Factors See “Risk Factors” beginning on page 26 of this Offering Memorandum and the applicable pricing supplement for a description of certain significant risks involved in making an investment in the notes. 21 KEY INFORMATION ABOUT THE ISSUER Summary of Financial Information and Indicators The following table presents a summary of financial and other information of the Bank as of the dates and for the years indicated. The financial information as of December 31, 2012, 2011 and 2010, and for each of the years then ended has been derived from the Bank’s financial statements audited by Price Waterhouse & Co. S.R.L. The following data should be read in conjunction with and are qualified in their entirety by reference to the chapter "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and the Bank’s audited financial statements included in this Offering Memorandum. The Bank's audited financial statements have been prepared in accordance with the Argentine Banking GAAP, which differ in certain significant respects from Argentine Generally Accepted Accounting Principles (“Argentine GAAP”) and from U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The Bank’s audited financial statements do not contain a reconciliation to Argentine GAAP or U.S. GAAP of the Bank's shareholders' equity at December 31, 2012, December 31, 2011 or December 31, 2010, or the Bank’s net income for the years then ended. Potential investors should consult with their professional advisors for an understanding of the differences between the accounting principles implemented by the Bank and the Argentine GAAP and U.S. GAAP, and how those differences affect the financial information herein contained. On September 14, 2010 the Bank acquired 80% of the capital stock of Tarshop S.A. (“Tarshop”). Therefore, the accounting and financial information included in this Offering Memorandum reflects the consolidated financial position and results of the Bank, BACS Banco de Crédito y Securitización S.A., BHN Sociedad de Inversión S.A., BH Valores S.A. Sociedad de Bolsa and of Tarshop for the fiscal years ended December 31, 2012, 2011 and 2010 and of Tarshop for the fiscal year ended December 31, 2012, December 31, 2011 and the interim fiscal period ended December 31, 2010. Effective January 1, 1995 pursuant to Resolution No. 388 of the Central Bank’s Superintendency of Financial and Exchange Institutions (Superintendencia de Entidades Financieras), the Bank discontinued its prior practice of adjusting financial statements for inflation. Effective January 1, 2002, however, as a result of application of Communication “A” 3702 which repealed any regime that did not allow companies to restate their accounting balances at period-end currency values, the Bank resumed the application of the adjustment for inflation. On March 25, 2003, Decree No. 664/03 ceased to require that financial statements be prepared in constant currency, effective for financial periods on or after March 1, 2003 and on April 8, 2003, the Central Bank issued Communication “A” 3921 discontinuing inflation accounting effective as of March 1, 2003. As a result, the Bank’s audited financial statements as of December 31, 2012, 2011 and 2010 do not include the effects of inflation. 22 2010 Ps. As of December 31, 2011 2012 in thousands of: Ps. Ps. 2012 US$(8) Consolidated Income Statement Financial income Financial expenses Net financial income Provision for losses on loans Net contribution from insurance(1) Other net income from services(2) Administrative expenses Miscellaneous income (loss), net(3) Minority interest Income tax Net income (loss) 1,321,906 (728,860) 593,046 (96,783) 180,246 266,768 (709,009) (11,156) (5,705) (22,092) 195,315 1,562,782 (832,645) 730,137 (119,292) 248,404 542,835 (1,104,980) 4,545 (8,797) (41,335) 251,517 2,180,725 (1,138,629) 1,042,096 (200,922) 313,985 666,838 (1,440,391) 26,666 (9,569) (55,096) 343,607 443,480 (231,556) 211,924 (40,860) 63,853 135,611 (292,923) 5,423 (1,946) (11,205) 69,877 849,067 2,682,377 658,005 1,807,319 1,450,494 2,078,936 294,978 422,780 49,856 71,894 5,651,221 316,231 159,629 1,741,901 11,615 472,878 1,813,442 (37,766) 1,135,348 50,660 (12,717) (216,609) 5,556,362 26,620 4,873 (3,659) 5,584,196 1,571,867 729,855 11,417,362 50,768 146,776 7,540,694 635,090 250,736 1,705,635 22,933 788,256 2,701,531 (5,271) 1,388,722 77,398 (24,336) (223,904) 7,514,334 26,620 4,873 (3,659) 7,542,168 1,963,573 792,577 12,763,642 91,806 391,343 9,544,383 1,031,178 229,629 1,868,330 55,346 1,199,211 3,551,203 (1,723) 1,538,527 87,837 (15,155) (273,101) 9,754,431 18,238 3,510 (3,660) 9,772,519 1,677,614 1,024,111 16,003,674 18,670 79,585 1,940,980 209,704 46,698 379,950 11,255 243,876 722,186 (350) 312,880 17,863 (3,082) (55,539) 1,983,697 3,709 714 (744) 1,987,375 341,166 208,267 3,254,565 1,900,857 12,341 2,924,966 73,354 362,596 2,405,033 14,056 44,754 25,173 4,838,164 2,956,878 587,615 8,382,657 2,378,275 11,540 3,061,948 58,744 505,781 2,407,108 40 65,526 24,749 5,451,763 3,205,324 816,049 9,473,136 2,990,892 8,563 5,011,674 595,564 741,892 3,355,131 160,035 101,650 57,402 8,011,129 3,539,730 928,796 12,479,655 608,239 1,741 1,019,192 121,116 150,874 682,312 32,545 20,672 11,673 1,629,172 719,852 188,883 2,537,908 60,472 78,131 68,034 13,836 Consolidated Balance Sheet Cash and due from banks Government and corporate securities(4) Loans: To the non-financial public sector To the financial sector To the non-financial private sector and residents abroad Overdrafts Promissory notes Mortgage loans Pledge loans Personal loans Credit cards Non-applied collections Other Accrued interest and trading differences receivable Documented interest Provisions Loan Sub-total Loans pending securitization Accrued interest receivable Provisions Total Loans Other receivables from financial transactions Other assets Total Assets Deposits: Non-financial public sector Financial sector Non-financial private sector and residents abroad Checking accounts Savings accounts Fixed-term deposits Investment accounts Other Accrued interest and trading differences payable Total deposits Other liabilities from financial transactions(5) Other liabilities Total Liabilities Third parties’ interests 23 Total Shareholders’ Equity 2,974,233 3,212,375 3,455,985 702,822 Year ended December 31, 2010 2011 2012 Selected Ratios Profitability Return on average assets 1.70% 2.20% 2.48% Return on average shareholders’ equity 6.74% 8.12% 10.25% 5.18% 6.39% 7.53% 67.85% 72.35% 70.46% 26.1% 25.2% 21.6% 6.4% 6.2% 6.4% 73.0% 45.2% 44.1% 115.4% 138.3% 122.0% 1.6% 0.8% 0.6% 3.6% 3.0% 3.2% 3.0% 2.3% 2.3% 3.3% 2.5% 2.4% 112.6% 111.4% 102.6% Net financial margin (6) Efficiency Solvency Shareholders’ Equity / Assets Other Assets / Assets Liquidity Cash and due from banks plus government and corporate securities / Deposits Loans / Deposits Portfolio Quality Non-performing commercial loans as a % of Total Commercial Loans(7) (7) Non-performing consumer loans as a % of Total Consumer Loans (7) Non-performing loans as a % of Total Loans (7) Provisions as a % of Total Loans (7) Provisions as a percentage of Non-performing Loans References (1) (2) (3) (4) (5) (6) (7) (8) Consists of insurance premiums minus insurance claims. Consists of other income from services minus other expenditures on services. Consists of miscellaneous income minus miscellaneous losses. Includes Ps. 1,008.3 million, Ps. 1,049.6 million and Ps. 972.1 from instruments issued by the Argentine Central Bank as of December 31, 2010, 2011 and 2012, respectively. Includes Ps. 1,689.7 million, Ps. 1,748.5 million and Ps. 2,013.7 in unsubordinated notes as of December 31, 2010, 2011 and 2012, respectively. Consists of net financial margin to average assets. In the case of commercial loans, it includes “Problematic”, “High Risk of Insolvency”, “Uncollectible” and “Uncollectible for Technical Reasons” as classified by the Central Bank. In the case of consumer and mortgage loans it includes “Medium Risk”, “High Risk”, “Uncollectible” and “Uncollectible for Technical Reasons” as classified by the Central Bank. The exchange rate used for purposes of translation of balances as of December 31, 2012 was Ps. 4.9173 = US$ 1.00. 24 Capitalization and Indebtedness The following table sets forth the Bank’s capitalization and indebtedness as of December 31, 2012 and as of December 31, 2011, in thousands of Pesos and U.S. Dollars: As of December 31, 2011 As of December 31, 2012 (in thousands) (in thousands) Ps. US$(4) Ps. Short-term debt (1) Deposits Notes Financial Institutions Interest payable Total short-term debt 5,426,243 7,949,332 1,616,605 126,309 827,991 168,383 154,016 261,983 53,278 51,603 98,726 20,077 5,758,171 9,138,032 1,858,343 Long-term debt (1) Deposits Notes 771 4,395 894 1,622,166 1,185,687 241,126 Total long-term debt 1,622,937 1,190,082 242,020 1,500,000 1,500,000 305,045 Capital Capital stock(2) Non-capitalized contributions Adjustments to shareholders’ equity Earnings reserve(3) General Reserve Accumulated profit Total shareholders’ equity Total capitalization (1) (2) (3) (4) 834 834 170 717,115 717,115 145,835 476,524 526,828 107,138 0 367,601 74,757 517,902 343,607 69,877 3,212,375 3,455,985 702,822 10,593,483 13,784,099 2,803,185 Short-term debt is indebtedness the residual maturity of which is within one year of the balance sheet date. Longterm debt is any debt the maturity of which exceeds such period. Includes subscribed and paid-in capital in the amount of 1.5 billion common shares the par value of which is Ps. 1 per share. Consists primarily of non-distributable legal reserves established pursuant to Central Bank regulations in an annual amount equal to 20.0% of net income plus any adjustments in prior years. The earnings reserves may only be used during periods when the Bank has net losses and has depleted its reserves. Consequently, no dividends shall be distributed if the legal reserve has been affected. The exchange rate used for purposes of translation of balances as of December 31, 2012 was Ps. 4.9173 = US$ 1.00. Source: Central Bank Use of Proceeds The Bank will use any net proceeds from the issuance of notes under this Program in compliance with the requirements of Article 36 of the Negotiable Obligations Law (Ley de Obligaciones Negociables), the Central Bank Communication “A” 3046, as amended and supplemented, and other applicable regulations, as specified in the relevant pricing supplement. Article 36 of the Negotiable Obligations Law and the Central Bank Communication referred to above require that the Bank use such proceeds for: 25 • • • • • working capital in Argentina; investments in tangible assets located in Argentina; refinancing of outstanding debt; contributions to capital of a controlled or related corporation, provided that the proceeds are used as specified above, or loan origination in accordance with Central Bank regulations, provided that such loans are used for any of the above purposes. Pending their application as specified above, the Bank may also invest the proceeds from notes in government securities and short-term investments as permitted. Risk Factors Prospective purchasers of the Bank’s notes should carefully consider the risks described below, as well as the other information in this Offering Memorandum and in each Pricing Supplement before deciding to purchase any notes. The Bank’s business, results of operations, financial condition or prospects could be materially and adversely affected if any of these risks occurs, and as a result, the market price of the Bank’s notes could decline and you could lose all or a substantial part of your investment. In general, investors take more risk when they invest in the securities of issuers in emerging markets such as Argentina than when they invest in the securities of issuers in the United States and other developed markets. Risks Relating To Argentina All of the Bank’s operations, property and customers are located in Argentina. As a result, the quality of the Bank’s loan portfolio, its financial condition and the results of its operations are dependent upon the macroeconomic, regulatory and political conditions prevailing in Argentina from time to time. These conditions include growth rates, inflation rates, exchange rates, changes to interest rates, changes to Government policies, social instability and other political, economic or international developments either taking place in, or otherwise affecting, Argentina. Growth in Argentina might not be sustainable and any significant alteration could adversely affect the Bank’s financial condition. Although in recent years and in the aftermath of the 2001 crisis Argentina’s general economic conditions improved significantly, there is no certainty of growth being sustainable mainly because the upturn was initially tied to the significant devaluation of the Peso, the excess production capacity resulting from a lengthy and deep recession and the high prices of commodities. The global economic crisis of 2008 led to a sudden downturn in the economy, which came hand in hand with social and political unrest, inflationary pressures, a depreciation in the Peso and absence of confidence in consumers and investors. In 2010, Argentina’s Gross Domestic Product (“GDP”) increased by 9.16% and 8.87% in 2011, according to the Argentine Institute of Statistics and Censuses (“INDEC”). As of December 31, 2012, the Monthly Estimate of Economic Activity (Estimador Mensual de Actividad Económica) reported by INDEC and known as “EMAE” increased by 1.86% in 2012 compared to the same period in 2011, thus anticipating a commensurate increase in the GDP. The recent economic crisis in Europe, triggered by the financial crises of Greece, Spain, Italy and Portugal, their contagion to other markets, the international demand for Argentine products, the stability and competitiveness of the Argentine Peso vis-à-vis other currencies, confidence amongst local and international consumers and investors, a stable and relatively low inflation rate and uncertainties about the future political scenario, to name but a few factors, could affect the Argentine economy’s development, which could substantially and adversely affect the Bank’s financial condition and the results of its operations and thus substantially and adversely affect the Bank’s ability to repay its obligations. 26 The Bank cannot assure you that a decrease in economic growth or rising economic instability, which are occurrences outside its control, will not adversely affect its business, financial condition, the results of its operations and its ability to repay the notes. Inflation could rise, which would adversely affect the Argentine economy in general and the Argentine long-term credit markets. There is a discrepancy between the statistical data published by INDEC in connection with the Consumer Price Index (“CPI”) for the Greater Buenos Aires area and for the different Argentine regions and provinces and this index as estimated by private consultants. According to INDEC, the inflation rates for 2010, 2011 and 2012 were 9.7%, 11.26% and 9.21%, respectively. Uncertainty regarding future inflation rates may affect the pace of growth in investment. On average, private sources’ estimates point to inflation rates that are higher than those published by INDEC. In the event of high inflation rates, Argentine exports could lose competitiveness in international markets and private consumption could decline, causing a negative effect on economic activity and employment. Moreover, a high inflation rate could undermine confidence in the Argentine financial system in general, negatively affecting the business volume of banks, including the Bank’s, and could potentially hinder loan activities, especially those at long-term and fixed interest rates. Argentina’s limited ability to obtain funding in international markets could adversely affect the country’s ability to implement reforms and boost the economy. In 2005, Argentina restructured a portion of its defaulted sovereign debt that had remained unpaid since 2001. As a result of such restructuring, the Argentine Government announced that the gross government debt amounted to approximately US$ 129,200 million as of December 31, 2005. Certain bondholders who had refused to take part in such restructuring process ("holdouts"), mainly located in United States, Italy and Germany, filed legal actions against Argentina to collect payments under such defaulted bonds. Some of such proceedings are still pending and bondholders could make new claims in the future. On January 3, 2006, Argentina paid all amounts due to the International Monetary Fund in the amount of US$ 9,800 million approximately. In September 2008, Argentina announced its intention to pay its debt to the Paris Club creditors out of the Central Bank reserves in an amount of US$ 6,500 million approximately; late in 2010, the Argentine Government announced new negotiations with the Paris Club to discharge such debt which later totaled about US$ 8,000 million, without the IMF's intervention. Notwithstanding the foregoing, as of the date of this Offering Memorandum such intentions have not been fulfilled yet. In addition, foreign shareholders of several Argentine companies have filed claims with the International Centre for Settlement of Investment Disputes (ICSID) alleging that certain government measures adopted during the 2001 crisis were inconsistent with fair and equitable treatment rules established in different bilateral investment treaties to which Argentina is a party. Since May 2005 the ICSID courts have entered several awards against Argentina. Only the cases "CMS v. Argentina", "Azurix v. Argentina" and "Vivendi v. Argentina" have been concluded. These decisions compel the Argentine Government to pay US$ 133.2 million, US$ 165.2 million and US$ 105 million, respectively. As of the date of this Offering Memorandum, the abovementioned amounts have not been paid. On April 30, 2010, Argentina offered a new debt swap to the holdouts. As a result of swap offers in 2005 and 2010, Argentina restructured over 91% of its defaulted debt. The holdouts in 2005 or 2010 could continue to pursue legal actions against Argentina for the amounts due, which could adversely affect Argentina’s access to international capital markets. Late in December 2012, Argentina made an appearance before the US Courts and asserted its intention to reopen the debt swap so that some of the holdouts could collect payments under unpaid bonds due since 2001. The offer is included in a motion filed with the New York Court of Appeals for it to review a stayed judgment entered by federal judge Griesa which ordered Argentina to pay 1,330 million dollars to risk funds for defaulted bonds. In such motion (with an offer containing terms similar to those 27 offered to participants in the 2010 swap offer) Argentina further made it clear that the judgment referred to above violated the equity principle with respect to such creditors who had accepted the previous swap offers. However, in order to put an end to the legal dispute it made this new offer to “holdout” creditors. Argentina’s default and its inability to restructure its outstanding sovereign debt in the entirety and to fully negotiate with the foreign creditors could restrict Argentina’s ability to re-access the international capital markets. The legal actions commenced by the creditors and the claims filed with the ICSID could result in judgments against the Argentine Government which –if not paid- could prevent Argentina from obtaining loans from multilateral entities. In addition, certain foreign creditors have filed requests for attachments and other precautionary measures on Argentine assets located abroad, which could continue to be pursued in the future. Furthermore, several creditors have joined together and formed associations to make claims in connection with Argentina's defaulted debt. Throughout the years these groups have unsuccessfully called for the enactment of federal laws in the United States and New York State related to Argentina's defaulted debt in order to restrict Argentina’s access the capital markets in United States. Although neither the US Congress nor the New York State Legislature have taken significant steps towards the passage of such laws, we cannot guarantee that the enactment of new laws or other political actions intended to restrict Argentina’s access to the capital markets will not become effective. Therefore, the Government might not have the financial resources necessary to implement reforms and boost growth, which could have a significant adverse effect on the country’s economy and, therefore, on the Bank’s financial condition. A significant variation of the value of the Peso against the U.S. dollar may adversely affect the Argentine economy as well as the Bank’s financial performance. Following a major devaluation in the first half of 2002, the Peso stabilized in early 2003 at approximately Ps.3.0 per U.S. dollar. Despite the positive effects of the real depreciation of the Peso in 2002 on the competitiveness of certain sectors of the Argentine economy, it has also had a far-reaching negative impact on the Argentine economy and on the financial condition of businesses and individuals. The devaluation of the Peso has had a negative impact on the ability of Argentine businesses to honor their foreign currency-denominated debt, has led to very high inflation initially, significantly reduced real wages, has had a negative impact on businesses whose success is dependent on domestic market demand (such as utilities and the financial industry), and has adversely affected the government’s ability to honor its foreign debt obligations. The Bank may not assure that there will be no future sharp movements in the exchange rates against the Peso caused by a number of local and international circumstances. In particular, in the future, the Peso could undergo a major devaluation such as that of 2002. If the Peso devalues significantly, the negative effects on the Argentine economy related to such devaluation could recur, with adverse consequences to the Bank’s businesses. Similarly, a substantial increase in the value of the Peso against the U.S. dollar also presents risks for the Argentine economy. The appreciation of the Peso against the U.S. dollar negatively impacts the financial condition of entities whose foreign currency-denominated assets exceed their foreign currency-denominated liabilities. In addition, in the short term, a significant real appreciation of the Peso would adversely affect exports. This could have a negative effect on GDP growth and employment, as well as reduce the Argentine public sector’s revenues by reducing tax collection in real terms, given its current partial reliance on taxes on exports. Exchange controls and restrictions on transfers abroad and capital inflows have limited, and may continue to limit, the availability of international credit. In June 2005, the Argentine Government issued Decree No. 616/2005 to establish new controls on capital inflows which could reduce availability of international credit. Decree No. 616/2005 provides that, with very few exceptions, 30% of all amounts remitted to Argentina must be placed in a non-interest bearing deposit in an account opened at a financial institution of the Argentine financial system for a year. Failure to abide by any of the controls mentioned above could be punished by the Argentine Criminal Law on Foreign Exchange Matters. Besides, the breaches detected by the institutions authorized to deal in 28 foreign currency must be reported to the Central Bank’s Non-Financial Institutions Control Department in order for it to commence the relevant proceedings. Should such additional controls be imposed in an economic environment with limited access to local capital, the Bank’s economy and its businesses could be adversely affected. In October 2011, the Government implemented new measures in the field of foreign exchange that restrict capital inflows and outflows. As a part of these measures, the repatriation by non-residents of their direct investments (acquisition of equity in local companies and real estate) is now subject to the production of evidence that the foreign currency has entered Argentina and that such inflow has been settled through the Argentine single, free-floating foreign exchange market. These measures increase the costs of obtaining funds abroad and restrict access to such funding. The Argentine Government may impose, in the future, additional controls on the foreign exchange market, on inflows of capital into Argentina and on outflows of capital from Argentina, for instance as a response to capital flights or a depreciation in the Peso. If imposed in a scenario of constrained access to the local capital markets, these restrictions could adversely affect the economy and the Bank’s business. See “Exchange Controls”. The Argentine economy could be adversely affected by economic developments in other global markets. Financial and securities markets in Argentina are influenced, to varying degrees, by economic and market conditions in other global markets. Although economic conditions vary from country to country, investors’ perception of the events occurring in one country may substantially affect capital flows into other countries, including Argentina, and the availability of funds for issuers in such countries. Lower capital inflows and declining securities prices negatively affect the real economy of a country through higher interest rates or currency volatility. The Argentine economy was adversely impacted by the political and economic events that occurred in several emerging economies in the 1990s, including those in Mexico in 1994, the collapse of several Asian economies between 1997 and 1998, the economic crisis in Russia in 1998 and the Brazilian devaluation in January 1999. The sub-prime crisis that affected the United States in mid-2007 and the economic difficulties caused by the recession and the budget deficits in the Euro zone countries have contributed to a slowdown in the world’s largest economies whose spillover effects could be felt in Latin America. International discussions about the global economy seem to revolve around whether the Argentine economy will stagnate again or whether it will exhibit anemic growth for several years to come. The world’s economic crisis and the ensuing instability in the international financial system have had and could continue to have a negative impact on Argentina’s economic growth. Additionally, events such as the political and economic crises that afflicted Africa and the Middle East and natural catastrophes such as the earthquake and tsunami that have struck Japan could cause instability in local markets and adversely affect economic activity in Argentina. The global economic downturn and related instability in the international financial system have had, and may continue to have, a negative effect on economic growth in Argentina. The major losses recently posted by the world’s stock exchanges, including Argentina’s, could lead to an extended global downturn or even to a depression. A lengthy downturn in Argentina’s economy could adversely affect the Bank’s results of operations. Government measures, as well as claims filed by individual workers or by trade unions may exert pressure for salary increases or added benefits, all of which could increase companies’ operating costs. In the past, the Argentine Government has passed laws and regulations forcing privately owned companies to maintain certain wage levels and provide added benefits for their employees. Additionally, both public and private employers have been subject to strong pressure from their workforce or the trade unions representing them to grant salary increases and certain worker benefits. The Bank may not assure 29 you that in the future the Argentine Government will not adopt new measures imposing salary raises or additional worker benefits. Neither may the Bank assure you that employees or their trade unions will not exert pressure demanding such measures. Any salary raise as well as any additional fringe benefit could lead to increased costs and decreased results of operations in Argentine companies, including the Bank. Risks Relating to the Argentine Financial System The Argentine financial system’s growth and profits are partially dependent upon changes in long-term funding. As a consequence of the global economic recession, Argentina’s banking industry underwent a significant slow-down. This trend was reversed in late 2009. Although the extension of credit to the private section rose by late 2009, year-end results exhibited a smaller expansion. Loans to the private sector rose by 9.9% in 2009, 38.0% in 2010, 46.87% in 2011 and 30.74% in 2012. Despite the recovery in credit extension, the recovery of the long-term credit market (i.e., mortgage and pledge loans) makes progress at a slower pace. If longer-term financial intermediation did not grow, the ability of financial institutions to generate more profits could be adversely affected. Although deposits with the financial system have risen since 2002, most placements are sight deposits or very short term deposits, which exposes the banks engaged in long-term credit extension to liquidity risk and intensifies their need to depend on the Central Bank as a potential liquidity guarantor. The stability of the financial system depends upon the ability of financial institutions, including the Bank, to retain the confidence of depositors. The measures implemented by the Argentine Government in late 2001 and early 2002, in particular the restrictions imposed on depositors’ ability to withdraw money freely from banks and the pesification and restructuring of their deposits, resulted in losses for many depositors and undermined their confidence in the Argentine financial system. Although the financial system has seen a recovery in the amount of deposits since 2002 (measured in Pesos), the Bank may not assure that this trend will continue and that the deposit base of the Argentine financial system, including the Bank’s, will not be negatively affected in the future by adverse economic, social and political events. If, in the future, depositor confidence weakens and the deposit base contracts, such loss of confidence and contraction of deposits will have a substantial negative impact on the ability of financial institutions, including the Bank, to operate as financial intermediaries. If the Bank is not able to act as a financial intermediary and otherwise conduct its business as usual, its ability to honor its debts, including the notes, might be adversely affected or limited. Financial institutions’ asset quality is exposed to the non-financial public sector’s indebtedness. Financial institutions carry significant portfolios of bonds issued by the Argentine Government and provincial governments as well as loans granted to these governments. The exposure of the financial system to the non-financial public sector’s indebtedness had been shrinking steadily, from a 48.9% in 2002 to 12.8% in 2008. Although in the second half of 2009 this exposure had risen slightly, to 14.5% at December 31, 2009, it resumed a downward trend to slightly over 10% of assets as per the latest available information. To an extent, the value of the assets in the hands of Argentine banks, as well as their capacity to generate income is dependent on the creditworthiness of the non-financial public sector, which is in turn tied to the Argentine Government’s ability to foster sustainable long-term growth, generate fiscal revenues and cut back on public expenditure. As of December 31, 2012, the Bank’s total exposure to the public sector indebtedness was Ps. 781.9 million, that is, 4.9% of the Bank’s assets at that date. 30 Summary actions for collection as a means of enforcing creditors’ rights in Argentina may be limited. In order to protect the debtors affected by the 2001 economic crisis, starting in 2002 the Argentine Government adopted measures that suspended proceedings to enforce creditors’ rights (mortgage foreclosures and bankruptcy petitions) in the event of defaults by debtors. Although at the date of this Offering Memorandum those measures were no longer in force, the Bank may not assure you that they will not be reinstated in the future, or that the government will not take other measures that limit creditors’ rights. Any such measures could have a material adverse effect on the enforceability of creditor’s rights. Consumer protection laws may limit the enforceability of certain of the Bank’s rights. Argentine Consumer Protection Law No. 24,240, as supplemented or amended (the “Consumer Protection Law”) establishes a number of rules and principles for the defense of consumers’ interests. The Consumer Protection Law does not contain specific provisions for its enforcement in relation to financial activities, but it does contain general provisions that might be used as grounds to uphold such enforcement, as it has been previously interpreted in various legal precedents. The Bank may not assure you that the judgments passed by the courts and/or the resolutions handed down by administrative authorities in connection with the measures adopted by Argentina’s Secretary of Home Trade and other competent authorities will not increase in the future the degree of protection afforded their debtors and other clients or that they will not favor the claims filed by groups or associations of consumers. This could affect the ability of financial institutions, including the Bank’s, to freely collect charges, commissions or fees for their services and/or products as well as their amounts, and consequently affect their business and the results of their operations. Class actions against financial institutions for unliquidated amounts may adversely affect the financial system’s profitability. Certain public and private organizations have initiated class actions against financial institutions in Argentina. The Argentine National Constitution and the Consumer Protection Law contain certain provisions regarding class actions. However, their guidance with respect to procedural rules for instituting and trying class action cases is limited. Nonetheless, through an ad hoc doctrine, Argentine courts have admitted class actions in some cases, including various lawsuits against financial entities related to “collective interests” such as alleged overcharging on products, interest rates and advice in the sale of public securities, etc. If class action plaintiffs were to prevail against financial institutions, their success could have an adverse effect on the financial industry in general and indirectly on the Bank’s business. The Bank operates in a highly regulated environment, and its operations are subject to regulations adopted, and measures taken, by several regulatory agencies. Financial institutions are subject to a major number of regulations concerning functions historically determined by the Central Bank and other regulatory authorities. The Central Bank may penalize the Bank in the event that it breaches any applicable regulation. Similarly, the CNV, which authorizes securities offerings and regulates the public markets in Argentina, has the authority to impose sanctions on the Bank and its board of directors for breaches of corporate governance. The Financial Information Unit (Unidad de Información Financiera or “UIF”) regulates matters relating to the prevention of asset laundering and has the ability to monitor compliance with any such regulations by financial institutions and, eventually, impose sanctions. The Bank may not assure you that none of such regulatory authorities will commence proceedings against the Bank, its shareholders or directors nor penalize the Bank. This notwithstanding, in addition to “Know Your Client”, the Bank has implemented other policies and procedures to comply with its duties under currently applicable rules and regulations. For further information on this subject, please see “Asset Laundering and Terrorism Financing” in this Offering Memorandum. 31 In addition to regulations specific to its industry, the Bank is subject to a wide range of federal, provincial and municipal regulations and supervision generally applicable to businesses operating in Argentina, including laws and regulations pertaining to labor, social security, public health, consumer protection, the environment, competition and price controls. The Bank may not assure that existing or future legislation and regulation will not require material expenditures by the Bank or otherwise have a material adverse effect on the Bank’s consolidated operations. Future governmental measures may adversely affect the economy and the operations of financial institutions. The Argentine Government has historically exercised significant influence over the economy, and financial institutions, in particular, have operated in a highly regulated environment. The Bank may not assure that the laws and regulations currently governing the economy or the banking sector will remain unaltered in the future. Neither may the Bank assure you that changes will not adversely affect its business, financial condition or results of operations and the Bank’s ability to honor its debt obligations in foreign currency, including the notes. As of the date of this Offering Memorandum, there are three legislative bills to amend the Financial Institutions Law which have been sent to the Argentine Congress by representatives Heller, Pinedo and Milman, respectively, seeking to modify different aspects of the Financial Institutions Law. If the law currently in force were to be comprehensively modified, the financial system as a whole could be substantially and adversely affected. If any of these legislative bills were to be enacted or if the Financial Institutions Law were amended in any other way, there is no predicting the impact of the subsequent amendments to the regulations on the financial institutions in general, the Bank’s businesses, its financial condition and the results of its operations. Accordingly, Law No. 26,739 has been recently enacted to amend the Central Bank Charter, the principal aspects of which are: (i) to broaden the scope of the Central Bank's mission (by establishing that such institution shall be responsible for financial stability and economic development while pursuing social equity); (ii) to change the obligation to maintain an equivalent ratio between the monetary base and the amount of international reserves; (iii) to establish that the board of directors of the institution will be the authority responsible for determining the level of reserves required to guarantee normal operation of the foreign exchange market based on changes in external accounts; (iv) to empower the monetary authority to regulate and provide guidance on credit through the financial system institutions, so as to "promote long-term production investment”. The Bank is not able to ensure that any current or future laws and regulations (including, in particular, the amendment to the Financial Institutions Law and the amendment to the Central Bank Charter) will not result in significant costs to the Bank, or will otherwise have an adverse effect on its operations. A highly volatile regulatory framework could affect the country's economy in general, the financial institutions and the Bank. The Argentine Government has historically exercised significant influence over the Argentine economy and financial institutions in particular have operated in a highly regulated environment throughout different periods. Since December 2001, the Argentine Government has promulgated numerous, far-reaching regulations affecting the economy in general and financial institutions in particular. The laws and regulations that currently govern the economy and the financial sector may change in the future. We cannot assure that any changes in the regulations and the policies of the Argentine Government will not adversely affect financial institutions in Argentina, including the Bank, its business, financial condition, the results of its operations or its ability to service foreign debt denominated in foreign currency. A non-stable regulatory framework would impose significant limitations on the activities of the financial system, including the Bank, and it would give rise to uncertainty as regards its future financial condition and the result of its operations. 32 Risks Relating to the Bank’s Business The quality of the Bank’s loan portfolio could be impaired if the Argentine private sector continues to be adversely affected by the global economic downturn. The Bank’s loan portfolio is concentrated on recession-sensitive segments and it is to a large extent dependent upon local and international economic conditions. This in turn might affect the creditworthiness of the Bank's loan portfolio and its results of operations. Increased competition and M&A activities in the banking industry may adversely affect the Bank. The Bank foresees increased competition in the banking sector. Additionally, if the trend towards decreasing spreads is not offset by the increase in lending volumes, the ensuing losses could lead to mergers in the industry. These mergers could lead to the establishment of larger, stronger banks with more resources than the Bank. Therefore, although the demand for financial products and services in these markets continues to grow, competition may adversely affect the Bank’s results of operations, shrinking spreads and commissions. Reduced spreads without corresponding increases in lending volumes could adversely affect the Bank’s profitability. In recent years, the Argentine financial system has seen a reduction in the spreads between the interest rates accrued on assets and liabilities as a result of increased competition in the banking sector and the Argentine Government’s tightening of the monetary policy in response to inflation concerns, which may continue in the near future. Although there has been a reversal in this trend, the Bank may not assure you that the interest rate spreads will continue to rise. However, if spreads continue to decrease, the Bank’s profitability may be adversely affected. We cannot assure that any changes in the regulations and the policies will not adversely affect financial institutions in Argentina, including the Bank, its business, financial condition, and the results of its operations. Differences in the accounting standards between Argentina and certain countries with developed capital markets, such as the United States, may make it difficult to compare the Bank’s financial statements and those prepared by companies from these other countries. Publicly available information about the Bank in Argentina is presented differently from the information available for registered public companies in certain countries with highly developed capital markets, such as the United States. Except as otherwise described herein, the Bank prepares its financial statements in accordance with Argentine Banking GAAP, which differ in certain significant respects from Argentine GAAP and from US GAAP. The effects of the legislation that restricts the Bank’s ability to pursue mortgage foreclosure proceedings could adversely affect the Bank. As is also the case with other mortgagees, the ability to pursue foreclosure proceedings through completion in order to recover on its defaulted mortgage loans has an impact on the Bank’s activities. On December 13, 2006 and pursuant to Law No. 26,177, the “Restructuring Unit Law” was created to allow all the mortgage loans to be restructured between debtors and former Banco Hipotecario Nacional in so far as they had been granted previous to the entry into force of Law No. 23,928 (the “Convertibility Law”). Law No. 26,313, the “Pre-convertibility Mortgage Loans Restructuring Law” was enacted by the Argentine Congress on November 21, 2007 and partially signed into law on December 6, 2007 to lay down the procedure to be followed in restructuring the mortgage loans within the scope of Section 23 of the Mortgage Refinancing System Law in accordance with the guidelines established by the Restructuring Unit Law. To this end, a new recalculation was established for certain mortgage loans originated by the former Banco Hipotecario Nacional before April 1, 1991. 33 Decree 2107/08 issued on December 19, 2008 regulated the Pre-convertibility Mortgage Loans Restructuring Law and established that the recalculation of the debt applies to the individual mortgage loans from global operations in force at December 31, 2008 and agreed upon previous to April 1, 1991, and in arrears at least since November 2007 and remaining in arrears at December 31, 2008. In turn, Decree 1366/10, published on September 21, 2010, expanded the universe of Pre-convertibility loans subject to restructuring to include the individual mortgage loans not originating in global operations in so far as they met the other requirements imposed by Decree 2107/08. In addition, Law No. 26,313 and its regulatory decrees also condoned the debts on mortgage loans granted before the Convertibility Law in so far as they had been granted to deal with emergency situations and in so far as they met the arrears requirement imposed on the loans subject to recalculation. Subject to the Central Bank’s supervision, the Bank has implemented the recalculation of mortgage loans within the scope of the above-discussed rules by adjusting the value of the new installments to a maximum amount not in excess of 20% of the household income. In this respect, the Bank estimates that it has sufficient loan loss provisions to face any adverse economic impact on the portfolio involved. However, the Bank may not assure you that the Argentine Government will not enact new additional laws restricting the Bank’s ability to enforce its rights as a creditor and/or imposing a condonation or a reduction of principal on the amounts unpaid in the Bank’s mortgage loan portfolio. Any such circumstance might have a significant adverse effect on the Bank’s financial condition and on the results of operations. See “Certain Legal Aspects of Mortgages in Argentina-Regulatory Framework” for further information on Argentina’s mortgage legislation. Given the mismatch between assets and liabilities in terms of foreign currency, the Bank has significant exposure. As of December 31, 2012, the Bank’s foreign-denominated liabilities exceed its foreigndenominated assets by approximately US$ 169.1 million, excluding foreign currency futures agreed upon in the local market. Were these locally traded foreign currency futures included, the Bank’s net position in foreign currency as of December 31, 2012 is US$ 305.8 million. Such mismatch leaves the Bank exposed to the risk of volatility in foreign exchange which could adversely affect its financial results in the event of a Peso depreciation. The Argentine Government might prevail at the Bank’s General Shareholders’ Meetings. By virtue of Law No. 23,696 (the “Privatization Law”) there are no restrictions on the Argentine Government’s ability to dispose of its Class A shares and all those shares minus one could be sold to third parties through public offering. The Bank’s By-laws set forth that if at any time Class A shares were to represent less than 42% of the Bank’s shares with right to vote, Class D shares automatically lose their triple vote right, which could result in the Main Shareholders losing control. Should any such situation materialize and should the Argentine Government retain a sufficient number of Class A shares, the Argentine Government could prevail in Shareholders’ Meetings (except for some decisions that call for qualified majorities) and could thus exert actual control on the decisions that must be submitted to consideration by the Shareholders’ Meeting. The Bank might in the future consider new business opportunities which could turn out to be unsuccessful. In recent years the Bank has considered some business acquisitions or combinations and it plans to continue considering acquisitions that offer appealing opportunities and that are in line with the Bank’s commercial strategy. However, the Bank may not assure you that such businesses could deliver sustainable outcomes or that the Bank will be able to consummate the acquisition of financial institutions in favorable conditions. Additionally, the Bank’s ability to obtain the desired outcome as a result of said acquisitions will be partly dependent upon the Bank’s ability to follow through with the successful integration of the businesses. To integrate any acquired business entails major risks, including: • Unforeseen difficulties in integrating operations and systems; • Problems inherent in assimilating or retaining the target’s employees; 34 • Challenges associated to keeping the target’s customers; • Unforeseen liabilities or contingencies associated to the targets; and • The likelihood of management having to take time and attention out of the business’s day-to-day to focus on the integration activities and the resolution of associated problems. Risks Relating to the Notes In the event of the Bank’s bankruptcy, the notes will rank junior to claims from depositors and other privileged creditors. The Financial Institutions Law, as amended, provides that in the event of the Bank’s bankruptcy or liquidation, all depositors, whether individuals or legal entities, and whichever the type, amount or currency of their deposits, will have general and absolute priority over any other of the Bank’s creditors, including the holders of the notes, except for labor creditors, creditors secured by a pledge or mortgage, or facilities granted by the Central Bank or by the Argentine bank liquidity fund and secured by a pledge or mortgage collateral, to be paid with 100% of the proceeds of the liquidation of our assets. Also, the owners of any kind of deposits will have special priority rights with respect to the Bank’s remaining creditors, except with respect to labor claims and claims secured by a pledge or mortgage, to be paid out of (i) our funds in possession of the Central Bank as reserves; (ii) other funds existing at the date when the Bank’s authorization is revoked; or (iii) the proceeds of the mandatory transfer of the Bank’s assets as determined by the Central Bank, in the following order of priority: (a) deposits of up to Ps.120,000 per person or corporation (considering all amount of such person/corporation deposited in one financial institution) or its equivalent amount in foreign currency, with priority right granted to one person per deposit (in the case of more than one account holder, the amount is pro rated among such account holders); (b) any deposits greater than Ps.50,000 or its equivalent in foreign currency, for the amounts exceeding such sum; and (c) liabilities derived from credit facilities granted to the bank, which directly affect international trade. Also, under Section 53 of the Financial Institutions Law, any claims of the Central Bank will have priority over any other creditors, except for creditors secured by a pledge or mortgage, certain labor creditors and depositors (in the terms set forth above), facilities granted pursuant to the Central Bank Charter (rediscounts granted to financial entities in the event of a temporary lack of liquidity, advances to financial entities under a bond, bond assignment, pledge or special assignment of certain assets), and facilities granted by the Argentine bank liquidity fund and secured by a pledge or mortgage collateral. Any insolvency of the bank would trigger an administrative proceeding, which may delay noteholder recoveries in respect of their claims. If the Bank becomes insolvent, it would not automatically be subject to bankruptcy proceedings under Law No. 24,522 (the “Argentine Bankruptcy Law”). Instead, the Bank would be subject to a prior administrative proceeding in accordance with the Financial Institutions Law, pursuant to which the Central Bank would intervene by appointing a reviewer, requesting the Bank to file a reorganization plan, transferring certain of the Bank’s assets and suspending or revoking the Bank’s banking license. Only upon the revocation of the Bank’s banking license may the Bank be subject to bankruptcy proceeding and/or judicial liquidation pursuant to the Argentine Bankruptcy Law. Consequently, noteholders could receive the amounts of their claims after more delays than they would otherwise have received in a normal bankruptcy proceeding in Argentina (other than a financial institution’s bankruptcy proceeding), the United States or any other country. An active trading market for the notes may not develop. Each series of notes issued under the Program and in connection with the applicable Pricing Supplement shall constitute a new issue of notes for which there may not be an established trading market. The Bank may apply to have notes in a series listed on different stock exchanges or markets, but the Bank cannot assure you that any such applications, if made, would be approved. Additionally, the Bank may not list notes in a series on any securities exchange or quotation system. Moreover, even if a listing or quotation may be obtained in respect of an issue of notes, the Bank cannot assure you as to the liquidity of, or the development or continuation of trading markets for, the notes. If an active trading market for the notes does not develop or continue, the market price and liquidity of the notes may be 35 adversely affected. If the notes are traded, they may trade at a discount from their initial offering price, depending on prevailing interest rates, the market for similar securities, the Bank’s operating performance and financial condition, general economic conditions and other factors. Holders of notes may find it difficult to enforce civil liabilities against the Bank or its directors, officers and controlling persons. The Bank is organized under the laws of Argentina and its principal place of business (domicilio social) is in the City of Buenos Aires. The Bank’s directors, officers and controlling persons reside outside the United States. In addition, a substantial portion of the Bank’s assets and the assets of the Bank’s directors, officers and controlling persons is located outside the United States. As a result, it may be difficult for holders of notes to effect service of process within the United States on such persons or to enforce judgments against them, including in any action based on civil liabilities under the U.S. federal securities laws. In addition, under Argentine law, enforcement of foreign judgments would be recognized, provided that the requirements of Articles 517 through 519 of the National Code of Civil and Commercial Procedure are complied with, including the requirement that the judgment does not violate principles of public policy of Argentine law, as determined by the Argentine court. The Bank cannot assure you that an Argentine court would not deem the enforcement of foreign judgments, requiring the Bank to make a payment under the notes in foreign currency outside of Argentina, to be contrary to Argentine public policy, if at that time there are legal restrictions prohibiting Argentine debtors from transferring foreign currency outside of Argentina to cancel indebtedness. Based on the opinion of the Bank’s Argentine counsel, there is doubt as to the enforceability against the Bank’s directors, officers and controlling persons in Argentina, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws. The Bank may redeem the notes prior to maturity. Unless otherwise specified in the applicable pricing supplement, the notes are redeemable at the Bank’s option in the event of certain changes in Argentine laws or the occurrence of certain events, as set forth in this Offering memorandum. See “Description of the Notes – Redemption and Repurchase.” In addition, if the applicable pricing supplement so specifies, the notes may also be redeemable at the Bank’s option under certain conditions, upon the occurrence of events in addition to those set forth in the Program and on certain specified dates. If any such redemption were to occur, an investor may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate similar to the one expected under the notes. The Bank might be unable to make payments in US Dollars and/or to make payments outside Argentina due to controls in the foreign exchange market. Decree 1570/01, which came into force on December 3, 2001 imposed certain restrictions on the ability to send foreign currency abroad and prohibited the most habitual remittances ordered from Argentina. Decree 1606/01 maintained the same restrictions and included certain additional exceptions related to remittances to be received in Argentina after December 3, 2001. Additionally, pursuant to Decree No. 616/05, as subsequently amended and supplemented, the Argentine Government regulated inflows and outflows of capital. Broadly speaking, Decree No. 616/05 mandates that, save for certain exceptions, certain funds transferred to Argentina by residents or nonresidents are subject to the establishment of a mandatory reserve (or an amount required to be deposited) equivalent to 30% of the amount of foreign currency received in Argentina, which must be deposited in US Dollars for a term of one year in an non-transferable, non-interest bearing account at a local financial institution. This regulation sets forth that, save for certain exceptions, transfers of currency from Argentina to foreign accounts are subject to the Central Bank’s prior approval and it also lays down certain maximum amounts that individuals may acquire in the foreign exchange market. There are no assurances that the regulations discussed above will not be amended or that no new regulations will be imposed in the future to limit even further the foreign currency inflows and outflows into and out of Argentina. Furthermore, new restrictions might be imposed by regulatory agencies devoid of all legal support. Any such measure, as well as any other additional control and/or restriction could substantially and adversely affect the Bank’s ability to access the international capital markets and to actually invest the proceeds, make principal and/or interest payments on its foreign-denominated notes, remit funds abroad (in whole or in part) to honor payment commitments on its notes (which could 36 materially and substantially affect the Bank’s financial condition and the results of its operations), and/or from time to time and if applicable in line with the terms and conditions of the notes, remit abroad the funds received in Argentina by the noteholders as payment on the notes. The Bank could be unable to make payments in US Dollars and/or to make payments outside Argentina due to restrictions in force at that time on the foreign exchange market and/or due to the restricted ability of companies to remit funds abroad. See “Exchange Controls”. 37 INFORMATION ABOUT THE ISSUER History and Description of the Bank’s Businesses Introduction The Bank was created in 1886 by the Argentine Government and privatized in 1999. Historically, the Bank has led the Argentine mortgage loan market and has been ranked as the largest supplier of insurance products and services in the field of mortgages and mortgage loans in Argentina. All of the Bank’s transactions and customers are located in Argentina, where the Bank runs a national network spanning 54 branches throughout the Argentine territory and an additional 16 points of sales. The Bank is a commercial bank that provides universal banking services and offers a broad range of banking activities and related financial services to individuals, small and medium enterprises and large companies. The Bank seeks differentiation through its focus on home mortgages and consumer loans as it considers that these products offer attractive continued growth opportunities. The Bank considers that it tops the ranking of mortgage lenders in Argentina and it also offers its customers a wide array of personal and corporate loans, deposits, credit and debit cards and additional financial services. As of December 31, 2012, the Bank ranked tenth amongst Argentine banks in terms of net shareholders’ equity, with net shareholders’ equity of Ps. 3,456.0 million and thirteenth in terms of total assets, with assets for Ps. 16,003.7 million. The Bank’s net income for the fiscal years ended December 31, 2010, 2011 and 2012 was Ps. 195.3 million, Ps. 251.5 million and Ps. 343.6 million, respectively, which stands for an average return on equity of 6.7%, 8.1% and 10.2%, respectively and a return on average assets of 1.7%, 2.2% and 2.5%, respectively. In line with its strategy to diversify its loan portfolio, the Bank has posted an increase in its nonmortgage loans, from Ps. 3,909.1 million as of December 31, 2010 to Ps. 7,605.1 million as of December 31, 2012, representative of an increase in non-mortgage loans over the Bank’s total portfolio of loans from 69.2% to 80.3%, respectively. Additionally, the Bank has improved the quality of these assets. Non-performing loans over Total portfolio stood at 3.0% as of December 31, 2010 and dropped to 2.3% as of December 31, 2012. The Bank has also diversified its funding sources: it reduced in relative terms its financial borrowings and increased its deposit base. In response to the volatility prevailing in the markets over the past two years, the Bank increased its liquidity and mitigated its re-financing risks. The financial indebtedness reduced its share in the total funding from 27.6% as of December 31, 2010 to 22.2% as of December 31, 2012. The Bank’s shares have been listed on the Buenos Aires Stock Exchange since 1999. Since 2006 the Bank carries a Level I ADR Program. Brief Description of the Loan Portfolio As of December 31, 2012, the Bank’s loan portfolio totaled Ps. 9,772.5 million. The following is a detail of the Bank’s loan portfolio as of the dates indicated: 38 As of December 31, 2010 2011 2012 2012 in thousands of: Ps. Ps. Ps. US$(1) Loan Portfolio To the non-financial public sector 49,856 50,768 91,806 18,670 To the financial sector 71,894 146,776 391,343 79,585 5,651,221 7,540,694 9,544,383 1,940,980 Advances 316,231 635,090 1,031,178 209,704 Promissory notes 159,629 250,736 229,629 46,698 1,741,901 1,705,635 1,868,330 379,950 11,615 22,933 55,346 11,255 472,878 788,256 1,199,211 243,876 1,813,442 2,701,531 3,551,203 722,186 (37,766) (5,271) (1,723) (350) 1,135,348 1,388,722 1,538,527 312,880 50,660 77,398 87,837 17,863 (12,717) (24,336) (15,155) (3,082) Provisions (216,609) (223,904) (273,101) (55,539) Total loans 5,556,362 7,514,334 9,754,431 1,983,697 26,620 26,620 18,238 3,709 4,873 4,873 3,510 714 (3,659) (3,659) (3,660) (744) 5,584,196 7,542,168 9,772,519 1,987,375 To the non-financial private sector and residents abroad Mortgage loans Pledge loans Personal loans Credit cards Unapplied cash Other Accrued interest and foreign exchange gains/(losses) receivable Unaccrued interest Loans pending securitization Accrued interest receivable Loan loss provision Total Loan portfolio (1) The exchange rate used for purposes of translation of balances as of December 31, 2012 was Ps. 4.9173 = US$ 1.00. Source: BCRA. Strategy In the last years the Bank has materialized a change in its universal banking-based business structure. Such change implied the release of various products, making necessary changes in the systems, processes and strengthening its market positioning. Therefore, the Bank has changed from a financial intermediary focused on trading mortgage loans to a commercial Bank offering a wide range of products and services. Banco Hipotecario adopted a new vision as a contemporaneous, straightforward and inclusive Bank. In particular, actions were taken to reduce costs, make changes in the volumes of loan origination so that they can fit in the new context of lower liquidity, give priority to deposit attraction efforts, design programs together with governmental agencies and diversified growth. For 2013, the main actions will be focused on: • Universal banking related to housing solutions: To bring into the consumers’ mind the slogan “Everything for your home (Todo para tu casa)” basing the Bank products on such concept; 39 • Making changes in the levels of Liquidity: Aim at maintaining an adequate level of liquid resources to ensure a proper development of the Bank's business cycles and to enable placement of liquid resources surplus in more profitable transactions; • Improving diversity of short-term funding and maximizing long-term funding: To obtain a more balanced structure in line with the guidelines laid down by the financial system and take advantage of capital market opportunities. Accordingly, special emphasis will be placed on attracting demand deposits while continuing to work on the scope of the loan securitization program by issuing new series of Argentine mortgage-backed securities (Cédulas Hipotecarias), and evaluating the possibility of issuing debt securities as long as it is possible under market conditions; • Improved focus on the interaction between the Bank and customers, employees and suppliers: Achievement of synergies in the interaction between the Bank and its domestic and foreign clients and suppliers; • Laying down the foundations for greater operating efficiency and transaction automation: Continued search for improvements in quality and productivity through the systematization of processes and systems. Continuous technology innovation. Strong change in process engineering paving the way towards minimization of waste and process-associated costs. The “industrial metaphor” has a leading role in the Institution's operating organization system; • Maintaining portfolio quality: To maintain the credit quality of new loans; to perform segmented actions on the retail banking portfolio; to encourage the atomization of the corporate banking portfolio; • Seeking greater profitability per client: Continuous search for portfolio loyalty generation, taking actions on key variables in order to increase income from commissions, contributing multiproduct offers and giving priority to cross-selling. Therefore, there will be an increase in operating income and the share in the Bank's total income; • Continuing to boost the Corporate Banking business: To maintain a balance between individual and commercial loans. The Bank will seek to identify entrepreneurs with a high potential to support them in developing their projects, for which purpose greater support will be given to small and mediumsized companies (PyME) banking. The Bank's contribution in relation to corporate funding will not only be limited to loan granting but it will also continue to play an active role so that the companies may obtain access to the capital markets; • Improving risk management: To set out the process for continued improvement in global risk management towards implementing the best practices; Program intended to further develop the cultural insertion on risk management in the organization; • Implementing a model of leadership and assessment of potential at all management levels: To encourage management of knowledge and intellectual capital of all collaborators to increase their strengths in critical aspects through greater involvement and motivation; • Branding reinforcing: Continuous actions intended to further promote the concept of a contemporaneous, straightforward and inclusive bank. Establishing a comprehensive communication plan through the Internet to lead the Internet 2.0 channel (Facebook, Twitter, Google+, and other social networks). • Maintaining the dynamism displayed in the previous year in relation loan granting, paying continuous attention to changes in the local market conditions in a global scenario of crisis; • Furthering the use of tools enabling better management and business development control. For such purpose, a comprehensive management scheme consisting of five strategic environments (Business, Employees, Clients, Sustainability and Organizational Intelligence) will continue to be used. Together with the analysis of profitability by Business Unit, it will be aimed at monitoring and controlling the organizational strategy by measuring strategic goals, which enables to make the corporate vision more clear and align business units with resources under a consistent strategy; 40 • Furthering the comprehensive program for quality and process reengineering in order to identify the “client’s opinion”, aligning their expectations with those of the Bank, and further increasing profitability and reducing costs from waste or “no quality”; • Encouraging leadership and communication, mainly in relation to middle management and further improving coordination between different areas upon planning and executing different projects. Business Lines Mortgage Loans Without prejudice to its expansion and growth in different financial products, the Bank strives to maintain its leading position in the mortgage loan market and looks to offer a wide array of products to meet home financing needs. At present, the Bank grants Peso-denominated mortgage loans at a fixed interest rate for up to a maximum term of 20 years. The Bank finances up to 70% of the real property value when the property is to be used as a family home. When properties are acquired for construction purposes, the Bank finances 75% and when the loan proceeds are to be applied to home expansions and completion, the Bank finances 100%. For the segment “Salary Plan” (clients who are employed by companies that signed agreements to deposit the employees' salaries with Banco Hipotecario) a credit facility is offered "at a fixed rate with step-up repayment installments" subject to a single 10-year term for House Construction, Expansion or completion and in the above three cases up to 100% of the work project is financed. The maximum loan amount for purchases and construction is Ps. 500,000 and for expansions and/or construction, this upper limit is Ps. 250,000. The mortgage payment installment shall never exceed 30% of household income, with household understood as comprising both marriage and cohabitation arrangements. The Bank relies on a pre-qualification system to inform applicants as early as in their initial enquiries of the maximum amount that they can borrow if they meet all requirements in terms of personal conditions, credit history and the property to be used as collateral. The origination of mortgage loans at the Bank decreased in the year 2008 due to the volatility exhibited by international financial markets in late 2007 and the ensuing long-term credit crunch. By mid2009 and together with the Argentine Government, the Bank launched a line by the name of “Credit for Your Home” to the market, which was very well received by the public and helped the Bank grant approximately 7,000 mortgage loans in 10 months and thus demonstrate major management and administrative capabilities to grant such number of loans. In this respect, origination at the Bank in the years 2010 and 2011 amounted to Ps. 738.0 million and Ps. 189.9 million, respectively. And, in the year ended on December 31, 2012, originations amounted to Ps. 264.7 million. Procrear Bicentenario In 2012 the Argentine Government launched the Program known as PROCREAR Bicentenario, an Argentine Loan Program celebrating the Bicentenary for a single family house, together with the Ministry of Economy, ANSES, the Ministry of Federal Planning and the Government Property Management Agency (Agencia de Administración de Bienes del Estado). In this program the Bank acts as trustee of the PROCREAR trust and its main role is the implementation and execution of the program. PROCREAR Bicentenario is expected to grant 400,000 loans for construction of houses within 4 years and to grant the first 100,000 loans for the benefit of about 400,000 people during 2012-2013. For such purpose, as of December 31, 2012, the settlor contributed P.s 3,500 million in cash. The program provides for two types of credit facilities: 41 • For owners of a piece of land: This is for those persons who have a piece of land of their own or owned by an immediate relative (parent or son/daughter of the applicant or his/her spouse) where a new independent house can be built. • For non-owners: This is intended for construction of houses over 1700 hectares of government-owned lands made available by the Argentine Government, including the lands assigned by the provinces and/or municipal governments. Such lands are used for urban construction projects so that the space is intelligently used, contemplating different family characteristics and the possibility of a future expansion. In 2012 four drawings were held and one new drawing was held as a second chance among those registered as “owners of a piece of land” giving rise to 59,186 beneficiaries, out of which 14,130 made the filings to obtain their mortgage loans as of December 31, 2012. In turn, with respect to the non-owners line, there were two calls for bids in 2012 for a total number of 15,000 houses. The projects to be submitted by the selected companies will be developed and awarded to the beneficiaries in 2013. New drawings are expected to be held under the program for 2013 addressed to beneficiaries who "own a piece of land" and awards to beneficiaries registered as “Non-owners”. In addition, there will be new calls for bids for urban developments related to such project. The Bank's participation in this origination of mortgage loans reaffirms its historic mission of making owners. Consumer Loans (Personal Loans and Credit Cards) In recent years, the Bank has exerted major effort in deploying a new business strategy geared towards universal banking. The Bank has made major headway in its goal to reconvert into a retail business launching products, re-sizing systems and processes and strengthening its market positioning. As regards its positioning, the Bank aspires to segment not only by socioeconomic status but also by classifications based on consumption habits or affinity groups in order to constantly embed in its product offerings the features that clients appreciate. In addition, the Bank will focus its efforts on channeling the highest number of clients to the automatic customer service tools striving for continuous improvement in its interaction with clients and increased efficiency at lower costs. As a part of its multi-product strategy, the Bank offers Personal Loans through its branches and alternative sales channels, at a fixed rate, for up to 60 months and for a maximum amount not in excess of the lower of (i) the equivalent to the applicant’s eight months’ income and (ii) Ps. 200,000. Whilst in 2010 and in 2011, the Bank had originated Ps. 314.8 million and Ps. 585.5 million, respectively, in the fiscal year ended on December 31, 2012, the Bank originated Ps. 751.5 million. As regards credit card marketing efforts, the Bank has entered into a contract with Visa Argentina S.A. to issue Visa credit cards. This credit card provides financing at competitive interest rates and its inherent characteristics foster consumption. In this respect, the Bank has implemented a number of promotional actions for certain time periods and certain lines of business and products, alliances with different sought-after retailers as well as co-branding arrangements. The Bank undertook these actions to increase client loyalty and retention which leads to increased revenues from fees. As a result of the actions described above, plus the acquisition of an 80% stake in Tarshop (see “Tarshop” in this section), the Bank’s Credit card balances grew from Ps. 1,813.4 million at December 42 31, 2010, to Ps. 2,701.5 million at December 31, 2011. In turn, as of December 31, 2012, the Bank’s credit card balance was Ps. 3,551.2 million. Corporate Banking The Bank’s objective for 2012 is to consolidate its presence as a major player within the corporate banking segment. Additionally, the Bank plans to continue with its strategy of active involvement in syndicated loan structuring transactions and the organization and placement of capital market transactions. At the same time, the Bank plans to further the development of transactional products, extending credit under the “Communities” concept and rendering comprehensive financial advice to Argentine entrepreneurs. To attain its objectives, the Bank plans to tailor its structure to the new businesses through the creation of a team that specializes in different industries and sectors, deepening segmentation by industries with a view to improving penetration in each industry and better understanding the needs and risks inherent in each particular industry. The Bank will further the strategy deployed until now that consisted in granting financial loans to companies for short and medium terms, including syndications with other banks. Besides, in order to improve profitability and to maintain balanced credit exposure, the Bank will seek to expand its longer term deals, where collaterals and payments will be basically tied to clients’ cash flows. Thus, the Bank aims at consolidating an atomized portfolio made up by short-, medium-, and long-term transactions to enable the Bank to make adjustments fast in the event of changes in market conditions. In turn, and as a continuation of what started in the year 2010, a new challenge for the year ahead will be to enter the SMEs market looking to address the funding needs of those companies with annual turnover ranging from Ps 6.0 million to Ps. 60 million and with appealing growth prospects. In order to enhance its comprehensive offering, the Bank will continue to develop products to help companies optimize cash flow management thus contributing to the objective consisting in increasing the deposit base and improving transactionality by client in this business unit. Along these lines, the Bank launched a new Check Collection and Custody System and in the last quarter of the year the Bank will start to offer Leasing products. In 2013 the Bank will continue to generate “structured”-type financing together with other banks by organizing and placing syndicated loans. The proceeds from these deals are to be applied to capital expenditures and to the restoration of working capital above all in those companies that have sufficient capacity for the generation of liquid funds and excellent growth prospects. The Bank will continue to target the most appealing sectors that have good growth prospects and require major investments, focusing mainly on sectors such as Exports, Energy, Agribusiness, Real Estate and Consumption. In addition, to accompany the 2013 commercial strategy for capturing liabilities, the Bank will continue to attract deposits from companies, both in sight accounts and in the form of time deposits to the extent this mechanism is in harmony with the Bank’s funding needs. In order to leverage the synergies between its Corporate, SMEs and Individual Banking areas, the Bank will endorse its “Communities” credit extension concept, i.e., extending credit not only to its clients but also to its clients’ suppliers and clients thus encompassing the whole value chain. Having undertaken actions to boost its corporate business, the Bank has seen its balances for these loans rise from Ps. 1,622.8 million at December 31, 2010 to Ps. 2,854.7 million as of December 31, 2012. Deposits In order to diversify its sources of funding, the Bank has been focusing on attracting deposits from both the public and private sectors in recent years and has succeeded in ranking amongst the leading 43 15 banks in the financial system. At present, the Bank’s main source of deposits consists in Pesodenominated term deposits, though it also carries term deposits in US Dollars and deposits in savings accounts and in checking accounts. As of the year ended December 31, 2010 2011 2012 2012 in thousands of: Ps. Ps. Ps. US$(1) Deposits Non-financial public sector 1,900,857 2,378,275 2,990,892 608,239 12,341 11,540 8,563 1,741 2,924,966 3,061,948 5,011,674 1,019,192 73,354 58,744 595,564 121,116 362,596 505,781 741,892 150,874 2,405,033 2,407,108 3,355,131 682,312 Investment accounts 14,056 40 160,035 32,545 Other 44,754 65,526 101,650 20,672 25,173 24,749 57,402 11,673 4,838,164 5,451,763 8,011,129 1,629,172 Financial sector Non-financial private sector and residents abroad Checking accounts Savings accounts Term deposits Interest and foreign exchange gains/(losses) payable Total deposits (1) The exchange rate used for purposes of translation of balances as of December 31, 2012 was Ps. 4.9173 = US$ 1.00. Source: BCRA. 44 Distribution channels The Bank’s branch network is presently made up by 54 branches and 16 sales offices, which, in the aggregate, represent 70 points of sales within Argentina. The Bank’s product distribution policy revolves around four axes: • Branches, • Points of sales, • Telemarketing, and • The Bank’s own sales force. The Bank deploys a direct marketing strategy to reach its existing clients and prospects with cross-selling offerings. This strategy is basically supported by the use of technological tools specifically designed for processes to incorporate more intelligence, segmenting databases for improved communication efficiency and product acceptance. Responsibility for selling Bank products to new clients lies mainly with the sales force teams at the head office and at the branches. The Bank looks to steer its distribution and sales channels to succeed in reaching a larger universe of prospective customers with a larger product offering. In addition to the traditional sales platform at the branches, the Bank has forged business alliances seeking to supplement its functions with strategic partners who add value to the distribution chain with the overarching objective being a decrease in the costs incurred in client acquisition and new product placement. Insurance Products The Bank offers insurance coverage for the financial products originated by the Bank (loans, checking accounts and Credit Cards). Therefore, the insurance business’s contribution to the Bank’s results is linked to the origination of these financial products. The Bank also offers additional homeowners’ insurance and life insurance to its clients. In all these cases, it is the Bank that takes on the risk, collects the premiums and pays the claims. These types of coverage are offered only to the Bank’s current clients or to clients whose homes have been financed by the Bank. At present, the Bank operates in two modalities: (i) as policy-owner; and (ii) as insurance broker. The following is a description of the insurance provided in these two modalities: Insurance related to financial products: The aim of this coverage is to minimize the risk of uncollectibility in the event of the debtor’s death and to preserve the value of collateral. In this respect, the risks for which policies are purchased are: • Life insurance: applicable to Personal Loans, Mortgage Loans, Credit Cards and Accounts for the repayment of debit balances in the event of the insured debt passing away. Type of contract: group life insurance policy whereby the Bank is both Policyowner and Beneficiary for the amount established according to each financial product. • Fire insurance: applicable to Mortgage loans and accounts (or any other product) secured by mortgages. Type of contract: insurance policy against fire and other damages to property, in which the Bank is the Policy-owner. It is important to note that for all the products acquired until July 23, 2007, the insurer was the Bank. From that date onwards, the insurance carriers have been BHN Vida S.A. in coverage against death and BHN Seguros Generales for fire insurance. These companies are Bank affiliates and they have both been duly formed and authorized by the Argentine Superintendence of Insurance. 45 Coverage offered to clients in which the Bank acts as a part of the distribution channel: These are insurance products that supplement the clients’ loan insurance coverage or meet their different insurance needs and are voluntarily acquired by clients. The Bank earns fees in proportion to the portfolio of insurance products it generates. These are insurance products designed together with the insurance companies in accordance with the definitions established by the Bank based on the price-benefit ratios that best fit each client segment. In this modality, the Bank acts as an insurance broker pursuant to agreements made with various insurance companies. The risks are taken on and managed by the insurance companies based on rates, coverage, requirements, standards and procedures regulated by the Argentine Superintendence of Insurance. The insurance products comprised in the Bank’s Insurance Broker agreements with insurance carriers include: life, personal accidents, homeowners, health, motor vehicle, protected purchase for products and/or services acquired with credit cards and ATM robbery. Argentine mortgage-backed securities (CHAs) The Cédulas Hipotecarias Argentinas (CHAs) issued by the Bank represent an important instrument in the Argentine capital markets. CHAs are securities backed by the Bank’s mortgage loans and structured through a financial trust. They are frequently listed on the Buenos Aires Stock Exchange. The Bank issued a total of 14 series for approximately Ps. 1,785 million. Tarshop In order to further its strategy towards consumer finance, on September 29, 2009, the Bank acquired 107,037,152 ordinary shares, representative of 80% of Tarshop’s capital stock. Tarshop’s business is based on selling consumer finance products, including its own credit card which does business as “Tarjeta Shopping”, and on extending cash advances. At present, its portfolio amounts to over Ps. 1,000 million and over 600,000 customers. It should be mentioned that the Argentine Antitrust Authority (Comisión Nacional de Defensa de la Competencia) has authorized the acquisition of 80% of Tarshop’s capital stock by Banco Hipotecario. See “Transactions with Related Parties” for further information. Competition The Bank considers that its main competitors are Banco Macro S.A., Banco Patagonia S.A., Banco Santander Río S.A., Banco de Galicia y Buenos Aires S.A., BBVA Banco Francés S.A. and Banco de la Ciudad de Buenos Aires. Litigation Introduction As of December 31, 2010, 2011 and 2012, the Bank had raised provisions for lawsuits for approximately Ps. 106.4 million, Ps. 115.2 million and Ps. 81.8 million, respectively. These provisions are determined on the basis of the amounts claimed and the likelihood of being the losing party in the various legal actions. The Bank understands that these legal actions and claims are habitual in the conduct of business and does not consider that any of these claims, taken either individually or in the aggregate, might be likely to adversely affect its business activities, operations or financial condition. Out-of-Court Workout On June 9, 2004, the Bank filed an Out-of-Court Workout proposal with the court of original jurisdiction over commercial matters No. 14, Clerk of Court’s Office No. 28 for confirmation. 46 On October 29, 2004, this court dismissed the Bank’s petition on grounds that the institutions within the scope of the Financial Institutions Law are enjoined from resorting to Out-of-Court Workouts. In response, the Bank lodged an appeal against this ruling, which was denied by the resolution handed down by Panel D of the Commercial Appellate Court notified to the Bank on May 31, 2006. The Bank then lodged an extraordinary appeal with the Argentine Supreme Court of Justice, which was conceded on October 31, 2006: the Supreme Court of Justice accepted to adjudge on the merits of the case. On March 22, 2011, the Bank was notified that the Argentine Supreme Court of Justice had confirmed the ruling passed by the court of original jurisdiction that had refused to confirm the Outof-Court Workout. Additionally, pursuant to Resolution No. 282 dated August 16, 2006, the Argentine Central Bank’s Superintendence of Financial and Foreign Exchange Institutions instituted proceedings against the Bank, its Directors and members of the Supervisory Committee and Finance Manager in office at that time on grounds of a violation of the provisions under Paragraph 1.3 of Resolution No. 301 passed by the Central Bank’s Board of Trustees on July 24, 2003 in as much as Resolution 301 prescribed that the Bank had to eliminate all references to the potential petition for an Out-of-Court Workout from the terms of the proposal to restructure amounts owed to foreign creditors filed with the Central Bank in the framework of Communication “A” 3940. The CNV was informed of this situation on September 29, 2006. Both the Bank and its Directors, the members of the Supervisory Committee and the Finance Manager filed their defenses in due time requesting to be exempted from penalties on the understanding that no punishable actions had been undertaken. As of the date of this Offering Memorandum, no resolution has been handed down in these proceedings. Proceedings instituted The Bank has been notified of Resolution No. 286 dated July 2, 2010, passed by the Superintendent of Financial and Foreign Exchange Institutions, whereby it was ordered that proceedings be instituted against this institution and its directors based on the provisions under Section 8 of the Argentine Criminal Law on Foreign Exchange Matters (text as unified by Decree 480/95). Such proceedings allege reputed breaches of Communications “A” 4087 and 4177 due to early repayments of restructured foreign debt for US$ 91,420,135 and Euro 2,803,965 conducted between February 2004 and June 2005. Defenses and answers were filed in due time in favor of the Bank’s rights, and the proceedings are pending at the administrative instance. In the opinion of the Bank and of its legal advisors, these proceedings are not likely to be successful, therefore no contingency has been provided for in the current financial statements. As a result of the transaction “CER Swap Linked to PG08s and External Debt” entered into on February 23, 2007 and terminated on January 29, 2009, the Bank was notified on May 5, 2011 of the commencement of proceedings No. 1320 (File No. 100.299/10). Such proceedings raise the issue of alleged violations of the rules on support to the Non-Financial Public Sector, excesses over the fractioning limits applicable to credit risk in the exposure to the non-financial public sector, excesses over allocation of collateral and the insufficiency of minimum capital requirements. Another objection was the transaction accounting treatment afforded. In such proceedings, the defenses and answers were filed in due time in favor of the Bank’s rights, which are to be reviewed by the Central Bank’ Office of Disputes (Gerencia de Asuntos Contenciosos). In the opinion of the Bank and of its legal advisors, these proceedings are not likely to be successful, therefore no contingency has been provided for in the current financial statements. On May 4, 2012, the Bank was notified of Resolution No. 186 dated April 25, 2012 passed by the Superintendent of Financial and Foreign Exchange Institutions, whereby it was ordered that proceedings be instituted against this institution and its directors based on the provisions under Section 8 of the Argentine Criminal Law on Foreign Exchange Matters (text as unified by Decree 480/95). 47 Such proceedings allege reputed breaches of the provisions of Communications “A” 3640, 3645, 4347 as supplemented, due to acquisition of good delivery silver bars out of funds resulting from its General Exchange Position. The Bank is in the course of analyzing the proceedings to file the proper defenses and answers. On September 14, 2012 the Bank was notified of Resolution No. 383 passed on August 30, 2012 by the Superintendent of Financial and Foreign Exchange Institutions whereby it was ordered that proceedings be instituted against the institution and its president pursuant to Section 41 of the Financial Institutions Law. Such proceedings raise the issue of untimely filing of documents related to the appointment of directors. The defenses and answers in favor of the Bank’s rights were filed and they are to be reviewed by the Central Bank's Office of Disputes. In the opinion of the Bank and of its legal advisors, these proceedings are not likely to be successful, therefore no contingency has been provided for in the current financial statements. On December 20, 2012 the Bank was notified of Resolution No. 492 passed on November 21, 2012 by the Superintendent of Financial and Foreign Exchange Institutions whereby it was ordered that proceedings be instituted against the institution and its directors pursuant to Section 41 of the Financial Institutions Law. Such proceedings allege reputed breaches of minimum rules on internal controls contained in Communication “A” 2525. The Bank is in the course of analyzing the proceedings to file the proper defenses and answers. Risk Management Policy The Bank has a Comprehensive Risk Management Policy that set out basic guidelines to be followed in order to ensure proper management of all significant risks that may interfere with the achievement of its strategic goals. Such policy established the relevant concepts, classified different risks to be managed, set out specific responsibilities, including those of the Board of Directors and the Bank’s Top Management, which laid down the grounds to promote the implementation of the best practices in the field. The Comprehensive Risk Management Policy was defined as a process carried out by the Board of Directors, the Top Management and all the Bank’s personnel aimed at identifying potential events that may have an impact thereon and manage such risks based on the established tolerance level, so as to provide reasonable assurance concerning achievement of the Organization's objectives. This Policy further established a comprehensive risk management framework that includes the determination of policies, organizational structures and specific procedures (including implementation of control testing, stress tests, risk tolerance indicators, risk maps, product program, etc.) with respect to each of the identified individual risks. On the other hand, the Bank has risk management strategies, approved by the Board of Directors, which include setting limits or tolerance levels for each one of the main risks to which the Bank is exposed. It was established that these limits must be reviewed at least on an annual basis as part of Bank’s Business Plan preparation process. In determining this entire set of rules, the provisions contained in the "Guidelines on risk management at financial institutions" disclosed by the Argentine Central Bank in Communication “A” 5203 were taken into account. In 2012, the following specific actions were taken in connection with the policy described above: 48 • • • • • • • • • • • • • • • Transparence: a document was prepared to describe the comprehensive risk management process for disclosure. Stress Testing Policy and Contingency Plan: a policy was designed to provide for a regulatory framework governing the comprehensive stress testing program developed by the Bank, as well as the relevant contingency plans. Such policy was approved by the Risk Management Committee and the Board of the Directors. Contingency Plan: an action plan was designed with the actions that could be taken by the Bank in the event of occurrence of or an increased likelihood of stress events in the economic and/or financial situation that are preliminarily judged as seriously adverse in relation to solvency, liquidity and/or profitability of the Institution. Stress Testing: Two comprehensive tests were run in the year, including treatment afforded to subsidiaries, and the outcomes were submitted to the Risk Management Committee and the Board of Directors. Risk Dashboard: the scope of the Bank’s dashboard was broadened by adding the main risk indicators of its subsidiaries. The indicators and their thresholds were redefined considering the 2012 risk strategy. Comprehensive Risk Management Policy: a new policy version was prepared by broadening its scope so as to describe the frame and risk management tools, both at a comprehensive management level and at the specific management level for each of the main risks. Such policy was approved by the Risk Management Committee and the Board of Directors. Corporate Banking Credit Risk: a policy was designed on risk mitigation; the methodology for analysis of syndicated loans was formalized; and other minor issues related to Communication “A” 5203 were dealt with. “Pricing” adjusted by Risk: a methodology was defined for loan and deposit pricing to consider costs and liquidity risks, interest rate and credit; a policy was prepared to include the responsibilities of different areas in the process of determination of the relevant interest rates. Reputational Risk Management: the framework for management of the reputational risk was determined with the main objective of identifying potential impacts on the Bank’s reputation and taking advantage of management thereof; the main stakeholders and their expectations were identified; processes were surveyed in order to identify the main sources of risk; a first control dashboard was prepared. Argentine Regulatory Capital Management: a “calculator” was developed to anticipate capital requirements. Economic Capital: for each type of risk a methodology was developed to compute the required capital in accordance with internal models, resulting from the sum of stressed values at risk for each type of risk; it was set forth in a technical document. Risk Strategy: a Risk Strategy was prepared to include it in the Bank’s 2013 Business Plan; the actions intended to continue to implement best risk management practices were specified therein; furthermore, an estimate was included about the Bank’s potential exposure if its risk profile is defined by the tolerance levels. The subsidiaries were included in this process. Risk Culture: different actions set out in the comprehensive risk management program were taken; in particular, various communication and training actions were taken. Corporate Governance: Monitoring of risk management at subsidiaries was implemented. Organizational Structure: Management of credit, liquidity, market, interest rate and operational risks is mainly the responsibility of the following organizational units within the scope described below: • • Risk Management Committee: The Risk Management Committee is composed of at least 3 Directors, and the General Manager and the Risk and Controlling Manager can speak but have no voting rights. The main objective of this Committee is to monitor the risks to which the Institution is exposed, and its responsibilities include, without limitation, monitoring management of credit, market, liquidity, interest rate and operational risks taking into account the best practices in the field of risk management and assisting the Board of Directors in determining risk policies and strategies. Finance Committee: The Finance Committee is composed of 3 Directors, and the General Manager and the top executive officers of the Financial and Market Risk Management Departments can speak but have no voting rights. The Committee’s responsibilities include controlling the Institution's liquidity and solvency levels, defining the levels of tolerance to 49 liquidity risk and of limits and/or areas for early alerts of financial risks and determination, assessment and control of financial risks of different investment portfolios. • Risk and Controlling Management Office: The Risk and Controlling Management Office, reporting to the General Management Office, has management units specialized in managing each of the main risks defined as follows: (i) Retail credit risk: Management of Retail Banking Credit Risk, (ii) Corporate Credit Risk: Management of Corporate Banking Credit Risk, (iii) Market risks (price, exchange rate and interest rate): Management of Market Risk and (iv) Operational Risk: Management of Operational Risk. The Risk and Controlling Management Office prepares a comprehensive report known as “Risk Dashboard”, which is submitted to the Board of Directors on a quarterly basis. This report reflects the institutions' risk profile and enables the Board of Directors and the Top Management to monitor the main risks of the business. In addition, this Management Office conducts the stress testing process and analysis of outcomes that is later referred to the Risk Management Committee and the Institution's Board of Directors. It is important to mention that the Bank has a proven methodology for running comprehensive stress tests to obtain prospective risk assessments, support the capital and liquidity planning procedures, permit the establishment of risk tolerance levels and facilitate contingency plans in the event of stress situations. The main resources (policies, processes, tools, etc.) implemented by the Bank to manage each of the main risks are described below. • Retail Banking Credit Risk: • • • • • • Corporate Banking Credit Risk: • • • Corporate Banking Credit Risk Management Policy: it defines the management framework and the main resources used for an adequate management of credit risk. Corporate Banking Credit Policy: it lays down the general guidelines based on which the credit risk related to the granting of credit support to companies will be assessed. Credit Rating Model: a model based on qualitative and quantitative aspects. It generates a Rating associated with a Company's default likelihood. • • Retail Banking Credit Risk Management Policy: it defines the framework and the main resources used for an adequate management of credit risk. Credit Manuals: they govern in connection with each Retail Banking product or business the granting of loans, subsequent follow-up and recovery of unpaid amounts. Score Models: models by means of which decisions related to the credit cycle are automated based on statistics. Management Information System: it enables an adequate and timely monitoring of performance of different segments in the credit portfolio and of decisions related to risk management. Decision Engine: This decision scheme determines rules, algorithms and models that are used to govern the granting of loans and/or previous approval in the case of selling campaigns. Credit Limits: the Credit Committee is responsible for approval thereof; significant financings are in turn referred to the Executive Committee or the Board of Directors, as applicable. Market Risks (prices, interest rate and exchange rate): • Market Risk Management Policy: it lays down the guidelines and methodologies in place for screening and controlling the Bank’s risks associated to prices, interest rates and foreign exchange rates. It also contains a detail of the mechanisms to report the risks incurred, 50 • • • existing limits and early alerts to keep the Finance Committee, the Risk Management Committee and the Top Management abreast of the risk profile and the roles and responsibilities of the different parties concerned. Daily follow-up on the securities portfolio: the risk is quantified through global methodologies and practices (mainly the “value at risk”) the limits of which are fixed by the Finance Committee. The strength of the used models is verified from time to time by “backtesting” and stress tests are run on the portfolio subject to pricing risks. Exchange rate risk: a weekly report on exchange exposure and the associated risks is prepared. Such report details the different products and instruments included therein. Interest Rate Risk Management: both the amounts and contractual conditions of the new origination and the current portfolio (loans, deposits, swaps, hedges, securities and other) are followed up so as to remain within preset risk appetite levels. On a supplementary basis, an ongoing analysis is performed on different hedging activities so as to reduce rate mismatching. Interest rate risk is quantified on the basis of two statistical methodological approaches: “Net financial income to risk” and “Economic value to risk”. Through the former an evaluation is performed on potential deviations in interest income(loss) as a result of changes in interest rates, while the latter enables an analysis of a potential impairment in the present value of the portfolio as a result of potential variations in the temporary structure of interest rates. Both approaches further include the “base risk”, which arises from an imperfect correlation in the adjustment of lending and borrowing rates applicable to instruments with similar revaluation characteristics. As a supplement to the approaches above mentioned, an analysis is also performed on the mismatch both in Pesos and Dollars in order to quantify the interest rate risk exposure on different future dates and various sensitivity analyses. • Liquidity Risk: • • • • Liquidity Risk Policy: it is intended for the Bank to have sufficient liquidity levels to fund increases in assets and honor payment commitments without incurring significant losses. Finance Committee Policy: it defines a voluntary Minimum Liquidity Level that surpasses the Minimum Cash Requirement-mandated liquidity. The Minimum Liquidity Level is made up by a High Liquidity indicator in turn made up by assets that are weighted in accordance with their volatility, liquidity and realization potential and by short liabilities in order to mitigate the liquidity risk and be able to efficiently comply with expected and unexpected current and future flows and with the guarantees without impacting the Bank’s daily operations or its financial condition. In order to monitor compliance with the Minimum Liquidity Level, the Policy establishes a mechanism of early alerts in a manner such that if the levels of High Liquidity forecast for the next six months, or the current ones, are less than the pre-determined levels, the Finance Management should deal with such matter at the next meeting of the Committee and/or convene a special meeting for such purpose. Reports intended to monitor liquidity risks: (i) report on cash flows, broken down by different terms, as well as changes in High Liquidity and in the Minimum Liquidity Level; (ii) report on the Bank’s deposit structure; (iii) report on net requirements of funds under different normal and stress scenarios and their implications in terms of High Liquidity and Minimum Liquidity Level; (iv) report on the possibilities of accessing the markets and (v) report on the situation and prospects of the financial system when it comes to asset origination, deposit placement and interest rates. Operational Risk: • • • Operational Risk Policy: it defines the framework and the main resources used for an adequate management of the operational risk. Resources under the Operational Risk Policy: (i) self-assessments, (ii) operational risk indicators, (iii) mitigation plans, (iv) event recording and (v) mitigating factor testing. Awareness Campaigns. 51 • • Operational risk management: it was integrated with the risk assessment process concerning risks created by assets of the information identifying the processes impacted by such risks. Report on management results. Argentine Banking Regulation Overview Founded in 1935, the Central Bank is the principal monetary and financial authority in Argentina. Its primary mission is to maintain stability in the value of the domestic currency, establish and implement monetary policy and regulate the financial sector. It operates pursuant to its charter and the provisions of the FIL. Under the terms of its charter, the Central Bank must operate independently from the Argentine Government. Since 1977, banking activities in Argentina have been regulated primarily by the FIL, which empowers the Central Bank to regulate the financial sector. The Central Bank regulates and supervises the Argentine banking system through the Superintendencia de Entidades Financieras y Cambiarias (Superintendency of Financial and Exchange Institutions, hereinafter referred to as the “Financial Superintendency”). The Superintendency is responsible for enforcing Argentina’s banking laws, establishing accounting and financial reporting requirements for the banking sector, monitoring and regulating the lending practices of financial institutions and establishing rules for participation of financial institutions in the foreign exchange market and the issuance of bonds and other securities, among other functions. The powers of the Central Bank include the authority to fix minimum capital, liquidity and solvency requirements, approve bank mergers, approve certain capital increases and transfers of stock, grant and revoke banking licenses, authorize the establishment of branches of foreign financial institutions in Argentina and the extension of financial assistance to financial institutions in cases of temporary illiquidity or solvency problems. The Central Bank establishes certain “technical ratios” that must be observed by financial entities, such as ratios related to levels of solvency, liquidity, the maximum credits that may be granted per customer and foreign exchange assets and liability positions. In addition, financial entities need the authorization of the Central Bank for the disposition of their assets, such as opening branches or ATMs, acquiring share interests in other financial or nonfinancial corporations and establishing liens over their assets, among others. As supervisor of the financial system, the Central Bank requires financial institutions to submit information on a daily, monthly, quarterly, semiannual and annual basis. These reports, which include balance sheets and income statements, information relating to reserve funds, use of deposits, classifications of portfolio quality (including details on principal debtors and any allowances for loan losses), compliance with capital requirements and any other relevant information, allow the Central Bank to monitor the business practices of financial entities. In order to confirm the accuracy of the information provided, the Central Bank is authorized to carry out inspections. If the Argentine Banking GAAP are not complied with, various sanctions may be imposed by the Superintendency, depending on the level of infringement. These sanctions range from a notice of noncompliance to the imposition of fines or, in extreme cases, the revocation of the financial entity’s operating license. Additionally, noncompliance with certain rules may result in the compulsory filing of specific adequacy or restructuring plans with the Central Bank. These plans must be approved by the Central Bank in order to permit the financial institution to remain in business. The Central Bank fulfills the function of lender of last resort, and is allowed to provide financial assistance to financial institutions with liquidity and/or solvency problems. Banking Regulation and Supervision 52 Central Bank Supervision Since September 1994, the Central Bank has supervised the Argentine financial entities on a consolidated basis. Such entities must file periodic consolidated financial statements that reflect the operations of head offices or headquarters as well as those of their branches in Argentina and abroad, and of their significant subsidiaries, whether domestic or foreign. Accordingly, requirements in relation to liquidity and solvency, minimum capital, risk concentration and loan loss provisions, among others, should be calculated on a consolidated basis. Permitted Activities and Investments The FIL governs any individuals and entities that perform habitual financial intermediation and, as such, are part of the financial system, including commercial banks, investment banks, mortgage banks, financial companies, savings and loan companies for residential purposes and credit unions. Except for commercial banks, which are authorized to conduct all financial activities and services that are specifically established by law or by the Argentine Banking GAAP, the activities that may be carried out by other Argentine financial entities are set forth in the FIL and related Argentine Banking GAAP. Commercial banks are allowed to perform any and all financial activities inasmuch as such activities are not forbidden by law. Some of the activities permitted for commercial banks include the ability to (i) receive deposits from the public in both local and foreign currency; (ii) underwrite, acquire, place or negotiate debt securities, including government securities, in both exchange and over-the-counter markets (subject to prior approval by the CNV, if applicable); (iii) grant and receive loans; (iv) guarantee customers’ debts; (v) conduct foreign currency exchange transactions; (vi) issue credit cards; (vii) act, subject to certain conditions, as brokers in real estate transactions; (viii) carry out commercial financing transactions; (ix) act as registrars of mortgage bonds; (x) carry out transactions in foreign currencies; and (xi) act as fiduciary in financial trusts. In addition, pursuant to the FIL and Central Bank Communication “A” 3086, commercial banks are authorized to operate commercial, industrial, agricultural and other types of companies that do not provide supplemental services to the banking services (as defined by applicable Argentine Banking GAAP) to the extent that the commercial bank’s interest in such companies does not exceed 12.5% of its voting stock or 12.5% of its capital stock. Nevertheless, if the abovementioned limits are exceeded, the bank shall: (i) apply for authorization from the Central Bank or (ii) communicate such situation to the referenced authority, as applicable. However, even when commercial banks’ interests do not reach such percentages, they are not allowed to operate such companies if (i) such interest allows them to control a majority of votes at a shareholders’ or board of directors’ meeting, or (ii) the Central Bank does not authorize the acquisition. Under Argentine Banking GAAP, the total amount of the investments of a commercial bank in the capital stock of third parties, including interests in Argentine mutual funds, may not exceed 50% of such bank’s regulatory capital (Responsabilidad Patrimonial Computable, or “RPC”). In addition, the total amount of a commercial bank’s investments in the following: (i) unlisted stock, excluding interests in companies that provide services that are supplementary to the finance business and interests in stateowned companies that provide public services, (ii) listed stock and interests in mutual funds that do not give rise to minimum capital requirements on the basis of market risk, and (iii) listed stock that does not have a “largely publicly available market price,” taken as a whole, is limited to 15% of such bank’s RPC. To this effect, a given stock’s market price is considered to be “largely publicly available” when daily quotations of significant transactions are available, and the sale of such stock held by the bank would not significantly affect the stock’s quotation. Operations and Activities that Banks Are Not Permitted to Perform The FIL prohibits commercial banks from: (a) creating liens on their assets without prior approval from the Central Bank, (b) accepting their own shares as security, (c) conducting transactions with their own directors or managers and with companies or persons related thereto under terms that are more favorable than those regularly offered in transactions with non-related parties, and (d) carrying out commercial, industrial, agricultural or other activities without prior approval of the Central Bank, except those considered financially related activities under Central Bank regulations. Notwithstanding the foregoing, banks may own shares in other financial institutions with the prior approval of the Central Bank. Liquidity and Solvency Requirements 53 Legal Reserve According to the FIL and Argentine Banking GAAP, financial institutions are required to maintain a legal reserve of 20% of their yearly income plus or minus prior-year adjustments and minus the accumulated loss at the previous year’s closing period. This legal reserve can only be used during periods in which a financial institution has incurred losses and has exhausted all other reserves. For further information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Non-liquid Assets Since February 2004, non-liquid assets (computed on the basis of their closing balance at the end of each month, and net of those assets that are deducted to compute the regulatory capital, such as equity investments in financial institutions and goodwill) plus the financings granted to a financial institution’s related persons (computed on the basis of the highest balance during each month for each customer) cannot exceed 100% of the Argentine regulatory capital of the financial institution, except for certain particular cases in which it may exceed up to 150%. Non-liquid assets consist of miscellaneous receivables, bank property and equipment, miscellaneous assets, assets securing obligations, except for swap, futures and derivative transactions, certain intangible assets and equity investments in unlisted companies or listed shares, if the holding exceeds 2.5% of the issuing company’s equity. Minimum Capital Requirements The Central Bank requires that financial institutions maintain minimum capital amounts measured as of each month’s closing, which are defined as a ratio of: (i) the counterparty risk, (ii) the market risk, and (iii) the operational risk of the financial institution. Such requirement should be compared to the basic requirement, which is explained below, taking into account the one with the highest value. The basic requirement varies depending on the type of financial institution and the jurisdiction in which the relevant institution is registered, from Ps. 12 million to Ps. 26 million for banks, and from Ps. 8 million to Ps. 15 million for other institutions. Financial institutions must comply with minimum capital requirements both on an individual and a consolidated basis. Basic Minimum Capital Pursuant to Central Bank Communication “A” 5355 dated September 20, 2012 the Central Bank classified by type and category the minimum capital requirements for financial entities. The categories were established in accordance with the jurisdiction in which the respective financial entity is located and were established on the basis of information obtained from the "National Census on Population and Houses 2001: Database,” prepared by the Argentine National Statistics and Censuses Institute. Category Banks I and II III to VI 26 15 Other Entities (except Credit Entities) -In Million Pesos12 8 Description of Argentine Tier 1 and Tier 2 Capital Regulations Argentine financial institutions must comply with guidelines similar to those adopted by the Basel Committee on Banking Regulations and Supervisory Practices, as amended in 1995 (the “Basel Rules”). The Central Bank takes into consideration a financial institution’s regulatory capital (RPC) in order to determine compliance with capital requirements. RPC consists of Tier 1 capital (Basic Net Worth) and Tier 2 capital (Complementary Net Worth) minus the items to be deducted from each Tier. 54 Tier 1 capital consists of (i) capital stock as defined by the Argentine Corporate Law, (ii) irrevocable contributions on account of future capital increases, (iii) adjustments to shareholders’ equity, (iv) savings reserves, (v) retained earnings and (vi) subordinated debt securities provided that they meet certain conditions and requirements and (vii) in the case of consolidation, minority interests shall also be included. Tier 2 capital consists of (i) liabilities contractually subordinated to all other liabilities not computable as Tier 1 capital, issued under certain conditions and requirements, including that the original term must not be shorter than 5 years, (ii) the results at prior fiscal years, 100% of net earnings or losses recorded through the most recent audited quarterly financial statements in the event the yearly financials are not audited, (iii) 100% of net earnings or losses for the current year as of the date of the most recent audited quarterly financial statement, (iv) 50% of profits or 100% of losses, from the most recent audited quarterly or annual financial statements, and (v) 100% of losses not shown in the financial statements, arising from quantification of any facts and circumstances reported by the auditor or the Superindendency of Financial and Foreign Exchange Institutions. Items to be deducted include, among others: (a) credit balances from application of the presumed income tax, (b) demand deposits maintained with foreign financial institutions that are not rated as “investment grade”; (c) securities not held by the relevant financial institutions, except where the Central Bank (CRYL), Caja de Valores S.A., Clearstream, Euroclear, Depositary Trust Company (DTC) or Deutsche Bank, New York, are in charge of their registration or custody; (d) securities issued by foreign governments whose risk rating is lower than that assigned to Argentine government securities; (e) subordinated debt instruments issued by other financial institutions; (f) equity interests in other Argentine or foreign financial institutions; (g) equity interests relating to the application of tax deferrals until February 19, 1999, or after such date provided they relate to irrevocable capital contributions made until such date, as from the month following expiration of the legal term of unavailability or loss of the tax benefits, as set forth in applicable regulations; (h) shareholders; (i) real property added to the assets of the financial entity and with respect to which the title deed is not duly recorded with the pertinent Argentine real property registry, except where such assets shall have been acquired in a court-ordered auction sale; (j) goodwill; (k) organization and development costs and other intangible property; (l) bridge accounts pending allocation with debit balance (m) any deficiency relating to the minimum loan loss provisions required by the Superintendency of Financial and Exchange Institutions; (n) equity interests in companies that have (i) financial assistance through leasing or factoring agreements or (ii) transitory equity acquisitions in other companies in order to further their development to the extent the ultimate purpose is selling such interest after development is accomplished; (o) excess in the granting of asset-backed guaranties, according to Argentine Banking GAAP; (p) the highest balance of that month’s financial assistance, when certain conditions are met; (q) gains from sales related to securitization transactions and selling transactions or portfolio assignment with assignor’s liability; and (r) liabilities from derivatives accounted for at reasonable value. Requirements for Subordinated Debt to Be Computed as Tier 1 Capital In order for debt securities to be considered as Tier 1 capital, they must be approved by: (i) the shareholders; (ii) the Superintendency of Financial and Foreign Exchange Institutions; and when applicable, (iii) the Argentine Securities Commission and (iv) a stock exchange, if debt securities are to be admitted for listing; (iv) they must be fully subscribed for and paid in; and (v) subordinated to depositors, unsecured creditors and subordinated indebtedness of the financial institution. In such case it must be set forth that in the event of bankruptcy of the institution and upon payment of all debts to the other creditors –including contractually subordinated debt-, the holders of debt securities computable as Tier 1 capital will have priority in the distribution of funds only with respect to the shareholders – irrespective of the class of shares-, expressly waiving any general or special privilege. In addition, for such classification the debt must not: (i) be guaranteed or covered by any guarantee from the issuer or an affiliate, or be the subject-matter of any other agreement providing for a legal or economic improvement in the order of priority for collection in the event of the institution’s bankruptcy; (ii) provide for any kind of payment of principal, except in the event of the entity’s liquidation, if applicable; and (iii) have any clauses providing for step-up payments or other incentives for early repayment. The financial institution may redeem such securities -following a minimum term of five years from issuance, provided that (i) the authorization of the Superintendency of Financial and Foreign Exchange Institutions has been obtained prior to exercising the purchase option; (ii) it refrains from 55 creating expectations that it will exercise the purchase option; and (iii) replaces the instrument with regulatory capital that is equivalent or better in terms of quality and under conditions that are sustainable considering its income generating capacity or shows that following exercise of the purchase option, its RPC largely exceeds -at least by 20%- the minimum capital requirements. The financial institution may at all times and at its sole discretion discharge payments of dividends or interests. The foregoing shall not be deemed as a breach or impose restrictions on the financial institution, except in relation to distributions of dividends to the holders of common shares. Payment of dividends must be made against distributable accounts, and the agreement shall not provide for a dividend that is adjusted from time to time based -in whole or in part- on the financial institution’s credit risk. The instruments that are a part of liabilities must absorb losses upon occurrence of a predetermined triggering event by: (i) conversion thereof into common shares; or (ii) a method to allocate losses to the instrument. Argentine financial institutions cannot acquire Tier 1 capital debt instruments issued by other Argentine financial institutions, nor can they purchase for subsequent resale their own Tier 1 capital debt instruments. Requirements for Subordinated Debt to Be Computed as Tier 2 Capital In order for debt securities to be computed as Tier 2 capital, the issuance of Tier 2 capital debt securities must be approved by: (i) the shareholders, (ii) the Superintendency of Financial and Exchange Institutions, and when applicable, (iii) the Comisión Nacional de Valores and (iv) a stock exchange, if the debt securities are to be admitted for listing. Argentine Banking GAAP require Tier 2 capital debt securities to be fully subscribed for and paid in, have a life of no less than 5 years. If the securities allow optional redemption by the issuer, such redemption is only effective (i) with the prior authorization of the Superintendency of Financial and Exchange Institutions, (ii) after at least 5 years have elapsed from the date of issuance and (iii) if the instrument is replaced with regulatory capital that is equivalent or better in terms of quality and under conditions that are sustainable considering its income generating capacity or shows that following exercise of the purchase option, its RPC largely exceeds -at least by 20%- the minimum capital requirements. Tier 2 capital debt securities: (i) cannot have acceleration or cross-acceleration provisions, except upon the bankruptcy or liquidation of the issuer. They must be subordinated to depositors and unsecured creditors; and (ii) cannot be guaranteed or covered by any guarantee from the issuer or an affiliate, or be the subject-matter of any other agreement providing for a legal or economic improvement in the order of priority for collection in the event of the institution’s bankruptcy or liquidation. Argentine financial institutions cannot acquire Tier 2 capital debt securities issued by other Argentine financial institutions, nor can they purchase for subsequent resale their own Tier 2 capital debt securities. New Requirements Applicable to Dividend Distribution The Central Bank has imposed restrictions on the payment of dividends, substantially limiting the ability of financial institutions to distribute such dividends without its prior consent. By means of Communication “A” 5180 (as amended and supplemented), the Central Bank amended and restated its regulations regarding dividend distribution by financial institutions. According to such regulation, the Superintendency of Financial and Exchange Institutions will review the ability of a bank to distribute dividends upon the bank’s request for its approval. The request must be filed within 30 business days prior to the shareholders’ meeting that will approve the institution’s annual financial statements. The Superintendency may authorize the distribution of dividends when each of the following circumstances are applicable during the month preceding the request: 56 (i) the financial institution is not subject to a liquidation procedure or the mandatory transfer of assets at the request of the Central Bank in accordance with section 34 or 35 bis of the FIL; (ii) the institution is not receiving financial assistance from the Central Bank; (iii) the institution is in compliance with its reporting obligations to the Central Bank; and (iv) the institution is in compliance with minimum capital requirements (both on an individual and consolidated basis) and with minimum cash reserves (on average); (v) must not affect the solvency of the institution (it shall deduct the tax on presumed minimum income from its RPC, value its securities at market value and there shall be an additional 75% margin between the requirement and payment of minimum capital). (vi) the distributable amount shall not affect the liquidity of the institution. Below is a summary describing the main risks ascertained under the regulations in force: Counterparty Risk The capital requirement for counterparty risk is defined as: Cer = k* [a* Ais + c* Fsp + r* (Vrf + Vrani)] + INC + IP. The required capital to assets-at-risk ratio is 10% (“a”) for fixed assets (“Ais”) and 8% (“r”) for loans (“Vrf”), other claims from financial intermediation and other financing (“Vrani”). The same ratio (“c”) is applied to claims on the public-sector loans (“Fsp”). The “INC” variable refers to increases in minimum capital requirements that arise when certain mandated technical ratios are exceeded (fixed assets, counterparty risk diversification and rating and limitations on transactions with related clients). The variable “IP” refers to increases that arise by virtue of the extension of the general limit on negative foreign currency net global position. Each type of asset is weighted according to the level of risk assumed to be associated with it. In broad terms, the weights assigned to the different types of assets are: Type of Asset Weighting Cash and cash equivalents Government Bonds With market risk capital requirements and Central Bank monetary control instruments including those registered as “available of sale” and “investment accounts” Other domestic bonds (without Government collateral) OECD Central Government bonds—rated AA or higher Loans To the non-financial private sector With preferred collateral under the form of: Cash, term deposit certificates issued by the creditor entity and given as security A guarantee by Reciprocal Guarantee Companies authorized by the Central Bank, export credit insurance, documentary credits 0-20% Mortgages Pledges To the non-financial public sector To the financial sector 0% 100% 20% 0% 50% 50%- 100% 50%-100% 100% 57 Public financial institutions with the collection of federal taxes as collateral To foreign financial institutions or to financial institutions backed by them (rated AA or higher) Other credits from financial intermediation Assets subject to financial leasing Other assets Guarantees, securities and other contingent liabilities 50% 0% - 20% 0%- 100% 50%- 100% 0%- 100% 0%- 100% Minimum capital requirements also depend on the CAMELBIG rating (1 strongest, 5 weakest) assigned by the Superintendency, which also determines the “k” value. This rating system complies with international standards and provides a broad definition of the performance, risks and perspectives of financial entities. Financial entities have to adjust their capital requirements according to the following “k” factors: CAMELBIG Rating 1 2 3 4 5 K Factor 0.97 1.00 1.05 1.10 1.15 Financing granted by branches or local subsidiaries of foreign financial entities by order and on account of their headquarters is not subject to minimum capital requirements, to the extent the foreign entity has an investment grade rating, is subject to regulations that entail consolidated fiscalization and such transactions are expressly guaranteed by the headquarters. Interest Rate Risk Financial entities must comply with minimum capital requirements regarding interest rate risk. These minimum capital requirements capture the risk arising from the different sensitivity of assets and liabilities adversely affected by adverse and unexpected changes in interest rates (“duration approach”). This effect is immediately evident in the case of secondary market, as a change in the interest rate leads to a change in the price of such assets, and therefore in the entity’s balance sheet. This regulation governs all the assets and liabilities derived from financial intermediation not subject to the minimum capital requirements covering market risk (including securities held at investment accounts). Minimum capital requirements measure the value risk (“VaR”) or maximum potential loss due to interest rate risk increases, considering a 3-month horizon and with a confidence level of 99%. When calculating the requirements, the cash flows of the financial entity’s transactions are assigned to different time bands taking into account their maturity. Financial entities with 1-3 CAMELBIG ratings may treat 50% of sight deposits as long-term maturities (in the case of financial entities with a 3 CAMELBIG rating, the assigned maturity cannot exceed 3 years). Transactions with variable interest rates related to a foreign index are treated as if they had fixed interest rates. The risk arising from liabilities with variable rates related to a domestic index is considered up to the first rate adjustment date. 40% of the assets related to a domestic index (except where the Government is the borrower) are considered as fixed interest rate credits in order to reflect the fact that impacts on interest rate do not have negative effects exclusively for borrowers. Market Risk Minimum capital requirements for market risks are added to previous requirements. Minimum capital requirements are computed as a function of the market risk of financial entities’ portfolios, measured as their VaR. The regulation includes those assets traded on a regular basis in open markets and excludes those assets held at investment accounts, which must meet counterparty and interest rate risk minimum capital requirements. 58 There are five categories of assets. Domestic assets are divided into equity and public bonds/Central Bank’s debt instruments, the latter being classified in two categories according to whether their average duration is less than or more than 2.5 years. Foreign equity and foreign bonds make up another two categories, are classified according to their duration as well, the latter also comprising two separate categories, defined as for domestic assets. The fifth category is comprised of foreign exchange positions, differentiated according to currency involved. Overall capital requirements in relation to market risk are the sum of the five amounts of capital necessary to cover the risks arising from each category. Market risk minimum capital requirements must be met daily. Information must be reported to the Central Bank on a monthly basis. As from May 2003, the U.S. dollar has been included as a foreign currency risk factor for the calculation of the market risk requirement, considering all assets and liabilities in that currency. Consequences of a Failure to Meet Minimum Capital Requirements In the event of noncompliance with minimum capital requirements by an existing financial institution, Central Bank Communication “A” 3171 provides the following: (i) (ii) noncompliance reported by the institutions: the institution must meet the required capital no later than in the second month after noncompliance was incurred or submit a restructuring plan within 30 calendar days following the last day of the month in which such noncompliance occurred. noncompliance detected by the Superintendency: the institution must file its defense within 30 calendar days after being served notice by the Superintendency. If no defense is filed, or if the defense is disallowed, the noncompliance will be deemed to be final, and the procedure described in item (i) above will apply. In addition, noncompliance with minimum capital requirements will entail a number of consequences for the financial institution, including prohibition from opening branches in Argentina or in other countries, establishing representative offices abroad, or owning equity in foreign financial institutions, as well as a prohibition from paying cash dividends and increase the volume of deposits. In addition, the Superintendency may appoint a delegate, who shall have the powers set forth by the FIL. Operational Risk The regulation on operational risk (“OR”) recognizes the management of OR as a comprehensive practice, separated from that of other risks given its importance. OR is defined as the risk of loss resulting from inadequate and/or failed internal processes, people and systems and/or from external events. The definition includes legal risk but excludes strategic and reputational risk. Financial institutions must establish a system for the management of OR that includes policies, processes, procedures and the structure for their adequate management. Seven OR event types are defined, according to internationally accepted criteria: Internal fraud, External fraud, Employment practices and workplace security, clients, products and business practices; damage to physical assets, Business disruption and system failures, and 59 execution, delivery and process management. A solid system for risk management must have a clear assignment of responsibilities within the organization of financial entities. Thus, the regulation describes the roles of each level of the organization for the management of OR (such as the roles of the board of directors, senior management and the business units of the financial institution). An “OR unit” is required, adjusted to the financial institutions’ size and sophistication and the nature and complexity of its products and processes, and the extent of the transactions. For small institutions, this unit may even consist of a single person. This unit may functionally respond to the senior management (or similar) or a functional level with risk management decision capacity that reports to that senior management. An effective risk management will contribute to prevent future losses derived from operational events. Consequently, financial entities must manage the inherent OR in their products, activities, processes and systems. The OR management process comprises: a) Identification and assessment: the identification process should consider both internal and external factors that could adversely affect the development of the processes and projections done according to the business strategies defined by the financial institution. Financial entities should use internal data, establishing a process to register frequency, severity, categories and other relevant aspects of the OR loss events. This should be complemented with other tools, such as self-risk assessments, risk mapping and key risk indicators. b) Monitoring: an effective monitoring process is required, for quickly detecting and correcting deficiencies in the policies, processes and procedures for managing OR. In addition to monitoring operational loss events, banks should identify forward-looking indicators that enable them to act upon these risks appropriately. c) Control and mitigation: financial entities must have an appropriate control system for ensuring compliance with a documented set of internal policies, which involves periodic reviews (at least annually) of control strategies and risk mitigation, and should adjust them if necessary. The Schedule for the full implementation of the OR Management system concluded in December 2009. Pursuant to Communication “A” 5272 issued by the Central Bank, the minimum capital requirements in relation to OR amount to 15% of the average for the last 3 years of: i) financial/services income minus financial/services expenses, and ii) other profits minus other losses. The following items –comprised in the above-mentioned accounting items are excluded from the (i) and (ii) above, as applicable: - expenses arising out of the creation of reserves, elimination of reserves created during previous financial years and recovered credits in the financial year which were written off in previous financial years; - profits or losses arising out of equity in other financial institutions or companies, if these are deductible from RPC; - extraordinary or irregular sums –those arising from unusual and exceptional events which resulted in sums, events which have unlikely occurred in the past and are unlikely to occur in the future, including income from insurance recovery; and - sums arising out of the sales referred to in Section 2 of the rules on assessment of debt instruments of public non-financial sector and monetary regulations of the Central Bank ("Valuación de 60 instrumentos de deuda del sector público no financiero y de regulación monetaria del Banco Central de la República Argentina"). Minimum Cash Reserve Requirements The minimum cash reserve requirement requires that a financial institution keep a portion of its deposits or obligations readily available and not allocated to lending transactions. On March 1, 2002 the Argentine Central Bank established that minimum cash requirements are applicable to demand, time deposits and other liabilities arising from financial intermediation denominated in Pesos, foreign currency, or government and corporate securities, and any unused balances of advances in checking accounts under formal agreements not containing any clauses that permit the bank to discretionally and unilaterally revoke the possibility of using such balances. Minimum cash reserve obligations exclude (i) amounts owed to the Central Bank, to domestic financial institutions, to foreign banks and (ii) amounts owed in connection loans intended to finance foreign trade transactions, cash purchases pending settlement, forward purchases (whether or not related to reverse repos) and demand obligations for money orders and transfers from abroad pending settlement and correspondent transactions abroad. The liabilities subject to these requirements are computed on the basis of the effective principal amount of the transactions, excluding interest accrued, past due, or to become due on the aforementioned liabilities, provided they were not credited to the account of, or made available to, third parties, and, where available, the amount accruing upon the adjustment rate (CER) is applied. The basis on which the minimum cash reserve requirement is computed is the monthly average of the daily balances of the liabilities at the end of each day during each calendar month, except for the period ranging from December of a year to February of the next, period in which it shall be applied on a quarterly average. Such requirement shall be complied with on a separate basis for each currency in which the liabilities are denominated. In addition, such requirement will take into account: (i) the region of the country where the transaction takes place, for which purpose the country has been divided into categories, (ii) the share in the total financing to the non-financial private sector in Pesos at the institution with respect to loans to Micro, Small and Medium-sized Companies (MiPyMES), which will result in a reduction in the minimum cash reserve obligation. The table below shows the percentage rates that should be applied to determine the required minimum cash reserve requirement: Rates (%) Category I Item Categories II to VI 1.3.1. Deposits in checking accounts and demand deposits opened in cooperative credit accounts. 17 15 1.3.2.1. In Pesos. 17 15 1.3.2.2. In foreign currency. 1.3.3. Deposits under legal custody (Usuras pupilares), special accounts for savings clubs, employment 20 20 1.3.2. Deposits in savings accounts, basic accounts and universal accounts for no charge (cuenta gratuita universal). 61 termination fund for construction workers, social security wages, special checking accounts for legal entities and savings accounts for payment of welfare plans or programs. 1.3.3.1. In Pesos. 17 15 1.3.3.2. In foreign currency. 1.3.4. Other demand deposits and liabilities, pension and social security benefits credited by ANSES (government Social Security Agency) pending collection and immobilized balances for liabilities covered by these regulations. 20 20 1.3.4.1. In Pesos. 17 15 20 20 1.3.4.2. In foreign currency. 1.3.5. Unused balances of advances in checking accounts. 1.3.6. Deposits in checking accounts of non-bank financial institutions, computed for purposes of meeting their required minimum cash reserve. 1.3.7. Time deposits, liabilities under “acceptances” –including responsibilities for sale or assignment of credits to subjects other than financial institutions-, passive repos, cautions and stock exchange passive repos, constant-term investments, with an option for early termination or for renewal for a specified term and variable income, and other fixed-term liabilities, except for deposits included in items 1.3.11 to 1.3.14, based on the residual term thereof: 1.3.7.1. In Pesos. i) Up to 29 days. ii) From 30 to 59 days. iii) From 60 to 89 days. iv) From 90 to 179 days. v) From 180 days or over. This item includes deposits subject to a “CER” adjustment clause. 1.3.7.2. In foreign currency. i) Up to 29 days. ii) From 30 to 59 days. iii) From 60 to 89 days. iv) From 90 to 179 days. v) From 180 days or over. vi) More than 365 days. 1.3.8. Liabilities owed due to foreign facilities (not executed by means of time deposits or debt securities) which should meet the requirements set forth under items 1.3.7. and 1.3.9., respectively). 1.3.9. Debt securities (including Negotiable Obligations), based on the residual term thereof: 62 17 15 100 100 13 10 6 1 0 12 9 5 0 0 20 15 10 5 2 20 15 10 5 2 0 0 0 0 a) In Pesos. i) Up to 29 days. ii) From 30 to 59 days. iii) From 60 to 89 days. iv) From 90 to 179 days. v) From 180 days or over. b) In foreign currency i) Up to 29 days. ii) From 30 to 59 days. iii) From 60 to 89 days. iv) From 90 to 179 days. v) From 180 to 365 days. vi) More than 365 days. 1.3.10. Liabilities owing to the Trust Fund for Assistance to Financial and Insurance Institutions. 14 11 14 11 7 2 7 2 0 0 20 15 20 15 10 5 10 5 2 2 0 0 0 0 10 10 10 10 19 20 19 20 100 100 15 14 1.3.11. Demand and time deposits made upon a court order with funds arising from cases pending before the court, and the related immobilized balances. 1.3.11.1. In Pesos. 1.3.11.2. In foreign currency. 1.3.12. Deposits –irrespective of the type- as assets of mutual funds. 1.3.12.1. In Pesos. 1.3.12.2. In foreign currency. 1.3.13. Special deposits related to inflows of funds from foreign countries- Decree 616/05. 1.3.14. Time deposits in nominative, non-transferable Pesodenominated certificates, belonging to public sector holders, with the right to exercise an option of early withdrawal in less than 30 days from its setting up. Reduction in the average requirement in Pesos. The demand will be reduced based on the share in total financings to the non-financial private sector at the institution with respect to financings to Micro, Small and Medium-sized Companies (MiPyMES) in the same currency –as defined in the rules on “Determination of the condition of a Micro, Small or Medium-sized Company”- considering such classification at the time of the granting, in accordance with the following table, without exceeding the amount of the demand as previously determined: Share, of financings to MiPyMES with respect to total financings to the non-financial private sector, at the institution. (%) Less than 4 more than 4 and less than 6 more than 6 and less than 8 more than 8 and less than 10 63 Deduction (on the aggregate of included items in Pesos). (%) 0.00 0.25 0.50 0.75 more than 10 and less than 12 more than 12 and less than 14 more than 14 and less than 16 more than 16 and less than 18 more than 18 and less than 20 more than 20 and less than 22 more than 22 and less than 24 more than 24 and less than 26 more than 26 and less than 28 more than 28 and less than 30 30 and over 1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.65 2.80 2.90 3.00 In addition to the abovementioned requirements, the following conditions shall be satisfied: a 100% reserve for any defect in the application of resources in foreign currency for a certain month in respect of which the minimum cash amount is assessed. The minimum cash reserve must be set up in the same currency to which the requirement applies, and eligible items include the following: (i) Accounts maintained by financial institutions with the Central Bank in Pesos; (ii) Accounts of minimum cash maintained by financial institutions with the Central Bank in U.S. dollars, or other foreign currency; (iv) Special guarantee accounts for the benefit of electronic clearing houses and to cover settlement of credit card and ATM transactions; (v) Checking accounts maintained by non-bank financial institutions with commercial banks for the purpose of meeting the minimum reserve requirement; (vi) Special guarantee accounts with the Central Bank for transactions involving banker´s checks (a check similar to the teller´s check that may be purchased from a bank to make payments to third parties); and (vii) Special accounts maintained with the Central Bank for transactions involving social security payments by the ANSES. (viii) Special accounts maintained by financial institutions with the Central Bank in public bonds and other securities issued by the Central Bank. These eligible items are subject to review by the Central Bank and may be changed in the future. Compliance on public bonds and time deposits must be done with holdings marked to market and of the same type, only in terms of monthly status. Holdings must be deposited on special accounts at the Central Bank. Compliance with the minimum cash reserve requirement will be measured on the basis of the monthly average of the daily balances of eligible items maintained during the month to which the minimum cash reserve refers by dividing the aggregate of such balances by the total number of days in the relevant period. Any deficiencies in meeting the required minimum cash reserve and the daily minimum reserve in foreign currency are subject to a penalty equal to twice the private banks’ BADLAR rate for deposits in U.S. dollars or twice the 30-day U.S. dollar LIBO rate for the last business day of the month (whichever is higher). Internal Liquidity Policies of Financial Institutions 64 The regulations designed to limit liquidity risk provide that financial institutions should adopt management and control policies that ensure the maintenance of reasonable liquidity levels to efficiently manage their deposits and other financial commitments. Such policies should establish procedures for evaluating the liquidity of the institutions in the framework of prevailing market conditions to allow them to revise projections, take steps to eliminate liquidity constraints and obtain sufficient funds, at market terms, to maintain a reasonable level of assets over the long term. Such policies should also address (i) the concentration of assets and liabilities in specific customers, (ii) the overall economic situation, likely trends and the impact on credit availability, and (iii) the ability to obtain funds by selling government debt securities and/or assets. Credit Risk Regulations The regulations on Credit Risk prescribe standards in order to reduce such risk without significantly eroding average profitability. There are three types of ratios that limit a lender’s risk exposure, namely: risk concentration limits, limits on transactions with customers on the basis of the institution’s capital and credit limits on the basis of the customer’s net worth. “Risk concentration” means the aggregate amount of relevant transactions executed with companies, individuals or groups of companies—whether affiliated or not—where such transactions, measured for each one of such customers, are at any time equal to or higher than 10% of the institution’s RPC on the last day of the month prior to the relevant month. Total operations may not exceed, at any time: - three times the institution’s RPC for the previous month, without considering the operations involving local financial institutions (domestic or foreign headquarters or branches); - five times the institution’s RPC for the previous month if operations involving local financial institutions are considered; or - ten times the institution’s RPC, in the case of second tier financial institutions (considering the loans to other domestic financial institutions). See “Description of Argentine Tier 1 and Tier 2 Capital Regulations” in this Section. Diversification of risk: limitations are established for operations with clients, which may not exceed certain percentages applied on top of the institution’s RPC for the previous month. These percentages vary depending upon the type of client, the type of operation and the collateral involved. The regulation sets forth a number of transactions that are excluded from the credit risk diversification rules. Degree of risk: In the case of credit limits based on the customers’ net worth, as a general rule the financial assistance cannot exceed 100% of the customer’s net worth. The basic margin may be increased by an additional 200% provided such additional margin does not exceed 2.5% of the financial institution’s RPC and the increase is approved by the board of directors of the relevant financial institution. Limits for non affiliated individuals. The aggregate amount of relevant transactions with affiliated companies or individuals may not exceed at any time the limits of the financial institution’s net worth as of the last day of the month prior to the month of calculation, according to the following general rules: • in the case of local financial institutions which have transactions that are subject to consolidation by the lender or borrower, when the entity receiving financial assistance (i) has received a grade 1 rating by the Superintendency of Financial and Exchange Institutions, the financial institution can provide assistance for an amount up to 100% of its computable net worth; or (ii) has received a grade 2 rating by the Superintendency of Financial and Exchange Institutions, general financial assistance can be provided for an amount up to 10% of the financial institution’s computable net worth; and additional assistance for an amount up to 90% of said computable net worth as long as loans and other credit facilities mature within 180 days; 65 • in the case of local financial institutions not included in (i) above, the financial institution can provide assistance for an amount up to 10% of its computable net worth; and • in the case of other related local companies that exclusively provide complementary services to the activity performed by the financial institution, as well as related foreign banks rated “investment grade”, such companies may receive assistance for an amount up to 10% of the computable net worth of the financial institution which grants assistance. If the financial institution has a rating of 4 or 5, financial assistance to a related person or company cannot be granted, except in certain situations. Finally, the total, non-excluded amount of financial assistance provided to, and the shareholder participation in the related persons and companies by a financial institution cannot exceed 20.0% of the institution’s Argentine regulatory capital, except when the applicable limit is 100.0%. Under Central Bank regulations, a person is “related” to a financial institution (and thus part of the same “economic group”): • if the financial institution directly or indirectly controls, is controlled by, or is under common control with, such person; • if the financial institution or the person that controls the financial institution and such person have common directors to the extent such directors, voting together, will constitute a simple majority of each board; or • in certain exceptional cases, if such person has a relationship with the financial institution, or with the person controlling such financial institution, that might result in economic damage to such financial institution, as determined by the board of directors of the Central Bank. In turn, control by one person of another is defined under such regulations as: • holding or controlling, directly or indirectly, 25.0% or more of the voting stock of the other person; • holding 50% or more of the voting stock of the other person at the time of the last election of directors; • holding, directly or indirectly, any other kind of participation in the other person so as to be able to have a controlling vote in its shareholders’ or board of directors meetings; or • when the board of directors of the Central Bank determines that a person is exercising a controlling influence, directly or indirectly, in the direction or policies of another person. The regulations contain several non-exclusive factors to be used in determining the existence of such controlling influence, including, among others: • the holding of a sufficient amount of the other person’s capital stock as to exercise influence over the approval of such person’s financial statements and payment of dividends; • representation on the other person’s board of directors; • significant transactions between both persons; • transfers of directors or senior officers between both persons; • technical and administrative subordination by one person to the other; and • participation in the creation of policies of the financial institution. 66 Foreign Exchange System During the first quarter of 2002, the Argentine Government established certain foreign exchange controls and restrictions. On February 8, 2002, Decree No. 260 was issued, establishing as of February 11, 2002 a Local Foreign Exchange Market (“Mercado Único y Libre de Cambios”) system through which all transactions involving the exchange of foreign currency are to be traded at exchange rates to be freely agreed upon. On such date, the Central Bank issued Communications “A” 3471 and “A” 3473, which stated that the sale and purchase of foreign currency can only be performed with entities authorized by the Central Bank to operate in foreign exchange. Item 4 of Central Bank Communication “A” 3471 stated that the sale of foreign currency in the local exchange market shall in all cases be against Peso bills. Since January 2, 2003, there have been further modifications to the restrictions imposed by the Central Bank. For further information, see “Exchange Controls”. Foreign Currency Lending Capacity The Regulations on the allocation of deposits in foreign currencies establish that the lending capacity from foreign currency deposits, including U.S. dollar-denominated deposits to be settled in Pesos, must fall under one of the following categories: (a) pre-financing and financing of exports to be made directly or through agents, trustees or other brokers, acting on behalf of the owner of the merchandise; (b) financing for manufacturers, processors or collectors of goods, provided they refer to non-revocable sales agreements with exporters for foreign currency-denominated prices (irrespective of the currency in which such transaction is settled), and they refer to exchangeable foreign-currency denominated goods listed in local or foreign markets, broadly advertised and easily available to the general public; (c) financing for manufacturers of goods to be exported, as final products or as part of other goods, by third-party purchasers, provided that such transactions are secured or collateralized in foreign currency by third-party purchasers; (d) financing of investment projects, working capital or purchase of any kind of goods –including temporary imports of commodities- that increase or are related to the production of goods to be exported; (e) financing for commercial clients or commercial loans considered as consumer loans, with the purpose of importing capital goods, whenever they help to increase goods production for the domestic market; (f) debt securities or financial trust participation certificates whose underlying assets are loans made by the financial entities in the manners set forth in (a) to (d) above; (g) foreign currency debt securities or financial trust participation certificates, publicly listed under an authorization by the CNV, whose underlying assets are securities bought by the fiduciary and guaranteed by reciprocal guarantee companies, in order to finance export transactions; (h) financings for purposes other than those mentioned in (a) to (d) above, included under the IDB credit program (“Préstamos BID N° 119/OC-AR”), not exceeding 10% of the lending capacity; and (i) inter-financing loans (any inter-financing loans granted with such resources must be identified). The lending capacity shall be determined for each foreign currency raised, such determination being made on the basis of the monthly average of daily balances recorded during each calendar month. Any defect in the application shall give rise to an increase in the minimum cash requirement in the relevant foreign currency. General Exchange Position The General Exchange Position includes all the liquid external assets of the institution, such as gold, currency and bills in Argentina and abroad, deposits and investments for any term in foreign banks, investments in securities issued by foreign governments (OECD member governments with a sovereign debt rating not below “AA”), certificates of time deposits in foreign institutions (rated not less than “AA”), and correspondents’ debit and credit balances. It also includes purchases and sales of these assets already arranged and pending settlement involving foreign exchange purchases and sales performed with customers within a term not exceeding two business days. It does not include, however, correspondent account balances for third-party transfers pending settlement, term sales and purchases of foreign currency or securities nor direct investments abroad. 67 The GEP ceiling is calculated every month and, therefore, updated the first business day of the month. Pursuant to the relevant reporting system regulations, this ceiling is set at 15% of the amount equivalent in U.S. dollars to the computable equity at the end of the month immediately preceding the last month when filing with the Central Bank has already expired. It will be increased by an amount equivalent in U.S. dollars to 5% of the total amount traded by the institution on account of the purchases and sales of foreign currency in the calendar month prior to the immediately preceding month, and by 2% of the total demand and time deposits locally held and payable in foreign bills, excluding deposits held in custody, recorded by the institution at the end of the calendar month prior to the immediately preceding month. If the ceiling does not exceed US$8.0 million, this figure will be considered its floor. Institutions authorized to trade in foreign currency failing to comply with the GEP ceilings or the exchange reporting regulations should refrain from trading in foreign currency until they are in compliance with the above. Although certain exceptions are admitted, institutions authorized to trade in foreign currency require the Central Bank’s prior consent to perform their own purchases when payment is made against delivery of foreign currency or other foreign assets comprising the GEP. Foreign Currency Net Global Position All assets and liabilities from financial intermediation in foreign currency and securities in foreign currency (deriving from cash and term transactions) are included in the Net Global Position (for ongoing and completed operations). In addition, forward transactions under master agreements entered within domestic self-regulated markets paid by settlement of the net amount without delivery of the underlying asset are also included. Deductible assets for determining RPC are excluded from the ratio. Two ratios are considered in the Foreign Currency Net Global Position: - Negative Foreign Currency Net Global Position (liabilities exceeding assets): as from January 1, 2007 (Communications “A” 4577 and 4598) the limit is 15%, but it can be extended up to 15 p.p. provided the entity records at the same time: a) medium and long-term financing in Pesos to non-financial private sector (mid and long-term financings are those exceeding 4 years, weighting capital maturity without considering CER) under certain conditions for an amount equivalent to the increase of said limit; and b) an increase in the minimum capital requirement equivalent to the increase of the general limit of the negative foreign currency net global position. - Positive Net Global Position (assets exceeding liabilities): this limit cannot exceed the lesser of: 1. 30% of the RPC. 2. Own liquid funds (which refer to the RPC minus “fixed assets” and loans to related clients). By Communication “A” 4350, the Central Bank suspended as of May 1, 2005 the limits for the positive net global position. The excesses of these ratios are subject to a charge equal to the greater of twice the nominal interest rate of the U.S. dollar denominated LEBAC (Central Bank bill) or twice the 30-day U.S. dollar LIBO rate for the last business day of the month. Charges not paid when due are subject, during the default term, to interest at a rate established for excesses, increased by 50%. Fixed Assets and Other Items The Central Bank determines that the fixed assets and other items maintained by the financial entities must not exceed 100% of the entity’s RPC. Such fixed assets and other items include the following: 68 (vii) Shares of local companies (viii) Miscellaneous receivables (ix) Property for own use (x) Other assets, (xi) Organization and development expenses (xii) Goodwill, (xiii) Financing granted to related clients. The calculation of such assets will be effected according to the month-end balances, net of depreciations, accumulated amortizations and allowances for loan losses. Non-compliance with the ratio produces an increase in the minimum capital requirements equal to 100% of the excess on the ratio. Differences arising from the enforcement of legal orders within the framework of Amparos (proceedings intended for the protection of constitutional guarantees) ordering the repayment of deposits in their original foreign currency shall not computed be for this ratio up to December 3, 2008. Debt Classification and Loan Loss Provisions Credit Portfolio The regulations on debt classification are designed to establish clear guidelines for identifying and classifying the quality of assets, as well as evaluating the actual or potential risk of a lender sustaining losses on principal and/or interest, in order to determine, taking into account any loan security, whether the provisions against such contingencies are adequate. Banks must classify their loan portfolios into two different categories: (i) consumer or housing loans and (ii) commercial loans. Consumer and housing loans include housing loans, consumer loans, credit-card financings and other types of installment credits to individuals. All other loans are considered commercial loans. Consumer or housing loans in excess of AR$ 750,000, the repayment of which is linked to their projected cash flows, are classified as commercial loans. Argentine Banking GAAP allow financial institutions to apply the consumer and housing loan classification criteria to commercial loans of up to AR$ 750,000, given with or without guarantees. If a customer has both kinds of loans (commercial and consumer and housing loans), the consumer or housing loans will be added to the commercial portfolio to determine under which portfolio they should be classified based on the amount indicated. In these cases, the loans secured by preferred guarantees shall be considered to be at 50% of its face value. Under the current debt classification system, each customer, as well as the customer’s outstanding debts, are included within one of seven sub-categories. The debt classification criteria applied to the consumer loan portfolio are primarily based on objective factors related to customers’ performance on their obligations or their legal standing, while the key criterion for classifying the commercial loan portfolio is each borrower’s paying ability based on its future cash flow. Commercial Loans Classification The principal criterion to evaluate a loan pertaining to the commercial portfolio is its borrower’s ability to repay it, whose ability is mainly measured by such borrower’s future cash flow. Pursuant to Argentine Banking GAAP, commercial loans are classified as follows: Classification Criteria Normal situation Borrowers for whom there is no doubt as to their ability to comply with their payment obligations. Borrowers that, among other criteria, are up to 90 days past due and, although considered to be able to meet all their financial obligations, are sensitive to changes Subject to special Monitoring/Under 69 Classification Criteria observation ................................ that could compromise their ability to honor debts absent timely corrective measures. Subject to special Borrowers who are unable to comply with their obligations as agreed with the bank Monitoring / and, therefore, formally state, within 60 calendar days after the maturity date, their Under negotiation or intention to refinance such debts. The borrower must enter into a refinancing subject to agreement with the bank within 90 calendar days (if up to two lenders are refinancing agreements involved) or 180 calendar days (if more than two lenders are involved) after the payment default date. If no agreement has been reached within the established deadline, the borrower must be reclassified to the next category according to the indicators established for each level. With problems Borrowers with difficulties honoring their financial obligations under the loan on a regular basis, which, if uncorrected, may result in losses to the bank. With high risk of Borrowers who are highly unlikely to honor their financial obligations under the insolvency loan. Uncollectible Loans classified as irrecoverable at the time they are reviewed (although the possibility might exist that such loans might be collected in the future). The borrower will not meet its financial obligations with the financial institution Uncollectible according to (a) Borrower has defaulted on its payment obligations under a loan for more than Central Bank rules ................................ 180 calendar days according to the corresponding report provided by the Central Bank, which report includes (1) financial institutions liquidated by the Central Bank, (2) residual entities created as a result of the privatization of public financial institutions, or in the privatization or dissolution process, (3) financial institutions whose licenses have been revoked by the Central Bank and find themselves subject to judicial liquidation or bankruptcy proceedings and (4) trusts in which Seguro de Depósitos S.A. (SEDESA) is a beneficiary, or (b) certain kinds of foreign borrowers (including banks or other financial institutions that are not subject to the supervision of the Central Bank or similar authority of the country in which they are incorporated) that are not classified as “investment grade” by any of the rating agencies approved by the Central Bank. Consumer and Housing Loans Classification The principal criterion applied to loans in the consumer and housing portfolio is the length of the duration of the default of such loans. Under the Argentine Banking GAAP, consumer and housing borrowers are classified as follows: Classification Criteria Performing If all payments on loans are current or less than 31 calendar days overdue and, in the case of checking account overdrafts, less than 61 calendar days overdue. Loans upon which payment obligations are overdue for a period of more than 31 and up to 90 calendar days. Loans upon which payment obligations are overdue for a period of more than 90 and up to 180 calendar days. Loans in respect of which a legal action seeking collection has been filed or loans having payment obligations overdue for more than 180 calendar days, but less than 365 calendar days. Borrowers who are highly unlikely to honor their financial obligations under the loan. Loans in which payment obligations are more than one year overdue or the debtor is insolvent or in bankruptcy or liquidation. Same criteria as for commercial loans in Irrecoverable status according to Argentine Banking GAAP. Low Risk Medium Risk High Risk Uncollectible Non-recoverable loans Uncollectible according to Central Bank rules Minimum Credit Provisions The following minimum credit provisions are required to be made by Argentine banks in relation to the credit portfolio category: With Preferred Guarantees Category 70 Without Preferred Guarantees “Normal” “Under Observation” and “Low Risk” “Under negotiation or subject to refinancing agreements” “With Problems” and “Medium Risk” “With high risk of insolvency” and “High Risk” “Uncollectible” “Uncollectible according to Central Bank rules” 1% 3% 6% 12% 25% 50% 100% 1% 5% 12% 25% 50% 100% 100% The Superintendency may require additional provisioning if it determines that the current level is inadequate. Financial institutions are entitled to record allowances for loan losses in amounts larger than those required by the Argentine Banking GAAP. In such cases and despite the existence of certain exceptions, recording a larger allowance for a commercial loan, to the extent the recorded allowance amount falls into the next credit portfolio category set forth by the Argentine Banking GAAP, shall automatically result in the corresponding debtor being recategorized accordingly. Minimum Frequency for Classification Review Financial institutions are required to classify loans at least once a year in accordance with the Argentine Banking GAAP. Nevertheless, a quarterly review is required for credits that amount to 5% or more of the Bank´s RPC and mid-year review for credits that amount to the lower of: (i) AR$ 1 million or (ii) the range between 1% and 5% of the Bank´s RPC. In addition, financial institutions have to review the rating assigned to a debtor in certain instances, such as when another financial institution reduces the debtor classification in the “Credit Information Database” and grants 10% or more of the debtor’s total financing in the financial system. Only one-level discrepancy is allowed in relation to the information submitted by financial institutions to the “Credit Information Database” and the lower classification awarded by at least two other banks and total lending from such banks account for 40% or more of the total informed; if there is a greater discrepancy, the financial institution will be required to reclassify the debtor. Allowances for Loan Losses The allowance for loan losses is maintained in accordance with applicable regulatory requirements of the Central Bank. Increases in the allowance are based on the level of growth of the loan portfolio, as well as on the deterioration of the quality of existing loans, while decreases in the allowance are based on regulations requiring the write-off of non-performing loans classified as irrecoverable after a certain period of time and on decisions of the management to write off non-performing loans evidencing a very low probability of recovery. Priority Rights of Depositors Under Section 49 of the FIL, in the event of judicial liquidation or bankruptcy of a bank, depositors have a general and absolute priority right to collect their claims over all other creditors, except claims secured by pledges or mortgages and certain employee liens. Additionally, the holders of any type of deposit have a special priority right over all other creditors of the bank, except certain employee creditors, to be paid out of (i) any funds of the branch that may be in the possession of the Central Bank as Statutory Reserve, (ii) any other funds of the bank existing as of the date on which the bank’s license is revoked, or (iii) any proceeds resulting from the mandatory transfer of certain assets of the financial institution to another as determined by the Central Bank pursuant to Section 35 of the FIL, according to the following order of priority: (a) deposits of up to AR$ 50,000 per person (including all amounts such person deposited in one financial entity), or its equivalent in foreign currency, (b) all deposits of an amount higher than AR$ 50,000, or its equivalent in foreign currency for the amount exceeding AR$ 50,000, and (c) the liabilities originated in commercial lines granted to the financial institution and which directly affect international commerce. Deposits held by parties related to a financial institutions do not benefit from the priority rights set forth in paragraphs (i) and (ii) above, in view of the relevant regulations issued by the Central Bank of Argentina. 71 Mandatory Deposit Insurance System Law No. 24,485 passed on April 12, 1995, as amended by Law No. 25,089 and Decrees No. 538/95 and No. 540/95, created a Deposit Insurance System, or “SSGD”, which is mandatory for bank deposits, and delegated the responsibility for organizing and implementing the system to the Central Bank. The SSGD is a supplemental protection to the privilege granted to depositors by means of Section 49 of the FIL, as mentioned above. The SSGD has been implemented through the establishment of a Deposit Guarantee Fund, or “FGD”, managed by a private-sector corporation called Seguro de Depósitos Sociedad Anónima, (Deposit Insurance Corporation, or “SEDESA”). According to Decree No. 1292/96, the shareholders of SEDESA are the government through the Central Bank and a trust set up by the participating financial institutions. These institutions must pay into the FGD a monthly contribution determined by Argentine Banking GAAP. The SSGD is financed through regular and additional contributions made by financial institutions, as provided for in Central Bank Communication “A” 4271, dated December 30, 2004. The SSGD covers deposits made by individuals and legal entities in Argentine or foreign currency and maintained in accounts with the participating financial institutions, including checking accounts, savings accounts, and time deposits up to the amount of AR$ 120,000. Effective payment on this guarantee will be made within 30 business days after revocation of the license of the financial institution in which the funds are held; such payment is subject to the exercise of the depositor’s priority rights described above. In view of the circumstances affecting the financial system, Decree No. 214/2002 provided that SEDESA may issue registered securities for the purpose of offering them to depositors in payment of the guarantee in the event it should not have sufficient funds available. The SSGD does not cover: (i) deposits maintained by financial institutions in other financial institutions, including certificates of deposit bought in the secondary market, (ii) deposits made by persons directly or indirectly affiliated with the institution, (iii) time deposits of securities, acceptances or guarantees, (iv) any transferable time deposits that have been transferred by endorsement, (v) any deposits benefiting from some incentive (e.g., car raffles) in addition to the agreed upon interest rate, and (vi) any deposits in which the agreed-upon interest rate is higher than the reference interest rates periodically released by the Central Bank for time deposits and demand deposit account balances and available amounts from overdue deposits or closed accounts. Pursuant to Communication “A” 4271, every financial institution is required to contribute to the FGD a monthly amount of between 0.015% and 0.06% of the monthly average of daily balances of deposits in local and foreign currency, as determined by the Central Bank. Prompt contribution of such amounts is a condition precedent to the continuing operation of the financial institution. The first contribution was made on May 24, 1995. The Central Bank may require financial institutions to advance the payment of up to the equivalent of two years of monthly contributions and debit the past due contributions from funds of the financial institutions deposited with the Central Bank. The Central Bank may require additional contributions by certain institutions, depending on its evaluation of the financial condition of those institutions. When the contributions to the FGD reach the greater of AR$ 2 billion or 5.0% of the total deposits of the system, the Central Bank may suspend or reduce the monthly contributions, and reinstate them when the contributions subsequently fall below that level. Other Restrictions Pursuant to FIL, financial institutions cannot create any kind of rights over their assets without the Central Bank’s authorization, nor enter into transactions with their directors, officers or affiliates in terms more favorable than those offered to their clients. Capital Markets 72 Commercial banks are authorized to subscribe for and sell shares and debt securities. At present, there are no statutory limitations as to the amount of securities for which a bank may undertake to subscribe. However, under Argentine Banking GAAP, underwriting of debt securities by a bank would be treated as “financial assistance” and, accordingly, until the securities are sold to third parties, such underwriting would be subject to limitations. In 1990, the Buenos Aires securities market authorized firms organized as brokerage houses, or sociedades de bolsa, to operate as brokers on the Buenos Aires Stock Exchange in addition to individual stockbrokers. There are currently no restrictions on ownership of a sociedad de bolsa by a commercial bank, and, in fact, most of the main commercial banks operating in Argentina have established their own sociedad de bolsa. All brokers, whether individuals or firms, are required to own at least one share of Mercado de Valores S.A. to be allowed to operate as brokers on the Buenos Aires Stock Exchange. The MAE started doing business in 1989, it being at present a self-regulated institution under the supervision of the CNV governed by the legal provisions of General Resolution No. 9934 dated February 26, 1993 that made self-regulation effective as from March 1993. It is the major electronic open market for securities and trading of foreign currency in Argentina. It is based on a modular electronic platform with specific information technology support where both public and private fixed-income securities are traded, as well as currencies, swap transactions and futures transactions with currencies and interest rate. Supplementarily, this technological support is used in bids of bills and bonds of the BCRA and the primary placement of Government securities. An agreement between the Buenos Aires Stock Exchange and representatives of the MAE dealers provides that trading in shares and other equity securities will be conducted exclusively on the Buenos Aires Stock Exchange and that all debt securities listed on the Buenos Aires Stock Exchange may also be traded on the MAE. Trading in Argentine Government securities, which are not covered by the agreement, is conducted mainly on the MAE. The agreement does not extend to other Argentine exchanges. Commercial banks may operate as both managers and custodians of Argentine fondos comunes de inversión, or mutual funds; provided, however, that a bank may not act simultaneously as manager and custodian for the same fund. Financial Institutions undergoing Economic Difficulties The FIL provides that any financial institution, including a commercial bank, operating at less than certain required technical ratios and minimum net worth levels, in the judgment of the Central Bank adopted by members representing the majority of the board of directors, with impaired solvency or liquidity or in any of the other circumstances listed in Section 44 of the FIL, must (upon request from the Central Bank and in order to avoid the revocation of its license) prepare a plan de regularización y saneamiento, or a restructuring plan. The plan must be submitted to the Central Bank on a specified date, not later than 30 calendar days from the date on which a request to that effect is made by the Central Bank. Upon the institution’s failure to submit, secure regulatory approval of, or comply with, a restructuring plan, the Central Bank will be empowered to revoke the institution’s license to operate as such. Furthermore, the Central Bank Charter authorizes the Superintendency to fully or partially suspend, exclusively subject to the approval of the President of the Central Bank, the operations of a financial institution for a term of 30 days if the liquidity or solvency thereof are adversely affected. Such term could be renewed for up to 90 additional days, with the approval of the Central Bank’s board of directors. During such suspension term an automatic stay of claims, enforcement actions and precautionary measures is triggered, any commitment increasing the financial institution’s obligations shall be null and void, and debt acceleration and interest accrual shall be suspended. If per the Central Bank’s criteria a financial institution is undergoing a situation which, under the FIL, would authorize the Central Bank to revoke its license to operate as such, the Central Bank may, before considering such revocation, order a plan of restructuring that may consist of a series of measures, including, among others: 73 • • • • • adoption of measures to capitalize or increase the capital of the financial institution; revoke the approval granted to the shareholders of the financial institution to hold interests therein; restructure and/or transfer assets and liabilities; grant temporary exemptions to comply with technical regulations and/or payment of charges and penalties arising from such flawed compliance; or appoint a delegate or auditor (“interventor”) that may prospectively replace the board of directors of the financial institution. Revocation of the License to Operate as a Financial Institution The Central Bank may revoke the license to operate as a financial institution in case a restructuring plan has failed or is not deemed feasible, or violations of local laws and regulations have been incurred, or solvency or liquidity of the financial institution has been affected, or significant changes have occurred in the institution’s condition since the original authorization was granted, or if any decision by the financial institution’s legal or corporate authorities concerning its dissolution has been adopted, among other circumstances set forth in the FIL. Once the license to operate as a financial institution has been revoked, the financial institution shall be liquidated. Liquidation of Financial Institutions As provided in the FIL, the Central Bank must notify the revocation decision to a competent court, which will then determine who will liquidate the entity: the corporate authorities (extrajudicial liquidation) or an independent liquidator appointed by the court for that purpose (judicial liquidation). The court’s decision will be based on whether or not there is sufficient assurance that the corporate authorities are capable of carrying out such liquidation properly. Bankruptcy of Financial Institutions According to the FIL, financial institutions are not allowed to file their own bankruptcy petitions. In addition, the bankruptcy shall not be adjudged until the license to operate as financial institution has been revoked. Once the license to operate as a financial institution has been revoked, a court of competent jurisdiction may adjudge the former financial institution in bankruptcy, or a petition in bankruptcy may be filed by the Central Bank or by any creditor of the bank, in this case after a period of 60 calendar days has elapsed since the license was revoked. Once the bankruptcy of a financial institution has been adjudged, provisions of the Bankruptcy Law (as defined below) and the FIL shall be applicable; provided however that in certain cases, specific provisions of the FIL shall supersede the provisions of the Argentine Bankruptcy Law (i.e. priority rights of depositors). Merger, Consolidation and Transfer of Goodwill Merger, consolidation and transfer of goodwill may be arranged between entities of the same or different type and will be subject to the prior approval of the Central Bank. The new entity must submit a financial-economic structure profile supporting the project in order to obtain authorization from the Central Bank. Money laundering and financing of terrorism Law No. 25,246 (as subsequently amended by Laws No. 26,087; 26,119; 26,268 and 26,683, the “Anti-Money Laundering Law”), defines money laundering as a type of crime. Money laundering is defined as a type of crime committed whenever a person converts, transfers, manages, sells, encumbers, or otherwise uses money, or any other assets originating in a crime, with the possible result that the original or substituted assets may appear to be of a legitimate origin, provided the value of the assets 74 exceeds AR$ 300,000 (Pesos Three hundred thousand), regardless of whether such amount results from one act or several interrelated transactions. Additionally, Law No. 26,683 introduces money laundering as a specific criminal offense against the economic and financial order and separates it from the crime of concealment, that is a crime against public administration, thus permitting to punish the autonomous offense of money laundering regardless of the participation in the crime that originated the funds that are the subject of money laundering. In order to prevent and avoid money laundering from the commission of criminal acts and terrorism financing, Law No. 25,246 created the Financial Information Unit (“UFI” as per its acronym in Spanish), subordinate to the National Ministry of Justice, Security and Human Rights. Pursuant to Decree 1936/10 the UIF, as enforcement authority under Law No. 25,246, as amended, and insofar as concerns all matters under its scope, was vested with coordination and controlling powers at a national, provincial and municipal level and it was also vested with controlling powers in respect of governmental agencies mentioned in Section 12 of Law No. 25,246; it was also granted national representation authority before several international agencies such as GAFI, GAFISUD and OEA, among others. The UIF is authorized to carry out the following activities, among others: request information, documentation, supporting documents and any such items as it may deem advisable for the discharge of its duties, from any governmental agency, either national, provincial or municipal, as well as from natural or corporate persons, be they public or private, which shall be under the obligation to provide such information and items within the term to be established, impose the penalties set forth in Chapter IV of Law No. 25,246 and request the Attorney General´s Office (Ministerio Público) to file a petition before the court having competent jurisdiction for it to issue search warrants in respect of public or private facilities, order personal searches and the seizure of documentation or items that may prove useful for the investigation. Within the framework of the review of a report on a suspicious transaction, the individuals mentioned in Section 20 of Law No 25,246 cannot refrain from disclosing to the UIF any information required from them by claiming that such information is subject to bank, stock market or professional secret, or legal or contractual confidentiality agreements. Pursuant to Resolution 121/11 issued by the UIF, as amended, financial institutions subject to the provisions of Law No 21,526, entities subject to the system of Law No 18,924 and individuals or legal entities authorized by the Central Bank to operate in the purchase and sale of foreign currency in the form of cash or checks drawn in foreign currency or in the transfer of funds within Argentina or abroad are under the obligation to take further rational steps intended to identify the beneficiaries and/or clients, ensure that the information they receive is complete and accurate and carry out a more stringent follow up on the transactions in which they are involved, among other activities. Emphasis is placed on the application of “Know-your-client” policies whereby, before engaging in a commercial or contractual relationship with clients, they shall identify such clients, comply with the provisions of Resolution (UIF) No 11/11 on Politically Exposed Persons, verify that they are not included in the lists of terrorists and/or terrorist organizations (Res UIF 28/12) and request that they provide information on products to be used and the reasons for their selection. Insofar as concerns the detection of unusual or suspicious transactions, when a liable party detects a transaction that it considers unusual, it shall reinforce the review of such transaction for the purposes of obtaining additional information, recording and maintaining supporting documentation and filing the relevant report within a maximum term of 150 calendar days, which term is reduced to 48 hours in the event such transaction is related to terrorism financing. Pursuant to Resolution No 229/11 issued by the UIF, that repealed Resolution 33/11, measures and procedures were implemented that should be complied with in the capital market in connection with the commission of crimes consisting in money laundering and financing of terrorism in the capital market; the applicable regulations were subject to clarifications and amendments. The resolution in force mainly reiterates some provisions related to the information to be requested and steps to be taken for identification of clients by the liable parties, such as the duty to report, the preservation of the documentation, the formalities to be carried out and the term to report on suspicious transactions, policies and procedures to prevent money laundering and financing of terrorism. A description is also given of transactions or conducts that, even by themselves or merely upon being perfected or attempted cannot be regarded as suspicious transactions, represent an example of transactions that may be used for the laundering of assets originating from crimes and the financing of terrorism, for which reason, the existence of one or various factors described above should be considered as a guideline to reinforce the review of the transaction. The main change introduced in connection with the repealed resolution is the 75 classification of clients, based on the type and amount of the transactions, that is: (i) Habitual: clients carrying out transactions for annual amounts equivalent to or higher than AR$ 60,000 or the equivalent thereof in other currencies, (ii) Occasional: those clients whose annual transactions do not exceed the amount of AR$ 60,000 or the equivalent thereof in other currencies, (iii) Inactive: those whose accounts have shown no movements for more than one calendar year, the valuation of assets pertaining to such accounts being lower than AR$ 60,000. Furthermore, Chapter XXII of the CNV Rules refers to the guidelines set forth by the UIF, in particular as concerns knowledge of the client, to take a decision about the opening or maintenance of accounts by intermediaries such as, among others, natural or corporate persons acting as placement agents in any primary issue of notes. Finally, such guidelines for client identification should be reinforced when politically exposed persons are involved. Additionally, Section 1, Chapter XXII “Prevention of Money Laundering and Financing of Terrorism” of the CNV Rules provides that broker-dealers, brokerage firms, investment funds managers, over-the-counter market agents and all intermediaries engaged in the purchase, lease, or borrowing of securities, acting under the scope of Stock Exchanges with or without adhered markets, intermediary agents registered in futures and options markets, regardless of the purpose thereof, and individuals or legal entities acting as trustees by virtue of trust agreements and individuals or legal entities that directly or indirectly hold or are related to trust accounts, trustors and trustees by virtue of trust agreements, must comply with the provisions of Law No. 25,246, the regulations issued by the UIF and ancillary rules, including Decrees of the Argentine Executive Branch, in connection with the decisions adopted by the Security Council of the United Nations, to fight against terrorism and comply with the Resolutions issued by the Ministry of Foreign Affairs, International Trade and Worship. Such regulations should also be observed by: Depositaries of Mutual Funds, placement agents or any other intermediaries, be they individuals or legal entities that may exist in the future, of Mutual Funds, individuals or legal entities acting as placement agents in respect of any primary issue of securities and issuing companies in respect of capital contributions, irrevocable capital contributions on account of future issues of shares or significant loans received, regardless of whether those who make such contributions are shareholders or not at the time of making same, in particular as regards the identification of such persons and the origin and lawfulness of funds contributed or loaned. One or more parties involved in the placement and issue of notes, such as the placement agents, may be under the obligation to gather information regarding the subscribers of notes and provide information to the authorities about transactions that may be deemed suspicious or unusual or that lack economic or legal justification or that are unnecessarily complex, regardless of whether same are made on an occasional or repeated basis. The CNV, pursuant to Resolution No 602/12, established that the parties falling within its scope, listed in Section 1, Chapter XXII of the CNV Rules, may only perform transactions in connection with the public offering of securities, forward, futures or options contracts of any nature and other financial instruments and products, when they are made or ordered by persons incorporated, domiciled or residing in jurisdictions, territories or associated states, that are not included in the list set forth in Decree No. 1037/00 (regulating Income Tax Law No. 20,628, as amended). In case such parties are not included in such list and are considered in their jurisdiction of origin as intermediaries registered with or in a selfregulated market subject to the control of an authority similar to the Argentine CNV, such transaction may only be performed in case evidence is furnished that the CNV has entered into a memorandum of understanding, cooperation and exchange of information with such foreign regulatory authority. Investors that intend to subscribe notes shall provide all such information and documentation as may be required by the Bank and/or the placement agents in compliance with, among others, the regulations on prevention on laundering of money originating in crimes, issued by the UIF, CNV or BCRA. For a more detailed analysis of the anti-money laundering system in force as of even date, investors are suggested to seek advice from their legal counsel and thoroughly read Chapter XII, Title XI, Book Two of the Argentine Criminal Code and the regulations issued by the UIF, for which purposes those interested may visit the website of the Ministry of Economy and Public Finance, namely, the 76 legislative section www.infoleg.gov.ar and/or the website of the www.uif.gov.ar and/or the website of the CNV www.cnv.gob.ar. Certain Legal Aspects of Mortgages in Argentina The following is a summary of certain legal aspects of mortgages in Argentina, including provisions of Argentine law and regulations related to mortgages in Argentina. We do not intend this summary to constitute a complete analysis of all laws and regulations concerning mortgages in Argentina. We advise you to consult your legal advisors for a more detailed analysis. Regulatory Framework The Argentine Civil Code (the “Civil Code”), Trust Law No. 24,441 (the “Trust Law”), the Argentine Civil and Commercial Procedure Code and Law No. 17,801 (the “Real Estate Registry Law”), as amended and supplemented, contain most of the legal guidelines applicable to almost all aspects of mortgages on real property in Argentina. Furthermore, on November 6, 2003, the Argentine Congress enacted Law No. 25,798, pursuant to which a Mortgage Refinancing System has been implemented to restructure delinquent mortgage loans and avoid foreclosure when the real property represents debtor´s sole dwelling. In connection with this matter, see “Risk Factors – Risks related to the Bank- Legislation limiting the Banks´ ability to foreclose on mortgaged collateral may have an adverse effect on the Bank ”, for further information. Creation, Perfection and Registration of Mortgages under Argentine Law Under Argentine law, a mortgage secures repayment of a debt by creating an interest in the property or properties in favor of the mortgagee, although the property remains in the possession of the mortgagor. Mortgages may only be created on individually identified real property, by a specified sum of money. Likewise a mortgage may secure a debt, which is conditional, future or indeterminate or otherwise uncertain in amount – in which case, an estimate shall be made when creating the mortgage – and need not be secured by real property owned by the principal debtor. The mortgage secures the principal amount of the debt as well as all costs and expenses, such as damages and interest, for which the debtor may become liable if the debtor fails to comply with the terms of the underlying credit agreement. Mortgages are indivisible; each real property mortgaged secures a debt as well as each part of the real property secures the payment of all and each part of the debt. Nevertheless in the foreclosure of mortgaged real property, if the division in lots is possible, or if the guarantee comprehends separated real property, the court may order the foreclosure on lots, and partial cancellation of the mortgage, provided that this does not detrimentally affects the mortgagee. Mortgages can be created only by public deed. Typically, credit agreements and mortgages securing such credit are documented in the same public deed, although it is possible to do so in separate documents. Public deeds are prepared by public notaries, who certify and witness certain matters of law and certain matters of fact as to which their participation creates a presumption of truth. The registration of a mortgage involves submitting a petition for its registration to the public real estate registry in the jurisdiction where the property is situated. To register a mortgage, a public notary must have received the public deed evidencing ownership of the property from the owner of the property, and a report from the real estate registry in the jurisdiction where the property is located named “certificado de dominio” (the “Real Estate Report”). The Real Estate Report is valid for, respectively, 15, 25 or 30 calendar days from its issuance, depending on where the public notary is domiciled in relation to the property. At the time a Real Estate Report is issued, the real estate registry makes provisional registration of the mortgage, which lasts for 60, 70 or 75 calendar days, depending on how long the Real Estate Report remains valid. If the mortgage is registered within a limited time period from its creation (currently 45 days), the provisional registration becomes final and effective as of the date of execution of 77 the relevant public deed; if not, the provisional registration automatically expires and if the mortgage is thereafter registered, such registration will be effective from the date it is actually filed. Once registered, the mortgage is enforceable against third parties since the day of the granting of the mortgage if the registration was requested within 45 days from its creation, or from the day of its registration if the registration was requested after such period. Prior thereto, it is legally binding only between the contracting parties, their heirs and the persons who have intervened in the act, such as the notary and witnesses, who are not able to invoke defects of registration, and in relation to them the mortgage created by public deed is deemed duly registered. Thus, the proper registration of a mortgage by a subsequent creditor with respect to certain property would give that subsequent mortgagee preference over any prior, unregistered mortgage created on that same property. The registration of a mortgage expires 20 years after the date on which it was registered, although it may be renewed without the consent of the mortgagor. Pursuant to Argentine Banking GAAP, in order for mortgage loans to be considered secured loans for purposes of calculating minimum capital requirements, diversification of the credit risk (fraccionamiento del riesgo crediticio) and loan loss provisions (previsiones por riesgo de incobrabilidad), financial entities are required to document mortgage loans in the form of book-entry negotiable mortgage instruments or letras hipotecarias escritulares. In order to have said effects, the Mortgage Instruments shall be executed substantially in the same form as provided by the Central Bank Communication “A” 3055, as amended and supplemented. The Trust Law has created the Mortgage Instruments, as a new type of negotiable instruments secured by a Mortgage. Mortgage Instruments were created to expedite and reduce the cost of transferring mortgages, to facilitate securitization activities and to simplify administrative procedures related to the transfer of mortgage loans. This expedited and less costly transfer results from the fact that the assignment of a Mortgage Instrument does not require the registration of the assignment in any real estate registry or the involvement of a notary public or the instrumentation of the assignment in a public deed. Mortgage Instruments are registered in the real estate registry and deposited with Caja de Valores S.A. or with Argentine banks or companies acting as registrars established by Argentine Banks. Caja de Valores is in charge of handling transfers in bookentry form and issuing receipts allowing the holder of the Mortgage Instrument to exercise its rights as mortgagee. The Bank has been voluntarily using the Mortgage Instruments since June 1998, the last issue of Series XIV being completed in March 2011. Assignment of Mortgages In general, Argentine law requires that every debtor be given notice of a credit assignment or acceptance thereof by the debtor for the assignment to be enforceable against the debtor. To enforce an assignment agreement against third parties, however, notarized notice of the assignment must be given. The failure to provide such notice by public means would allow the assignor’s creditors to argue successfully that the assignor and not the assignee owns the assigned credits. However, under the Trust Law, parties may agree that it is not necessary to serve notice of the assignment of the mortgage loan on the debtor, in connection with certain transactions, including securitization transactions, provided that such securitizations result in a public offer of securities. In addition, the assignment must be registered with the relevant real estate registry, except with respect to Mortgage Instruments, in which case the assignment is noted in book-entry form by Caja de Valores, or the corresponding Argentine banks or special purpose companies established by Argentine banks acting as registrar thereof, and a notice is not required to be given to the debtor by public means nor is his consent required to perfect such assignment. Foreclosure of Mortgage Loans Since January 1995 there have been two systems governing real property foreclosure procedures under Argentine law. Therefore, the Bank’s mortgage loans are subject to foreclosure procedures under the Civil and Commercial Procedure Code and to the foreclosure procedures under the Trust Law. See “Risk Factors – Risks related to the Bank- Legislation limiting the Banks´ ability to foreclose on mortgaged collateral may have an adverse effect on the Bank -”, for further information. 78 Procedures Under the Civil and Commercial Procedure Code General The procedures applicable in a judicial foreclosure proceeding differ depending on the Argentine court in which the action is commenced. However, a uniform set of rules set forth in the Civil and Commercial Procedure Code, described in the following paragraphs, applies to all judicial foreclosure proceedings instituted in the federal courts of Argentina and courts sitting in the City of Buenos Aires. Moreover, the rules and procedures applicable within other jurisdictions are, to a large extent, consistent with those applicable to the courts sitting in the City of Buenos Aires. Although filing times and other statutory periods vary significantly depending on the jurisdiction and the defenses raised by a particular debtor, based on the Bank´s experience, foreclosure proceedings under the Civil and Commercial Procedure Code generally take one to four years to complete. A judicial foreclosure proceeding commences with the filing of a complaint in the competent court. The mortgagor is given five days from the date on which he is served with the summons in which to file a brief setting forth any admissible defenses he may have to the proceeding. The court will issue a judgment either immediately thereafter or following review of any evidence the court may have ordered to be produced to evaluate the validity of the mortgagor’s defenses. If the mortgagor does not file an appeal or the court’s judgment is affirmed on appeal, the court’s judgment becomes final and the actual foreclosure on the property takes place. The sale of the underlying real property is accomplished through a public auction, for which purpose the court appoints an auctioneer. Prior to holding the auction, a Real Estate Report as to any liens that may have been perfected on the property and reports as to the existence of unpaid real estate taxes, water and sewage charges and condominium indebtedness (if applicable) must be obtained. Additionally, notice of the auction must be published in the Official Gazette for two days and in another publication circulated in the area where the property is located. The notice must contain, among other things, the date and time of the auction, the main characteristics of the property, the upset price, an indication of whether the property is presently occupied and the amount of any outstanding condominium expenses. A minimum sale price for the property is established, which must be met or exceeded at the auction. In the absence of such an agreement between the mortgagor and mortgagee, the minimum sale price will equal two-thirds of the property’s value as assessed for purposes of levying real estate taxes by the Argentine taxing authorities. If the property has not been assessed for real estate tax purposes, the court will appoint an expert to do so. The failure of the auctioneer to obtain the minimum price will result in a new auction at which the minimum sale price will be 25.0% less than the minimum price previously established. If the second auction fails, a third will be held at which no minimum sale price is established. The bidder submitting the highest bid is awarded the property. Within three days following the award, the auctioneer must deposit all amounts received from the bidder toward the purchase price of the property into an account with the court and supply the court with all relevant information regarding the auction. The court must thereafter approve the sale and, if approved, the purchaser must deposit the balance of the purchase price with the court within five days. Failure by the purchaser to comply with that requirement will result in a new auction and the purchaser will be required to pay for any decline in the value of the property, additional accrued interest and other costs resulting therefrom. The mortgagee will have priority in relation to the proceeds of the auction price for cancellation of the secured debt. The mortgagee is not prevented from participating in the auction as a bidder and subsequently purchasing the property if his bid is the highest. The mortgagee/purchaser may offset amounts owed him by the mortgagor against the amount of his bid upon informing the court of his intention to do so and avoid the requirement that the purchase price be deposited with the court. If the purchase price is insufficient to cancel the credit, the mortgagee may pursue a deficiency judgment for the outstanding balance. 79 Redemption Rights In a judicial foreclosure proceeding, the debtor has a redemption right, the exercise of which will prevent the sale of the property subject to the mortgage in a public auction. That right may be exercised at any time prior to the auction. To exercise this right, the mortgagor must deposit with the court an amount equal to the sum of the following: the principal amount of the secured debt, awarded fees, court fees paid to initiate the foreclosure proceeding and a prudent amount for interest and other costs payable by the debtor. The court will determine whether the amount so deposited is sufficient such that the sale of the property is no longer necessary and, provided such a determination is made, the court will order that the auction not take place. This decision cannot be appealed by the creditor and cannot be objected to by third parties (e.g., interested or potential purchasers of the property). If a purchaser at a judicial foreclosure deposits the purchase price for the property within five days from court approval of the auction, the debtor cannot exercise further rights of redemption. If such deposit is not made, Argentine law grants the debtor a second opportunity to recover the property, by depositing an amount sufficient: (i) to pay the mortgagee the principal and interest owed and to reimburse the mortgagee for its costs and (ii) to pay to the third party one and one-half times the earnest money to be applied towards the purchase price of the property actually paid by such third party and any auctioneer’s fees. Procedures Under Trust Law The Trust Law sets forth an out-of-court foreclosure procedure applicable if the parties have specifically agreed to apply such foreclosure procedure in the relevant public deed. Since enactment of the Trust Law in 1995, most mortgages granted in Argentina, and most mortgages granted by the Bank, have incorporated this procedure. Although times vary significantly depending on the jurisdiction and the defenses raised by a particular debtor, the Bank believes, based on its limited experience with this procedure, that foreclosure proceedings under the Trust Law generally take eight months to two years to complete. For creditors to take advantage of this expedited procedure, the debtor must be at least sixty days in arrears on the payment of principal or interest. The creditor must then serve a written demand on the debtor for payment in full of all delinquent sums within a certain period that cannot, in any event, be less than fifteen days and for the disclosure of the names of all privileged creditors and occupants of the mortgaged property. If the debtor fails to pay within the specified time period, the creditor becomes entitled to appear before a competent judge who, in turn, will serve notice on the debtor of the foreclosure proceedings and of the debtor’s ability to raise, within five days thereafter, any permissible defenses to the action. The defenses which a debtor may present to preclude foreclosure, including presentation of persuasive evidence in support thereof, consist of the following: • • • • that the debtor is not in default; that the creditor did not make a demand for payment as required by the Trust Law; that the summary foreclosure proceeding was not agreed upon by the parties; and that serious inadequacies existed with respect to the publication requirements prior to the auction of the property. Upon expiration of the five day time period in which the debtor may raise defenses, the creditor may hold a public auction for the sale of the property upon meeting certain publication requirements involving the appointment of the auctioneer by the creditor and notice of the auction. The notices must be published for three days in the Official Gazette and in two widely circulated newspapers, at least one of which must be in the area where the property is located. The final publication date cannot be more than two days prior to the date of the public auction. If the property in question is occupied and the debtor has failed to raise any permissible defense, the judge will order that the property be vacated within a ten-day period. The Trust Law specifically grants police the right to evict occupants prior to the actual foreclosure in the event the premises are not voluntarily vacated. The minimum sale price for the auction shall be equivalent to the outstanding debt as of the date of the auction. The failure of the auctioneer to obtain the minimum price will result in the holding of a 80 new auction at which the minimum sale price is 25.0% less than the price previously established. If the second auction also fails, a third auction will be held with no established minimum price. If the mortgagee purchases the property in the auction, then that creditor may offset all amounts due it under the mortgage loan, including expenses attributable to the foreclosure proceedings, and deposit the balance, if any, with the court. Otherwise, all amounts obtained at the auction must be deposited with the judge, who thereafter will distribute amounts due to creditors and any remaining amounts to the debtor. To prevent foreclosure proceedings, the debtor must either pay all amounts due within the initial fifteen-day demand period or raise a valid defense to the proceedings. If neither means is available, the debtor is precluded from challenging the proceedings until after the creditor’s debt is settled. Nevertheless, regardless of the fact that a creditor may have successfully foreclosed on a debtor’s property, the creditor will remain liable to the debtor for any wrongful action taken or omitted in connection with the foreclosure proceeding. Further, notwithstanding that the property was sold at the auction, within 30 days thereafter the debtor may recover possession of the property by payment to the purchaser of a sum equal to the price paid for the property at the auction, plus all expenses incurred in connection therewith up to an amount equivalent to three percent of the relevant mortgage loan. Priorities Under Argentine law, priorities with respect to both real and personal property arise exclusively by operation of law. The holder of a mortgage is granted a priority on the underlying real property as from the date on which the mortgage is formally created by instrument, to the extent a request for registration thereof has been submitted to the real estate registry, a Real Estate Report has been obtained and registration is made within the validity period by such report. The scope of this priority includes all unpaid principal and interest thereon, including interest accrued throughout any judicial proceeding brought to foreclose on the mortgage, until all amounts are paid in full. The credit extended by the holder of a duly registered first mortgage on real property has priority over all other credits subsequently secured by a mortgage on such real property. Thus, the priority among consecutively created mortgages, a concept specifically contemplated by Argentine law, is identical to the chronological order in which each mortgage is created and registered. Expenses incurred in connection with enforcement proceedings to which the property may be subject are given higher priority than the credit secured by a first mortgage. However, some other credits may take priority over the mortgagee´s, provided they arose prior to the creation of the mortgage, namely: • • • credits for real estate taxes; credits for common expenses of a building; and certain cases (such as mechanic’s liens) in which creditors retain possession of the mortgaged property as guarantee for what is due to them in connection with such property (derecho de retención), so long as such retention existed at the time the mortgage was created. Nevertheless, regarding credits for real estate taxes, a conflict between the mortgagee and the state regarding real estate taxes is quite rare, since a notary public will not issue a mortgage deed without having obtained a certification as to the absence of indebtedness for real estate taxes on the mortgaged property. However, and as provided by the Privatization Law, the Bank believes that when foreclosing on a property secured by a first mortgage, its priority is senior to all other creditors. Structure and Organization of the Bank and its Economic Group The following table provides information concerning ownership interest in the Bank and the percentage of votes in subsidiaries as of December 31, 2012: 81 Subsidiary Business Country of Incorporation BACS Banco de Crédito y Securitización S.A. Banking transactions Argentina Ownership interest (%) 87.50 Percentage of voting rights (%) 87.50 BHN Sociedad de Inversión S.A. Investments Argentina 99.99 99.99 BH Valores SA Soc. de Bolsa Brokerage firm Argentina 95.00 95.00 Tarshop S.A. Consumer Financing Argentina 80.00 80.00 Subsidiaries of the Bank: Below is a list of the subsidiaries of the Bank and their ownership structure. A) BACS Banco de Crédito y Securitización S.A. (formerly Banco Corporación Financiera Hipotecaria S.A.) Shareholder Shares Class Par value (Ps.) Votes % Banco Hipotecario S.A 54,687,500 - 54,687,500 54,687,500 87.50 IRSA Inversiones y representaciones Sociedad Anónima 3,984,375 - 3,984,375 3,984,375 6.375 Quantum Industrial Partners LDC 3,828,125 - 3,828,125 3,828,125 6.125 62,500,000 - 62,500,000 62,500,000 100 Class Votes TOTAL B) BHN Sociedad de Inversión S.A. Shareholder Shares Banco Hipotecario S.A. 39,131,682 BACS – Banco de Crédito y Securitización S.A. 80 39,131,762 TOTAL C) 0 0 0 Par Value (Ps.) 39,131,682 80 39,131,762 % 39,131,682 80 39,131,762 99.999 0.001 100 BHN Vida S.A. Shareholder Shares Class 120 Banco Hipotecario S.A. BHN Sociedad de Inversión S.A. 16,201,085 16.201.205 TOTAL - Par Value Votes % (Ps.) 120 120 0.002 16,201,085 16,201,085 99.998 16,201,205 16,201,205 100 D) BHN Seguros Generales S.A. Shareholders Shares Class Banco Hipotecario S.A. 120 BHN Sociedad de Inversión S.A. 10,111,282 10,111,402 TOTAL - 82 Par Value (Ps.) 120 10,111,282 10,111,402 Votes 120 10,111,282 10,111,402 % 0.002 99.998 100 E) BH Valores S.A Sociedad de Bolsa. Shareholders Shares Banco Hipotecario S.A. 1,425,000 Others1 75,000 1,500,000 TOTAL F) Class - Par Value (Ps.) 1,425,000 75,000 1,500,000 Votes 1,425,000 75,000 1,500,000 % 95.00 5.00 100.00 Tarshop S.A. Shareholders Shares Class Banco Hipotecario S.A. 107,037,152 Alto Palermo (APSA) S.A. 26,759,288 TOTAL 133,786,440 - Par Value Votes % (Ps.) 107,037,152 107,037,152 80.00 26,759,288 26,759,288 20.00 133,786,440 133,786,440 100.00 Fixed Assets The Bank is the owner of 19 of its offices. To replace the building where its headquarters were located in the City of Buenos Aires, that was transferred to the Argentine Government under the Privatization Law, the Bank purchased and refurbished a building in an adjoining area for a total cost of approximately US$ 32.0 million. 1 Bank's internal information 83 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the Bank’s audited and unaudited financial statements which are included in this Offering Memorandum. The Bank's audited and unaudited financial statements are prepared in accordance with Central Bank accounting rules which differ in certain significant respects from Argentine GAAP and from U.S. GAAP. The Bank’s audited financial statements do not contain a reconciliation to Argentine GAAP or to U.S. GAAP of our shareholders’ equity at December 31, 2010, 2011 and 2012 or of the Bank’s net income for the fiscal years then ended. Potential investors should consult with their professional advisors for an understanding of the differences between the accounting policies used by the Bank and Argentine GAAP and U.S. GAAP and how those differences affect the financial information herein contained. Presentation of Information Effective January 1, 1995, pursuant to resolution No. 388 of the Superintendency of Financial and Exchange Institutions, the Bank discontinued the practice of adjusting its financial statements for inflation. Effective January 1, 2002, however, as a result of application of Communication “A” 3702 which established the repeal of any regime that did not allow companies to restate their accounting balances at period-end currency values, the Bank resumed the application of the adjustment for inflation. On March 25, 2003, Decree No. 664/03 ceased to require that financial statements be prepared in constant currency, effective for financial periods on or after March 1, 2003 and on April 8, 2003, the Central Bank issued Communication “A” 3921 discontinuing inflation accounting effective as of March 1, 2003. As a result, the Bank’s audited financial statements as of December 31, 2012, 2011 and 2010 do not include the effects of inflation. In addition, financial information included in this section includes certain reclassifications, compared to the Financial Statements mentioned in the first paragraph. Factors Affecting Comparability of Financial Data On September 14, 2010 the Bank acquired 80% of the capital stock of Tarshop S.A. (“Tarshop”). Therefore, the accounting and financial information included in this Offering Memorandum reflects the consolidated financial position and results of the Bank, BACS Banco de Crédito y Securitización S.A., BHN Sociedad de Inversión S.A., BH Valores S.A. Sociedad de Bolsa and of Tarshop for the fiscal years ended December 31, 2012, 2011 and 2010 and of Tarshop for the fiscal year ended December 31, 2012, December 31, 2011 and the interim fiscal period ended December 31, 2010. Critical Accounting Policies The Bank believes that the following are the critical accounting policies. They are important to the portrayal of its financial condition and results of operations and require a subjective and complex judgment and the need to make estimates. Reserve for Loan Losses The reserve for loan losses is maintained in accordance with the regulations established by the Argentine Central Bank. Under such regulations, a minimum reserve for loan losses is calculated primarily based upon the classification of loan borrowers. Such classification is based on commercial or consumer origin, taking into account, among other variables, their past due status and payment ability. Such regulations require minimum reserves and the Bank is authorized to make additional provisions. Other Receivables from Financial Transactions and Miscellaneous Receivables The Bank carries other receivables from financial transactions and miscellaneous receivables net of allowances for uncollectible amounts. The Bank’s judgment regarding the ultimate collectivity is performed on an account-by-account basis and considers our assessment of the borrower’s ability to pay based on factors such as the borrower’s financial condition, past payment history and guarantees. Income Tax 84 Pursuant to Law No. 24,855 (the “Law on Regional Development and Employment Creation”) and regulatory decree 924/97, the Bank’s income from financing transactions formalized, agreed upon, undertaken and/or registered as of the date of registration of its By-laws are exempt from payment of income tax, while income from financing transactions after such date is subject to income tax. As a general rule, the Income Tax Law allows the deduction of such expenses required to obtain, maintain or preserve the taxable income. In the case of expenses incurred to obtain both taxable and nontaxable income, the portion of the expense incurred to obtain taxable income shall be identified and deducted for tax purposes. The tax rule gives preference to the direct allocation method of accounting over the apportionment method in determining deductible expenses (related to obtaining taxable income), providing that the apportionment method shall only be used in circumstances where it is not possible to make direct allocation of expenses to taxable and non-taxable income, respectively. Until December 31, 1998, the Bank determined income tax liability based on the expense apportionment method, treating as deductible the portion of expenses arising from applying to the total expenses incurred the ratio of taxable income to total income. Since December 31, 1999, the Bank has calculated income tax taking account of the direct relationship between expenses and taxable and non-taxable income to which those expenses relate. The apportionment method has only been used for those expenses that are not directly allocable to the income producing sources. The Bank has filed income tax returns for each of fiscal years 2000 to 2012 which were prepared in compliance with the aforementioned methodologies. Minimum Presumed Income Tax The Bank has recognized as a tax credit as of December 31, 2012 the minimum presumed income tax paid from 2002 to 2012, based on forecasts and the probability of recovery. The Bank’s estimate about the likelihood to use such assets is subjective and involves assumptions about matters that are inherently uncertain. Following prudent criteria and considering that as of the end of fiscal year 2012 the relevant Tax Returns for Income Tax and Minimum Presumed Income Tax had not been filed, the Bank has made provision for the position for fiscal year 2002. Underlying estimates and assumptions can change over time, influencing the Bank’s overall tax positions, as a result of unanticipated events or circumstances. Years ended December 31, 2011 and 2012 General The following table sets forth the principal components of the Bank’s net income for the years ended December 31, 2011 and 2012: 85 Net Income Financial income Year ended 2011 2012 (in Million Pesos) 1,562.8 2,180.7 Financial expenses % Change 2012/2011 39.5% (832.6) (1,138.6) 36.7% 730.1 (119.3) 248.4 542.8 (1,105.0) (8.8) 4.5 1,042.1 (200.9) 314.0 666.8 (1,440.4) (9.6) 26.7 42.7% 68.4% 26.4% 22.8% 30.4% 8.8% N/A Income tax (41.3) (55.1) 33.3% Net income 251.5 343.6 36.6% Net financial income Provision for losses on loans Net contribution from insurance Other net income from services Administrative expenses Minority interest Miscellaneous income, net The net income for the year ended December 31, 2012 increased by 36.6%, compared to the income for the year ended December 31, 2011, mainly due to higher financial income and other net income from services as a result of an increased diversity of products offered to clients. Such increases were partially offset by increased administration expenses related to higher salaries. Financial Income The following table sets forth the principal components of financial income for the years ended December 31, 2011 and 2012: Year ended 2011 2012 (in Million Pesos) 1,016.3 1,559.4 Interest from loans to the private sector Income from Government and corporate securities Interest from loans to the public sector Exchange forwards Hedging transactions Total financial income % Change 2012 / 2011 53.4% 466.8 17.6 11.0 51.1 548.8 18.7 17.0 36.8 17.6% 6.1% 55.3% -27.9% 1,562.8 2,180.7 39.5% Financial income for the year ended December 31, 2012 increased by 39.5% from the previous period due to higher interest income from loans to the private sector which increased from Ps. 1,016.3 million in 2011 to Ps. 1,559.4 million in December 2012. Financial Expenses The following table sets forth the principal components of financial expenses for the years ended December 31, 2011 and 2012: Year ended 2011 2012 (in Million Pesos) % Change 2012 / 2011 Interest on financial liabilities 182.8 225.8 23.5% Interest on deposits 466.6 585.4 25.4% Interest on other liabilities 64.2 78.6 22.5% Foreign exchange differences 47.8 137.6 188.1% 86 Hedging transactions Other expenses Taxes Total financial expenses 5.7 - 15.5 - 174.4% #¡DIV/0! 65.6 95.7 45.8% 832.6 1,138.6 36.7% Financial expenses increased from Ps. 851.0 million in 2011 to Ps. 1,150.6 million in 2012, primarily as a result of increased interest on deposits due to an increase in deposits and higher foreign exchange differences. Provision for Losses on Loans The following table sets forth the provision for loan losses for the years ended December 31, 2011 and 2012: Year ended 2011 2012 (in Millions Pesos) 119.3 200.9 Provisions for loan losses % Change 2012 / 2011 68.4% Provisions for loan losses increased by Ps. 81.6 million mainly due to an increase in the bank’s loan portfolio. Net Contribution from Insurance The following table sets forth the principal components of net contribution from insurance for the years ended December 31, 2011 and 2012: Net contribution from insurance Year ended 2011 2012 (in Million Pesos) % Change 2012 / 2011 Insurance premiums earned: Life Property damage Unemployment Other Subsidiaries 16.7 52.0 0.6 26.0 204.2 15.2 52.8 0.4 33.3 280.9 (8.8)% 1.5% (26.8)% 28.2% 37.6% Total insurance premiums earned 299.6 382.7 27.8% Claims paid: Life Property damage Unemployment Other Subsidiaries 0.4 5.1 0.0 1.0 44.6 0.6 5.4 0.0 1.2 61.5 67.0% 5.8% (17.1)% 18.0% 37.7% Total claims paid 51.2 68.7 34.3% 248.4 314.0 26.4% Total net contribution from insurance Net contribution from insurance increased from Ps. 248.4 million in 2011 to Ps. 314.0 million in 2012 as a result of an increase in products and services offered to the Bank's clients and in the volume of business in the last year. Other income from services, net 87 The following table includes the principal components of other income from services, net for the years ended December 31, 2011 and 2012: Year ended 2011 2012 (in Million Pesos) % Change 2012 / 2011 Other income from services Loan commissions FONAVI commissions Deposits commissions Credit card commissions Other commissions 78.1 14.3 35.7 390.6 155.8 99.8 20.5 46.8 500.6 121.7 27.7% 43.9% 31.0% 28.2% (21.9)% Total other income from services 674.5 789.4 17.0% Other expenses on services Loan commissions Placement commissions Taxes Deposits commissions Credit card commissions Other commissions 23.9 4.9 20.6 10.2 84.2 (12.1) 30.1 8.2 29.4 13.8 106.5 (65.4) 26.2% 67.6% 42.9% 35.3% 26.4% N/A Total other expenses on services 131.7 122.6 (6.9)% Total other income from services, net 542.8 666.8 22.8% Other income from services, net increased by Ps. 124.0 million, compared to the previous year, due to an increase in the volume of credit card business. Administrative Expenses The following table sets forth the principal components of administrative expenses for the years ended December 31, 2011 and 2012: Year ended 2011 2012 (in Million Pesos) 587.4 773.5 115.3 149.1 16.5 35.3 72.2 85.9 63.4 91.8 37.6 32.8 122.5 145.2 90.2 126.9 Salaries and social security contributions Other fees Fees to directors and statutory auditors Advertising and publicity Taxes Amortizations Operating expenses Other Total administrative expenses 1105.0 1440.4 % Change 2012 / 2011 31.7% 29.2% 114.2% 19.0% 44.9% (12.8)% 18.5% 40.7% 30.4% Administrative expenses increased by 30.4%, compared to year 2011. This increase is mainly due to: • • increases in remunerations as a result of salary increases, and increased operating costs resulting from an increase in the Bank’s business activity. Miscellaneous Income, net The following table sets forth the main components of miscellaneous income, net for the years ended December 31, 2011 and 2012: 88 Year ended 2011 2012 (in Million Pesos) % Change 2012 / 2011 Miscellaneous income Penalty interest Reversal of provisions Loan recoveries Other 42.0 4.4 166.4 64.1 52.0 10.6 98.6 48.3 23.7% 141.0% (40.7)% (24.7)% Total miscellaneous income 276.9 209.4 (24.4)% Miscellaneous losses Lawsuits Other provisions charges Provisions for taxes Taxes Loan rebates Other 29.0 60.1 11.6 13.1 14.5 144.1 1.6 65.1 (3.9) 20.6 19.6 79.7 (94.4)% 8.3% (133.7)% 58.1% 35.4% (44.7)% Total miscellaneous losses 272.4 182.8 (32.9)% 4.5 26.7 N/A Total miscellaneous income, net Miscellaneous income, net increased by Ps. 22.1 million, compared to the previous year mainly due to lower miscellaneous losses, partially offset by lower miscellaneous income. Years ended December 31, 2010 and 2011 General The following table sets forth the principal components of the Bank’s net income for the years ended December 31, 2010 and 2011: 89 Net Income Year ended 2010 2011 (in millions of Pesos) % Change 2011/2010 1*321.9 1*562.8 18.2% (728.9) (832.6) 14.2% Net financial income 593.0 730.2 23.1% Provision for losses on loans (96.8) (119.3) 23.2% Net contribution from insurance 180.2 248.4 37.8% Other net income from services 266.8 542.8 103.4% (709.0) (1*105.0) 55.9% (5.7) (8.8) 54.4% Miscellaneous income, net (11.2) 4.5 -140.2% Income tax (22.1) (41.3) 86.9% Net income 195.3 251.5 28.8% Financial income Financial expenses Administrative expenses Minority interest The net income for the year ended December 31, 2011 increased by 28.8%, compared to the income for the year ended December 31, 2010, mainly due to higher financial income and other net income from services as a result of an increased diversity of products offered to clients. Such increases were partially offset by increased administration expenses related to higher salaries. Financial Income The following table sets forth the principal components of financial income for the years ended December 31, 2010 and 2011: Year ended 2010 2011 (in Million Pesos) % Change 2011 / 2010 Interest from loans to the private sector 699.5 1,016.3 45.3% Interest from loans to the public sector 13.5 17.6 30.7% 528.4 466.8 -11.7% 80.5 62.0 -23.0% 1,321.9 1,562.8 18.2% Government and corporate securities Hedging transactions Total financial income Financial income for the year ended December 31, 2011 increased from the previous period due to higher interest income from loans to the private sector which increased from Ps. 699.5 million in 2010 to Ps. 1,016.3 million in December 2011. Financial Expenses 90 The following table sets forth the principal components of financial expenses for the years ended December 31, 2010 and 2011: Years ended 2010 2011 (in millions of Pesos) 211.8 374.4 18.7 22.0 36.8 51.6 13.5 728.9 Interest on financial liabilities Interest on deposits Interest on other liabilities Hedging transactions Exchange differences Taxes Other Total financial expenses 182.8 466.6 64.2 5.7 47.8 65.6 0.0 832.6 % Change 2011/2010 -14% 25% 243% -74% 30% 27% -100% 14% Financial expenses increased from Ps. 728.9 million in 2010 to Ps. 832.6 million in 2011, primarily as a result of increased interest on deposits due to an increase in deposits, partially offset by a decrease in interest on financial liabilities resulting from payment of foreign debt. Provision for Losses on Loans The following table sets forth the provision for loan losses for the years ended December 31, 2010 and 2011: Year ended 2010 2011 (in millions of Pesos) 96.8 119.3 Provisions for loan losses % Change 2011 / 2010 23.3% Provisions for loan losses increased by Ps. 22.5 million due to an increase in the bank’s loan portfolio. Net Contribution from Insurance The following table sets forth the principal components of net contribution from insurance for the years ended December 31, 2010 and 2011: Net contribution from insurance Year ended 2010 2011 (in millions of Pesos) Insurance premiums earned: Life Property damage Unemployment Other Subsidiaries Total insurance premiums earned Claims paid: Life Property damage Unemployment Other Subsidiaries Total claims paid 91 % Change 2011/2010 17.7 54.2 0.7 39.3 109.7 221.7 16.7 52.0 0.6 26.0 204.2 299.6 (5.6)% (4.2)% (17.2)% (33.9)% 86.2% 35.1% 0.5 5.9 0.1 6.1 28.8 41.5 0.4 5.1 0.0 1.0 44.6 51.2 (28.2)% (14.1)% (38.8)% (83.7)% 54.7% 23.4% Total net contribution from insurance 180.2 248.4 37.8% Net contribution from insurance increased from Ps. 180.2 million in 2010 to Ps. 248.4 million in 2011 as a result of an increase in products and services offered to the Bank's clients and in the volume of business in the last year. Other income from services, net The following table includes the principal components of other income from services, net for the years ended December 31, 2010 and 2011: Year ended 2010 2011 (in millions of Pesos) % Change 2011 / 2010 Other income from services Loan commissions FONAVI commissions Deposits commissions Credit card commissions Other commissions Total other income from services 60.5 11.5 24.3 242.0 49.8 388.2 78.1 14.3 35.7 390.6 155.8 674.5 29.2% 23.8% 46.8% 61.4% 213.0% 73.8% Other expenses on services Loan commissions Placement commissions Taxes Deposits commissions Credit card commissions Other commissions Total other expenses on services 23.1 7.3 14.8 8.2 60.0 7.9 121.4 23.9 4.9 20.6 10.2 84.2 (12.1) 131.7 1.7% (39.4)% 47.7% (14.5)% 48.1% (66.7)% 7.4% Total other income from services, net 266.8 542.8 195.9% Other income from services, net increased by Ps. 276.0 million, compared to the previous year, due to an increase in the volume of credit card business. Administrative Expenses The following table sets forth the principal components of administrative expenses for the years ended December 31, 2010 and 2011: Year ended 2010 2011 (in millions of Pesos) 369.4 587.4 63.3 115.3 13.1 16.5 55.5 72.2 31.2 63.4 29.6 37.6 105.6 122.5 41.3 90.2 709.0 1,105.0 Salaries and social security contributions Other fees Fees to directors and statutory auditors Advertising and publicity Taxes Amortizations Operating expenses Other Total administrative expenses % Change 2011 / 2010 59.0% 82.1% 26.1% 30.1% 103.1% 26.8% 16.1% 118.0% 55.8% Administrative expenses increased by 55.8%, compared to year 2010. This increase is mainly due to: • • increases in remunerations as a result of salary increases, and increased operating costs resulting from an increase in the Bank’s business activity. 92 Miscellaneous Income, net The following table sets forth the main components of miscellaneous income, net for the years ended December 31, 2010 and 2011: Year ended 2010 2011 (in millions of Pesos) % Change 2011 / 2010 Miscellaneous income Penalty interest Reversal of provisions Loan recoveries Other 15.5 115.5 20.5 42.0 4.4 166.4 64.1 170.6% NA 44.1% 213.5% Total miscellaneous income 151.5 276.9 82.8% Miscellaneous losses Lawsuits Other provisions charges Provisions for taxes Taxes Loan rebates Other Total miscellaneous losses 12.4 17.9 12.9 12.6 55.9 51.0 162.6 60.5 16.3 23.9 13.1 58.0 100.6 272.4 NA (8.8)% 84.6% 3.9% 3.7% 97.4% 67.5% Total miscellaneous income, net (11.2) 4.5 (140.7)% Miscellaneous income, net increased by Ps. 15.7 million, compared to the previous year mainly due to loan recoveries and higher penalty interest, partially offset by the creation of higher provisions. Liquidity The Bank’s general policy has been to maintain liquidity adequate to meet its operational needs and financial obligations. At December 31, 2012, the Bank’s liquid assets consisted of: • • • • Ps. 527.0 million of cash and due from banks, (net of regulatory minimum reserve [encaje]), Ps. 212.4 million of government securities classified under investment accounts, Ps. 894.4 million of government and corporate securities classified as held for trading, and Ps. 972.1 million of Argentine Central Bank instruments. As of December 31, 2011, the Bank’s liquid assets consisted of: • • • • Ps. 365.0 million of cash and due from banks, (net of regulatory minimum reserve), Ps. 207.5 million of government securities classified under investment accounts, Ps. 550.3 million of government and corporate securities classified as held for trading, and Ps. 1,049.6 million of Argentine Central Bank instruments. As of December 31, 2010, the Bank’s liquid assets consisted of: • • • • Ps. 438.8 million of cash and due from banks, (net regulatory minimum reserves), Ps. 1,192.7 million of government securities classified under investment accounts, Ps. 481.3 million of government and corporate securities classified as held for trading, and Ps. 1,008.3 million of Argentine Central Bank instruments. 93 Funding The Bank finances its lending operations mainly through: • • • • • deposits, the issuance of notes in international and domestic capital markets, Repo transactions, securitizations of loans, and cash flow from existing loans. The following table shows a summary of principal funding sources as of the dates indicated: As of December 31 2010 (1) Notes REPO Borrowings from Central Bank Borrowings from banks and other international entities(1) Deposits Total (1) 2011 2012 1.689,7 12,0 1.748,5 86,1 6,6 2.013,7 0,0 0,0 159,1 4.838,2 151,3 5.451,8 267,2 8.011,1 6.699,0 7.444,3 10.292,1 Excludes accrued interest Notes The following table shows the Bank’s series of notes outstanding as of December 31, 2012: December 31, 2012 (in Million Pesos) BHSA Program US$ 1,200 million Series 5 (US$ 250,000,000) 1,037.9 Series 1 (U$S 449.880.000) 103.3 Series 2 (Eur 278,367,000) 187.4 BHSA Program US$ 500 million Series 1 (Ps. 90,143,000) Series 2 (Ps. 120,101,000) Series 3 (US$ 10,541,000) Series 4 (Ps. 65,475,000) Series 5 (Ps. 85,264,000) Series 6 (Ps. 55,693,000) Series 7 (Ps. 77,055,000) Tarshop Program US$ 100 million Notes class III (Ps.100,000,000) Notes class IV (Ps. 74,822,916) Notes class V (US$ 1,236,835) Notes class VI (Ps. 70,147,864) Date of Issue Maturity Date 27-Apr-06 27-Apr-16 9.75% 15-Sep-03 1-Dec-13 3% - 6% 15-Sep-03 1-Dec-13 3% - 6% Interest Rate 90.1 17-Oct-11 17-Apr-13 Badlar + 3.50% 120.1 11-May-12 11-Nov-13 Badlar + 1.95% 51.8 11-May-12 11-Nov-13 4.5% 65.5 17-Aug-12 14-May-13 17.8% 85.3 17-Aug-12 17-Feb-14 Badlar + 3.75% 53.7 8-Nov-12 8-Aug-13 18.75% 77.1 8-Nov-12 8-May-14 Badlar + 4% 33.3 20-Sep-11 20-Mar-13 Badlar + 4% 74.8 2-Mar-12 2-Sep-13 Badlar + 2.98% 5.4 2-Mar-12 2-Sep-13 6.0% 70.1 27-Jul-12 27-Mar-14 Badlar + 2.98% 94 Deposits The following table shows the Bank’s deposits as of the dates indicated: As of December 31, 2010 2011 2012 2012 in thousands of: Ps. Ps. US$(1) Ps. Deposits Non-financial public sector 1,900,857 2,378,275 2,990,892 608,239 12,341 11,540 8,563 1,741 2,924,966 3,061,948 5,011,674 1,019,192 73,354 58,744 595,564 121,116 362,596 505,781 741,892 150,874 Fixed-term deposits 2,405,033 2,407,108 3,355,131 682,312 Investment accounts 14,056 40 160,035 32,545 Other 44,754 65,526 101,650 20,672 25,173 24,749 57,402 11,673 4,838,164 5,451,763 8,011,129 1,629,172 Financial sector Non-financial private sector and residents abroad Checking accounts Savings accounts Accrued interest and exchange differences payable Total deposits (1) The exchange rate used for purposes of translation of balances as of December 31, 2012 was Ps. 4.9173 = US$ 1.00. Source: Central Bank Securitizations The Bank has entered into various financial trust agreements as trustor whereby it transfers in trust mortgage-backed and personal loans of its loan portfolio to different financial institutions, as trustees. Upon transfer of mortgage-backed loans to the trustee, the trustee issues the relevant bonds and certificates of participation and pays the amounts outstanding under the claims assigned by the Bank out of the proceeds derived from placement. The trust property is held separate from the trustee’s and the trustor’s assets. The trustee is responsible for managing the trust funds in accordance with the provisions of the trust agreement. The following table shows the balances outstanding under financial trusts executed by the Bank as trustor*: Issued Bonds Bonds Bonds Class A1/AV Class A2/AF Class B Certificates of participation BHN II 05/09/1997 445.5 513.6 11,780.0 39,184.2 BHN III 10/29/1997 8.3 14.9 20,455.0 21,766.7 BHN IV 03/15/2000 120.3 36.6 168,650.9 (44,347.5) Bacs I 02/15/2001 1,465.2 72.8 80,275.3 (56,739.1) 95 CHA II 11/19/2004 - - - 4,560.2 CHA III 04/07/2005 - - - 15,021.2 CHA IV 06/22/2005 - - 957.4 13,238.1 CHA V 10/20/2005 - - - 18,115.7 CHA VI 04/07/2006 18,152.8 - - 14,256.2 CHA VII 09/27/2006 28,028.6 - - 8,098.8 CHA VIII 03/26/2007 32,539.1 - - 7,224.4 CHA IX 08/28/2009 157,744.4 - - 42,557.4 CHA X 08/28/2009 - US$ 71,810.4 - 141,437.4 CHA XI 12/21/2009 165,923.0 - - 27,892.4 CHA XII 07/21/2010 219,619.9 - - 48,269.0 CHA XIII 02/02/2010 101,896.2 - - 39,073.2 CHA XIV 03/18/2011 110,783.3 - - 37,426.4 * Prepared using Bank’s internal information, in thousands of Pesos, except as otherwise indicated. 96 The following table shows the balances outstanding under the financial trust agreements executed by Tarshop, as trustor*: Commencement Date Bonds Bonds Bonds Class A1/AV Class A2/AF Class B Certificates of Participation Series 68 03/30/2011 - - - 14,531.0 Series 69 08/26/2011 9,471.7 - - 12,541.9 Series 70 02/08/2012 35,528.7 3,351.5 - 9,731.5 Series 71 07/05/2012 85,505.2 - - 23,187.6 Series 72 NA 89,029.3 - - 13,303.2 Series 73 NA 66,879.0 - - 9,993.4 * Prepared using Bank’s internal information, in thousands of Pesos. The following table shows the balances outstanding under the financial trust agreements executed by BACS Banco de Crédito y Securitización, as trustor*: Commencement Date Bonds Bonds Bonds Class A1/AV Class A2/AF Class B Certificates of Participation BACS Personales I 02/18/2011 - - 596.7 7,127.5 BACS Personales II 06/13/2011 - - 3,700.0 6,437.5 BACS Personales III 08/17/2011 3,526.7 - 6,871.7 6,513.6 * Prepared using Bank’s internal information, in thousands of Pesos. 97 DIRECTORS, SENIOR MANAGEMENT AND MEMBERS OF THE SUPERVISORY COMMITTEE Board of Directors The Bank is managed by a board of directors, which is currently composed of thirteen directors and eight alternate directors. The members of the board of directors are elected to hold office for two-year terms by the Bank's shareholders at their annual general meeting, and may be reelected indefinitely. The directors are in charge of the administration of the Bank. The Executive Committee conducts the ordinary business of the Bank and is supervised by the board of directors. The board of directors is composed of: two members representing Class A shares; one member representing Class B shares; one member representing Class C shares; and nine members representing Class D shares; and their respective alternates. Duties and Liabilities of Directors Under Argentine law, the board of directors is in charge of the Bank’s administration and of making all the decisions related to such purpose, as well as those decisions expressly established by the Argentine Corporations Law, the Bank's bylaws and other applicable regulations. Thus, the board of directors is responsible for carrying out the decisions made by the shareholders’ meetings and the tasks specifically delegated by the shareholders. Under the Argentine Corporations Law, directors have the obligation to perform their duties with the loyalty and the diligence of a prudent business person. Directors are jointly and severally liable to the company in which they perform such duties, to the shareholders and third parties for the improper performance of their duties, for violating the law, the bylaws or rules issued by the Bank, if any, and for any damage caused by fraud, abuse of authority or gross negligence. The following are considered integral to a director’s duty of loyalty: (i) the prohibition from using corporate assets and confidential information for private objectives; (ii) the prohibition to take advantage, or to allow another one to take advantage, by action or omission, of the business opportunities of the company; (iii) the obligation to exercise board powers only for the purposes for which the law, the bylaws or the meeting or the board of directors have intended; and (iv) the obligation to take strict care so that board acts never go, directly or indirectly, against the company’s interests. A director must inform the board of directors and the supervisory committee of any conflicting interest he may have in a proposed transaction and must abstain from voting thereon. A director will not be liable if, notwithstanding his presence at the meeting at which a resolution was adopted or his knowledge of such resolution, a written record exists of his opposition thereto and he reports his opposition to the Supervisory Committee before any complaint against him is brought to the board of directors, the Supervisory Committee, a shareholders’ meeting, a competent governmental agency or the courts. Except in the event of our mandatory liquidation or bankruptcy, the shareholders’ approval of a director’s performance terminates any liability of a director with respect to us, provided that shareholders holding at least 5.0% of our capital stock do not object and provided further that such liability does not result from a violation of the law or the bylaws. The Bank may initiate causes of action against directors upon a majority vote of the shareholders. If the Bank has not initiated a cause of action within three months of a shareholders’ resolution approving its initiation, any shareholder may start the action on the Bank’s behalf and for its account. Pursuant to the bylaws, the Bank will indemnify all current and former directors, members of the Supervisory Committee, and executive and senior management against any liabilities incurred by any such person in connection with the defense of any issue, lawsuit or procedure in which they may be involved as a result of the public offering, placement and trading of the shares of the Bank. This indemnification shall include payment of amounts mandated in court judgments covered by insurance 98 policies currently in effect, except where the Director, member of the supervisory committee, manager, former director, former syndic or former manager has been judged by final judgment to have acted with fraud or gross negligence in performing their duties. The Bank has contracted with Zurich S.A. to provide a US$18 million directors’ and managers’ liability policy which expires on March 31, 2013. The premium paid amounted to US$217,073, including VAT. Members of the Board of Directors The following table shows the current members of the Bank's board of directors: Last and first name Date of Birth Position Beginning of current term Expiration of current term Class Elsztain, Eduardo Sergio 01-26-60 Chairman 03-27-12 12-31-13 D Blejer, Mario 06-11-48 Vice Chairman 03-14-11 12-31-12 D Bossio, Diego Luis Cufre, Marcelo Gustavo Vergara del Carril, Pablo Daniel Reznik, Gabriel Adolfo Gregorio Zang, Saúl Viñes, Ernesto Manuel Dreizzen, Jacobo Julio Wior, Mauricio Elías Písula, Carlos Bernardo Fornero, Edgardo Luis José Maza, Ada Mercedes (1) 09-09-79 06-26-58 10-03-65 Director Director Director 03-14-11 03-14-11 12-31-12 12-31-12 A A 27-03-12 12-31-13 D 11-18-58 Director 03-14-11 12-31-12 D 12-30-45 02-05-44 10-13-55 10-23-56 12-16-48 10-14-51 Director Director Director Director Director Director 03-27-12 03-14-11 03-14-11 03-27-12 03-27-12 12-31-13 12-31-12 12-31-12 12-31-13 12-31-13 04-30-10 12-31-11 D D D D D B 09-17-58 Director 03-27-12 12-31-13 C Elsztain, Daniel Ricardo Efkhanian, Gustavo Daniel Elsztain, Alejandro Gustavo Ocampo, Andrés Fabián 12-22-72 Alternate Director 03-27-12 12-31-13 D 10-28-64 Alternate Director 03-27-12 12-31-13 D 03-31-66 11-09-56 Alternate Director Alternate Director 03-14-11 03-14-11 12-31-12 12-31-12 D D 04-11-59 11-22-60 01-11-60 01-17-33 Alternate Director Alternate Director Alternate Director Alternate Director 03-27-12 03-27-12 04-30-10 03-27-12 12-31-13 12-31-13 12-31-11 12-31-13 D D B D Parrado, Mario César Blasi, Gabriel Pablo Alvarez Jorge Augusto Bensadón, Federico León (1) Class C Regular Director took office on an interim basis until the BCRA issues a formal authorization (pursuant to Communication “A” 4490) . 99 Below is a summarized biography of the Bank’s directors and alternate directors: Eduardo Sergio Elsztain. Mr. Elsztain studied Economics at Universidad de Buenos Aires. He has been engaged in the real estate business for more than 20 years and has been Chairman of the Board of Directors and CEO of IRSA Inversiones y Representaciones Sociedad Anónima since 1991. He founded Consultores Assets Management S.A. and has served as its President since 1989. He is also Chairman of the Board of Cresud S.A.C.I.F. y A., Alto Palermo S.A. (APSA) and BrasilAgro Companhia Brasilera de Propiedades Agricolas, among other companies. Eduardo Sergio Elsztain is the brother of Alternate Directors Daniel R. Elsztain and Alejandro G. Elsztain. Mario Blejer. Mr. Blejer obtained a PhD in Economics from the University of Chicago. From 1980 to 2001, he served as a senior consultant to the IMF in its European and Asia Departments. He was Vice Chairman and subsequently Chairman of the Central Bank from 2001 to 2002. He served as Director of the Center for Central Banking Studies of the Bank of England from 2003 to 2008 and as Advisor to the Governor of the Bank of England during the same period. He is Director of IRSA Inversiones y Representaciones Sociedad Anónima, Gems Investments and MAG Macroeconomic Advisory Group. He is also an external advisor to the Monetary Policy Board of the Central Bank of Mauritius and professor of post-graduate courses at Universidad Torcuato Di Tella. Diego L. Bossio. Mr. Bossio joined the Bank in January 2009. He obtained a degree in Economics from Universidad de Buenos Aires and a Master’s degree in Economics from Universidad de San Andrés. Before joining the Bank, Mr. Bossio served as Undersecretary of Public Administration under the jurisdiction of the General Secretariat of the Government of Mendoza, and as a coordinator of the International Financing Unit (UFI) under the Treasury Department. Prior to that, he served as Head of advisors to national senator Celso Alejandro Jaque. He also provided advice and coordinated the senator’s work in the Federal Revenue Sharing Committee and the Budget and Treasury and Infrastructure, Housing and Transportation Committees. He also served as junior economist at Exante Consultora Económica’s International Economy division. In July 2009, President Cristina Fernández de Kirchner appointed Mr. Bossio as Executive Director of ANSES (Federal Social Security Agency). Marcelo Gustavo Cufre. Mr. Cufre joined the Bank in April 2009. He has a degree in Architecture from Universidad de La Plata (UNLP). Mr. Cufre served as National Director of the Architecture Division of the Ministry of Federal Planning, Public Investment and Services. Formerly, Mr. Cufre served as Chairman of the Institute for Urban Development and Housing and as general Director of the Housing Program in the Province of Santa Cruz. He also served as advisor in the Ministry of Federal Planning, Public Investment and Services and as executive coordinator in the Ministry of Economy and Public Works. Pablo Daniel Vergara del Carril. Mr. Vergara del Carril obtained a degree in Law from Universidad Católica de Argentina, where he teaches Commercial Law and Contract Law. He also teaches Corporate Law, Contracts and Capital Markets in post-graduate courses. Mr. Vergara del Carril is a member of the Legal Advisory Committee of the Argentine Chamber of Corporations (Cámara de Sociedades Anónimas) as well as Vice President of the Competition Law Committee of the Colegio de Abogados de la Ciudad de Buenos Aires. He is a member of the board of directors of Emprendimiento Recoleta S.A. and Nuevas Fronteras S.A. and alternate director of Alto Palermo S.A. (APSA). He is one of the partners at Zang, Bergel & Viñes Abogados law firm. Gabriel Adolfo Gregorio Reznik. Mr. Reznik has been a Director of Banco Hipotecario since June 2002. He has served as Director and Manager of the Technical Department of IRSA Inversiones y Representaciones Sociedad Anónima. He currently serves as Director of Cresud S.A.C.I.F. y A., Emprendimiento Recoleta S.A. and IRSA Inversiones y Representaciones Sociedad Anónima. Mr. Reznik has been responsible for the control over the execution of engineering works for IRSA Inversiones y Representaciones Sociedad Anónima and Alto Palermo S.A. (APSA), and for the Office Building Operation and Maintenance areas. He has a degree in Civil Engineering from Universidad de Buenos Aires and a Master’s degree in Administration of Real Estate and Construction Businesses from Escuela Politécnica de Madrid, Spain. Saúl Zang. Mr. Zang obtained a Law degree from Universidad de Buenos Aires. He is a member of the International Bar Association and the Interamerican Federation of Lawyers. He is a founding partner of the law firm Zang, Bergel & Viñes Abogados. He is also Vice Chairman of IRSA Inversiones y 100 Representaciones Sociedad Anónima and Alto Palermo S.A. (APSA), Puerto Retiro and Fibesa. He is first Vice Chairman of Cresud S.A.C.I.F. y A. and member of the board of directors of Nuevas Fronteras S.A., Tarshop, Palermo Invest S.A. and BrasilAgro Companhia Brasilera de Propiedades Agricolas, among other companies. Ernesto Manuel Viñes. Mr. Viñes graduated in Law from Universidad de Buenos Aires where he took post-graduate courses. He has been a court officer and Subsecretary of State. He has been a university professor and has worked on a self-employed basis. He is a founding partner of the law firm Zang, Bergel & Viñes Abogados. Jacobo Julio Dreizzen. Mr. Dreizzen holds a degree in Economics from Universidad de Buenos Aires and a Master’s degree in Economics from the Catholic University of Río de Janeiro. In 1986, he was Deputy Executive Director of the IMF. In 1987, Mr. Dreizzen acted as advisor to the Presidency of the Central Bank and in the period from 1987 to 1989, he was Director of that institution. From 1990 to 1999 he served as executive Director of the Investment Banking Division of Banco Galicia. Also, he served as alternate Director at Banco de Inversión y Comercio Exterior S.A. (BICE). From 2000 to 2001, he was Undersecretary of Finance for the Ministry of Economy. He served as a consultant to the IADB (2002), UNDP (2005) and CAF (2005). From 2002 to 2005 he was President of Constellation, an investment trust. He is currently IMPSA S.A.’s CFO and Director of Banco Hipotecario. Mr. Dreizzen has been professor of Corporate Finance at the Universidad de Buenos Aires Capital Markets Graduate Program since 1993. Mauricio Elías Wior. Mr. Wior obtained a bachelor’s degree in Economics and Accounting from Tel Aviv University in Israel and a Master’s degree in Business Administration from the same university. Mr. Wior served as President of Radio Comunicaciones Móviles (Movicom) and as regional Vice President for the Southern Cone for Bell until 2004. Carlos Bernardo Písula. Mr. Písula obtained a degree in Accounting from Universidad de Buenos Aires in 1973, where he subsequently completed various professional development and specialization courses. Mr. Písula is a Class D Director of the Bank. During the period from 1996 through 1999 he acted as advisor to the Bank’s vice-presidency. Mr. Písula is the President of the Finance Commission and Vice President of the Housing Commission of the Cámara Argentina de la Construcción (CAC). He is also a board member of various private construction and real estate companies. Edgardo Luis José Fornero. Mr. Fornero has studied Law at Universidad de Lomas de Zamora. He has been a Class B Director of the Bank since September 1997. Mr. Fornero currently serves as Housing Secretary for La Bancaria banking association and as representative of the Bank's employee union. Ada Mercedes Maza. Mrs. Maza completed the Technical Degree in Legislative Administration at the Legislative Power of the Province of La Rioja. She worked for 3 years at Compañía Financiera Condecor and subsequently took office as Municipal Councilor in the Province of La Rioja for four years. She later served as Private Secretary of the Vice Governor. In 1995 she took office as Operating Manager of the Governor of La Rioja and later served as National Senator of such province for 10 years. She also participated as member of the Latin Parliament. Daniel R. Elsztain. Mr. Elsztain graduated with a major in Economic Sciences from Universidad Torcuato Di Tella and has a Master’s degree in Business Administration from the same university. He currently serves as Chief Operating Officer of IRSA Inversiones y Representaciones Sociedad Anónima, and as Director at Alto Palermo S.A. (APSA) and Supertel Hospitality Inc., among other companies. Mr. Daniel R. Elsztain is the brother of the Bank President Eduardo S. Elsztain and of the Alternate Director Alejandro G. Elsztain. Gustavo Daniel Efkhanian. Mr. Efkhanian served as Executive Director of the Bank from 1997 to 1999, Director since 1993 and has held various positions at the Bank since 1991. Mr. Efkhanian supervises corporate business-related issues. He had formerly served as a government-appointed advisor to the Bank in connection with the 1989-1993 Restructuring. Mr. Efkhanian has also served as an alternate Director of Banco de Inversión y Comercio Exterior S.A. (BICE). From 1988 to 1991, he was an economist for the Instituto de Estudios Económicos de la Realidad Argentina y Latinoamericana 101 (IEERAL). Mr. Efkhanian obtained a degree in Economics from Universidad de Córdoba. He currently serves as alternate Director and Manager of the Bank’s Risk and Controlling division. Alejandro G. Elsztain. Mr. Elsztain obtained a degree in Agricultural Engineering from Universidad de Buenos Aires. He currently serves as General Manager and Second Vice Chairman of Cresud S.A.C.I.F. y A. He also serves as Second Vice Chairman of IRSA Inversiones y Representaciones Sociedad Anónima, Executive Vice Chairman of Alto Palermo S.A. (APSA), Vice Chairman of Nuevas Fronteras and Hoteles Argentinos and Regular Director of Inversora Bolivar S.A. Mr. Alejandro G. Elsztain is the brother of the Bank President Eduardo S. Elsztain and of the Alternate Director Daniel R. Elsztain. Andrés Fabián Ocampo. Mr. Ocampo obtained a law degree from the School of Law and Political Sciences of Universidad Católica Argentina. He completed post-graduate studies at the Instituto de Altos Estudios Empresariales of Universidad Austral under the Senior Management Program and in Operating Finance, and in Banking Law at Universidad Argentina de la Empresa. Mario César Parrado. Mr. Parrado obtained a degree in Business Administration from Universidad Argentina de la Empresa (UADE). He has more than twenty years of experience in finance, having served as President of The Boston Investment Group, Director of BankBoston Argentina and Director of Fleet International Advisors S.A. Gabriel P. Blasi. Mr. Blasi obtained a degree in Business Administration and carried out postgraduate studies in Finance at Universidad del CEMA—Centro de Estudios Macroeconómicos Argentinos and in the IAE (Universidad Austral). He held several management positions in the areas of Investment Banking and Capital Markets at Citibank and Banco Río (BSCH). Prior to joining IRSA Inversiones y Representaciones Sociedad Anónima, he served as Financial Director of the Argentine Carrefour Group and Goyaique SACIFIA (Pérez Companc Group). Until 2011, he was Financial Manager of IRSA Inversiones y Representaciones Sociedad Anónima, Cresud S.A.C.I.F. y A. and Alto Palermo S.A. (APSA). Currently, he is the Bank’s Chief Financial Officer. Jorge Augusto Álvarez. Mr. Álvarez studied Systems Programming at Universidad de Champagnat in Mendoza. He has been Head of Division at Banco Hipotecario S.A. since 1979. Federico León Bensadón. Mr. Bensadon graduated as civil engineering from Universidad de Buenos Aires in 1957. He has been Class C Director of the Bank since September 2002. He is a member of the board of directors of Telemetrix S.A. (Costa Salguero), Emaco S.A., Edilcenter S.A., Rafoy S.A., and DR S.A., among other companies. He is also Treasurer of the Cámara Argentina de la Construcción and Secretary of the Unión Argentina de la Construcción. Employment Contracts with Directors The Bank has entered into employment contracts with some of its Directors. Ernesto Manuel Viñes and Edgardo Fornero perform executive and/or administrative functions at the Bank and, therefore, they are considered as Bank’s employees. Election and Meetings of Directors The Bank’s directors are elected for staggered two-year terms, unless they are elected to replace a previously appointed director. Following implementation of the Programa de Propiedad Participada (“PPP”), holders of Class B Shares are entitled to elect one director and one alternate director, provided that such shares represent more than 2.0% of the Bank’s outstanding capital stock at the time the shareholders’ meeting is convened. At the date of this Offering Memorandum, the PPP has not yet been implemented. Upon the transfer of Class C Shares to certain companies engaged in housing construction or real estate activities, holders of Class C Shares will be entitled to elect one director and one alternate director for so long as such shares represent more than 3.0% of the Bank’s outstanding capital at the time the shareholders’ meeting is convened. Until the foregoing conditions are met, such directors will be elected by the Argentine Government. If the percentage of the Bank’s capital represented by Class B or Class C Shares falls to 2.0% or 3.0% or lower, respectively, holders of such classes will be entitled to vote jointly with Class D shareholders. Holders of Class D Shares are entitled to elect nine directors and 102 respective alternates. For so long as at least one Class A Share is outstanding, holders of Class A Shares will be entitled to elect two directors and two alternates. Pursuant to Article 11 (c) of the Bank’s bylaws, directors are appointed by the vote of the majority of votes within each class of shares. The determination of the percentage of the Bank’s capital represented by each class of stock is made in each case with respect to the capital outstanding as of the date of the shareholders’ meeting at which the election in question will be held. In the event that no shares of a determined class are represented at the second call of a shareholders’ meeting called for the purpose of electing directors, the directors and alternates that the class is entitled to appoint will be elected by the holders of the other classes of shares, voting as a single class, except in the event that no shareholders attend a Class A shareholders’ meeting, in which case the members of the Supervisory Committee elected by the Class A shareholders will appoint the directors and alternates that the holders of the Class A Shares are entitled to appoint. Pursuant to Article 11 (i) of the Bank’s bylaws, any or all directors elected by holders of a particular class of shares may be removed without cause by a simple majority of shares of such class of shares present at an ordinary shareholders’ meeting, provided that such removal was proposed in the agenda for such meeting. Any directors so removed will be replaced by alternates of the same class, in the order in which such alternates were elected, until an election for their replacement has been held (which election may take place at the same meeting as the removal). Any shareholder or group of shareholders holding more than 3.0% of the Class D Shares may require that the Bank send a slate of candidates for election as directors of such class proposed by such shareholder or group to each holder of Class D Shares. In addition, the board of directors may propose a slate of candidates for election as directors by each class of shares, and such slate will be sent to each holder of shares together with any slates proposed by shareholders as described in the preceding sentence. Any shareholder present at a meeting may propose candidates for election as directors. If any shareholder opposes the election of directors by slate, all directors will be elected individually, and each nominee on a slate will be deemed to have been nominated individually. If no slate or individual, as the case may be, obtains the majority of Class D votes present at the meeting, Class D shareholders shall elect one of the two slates or individuals, as the case may be, which obtained more votes in the previous election. Argentine law requires the majority of the Bank’s directors to be residents of Argentina. All directors must establish a legal domicile in Argentina for service of notices in connection with their duties. In addition, a director must satisfy certain suitability and experience requirements of the Central Bank before obtaining regulatory approval to begin his term. The bylaws of the Bank require the board of directors and the Executive Committee to meet at least once per month. The Chairman of the board of directors may call a meeting of directors at any time and must call such a meeting upon the request of any director. The quorum requirement for meetings of the board of directors is a majority of the members, and if a quorum is not available one hour after the time set for a regularly called meeting, the Chairman or the person serving in his place at such meeting may invite the alternates of the same class as the absent directors to join the meeting in order to reach the minimum quorum. Resolutions must be adopted by a majority of the directors present (except for the cases when the director has an interest conflicting with those of the company); however, the Chairman or the person serving in his place at a particular meeting is entitled to cast the deciding vote in the case of a tie. By reason of the election of directors by classes of shares, as long as there exist several classes of shares, the appointment of Directors by cumulative voting shall not apply. Independence of Directors and Supervisory Committee Pursuant to the terms of General Resolution 400 of the CNV (“Resolution 400”), members of the board of directors or the Supervisory Committee of a public company such as the Bank shall inform the CNV within 10 days from the date of their appointment, whether such members of the board of directors or the Supervisory Committee are “independent.” For purposes of Resolution 400, a director shall not be considered independent in certain situations, including where a director (i) owns a 35% equity interest in a company, or a lesser interest if such director has the right to appoint one or more directors of a company (hereinafter “significant participation”) or has a significant participation in a corporation having a significant participation in the company or a significant influence on the company; (ii) depends on shareholders, or is otherwise related to shareholders, having a significant participation in the company or 103 of other corporations in which these shareholders have directly or indirectly a significant participation or significant influence; (iii) is or has been in the previous three years an employee of the company; (iv) has a professional relationship or is a member of a corporation that maintains professional relationships with, or receives remuneration (other than the one received in consideration of his performance as a director) from, a company or its shareholders having a direct or indirect significant participation or significant influence on the same, or with corporations in which these also have a direct or indirect significant participation or a significance influence; (v) directly or indirectly sells or provides goods or services to the company or to the shareholders of the same who have a direct or indirect significant participation or significant influence, for higher amounts than his remuneration as a member of the administrative body; or (vi) is the spouse or parent (up to second grade of affinity or up to fourth grade of consanguinity) of persons who, if they were members of the administrative body, would not be independent, according to the above listed rules. Directors Carlos Bernardo Písula, Jacobo Julio Dreizzen, Federico León Bensadón, Diego Luis Bossio, Ada Mercedes Maza and Mario César Parrado are independent members of the board of directors pursuant to the terms of Resolution 400 of the CNV. Directors Eduardo Sergio Elsztain, Saúl Zang, Ernesto Manuel Viñes, Gabriel Gregorio Reznik, Pablo Vergara del Carril, Mauricio Elias Wior, Mario Blejer, Marcelo Gustavo Cufre, Edgardo Luis José Fornero and alternate directors Ricardo Daniel Elsztain, Jorge Augusto Alvarez, Alejandro Gustavo Elsztain, Gustavo Daniel Efkhanian, Andrés Ocampo and Gabriel Pablo Blasi are non-independent members of the board of directors pursuant to the terms of Resolution 400 of the CNV. Syndics appointed by the Sindicatura General de la Nación (SIGEN) are non-independent members. Syndics José Daniel Abelovich, Marcelo Héctor Fuxman and Ricardo Flammini, and alternate syndics Roberto Murmis, Noemí Cohn and Silvia Cecilia De Feo are independent members of the Supervisory Committee pursuant to Resolution 400 of the CNV. Executive Committee At the General Extraordinary Shareholders’ Meeting held on March 15, 1999, article 19 of the Bank’s bylaws was amended to create an Executive Committee. The Executive Committee, whose general purpose is to oversee the Bank’s ordinary business, is comprised of five to nine Directors elected by Class D shareholders and an equal or lesser number of Alternate Directors of the same class of shares as the board of directors shall determine. The Executive Committee is required to meet at least once per month or whenever called by the Chairman. Pursuant to the Bank’s bylaws, the powers and duties of the Executive Committee include (i) conducting the ordinary business of the Bank as well as any matters delegated to it by the board of directors; (ii) developing commercial, credit-related and financial policies subject to approval by the board of directors; (iii) creating, maintaining and restructuring the Bank’s administration; (iv) creating Special Committees, approving their structures or functional levels and determining the scope of their duties; (v) naming general managers, the Executive Vice President and other members of the senior management; (vi) proposing to the board of directors the creation of branches, agencies or representative offices inside or outside Argentina; (vii) supervising management of the Bank’s subsidiaries; (viii) submitting contracting guidelines, annual budgets, cost and investment estimates, necessary debt levels and plans of action for consideration of the board of directors; (ix) approving novations, refinancings, debt write-offs and similar matters when necessary in the ordinary course of business of the Bank; and (x) setting forth its own internal regulations. The current members of the Executive Committee are: • • • • • Eduardo Sergio Elsztain (Chairman); Saúl Zang (member); Mario Blejer (member); Ernesto Manuel Viñes (member); Pablo Daniel Vergara del Carril (member); 104 • • Gabriel Adolfo Gregorio Reznik (member); and Mauricio Elías Wior (alternate member). Senior Management As of December 31, 2012, the Bank’s senior management consists of the following officers: Name Position Fernando Rubín Gerardo Rovner Ernesto Manuel Viñes Gustavo Daniel Efkhanian Manuel Herrera Esteban Guillermo Vainer Roland Costa Picazo Favio Gabriel Podjarny Gabriel Pablo Blasi Javier Varani General Manager Auditing Manager Legal Department Manager Risk and Controlling Manager Corporate Banking Manager Retail Banking Manager Organizational and Quality Development Manager Corporate Services Manager Finance Manager Institutional Relations Manager Below is a summarized biography of the Bank’s senior managers: Fernando Rubín. Mr. Rubín joined the Bank as Organization Development manager in July 2001. He obtained a degree in Psychology from Universidad de Buenos Aires and a post-graduate degree in Human Resources and Organizational Analysis in E.P.S.O. (Organizations Social Psychology School). Prior to joining the Bank, he served as Human Resources Corporate Manager for IRSA Group. He worked as Human Resources Director of LVMH (Louis Vuitton Moet Hennessy) and Chandon Wineries in Argentina and Brazil. He also served as Human Resources Manager for Roland Berger & PartnerInternational Management Consultant. Gerardo Rovner. Mr. Rovner holds a degree in Economics from Universidad de Buenos Aires. He has been working at Banco Hipotecario for sixteen years, acting as Manager of the Risk Policy, Collections Management and Operating Risks divisions. In February 2012, he was appointed Internal Audit Manager. He has specialized in statistics and has been teaching that subject at the School of Economic Sciences since 1994. Ernesto Manuel Viñes. Mr. Viñes graduated in Law from Universidad de Buenos Aires where he took post-graduate courses. He has been a court officer and Subsecretary of State. He has been a university professor and has worked on a self-employed basis. He is a founding partner of the law firm Zang, Bergel & Viñes. Gustavo Daniel Efkhanian. Mr. Efkhanian served as Executive Director of the Bank from 1997 to 1999, Director since 1993 and has held various positions at the Bank since 1991. Mr. Efkhanian supervises corporate business-related issues. He had formerly served as a government-appointed advisor to the Bank in connection with the 1989-1993 Restructuring. Mr. Efkhanian has also served as an alternate Director of Banco de Inversión y Comercio Exterior S.A. (BICE). From 1988 to 1991, he was an economist for the Instituto de Estudios Económicos de la Realidad Argentina y Latinoamericana (IEERAL). Mr. Efkhanian obtained a degree in Economics from Universidad de Córdoba. Manuel Herrera. Mr. Herrera joined the Bank in 2009. He holds a degree in Business Administration from Universidad Católica de Argentina. He carried out post-graduate studies at Harvard University. Mr. Herrera has sixteen years of experience in the Argentine and US financial systems. Prior to joining the Bank, he headed various areas within the Corporate Banking and Investment Banking units at BankBoston Argentina, subsequently acquired by StandardBank South Africa and US. Esteban Guillermo Vainer. Mr. Vainer joined the Bank on August 17, 2004. He obtained a degree in Business Administration from Universidad Argentina de la Empresa and a Master’s degree in 105 Business Administration from the IAE. He was Head of Banco Galicia’s Insurance Banking Division for nine years. Roland Costa Picazo. Mr. Costa Picazo holds a degree in Employment Relationships from Universidad de Buenos Aires. He has taken different updating courses and programs both in Argentina and abroad. He gained professional experience at IRSA Inversiones y Representaciones Sociedad Anónima, CRESUD S.A.C.I.F. y A. and Alto Palermo S.A. (APSA) as Human Resources Manager and at Bodegas Chandon and LVMH Argentina as Head of Recruitment and Development. Favio Gabriel Podjarny. Mr. Podjarny joined the Bank in December 2005. He is the Manager of the Administration, Logistics and Collections division. He served as representative of the Board of Directors of IRSA Inversiones y Representaciones S.A., being in charge of the Abril Club de Campo Project. Formerly, he had been Director of the Centro de Empleo y Emprendimientos Ariel Job Center, being in charge of the overall administration and management of the organization. He was also in charge of the overall management of Sociedad Hebraica Argentina in the capacity as the entity’s Executive Director. Gabriel P. Blasi. Mr. Blasi obtained a degree in Business Administration and carried out postgraduate studies in Finance at Universidad del CEMA—Centro de Estudios Macroeconómicos Argentinos and in the IAE (Universidad Austral). He held several management positions in the areas of Investment Banking and Capital Markets at Citibank and Banco Río (BSCH). Prior to joining IRSA Inversiones y Representaciones Sociedad Anónima, he served as Financial Director of the Argentine Carrefour Group and Goyaique SACIFIA (Pérez Companc Group). Until 2011, he was Financial Manager of IRSA Inversiones y Representaciones Sociedad Anónima, Cresud S.A.C.I.F. y A. and Alto Palermo S.A. (APSA). Currently, he is the Bank’s Chief Financial Officer. Javier Varani. Mr. Varani joined the Bank in June 2005 as Institutional Relations Manager. He had formerly worked in the Media and Institutional Affairs divisions of Telecom Argentina and Telecom Personal. From 1995 to 1999, Mr. Varani was city councilor for Vicente López (Province of Buenos Aires). He is a university professor specialized in municipal matters. Supervisory Committee Article 20 of the Bank’s bylaws provide for a Supervisory Committee consisting of five members (“Syndics”) and five alternate members. Article 20 (b) establishes that the members of the Supervisory Committee shall be elected as follows: three members of the Supervisory Committee and three alternates shall be elected jointly by the Class C and Class D Shares, one member and one alternate shall be elected by the Class B Shares (to the extent such shares represent more than 2.0% of the Bank’s outstanding capital stock) and one member and one alternate shall be elected by the Class A Shares. Syndics and alternate syndics shall be appointed for a two-year period. Pursuant to Argentine law, only lawyers and accountants admitted to practice in Argentina may serve as syndics of an Argentine sociedad anónima. If Class B Shares do not represent 2.0% of the Bank’s capital stock and the Class C Shares do not represent 3.0% of the Bank’s capital stock, the Supervisory Committee will be reduced to three members and three alternates. Two members and two alternate members will be elected jointly by the Class B, C and D Shares and one member and one alternate member will be elected by the Class A Shares. Meetings may be called by any of the syndics and shall be held with the presence of the absolute majority of its members, and resolutions shall be adopted by a majority of votes. Pursuant to article 294 of the Corporate Law 19.550, as amended, the primary duties and powers of the Supervisory Committee are to: (i) supervise and inspect the corporate books and records whenever necessary, but at least quarterly; (ii) attend meetings of the directors, executive committee and shareholders; (iii) prepare an annual report concerning the Bank’s financial condition and submit it to the shareholders at the ordinary meeting; (iv) provide certain information concerning the Bank upon written request of any shareholder holding at least 2.0% of the Bank’s outstanding capital; (v) call an extraordinary shareholders’ meeting when necessary, on its own initiative or at the request of the shareholders, or an ordinary one when the board of directors fails to do so; (vi) include matters for the agendas of any meeting the Supervisory Committee must attend; (vii) supervise and monitor Bank’s compliance with laws and regulations, the 106 bylaws and the shareholders’ decisions; (viii) investigate written complaints submitted by holders of at least 2.0% of the Bank’s capital; (ix) request judicial dissolution of the Bank and supervise the process; (x) designate directors when there are none remaining on the board of directors and the shareholders have failed to appoint replacements; and (xi) request judicial intervention in extraordinary circumstances, such as executive officer malfeasance threatening the Bank’s condition. In performing these duties, the Supervisory Committee does not control the operation of the Bank. On April 29, 2009, each of the shareholders of Class A, B, C and D shares held extraordinary shareholders’ meetings. At those meetings: a) Class D and C shareholders appointed José Daniel Abelovich, Marcelo Héctor Fuxman and Ricardo Flammini as syndics to hold office for two-year terms and Roberto Murmis, Noemí Cohn and Silvana Cecilia De Feo as alternate syndics; b) Class A shareholders appointed Alfredo Groppo as syndic, and Silvana Gentile as alternate syndic; and c) Class B shareholders appointed Martín Scotto as syndic and Nora Tibis as alternate syndic. Currently, the Supervisory Committee is composed of five syndics and five alternate syndics: Name Martin Scotto Alfredo Groppo José Daniel Abelovich Marcelo Héctor Fuxman Ricardo Flammini Nora Tibis Silvana Gentile Roberto Murmis Noemí Cohn Silvia Cecilia De Feo Position Class Expiration of Term Syndic Syndic Syndic Syndic Syndic Alternate Syndic Alternate Syndic Alternate Syndic Alternate Syndic Alternate Syndic B A C and D C and D C and D B A C and D C and D C and D December 31, 2012 December 31, 2012 December 31, 2012 December 31, 2012 December 31, 2012 December 31, 2012 December 31, 2012 December 31, 2012 December 31, 2012 December 31, 2012 Below is a summarized biography of the members of the Bank’s Supervisory Committee: Martín Esteban Scotto. Mr. Scotto holds a degree in Law from Universidad de Buenos Aires (1996) and works for the Sindicatura General de la Nación. Mr. Scotto has been Syndic of Banco de Inversión y Comercio Exterior S.A. (BICE) and Nación Seguros de Vida S.A since 2001. Since 2002, Mr. Scotto is a member of the supervisory committee of Nuevo Banco Bisel S.A., Nuevo Banco Suquía S.A. and Bisel Servicios S.A. Alfredo Héctor Groppo. Mr. Groppo holds a degree in Accounting from Universidad de Buenos Aires (1977) and works of the Sindicatura General de la Nación (SIGEN). He has been Syndic of Nación Factoring S.A., Nación Bursátil S.A., Nación Servicios S.A. and Polo Tecnológico Constituyentes S.A. since 2006. José D. Abelovich. Mr. Abelovich obtained a degree in Accounting from Universidad de Buenos Aires. He is a founding member and partner of Abelovich, Polano & Asociados S.R.L., a member firm of Nexia International, an accounting firm in Argentina. Formerly, he had been Manager of Harteneck, López y Cía/Coopers & Lybrand, and served as a senior advisor in Argentina for the United Nations and the World Bank. He is a member of the Supervisory Committees of Cresud S.A.C.I.F. y A., IRSA Inversiones y Representaciones Sociedad Anónima, Alto Palermo S.A. (APSA), Hoteles Argentinos e Inversora Bolívar S.A., among other companies. Marcelo H. Fuxman. Mr. Fuxman obtained a degree in Accounting from Universidad de Buenos Aires. He is a partner of Abelovich, Polano & Asociados S.R.L., a member firm of Nexia International, an accounting firm in Argentina. He is also a member of the Supervisory Committee of Cresud S.A.C.I.F. y A., IRSA Inversiones y Representaciones Sociedad Anónima and Alto Palermo S.A. (APSA), among other companies. Ricardo Flammini. Mr. Flammini holds a degree in Accounting from Universidad Nacional de La Plata. Mr. Flammini acted as syndic of the Bank from September 1997 until August 2001 and on May 30, 2003 he was elected for a two-year term. Mr. Flammini worked as auditor for the Tribunal de Cuentas de la Nación from 1957 to 1976 and was a member of the former Corporación de Empresas Nacionales (ex SIGEP and SIGEN) from 1976 until August 2001. Formerly, he had acted as syndic of Segba S.A., 107 Hidronor S.A., YPF S.A., YCF S.E., Encotesa, Intercargo S.A., Banco Caja de Ahorro S.A., Pellegrini S.A. Gerente de Fondos Comunes de Inversión, Nación Bursátil Sociedad de Bolsa S.A., Garantizar S.G.R. and Nación AFJP. He currently serves as syndic of BACS Banco de Crédito y Securitización S.A., BHN Sociedad de Inversión S.A., BHN Vida S.A., BHN Seguros Generales S.A. and ACH S.A. Nora Lía Tibis. Ms. Tibis holds a Law degree from Universidad de Buenos Aires and works for the Sindicatura General de la Nación (SIGEN). She is a Syndic in Banco de Inversión y Comercio Exterior S.A. (BICE), AFJP Nación, Nación Leasing S.A., Nación Factoring S.A. and Dioxitek S.A. Silvana María Gentile. Ms. Gentile has been a member of the Supervisory Committee of the Bank since 1997. She has served as a member of Sindicatura General de la Nación (SIGEN) since 1979 and currently serves as a Syndic of Pellegrini S.A. and Nación AFJP S.A. Ms. Gentile holds degrees in Accounting and Business Administration from Universidad de Lomas de Zamora. Roberto Murmis. Mr. Murmis holds a degree in Accounting from Universidad de Buenos Aires. Mr. Murmis is a partner at Abelovich, Polano y Asociados S.R.L., a member firm of Nexia International. Mr. Murmis worked as an advisor to the Secretariat of Federal Revenue under the Ministry of Economy. Furthermore, he is a member of the supervisory committee of Cresud S.A.C.I.F. y A., IRSA Inversiones y Representaciones Sociedad Anónima, Futuros y Opciones S.A. and Llao Llao Resorts S.A. Noemí Cohn. Ms. Cohn graduated as an Accountant from Universidad de Buenos Aires. She is a partner of Abelovich, Polano & Asociados S.R.L./Nexia International, an accounting firm in Argentina, and serves in the Auditing division. She worked at the auditing firm Harteneck, López and Company, Coopers & Lybrand in Argentina and in Los Angeles, California. Mrs. Cohn is a member of the Supervisory Committees of Cresud S.A.C.I.F. y A., IRSA Inversiones y Representaciones Sociedad Anónima and Alto Palermo S.A. (APSA), among other companies. Silvia De Feo. Ms. De Feo holds a degree in Accounting from Universidad de Belgrano. She is a manager at Abelovich, Polano & Asociados S.R.L, a member firm of Nexia International, an accounting firm in Argentina, and acted as manager at Harteneck, López & Cía/Coopers & Lybrand. Auditors The Bank’s audited financial statements included in this offering memorandum have been audited by Price Waterhouse & Co. S.R.L., member firm of PricewaterhouseCoopers, an accounting firm of certified independent public accountants, as stated in their reports appearing herein, registered with the Professional Council in Economic Sciences (CPCE) of the Autonomous City of Buenos Aires, Volume 1, Folio 17, and domiciled at Bouchard 557 7th floor (C1106ABG), in the Autonomous City of Buenos Aires, Argentina. Certified public accountants Norberto F. Montero (CPCE Autonomous City of Buenos Aires Volume 167 – Folio 179) and Carlos Horacio Rivarola (CPCE Autonomous City of Buenos Aires Volume 124 – Folio 225) were designated as external auditor and alternate external auditor, respectively, by the Shareholders' Meetings held on May 23, 2008, April 29, 2009 and April 30, 2010. At the General Ordinary Shareholders' Meeting dated March 27, 2012 Accountant Marcelo Alejandro Trama (CPCE Autonomous City of Buenos Aires Volume 252 – Folio 159) was designated as regular external auditor and Accountant Carlos Horacio Rivarola was reelected as alternate external auditor. 108 Other information related to the administrative, supervisory and special committee bodies: Committees reporting to the Board of Directors: (i) Audit Committee The Bank has an audit committee as required by the laws of the National Securities Commission and the Central Bank. Composition: Carlos B. Pisula Ada Mercedes Maza Gabriel A. Reznik Gerardo Rovner Director Director Director Audit Manager Duties: Members of the audit committee shall hold their positions for a term of at least two years, provided their mandate as director does not expire before, and for a maximum period of three years. The Audit Committee shall act in accordance with the provisions set forth in Communication “A” 5042, and related provisions issued by the Central Bank. The Audit Committee shall meet regularly and at least once a month. Pursuant to Communication “A” 5042, the Audit Committee shall have the following duties, among others: • • • • • • • • To supervise the Bank’s internal control systems through periodic evaluation. To contribute to the improvement of internal controls and be aware of the planning of the independent auditors. To review and approve the internal audit function and process. To consider the comments made by the Bank’s independent auditors with respect to internal control. To review the results obtained by the Supervisory Committee. To maintain constant communication with the Superintendency of Financial and Exchange Institutions. To review the Bank’s annual and quarterly financial statements and the corresponding reports delivered by the independent auditors; and To periodically review compliance with rules regarding the independence of the external auditors. 109 (ii) Social and Institutional Matters Committee: Composition: Eduardo Sergio Elsztain Edgardo Fornero Ada Mercedes Maza Fernando Rubin Javier Varani Chairman Director Director General Manager Manager of Institutional Affairs Duties: • To define the policies governing donations and subsidies for their approval by the Board of Directors; • To approve cash donations for amounts up to Ps.100,000; • To approve the donation of unused real property on the Bank’s balance sheet; • To grant subsidies for social and/or cultural purposes other than such set forth in Section 13 of the Mortgage Bank Law; • To propose the approval of donations and/or subsidies exceeding Ps.100,000 to the Board of Directors, and • To take part in any matter relating to the Bank’s image or insertion in society. (iii) Information Technology and Systems Committee Composition: Edgardo Fornero Ada Mercedes Maza Gabriel A. Reznik (alternate) Carlos D. Berruezo Ricardo Gaston Director Director Director Manager of Operations and Systems Manager of Individual Security and Logistics Duties: The Information Technology and Systems Committee performs its duties in accordance with the provisions of Communication “A” 4609 and related provisions and shall meet regularly and at least once every three months. This Committee is responsible for ensuring that related information and technology systems meet the needs of the Bank’s business and are in line with the Bank’s strategic plans. Accordingly, this Committee is responsible, among other things, for the following activities: (i) to define a technology and systems plan which shall be prepared and approved by the Bank’s Board of Directors in accordance with the guidelines laid down by it and the Argentine Central Bank rules in furtherance of the Bank’s strategic goals, which shall contain a project schedule; to follow up on implementation thereof and progress of such projects, allocation of priorities, the resources and sectors concerned; (ii) to oversee adequate performance of the information technology area and efficiency; (iii) to regularly review such plan and compliance therewith; (iv) to review reports on information technology, and (v) to maintain adequate contact with the division of independent auditors of the Superintendency of Financial and Exchange Institutions. (iv) Money Laundering Prevention Committee Composition: Ernesto Manuel Viñes Director 110 Mauricio Elias Wior Gustavo Daniel Efkhanian Jorge Gimeno Director Manager of Risk and Controlling Division Manager of Money Laundering Prevention Unit Duties: • • To act in accordance with the provisions contained in the Central Bank's rules and regulations as stated in Communication ¨A¨ 4835 and its supplementary sections and amendments. To follow the rules and regulations of Resolution No. 33/2011 of the Unit of Finance Information of Law No. 25,246 and its regulatory decrees, and other supplementary rules and amendments. (v) Executive Committee Composition: Eduardo Sergio Elsztain Mario Blejer Pablo D. Vergara del Carril Ernesto Manuel Viñes Saúl Zang Gabriel A. Reznik Mauricio Elias Wior (alternate) Chairman Director Director Director Director Director Director At the General Extraordinary Shareholders’ Meeting held on March 15, 1999, Section 19 of the Bank’s by-laws were amended to create an Executive Committee. The Executive Committee’s general purpose is to oversee the Bank’s ordinary course of business and it is comprised of five to nine Directors selected by Class D shareholders and an a number of alternate directors of the same class of shares as the board of directors shall determine. The Executive Committee is required to meet at least once a month or whenever called by the Chairman. Committees Reporting to the Executive Committee: (i) Finance Committee: Composition: Mauricio Elias Wior Jacobo Julio Dreizzen Carlos Bernardo Pisula Mario Blejer Fernando Rubin Gabriel Pablo Blasi Alejandro Sokol Maximiliano Weber Hernán Finkelstein Director Director Director Director General Manager Finance Manager Market Risk Manager Budget and Management Control Manager Assets and Liabilities Administration Manager Duties: • To control the liquidity and creditworthiness of the company; • To define the policies for investments in liquid assets and take part in the management of financial assets and liabilities; • To approve debt issuance and placement transactions within the framework and pursuant to the methods determined by the corporate shareholders’ meetings; 111 • To recommend the credit limits per product to domestic and international banks to be approved by the Credit Committee; • To approve the purchase and sale of government and corporate securities and futures, derivatives and arbitration transactions with fixed and floating rate securities; • To take part in the evaluation and approval of financial products; to fix, evaluate and control the financial risks of the different investment portfolios; • To recommend lending and borrowing interest rates, to assign fund transfer costs; • To fix, from time to time, the global quotas for the different credit lines, in accordance with the evolution of the financial planning; • To approve the engagement of banks, rating agencies, law firms and auditors or due diligence services in respect of the issuance and placement of debt securities; and • To take part in the purchase of treasury shares (pursuant to the guidelines set forth by the Board of Directors) and the Bank’s debt securities. (ii) Credit Committee: Composition: Mauricio Elias Wior Jacobo Julio Dreizzen Saúl Zang Carlos Bernardo Pisula Ernesto Manuel Viñes Fernando Rubin Manuel Herrera Gustavo Daniel Efkhanian Marcelo Portas Director Director Director Director Director General Manager Corporate Loan Manager Risk and Controlling Manager Credit Risk Manager Duties: • To define the Risk policies of the different Individual, PyME and Corporate Credit lines pursuant to the different rules and regulations in force; • To approve Corporate Credit lines financings for amounts up to Ps.2,500,000; • To approve PyME Credit lines financing; • To approve Individual Credit lines financings (*) for amounts exceeding Ps.200,000 and up to Ps.1,000,000; • To issue decisions in respect of Corporate Credit Lines financings for their consideration by the Executive Committee when their amounts exceed those indicated in paragraph 2; • To approve resolutions on refinancing, grace periods, foreclosure on trusts, etc. upon proposal of the Corporate Business Area; • To define provisioning policies; • To delegate duties, with the approval level being determined at its discretion; and • To define the policies to handle Delinquency and auctions. (*) Includes all the financings provided to the customer or economic group, if the financing exceeds the basic margin provided for by the Central Bank rules on credit classification, or exceeds 2.5% of the Bank’s Computable Net Worth, regardless of the amount of the financing, the prior authorization of the Board of Directors shall be obtained (which decision shall be adopted by simple majority). (iii) Employee Incentive Committee: 112 Composition: Eduardo Sergio Elsztain Saúl Zang Gabriel A Reznik Chairman Director Director Duties: • • • To evaluate and issue a decision in respect of the nominations of candidates to the board to be elected by the Company’s class “D” shareholders’ meetings and to prepare a list thereof; To propose directors to serve in subsidiaries; and To propose the compensation of the members of the Board of Directors and of the Bank’s and its subsidiaries’ committees. (iv) Housing Committee: Composition: Eduardo Sergio Elsztain Saúl Zang Gabriel A Reznik Ernesto Manuel Viñes Marcelo Gustavo Cufré Edgardo Fornero Ada Mercedes Maza Fernando Rubin Esteban Vainer Chairman Director Director Director Director Director Director General Manager Retail Banking Manager Duties: • • • • To investigate and detect methods of facilitating access to credit To evaluate and judge proposals of plans for the financing of housing on a large scale To delegate responsibility to persons for the representation of the Bank before official entities or before International Organizations of Credit that align with the fulfillment of this Committee's objectives To propose special house financing programs under the Board’s Policies (v) Risk Management Committee: Composition: Mario Blejer Julio Dreizzen Mauricio Wior Fernando Rubin Gustavo Daniel Efkhanian Favio Podjarny Director Director Director General Manager Risk and Controlling Manager Corporate Services Manager (vi) Corporate Governance Committee: Composition: Carlos Pisula Saúl Zang Ernesto M. Viñes Fernando Rubin Director Director Director General Manager 113 (vii) Ethics Committee: Composition: Ada Mercedes Maza Carlos Pisula Gabriel Reznik Director Director Director Compensation Argentine law provides that the compensation paid to all directors and statutory auditors in a fiscal year shall not exceed 5.0% of net income for such year, if the company is not paying dividends in respect of such net income. Argentine law increases the annual limitation on director compensation to up to 25.0% of net income based on the amount of such dividends, if any are paid. The board of directors determines the compensation of directors who are also senior managers, with the affected directors abstaining. In the case of directors that perform duties at special committees or perform administrative or technical tasks, the aforesaid limits may be exceeded if a shareholders’ meeting so approves and such issue is included in the agenda, and regulations of the CNV are complied with. In any case, the compensation of all directors and members of the Supervisory Committee requires shareholder ratification at an ordinary meeting. The Bank’s Board of Directors held a meeting on August 14, 1998 and established an incentive compensation plan for executive officers and managers, which was amended to include Directors who are members of the Executive Committee at a Shareholders’ Meeting held on April 28, 1999 and became effective following the consummation of the privatization (the “Management Plant”). The purpose of the plan was to provide incentives and rewards to those individuals largely responsible for our success and growth, to help us attract and retain such employees and to associate their interests with those of the Bank’s shareholders. Under the Management Plan, participants were entitled to receive a payment based on the appreciation in the value of the Bank’s Class D Shares pursuant to a formula set forth in the Management Plan. Participation in the Management Plan was subject to various terms and conditions including eligibility and vesting requirements. Payments pursuant to the Management Plan were made through a related charge to income. At the General Ordinary Shareholders’ Meeting No. 47 held on May 31, 2004, the Bank’s shareholders renewed the compensation plan approved by the General Ordinary Shareholders’ Meeting No. 13 under the same terms and conditions for a new period of five (5) years. Upon expiration of such period, the Management Plan was not renewed. In addition, the Shareholders’ Meeting held on April 28, 1999 established a profit-sharing plan pursuant to which participants received specific variable shares in the profits of the Bank based on the Bank's achievement of certain goals related to return on equity. Such plan is currently in force and applicable only to the Bank's senior managers. On July 21, 2006, the Bank’s shareholders approved an amendment to Article 14 of the Bank’s by-laws in relation to the compensation of the Executive Committee. Pursuant to such amendment the members of the Executive Committee will receive fees not in excess of 5% of the income after taxes for the year if no dividends are distributed. If a dividend is distributed, the fees may amount up to 15% of computable income. The above indicated compensation percentages shall be previously reduced by the amounts paid to the other members of the Bank’s Board of Directors. The aggregate amount of compensation paid by the Bank for the years ended December 31, 2011 and 2012 to directors was Ps. 8.0 million and Ps. 9.5 million, respectively, while aggregate amounts paid to statutory auditors were Ps. 1.7 million and Ps. 2,225 million, respectively. Employees The following table sets forth the number of the Bank’s employees as of December 31, 2010, 2011 and 2012: 114 Main Office Branches Total 12/31/2010 1,156 610 1,766 12/31/2011 1,255 637 1,892 12/31/2012 1,319 661 1,980 The Bank’s employees are represented by a federal union and union membership is optional. As of December 31, 2012, a certain number of the Bank’s employees were members of the union. The Bank has not experienced significant conflicts with the union and believes that relationships with its employees are highly satisfactory. The employees holding managerial positions are not members of any union. Share Ownership: The following table sets forth the number of Bank’s shares held by Bank’s Directors as of December 31, 2012. Director Number of SharesClass Elsztain, Eduardo Sergio 7,800 D Elsztain, Alejandro Gustavo 140,000 D Vergara del Carril, Pablo 30,000 D Ocampo, Andrés 100 D 115 PRINCIPAL SHAREHOLDERS AND RELATED PARTY TRANSACTIONS Principal Shareholders The following table sets forth information regarding ownership of the Bank’s capital stock in Argentina and abroad as of December 31, 2012. Shareholder Class Argentine Government/ Banco de la Nación Argentina as trustee of Fideicomiso de Asistencia al Fondo Federal de Infraestructura Regional.1 A Banco de la Nación Argentina, as trustee of the PPP B Banco de la Nación Argentina, as trustee of Fideicomiso de Asistencia al Fondo Federal de Infraestructura Regional. C THE BANK OF NEW YORK ADRs1 D Principal Shareholders2 D BANCO HIPOTECARIO S.A. D Directors3 D Other D ANSES D TOTAL Number of Shares 658,530,880 75,000,000 75,000,000 90,905,000 446,515,208 36,634,733 177,900 43,199,014 74,037,265 1,500,000,000 Percentage of Shares 43.90% 5.00% 5.00% 6.06% 29.77% 2.44% 0.01% 2.88% 4.94% 100.00% Number of Votes 658,530,880 75,000,000 75,000,000 272,715,000 1,317,028,740 533,700 129,597,042 222,111,795 2,750,517,157 Percentage of Votes 23.94% 2.73% 2.73% 9.92% 47.88% 0.00% 0.02% 4.71% 8.08% 100.00% (1) Comprises 9,090,500 ADRS (10 shares = 1ADR) the voting powers of which are exercised by the Argentine Government. (2) As of December 31, 2012 Principal Shareholders include: (i) 5% held by Tyrus S.A., a company organized under the laws of the Republic of Uruguay, in which IRSA Inversiones y Representaciones Sociedad Anónima holds 100% of its capital stock; (ii) 5% held by Ritelco S.A., a company organized under the laws of the Republic of Uruguay, in which IRSA Inversiones y Representaciones Sociedad Anónima holds 100% of its capital stock; (iii) 5% held by IRSA Inversiones y Representaciones Sociedad Anónima; (iv) 5% held by Inversora Bolívar S.A., a company organized under laws of Argentina, in which IRSA Inversiones y Representaciones Sociedad Anónima holds 95.13% of its capital stock; (v) 4.99% held by E-Commerce Latina S.A., a company organized under laws of Argentina, in which IRSA Inversiones y Representaciones Sociedad Anónima holds 99.999999% of its capital stock; and (vi) 4.78% held by Palermo Invest S.A., a company organized under the laws of Argentina, in which IRSA Inversiones y Representaciones Sociedad Anónima holds 99.9999993% of its capital stock. In addition, IRSA Inversiones y Representaciones Sociedad Anónima is controlled by (i) Cresud, which holds 64.5% of its capital stock (373,267,973 shares), (ii) 7,248,030 shares held by IFISA (iii) 628,070 shares held by Consultores Assets Management S.A.; and (iv) 1,218,250 shares directly held by Mr. Eduardo Sergio Elsztain. Lastly, Mr. Eduardo Sergio Elsztain can be regarded as beneficiary holder of 38.79% (on an entirely diluted basis) of the aggregate number of shares of Cresud, which includes (i) 189,051,574 shares beneficially owned by IFISA, of which Mr. Eduardo Sergio Elsztain can be regarded as beneficial owner; (ii) 870 common shares beneficially owned by Consultores Venture Capital Uruguay S.A.; and (iii) 25,553 common shares directly owned by Eduardo Sergio Elsztain. Furthermore, Mr. Eduardo Sergio Elsztain can be regarded as beneficial owner of 84,591,744 warrants of Cresud under which he is entitled to acquire 29,692,208 new common shares upon exercising such warrants. (3) As of December 31, 2012, the Directors Alejandro Gustavo Elsztain, Eduardo Sergio Elsztain, Pablo Vergara del Carril and Andrés F. Ocampo held 140,000; 7,800; 30,000 and 100 Class D shares, respectively. 116 Voting Rights of Principal Shareholders Holders of a majority of Class D shares are entitled to elect nine members of the Board. See “Additional Information– Capital Stock – Voting Rights”. Under the Privatization Law and pursuant to Article 6 of the Bank’s Bylaws, so long as it holds at least one Class A share, the Argentine Government will have the right to elect at least two regular directors and two alternate directors to the board. See “Directors, Senior Managers and Members of the Supervisory Committee”. Principal Shareholders do not have different voting rights within the same Class. Article 6 of the Bank’s By-laws requires, subject to certain exceptions, the prior approval of the Argentine Government as holder of Class A shares of any person’s (including its affiliates’) direct or indirect acquisition, by stock purchase, merger or otherwise, of Class D Shares or securities convertible into Class D Shares which, together with prior Class D Shares held by the acquirer, represent 30.0% or more of the Bank’s capital stock. The approval of the holders of Class A Shares is also required to approve certain changes in the Bank, including among others, spin-offs, the transfer of a substantial part of its loan portfolio to a third party and a change in the Bank’s corporate purpose. So long as the Principal Shareholders vote their Class D Shares together, they have sufficient voting power to elect a majority of the Bank’s board of directors and to prevail in all matters to be decided by a class vote of holders of Class D Shares. The Argentine Government has no limitation with respect to the disposition of any of the Class A Shares, except for one Class A Share, which must always be kept by the Argentine Government pursuant to Section 20 of the Law on Regional Development and Employment Creation. In addition, pursuant to the Bank’s By-laws, if as a result of a sale of Class A Shares by the Argentine Government, Class A Shares represent less than 42% of the Bank’s capital stock, the Class D Shares will lose the triple vote. In this event, the Class D Shares will lose its current majority at the General Shareholders’ Meetings, and depending on the number of shares held by the Argentine Government it may have sufficient voting power to prevail at general shareholders’ meetings except for certain decisions that require qualified majorities. Percentage of shares recorded in Argentina and percentage of shares recorded abroad The following table shows information on the portion of each class of shares held in Argentina and abroad and the number of holders registered in Argentina and abroad as of December 31, 2012. As of December 31, 2012 Number of Shares Class Percentage of Shares Percentage of Shares Percentage of Shares held in Argentina Percentage of Shares held outside Argentina A B C D 658,530,880 75,000,000 75,000,000 691,469,120 43.9% 5.0% 5.0% 23.4% 22.7% 43.9% 5.0% 5.0% 23.4% 22.7% Total 1,500,000,000 77.3% 22.7% 77.3% 22.7% Except as indicated above, the Bank is not aware of the existence of other shareholders holding more than 5% of the Bank’s capital stock. However, the Principal Shareholders have the power to elect a majority of members of the Board of Directors as done so far. The Bank is not aware of any agreement which in event of becoming effective may cause a change of control. On March 27, 2006 the US Securities and Exchange Commission (SEC) has made effective the Level I American Depositary Receipts, “ADR” program. 117 This program allows foreign investors to buy the Bank’s stock through the secondary market where ADRs are traded freely within the United States. The Bank of New York has been appointed as depositary institution. On February 14, 2007, the change in par value of the Bank’s shares of stock became effective. This change in par value, which did not involve a change in the Bank’s capital stock, was voted upon at the General Ordinary and Extraordinary Shareholders’ Meetings held on July 21, 2006. It was decided that the Bank would maintain its fully-subscribed and paid-in capital of Ps. 1.5 billion, represented by one and a half billion (1,500,000,000) common book-entry shares of one peso (Ps.1) par value each and carrying one vote per share, except for the multiple voting right conferred upon Class D shares. On January 29, 2009, upon expiration of the Total Return Swap agreement entered into on January 29, 2004 with Deutsche Bank A.G., the latter transferred to the Bank 71,100,000 Class “D” common shares of one Peso (Ps.1) par value each issued by the Bank. Such shares have been kept as Bank's treasury shares pursuant to the terms and conditions set forth in Section 221 of the Argentine Corporate Law. On January 12, 2010, the Bank’s Board of Directors resolved as follows: (a) to discuss at the General Ordinary Shareholders’ Meeting delivery of such Class D treasury shares in payment to the holders of Stock Appreciation Rights (“StAR”) in proportion to their shareholdings and based on the share price at such time, and (b) to discuss possible alternatives for the General Ordinary Shareholders’ Meeting to decide on the application of any remaining shares. The General Ordinary Shareholders’ Meeting held on April 30, 2010 resolved to extend for one year from January 31, 2010, the period to realize the Bank’s treasury shares. In addition, such meeting held on April 30, 2010 resolved to delegate to the Board the decision to pay StAR coupons -out of treasury shares- resulting from the debt restructuring as deemed fit based on calculations related to contract and real market value thereof, conferring on the shareholders preemptive rights on the same terms. On June 16, 2010, the Board of Directors resolved to make an offer for sale subject to preemptive rights of treasury shares held at such time. Accordingly, on July 26, 2010, pursuant to such offer, approximately 26,9 million of such shares were disposed of and the proceeds from such offer and the remaining shares were made available to the holders of StAR coupons on August 3, 2010. Related Party Transactions For purposes of this Section, “Related Parties" means Directors, principal officers, statutory auditors and controlling shareholders of the Bank, as well as any person related to them and any entity that is directly or indirectly related to any of them and which are not required to be consolidated pursuant to applicable laws. The Bank is not engaged in any transaction with its directors, senior managers or other related persons, nor has it granted to them any loan and there is no proposed transaction with such persons, except for those permitted under applicable laws. In particular, some directors and senior managers have engaged in certain credit transactions with the Bank. Pursuant to the Argentine Corporate Law and the Central Bank rules directors of a company are permitted to engage in transactions with such company if the transaction is consistent with market practices. In addition, granting of loans to persons or entities related to the Bank is subject to the Central Bank rules. Such rules establish limits on the amount of the loan permitted to be granted to related parties based, among other things, on a percentage of the Bank's adjusted shareholders' equity. The Central Bank requires monthly reporting of the amount of outstanding loans of directors, controlling shareholders, officers and other related entities transcribed in the board’s book of minutes. The Central Bank rules set forth that loans to directors, controlling shareholders, officers and other related entities shall be granted on equal terms in relation to rates, terms and guarantees of loans granted to the public at large. 118 The following table shows the most significant financial assistance to legal entities related to Directors, Statutory Auditors and Senior Personnel as of December 31, 20122: Gascón Emprendimientos IRSA Group IRSA, Inversiones y Representaciones S.A. Total In thousands of Pesos 6,000.0 145,837.5 151,837.5 The following table shows the most significant financial assistance to related companies as of December 31, 20121: In thousands of Pesos 262,751.0 10,000.0 10,000.0 BACS Banco de Crédito y Securitización S.A. BH Valores Sociedad de Bolsa Tarshop SA Total 2 262,771.0 This information has been submitted by the Bank to the Argentine Central Bank pursuant to Communication A 49. 119 OFFERING AND LISTING a) Description of the Notes The following is a description of the general terms and conditions of the notes that may be issued by the Bank under the Program, which may be supplemented and/or modified by the specific terms and conditions of each series and/or tranche specified in the applicable pricing supplement relating to the series and/or tranche in question. The pricing supplement will detail, with respect to the relevant series and/or tranche, the specific terms and conditions of such series and/or tranche which, if so specified in the applicable pricing supplement or to the extent they are inconsistent with the general terms and conditions described below, will supplement and/or modify these general terms and conditions only with respect to such series and/or tranche. General The notes may be issued or not under indentures and/or agency agreements executed from time to time by the Bank with entities acting as trustees and/or agents. Such trustees and/or agents will act only with respect to the series specified in the applicable pricing supplements and will have such rights and obligations as therein set forth. The appointment of trustees and agents will be set out in the applicable pricing supplements. The creation of the Program was approved by resolution of the Bank’s General Ordinary and Extraordinary Shareholders’ Meeting dated May 23, 2008 and resolution of the Bank’s board of directors dated February 9, 2011. In addition, the above mentioned Board resolution approved the reduction of the Program amount originally approved resolution of the General Ordinary and Extraordinary Shareholders’ Meeting of the Bank dated May 23, 2008 for an amount of up to US$ 2,000,000,000 (or its equivalent in pesos) to an amount of up to US$ 500,000,000 (or its equivalent in pesos). The notes may be issued from time to time in one or more series. The notes of all series outstanding at any one time under this Program are limited to an aggregate principal amount of US$ 500,000,000 (or its equivalent in pesos). The particular terms of each issue of notes, including, without limitation, the date of issue, issue price, currency of denomination and payment, maturity, interest rate or interest rate formula, if any, and, if applicable, redemption, repayment and index provisions, will be set forth for each such issue in the notes and described in the pricing supplement applicable to such tranche and/or series. With respect to any particular note, the description of the notes herein is qualified in its entirety by reference to, and to the extent inconsistent therewith is superseded by, such note and the applicable pricing supplement. The notes issued under this program will qualify as “obligaciones negociables simples no convertibles” under Argentine law and will be issued pursuant to, and in compliance with, all of the requirements of, the Negotiable Obligations Law and any other applicable Argentine laws and regulations. Unless otherwise specified in the applicable pricing supplement, the notes will constitute the Bank’s simple, unconditional, unsecured and unsubordinated obligations and will rank at least pari passu in right of payment with all its other existing and future unsecured and unsubordinated indebtedness (other than obligations preferred by statute or by operation of law). If so specified in the applicable pricing supplement, the Bank may issue subordinated notes in accordance with the Central Bank rules then applicable, that will rank junior in right of payment to the Bank’s secured indebtedness and, to the extent set forth therein, certain of its unsecured and unsubordinated indebtedness (as well as obligations preferred by statute or by operation of law). For further information see “Ranking.” Unless previously redeemed, a note will mature on the date (the “Stated Maturity”) no less than 30 days from its date of issue as specified on the face thereof and in the applicable pricing supplement. Each note may be denominated in any currency (a “Specified Currency”) as shall be specified on the face thereof and in the applicable pricing supplement. Unless otherwise specified in the applicable pricing supplement, payments on each note will be made in the applicable Specified Currency; provided that in certain circumstances, as may be described in the applicable pricing supplement, payments on any such note denominated in a currency other than U.S. dollars may, to the extent permitted by Argentine law, be made in U.S. dollars or in other currencies. See “Payment of Principal and Interest.” 120 Each note will bear interest, if any, at the interest rate or interest rate formula set forth in the applicable pricing supplement. Unless otherwise indicated in the applicable pricing supplement, each note may bear interest at a fixed rate (a “Fixed Rate Note”) or at a rate determined by reference to an interest rate basis or other interest rate formula (a “Floating Rate Note”) or may bear no interest (a “Zero Coupon Note”). See “Interest Rate.” The notes may also be issued with principal and/or interest payable, to the extent permitted by Argentine law, in one or more currencies different from the currency in which such notes are denominated (“Dual Currency Notes”) or linked to an index and/or a formula (“Indexed Notes”). Dual Currency Notes and Indexed Notes may be issued to bear interest on a fixed or floating rate basis or on a non-interest bearing basis or a combination of such bases, in which case provisions relating to Fixed Rate Notes, Floating Rate Notes, Zero Coupon Notes or a combination thereof, respectively, shall, where the context so admits, apply to such Dual Currency or Indexed Notes. References herein to notes denominated in a Specified Currency shall, unless the context otherwise requires, include Dual Currency Notes payable in such Specified Currency. The notes may be issued as Original Issue Discount Notes. An “Original Issue Discount Note,” including any Zero Coupon Note, is a note which is issued at a price lower than the principal amount thereof, and which provides that upon redemption or acceleration of the Stated Maturity thereof, the amount payable to the holder of such note will be determined in accordance with the terms of such note, and will be an amount that is less than the amount payable on the Stated Maturity of such note. for further information see “Taxation.” Unless otherwise specified in the applicable pricing supplement, the notes will not be subject to any sinking fund (“Sinking Fund”) and will not be redeemable prior to their Stated Maturity, except in the event of certain changes involving Argentine taxes. See “Redemption and Repurchase.” The applicable Pricing Supplement may provide for the creation of a Sinking Fund for a Tranche or Series, which may be created to secure payment of such notes. The Sinking Fund’s composition and raising method, as applicable, will be specified in the applicable Pricing Supplement. If specified in the applicable pricing supplement with respect to a series of notes, the Bank may from time to time, without the consent of holders of notes outstanding, create and issue additional notes of such series provided that such additional notes have the same terms and conditions as the notes of that series in all respects (except for the date of issue, the issue price, the applicable legends and, if applicable, the first payment of interest) and the additional notes will ultimately form a single series with the previously outstanding notes of the relevant series. Program Duration The Program’s duration will be five years as from its approval by the Argentine Securities Commission. Form and Denomination The notes will be issued in the minimum denominations and other denominations specified in the pricing supplement applicable to each tranche or series. Pursuant to the Law on Corporate Notes’ Mandatory Registered Form, Argentine companies are not authorized to issue certificated securities in bearer form unless they are authorized by the Argentine Securities Commission to be placed by means of a public offering in Argentina and are represented by global or individual securities, registered or deposited with common depositary systems authorized by the Argentine Securities Commission. Therefore, for as long as the provisions of the Law on Corporate Notes’ Mandatory Registered Form are in effect, the Bank will only issue registered, non-endorsable notes or notes deposited with a custodian or clearing system, not exchangeable for bearer certificated notes, as set forth in the applicable pricing supplement. In the event that the Notes are offered in the United States to qualified institutional buyers in reliance on Rule 144A under the Securities Act, they will be represented by one or more Rule 144A global notes. In the event that the notes are offered in reliance on Regulation S, they will be represented 121 by one or more Regulation S global notes. In the event that the notes are offered in other markets, they will be represented in compliance with the applicable laws of such markets. Replacement of Notes Notes that become mutilated, destroyed, stolen or lost will be replaced upon delivery to the Bank and the Trustee (if appointed by the Bank) of evidence of the loss, theft or destruction thereof satisfactory to the Bank. In the case of a lost, stolen or destroyed note, an indemnity and/or security satisfactory to the Bank may be required at the expense of the holder of such note before a replacement note will be issued. Upon the issuance of any new note, the Bank may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and the expenses of its counsel and its agents) connected therewith. Definitive and Temporary Notes Temporary notes may be exchanged for definitive notes, in the denominations set forth in each opportunity, as specified in the applicable pricing supplement. All temporary notes will be identified as such and will make reference to the Noteholder’s right to exchange them for definitive notes, as well as the manner in which such exchange will be made. Ranking The notes will qualify as “obligaciones negociables” under the Negotiable Obligations Law and Resolution 597/2011, and will be entitled to the benefits set forth therein and subject to the procedural requirements established therein. In particular, pursuant to Section 29 of the Negotiable Obligations Law, in case of default by the Bank in the payment of any amounts outstanding under the notes of any series, the holder of such notes will be entitled to file a summary action (“acción ejecutiva”) in Argentina for collection of such amount. The notes will constitute simple, unconditional, unsecured and unsubordinated obligations of the Bank and will rank at least pari passu in right of payment with all its other existing and future unsecured and unsubordinated indebtedness (other than obligations preferred by statute or by operation of law, including, inter alia, tax and labor claims and obligations of the Bank vis-à-vis its depositors). These general conditions may be superseded, enlarged and/or supplemented in the applicable pricing supplement relating to each tranche and/or series, always safeguarding the investors’ interests. Specifically, pursuant to the FIL, all existing and future depositors of the Bank will have a general priority over the holders of notes issued under this Program. The FIL provides that, in the event of judicial liquidation or bankruptcy, all depositors, whether individuals or legal entities, and whichever the type, amount or currency of their deposits, would have general and absolute priority over any other of the Bank’s creditors (including the holders of the notes), except for certain labor and secured creditors. In addition, the depositors would have priority over all the other creditors, save for certain labor creditors, over the funds in possession of the Central Bank as reserves, other funds existing at the date when the Bank’s authorization is revoked and the proceeds of the mandatory transfer of the Bank’s assets as determined by the Central Bank. If so specified in the applicable pricing supplement, the Bank may issue subordinated notes that will rank junior in right of payment to its unsubordinated indebtedness, in accordance with the applicable laws. In addition, the owners of any kind of deposits will have special priority rights with respect to the Banks remaining creditors, except with respect to labor claims and claims secured by a pledge or mortgage, to be paid out of (i) the Bank’s funds in possession of the Central Bank as reserves; (ii) other funds existing at the date when the Bank’s authorization is revoked; or (iii) the proceeds of the mandatory transfer of the Bank’s assets as determined by the Central Bank, in the following order of priority: (a) deposits of up to Ps.50,000 per person or corporation (considering all amounts of such person/corporation deposited in one financial institution) or its equivalent amount in foreign currency, with priority right granted to one person per deposit (in the case of more than one account holder, the amount is pro rated among such account holders); (b) any deposits greater than Ps.50,000 or its equivalent in foreign currency, for the amounts exceeding such sum; and (c) liabilities derived from credit facilities granted to 122 the bank, which directly affect international trade. Also, under Section 53 of the FIL, any claims of the Central Bank will have priority over any other creditors, except for creditors secured by a pledge or mortgage, certain labor creditors and depositors (in the terms set forth above), facilities granted pursuant to the Central Bank Charter (rediscounts granted to financial entities in the event of a temporary lack of liquidity, advances to financial entities under a bond, bond assignment, pledge or special assignment of certain assets), and facilities granted by the Argentine Bank Liquidity Fund and secured by a pledge or mortgage collateral. Interest Rate General Each Fixed Rate Note or Floating Rate Note will bear interest from (and including) the issue date or such other date (the “Interest Commencement Date”) specified in the applicable pricing supplement or from the most recent Interest Payment Date (or, if such note is a Floating Rate Note and the Interest Reset Period is daily or weekly, from the day following the most recent Interest Reset Date) (as each such term is defined below) to which interest on such note has been paid or duly provided for at the fixed rate per annum, or at the rate per annum determined pursuant to the interest rate formula, stated in the applicable pricing supplement, until the principal thereof is paid or made available for payment. Interest will be payable on the date or dates specified in the applicable pricing supplement (an “Interest Payment Date”) and at Stated Maturity or upon redemption or acceleration, as specified under “Payment of Principal and Interest” below. Each note bearing interest will bear interest at either (a) a fixed rate or (b) a variable rate determined by reference to an interest rate basis (including LIBOR (a “LIBOR Note”), the Treasury Rate (a “Treasury Rate Note”) or such other interest rate basis as is set forth in the applicable pricing supplement, including but not limited to BADLAR rate and/or CER rate, and in compliance with the applicable Argentine laws and regulations, which may be adjusted by adding or subtracting the Spread and/or multiplying by the Spread Multiplier. The “Spread” is the number of basis points specified in the applicable pricing supplement as being applicable to the interest rate for such note, and the “Spread Multiplier” is the percentage specified in the applicable pricing supplement as being applicable to the interest rate for such note. A Floating Rate Note may also have either or both of the following as specified in the applicable pricing supplement: (a) a maximum numerical interest rate limitation, or ceiling, on the rate of interest which may accrue during any interest period (a “Maximum Rate”) and (b) a minimum numerical interest rate limitation, or floor, on the rate of interest which may accrue during any interest period (a “Minimum Rate”). The referred general conditions on Interest Rate may be superseded, enlarged and/or supplemented in the applicable pricing supplement relating to each tranche and/or series, always safeguarding the investors’ interests. The Bank uses the following general definitions throughout this section: “BADLAR” means the average of the interest rates offered for fixed term operations over a million Pesos by private banking entities for a term of between 30 and 35 days. This rate is published by the Central Bank in its web site. “Business Day” means, unless otherwise defined in the applicable pricing supplement, any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which commercial banks are authorized or required by law, regulation or executive order to close in New York City or Buenos Aires City; provided, however, that, with respect to notes denominated in a Specified Currency other than U.S. dollars, it is also not a day on which commercial banks are authorized or required by law, regulation or executive order to close in the principal financial center of the country issuing the Specified Currency (or, if the Specified Currency is the Euro, such day is also a day on which the Trans-European Automated Real Time Gross Settlement Express Transfer (TARGET) System is open, (a “TARGET Settlement Date”); provided further that, with respect to a LIBOR Note, it is also a London Banking Day. “CER” means a daily adjustment index issued by the Central Bank which reflects the rate of inflation. This calculation is based on the registered fluctuation of the Consumer Prices Index which is issued by the National Institute of Statistics and Census. 123 “London Banking Day” means any day on which dealings in deposits in U.S. dollars are transacted in the London interbank market. “Index Maturity” means, with respect to a Floating Rate Note, the period to maturity of the instrument or obligation on which the interest rate formula is based, as specified in the applicable pricing supplement. The trustee and the calculation agent for the Global Notes (the “Calculation Agent”) with respect to the Floating Rate Notes will be specified in the applicable pricing supplement. Fixed Rate Notes Fixed Rate Notes will bear interest from (and including) the Interest Commencement Date specified in the applicable pricing supplement at the rate or rates per annum so specified (the “Fixed Rate(s) of Interest”) payable in arrears on the Interest Payment Date(s) in each year and on the Stated Maturity or upon redemption or acceleration. The first payment of interest will be made on the Interest Payment Date next following the Interest Commencement Date and, if the period from the Interest Commencement Date to the Interest Payment Date differs from the period between subsequent Interest Payment Dates, will equal the “Initial Broken Amount” specified in the applicable pricing supplement. If the Stated Maturity is not an Interest Payment Date, interest from and including the preceding Interest Payment Date (or the Interest Commencement Date, as the case may be) to (but excluding) the Stated Maturity will equal the “Final Broken Amount” specified in the applicable pricing supplement. Floating Rate Notes General The applicable pricing supplement relating to a Floating Rate Note will designate an interest rate basis (the “Interest Rate Basis”) for such Floating Rate Note. The Interest Rate Basis for each Floating Rate Note will be: (a) LIBOR, in which case such note will be a LIBOR Note; (b) the Treasury Rate, in which case such note will be a Treasury Rate Note; or (c) such other interest rate basis as is set forth in such pricing supplement including but not limited to BADLAR rate and/or CER rate. The pricing supplement for a Floating Rate Note will also specify, if applicable, the Calculation Agent, the Index Maturity, the Spread and/or Spread Multiplier, the Maximum Rate, the Minimum Rate, the Regular Record Dates and the Initial Interest Rate, the Interest Payment Dates, the Calculation Dates, the Interest Determination Dates, the Interest Reset Period and the Interest Reset Dates (each as defined below) with respect to such note. The rate of interest on each Floating Rate Note will be reset and become effective daily, weekly, monthly, quarterly, semiannually or annually or otherwise, as specified in the applicable pricing supplement (each an “Interest Reset Period”); provided, however, that (a) the interest rate in effect from the date of issue to the first Interest Reset Date with respect to a Floating Rate Note will be the initial interest rate as set forth in the applicable pricing supplement (the “Initial Interest Rate”) and (b) unless otherwise specified in the applicable pricing supplement, the interest rate in effect for the ten days immediately prior to Stated Maturity of a note will be that in effect on the tenth day preceding such Stated Maturity. The dates on which the rate of interest will be reset (each an “Interest Reset Date”) will be specified in the applicable pricing supplement. If any Interest Reset Date for any Floating Rate Note would otherwise be a day that is not a Business Day with respect to such Floating Rate Note, the Interest Reset Date for such Floating Rate Note will be postponed to the next day that is a Business Day with respect to such Floating Rate Note, except that, in the case of a LIBOR Note, if such Business Day is in the next succeeding calendar month, such Interest Reset Date will be the next preceding Business Day. The “Interest Determination Dates” will be as set forth below, unless otherwise specified in the applicable pricing supplement, always safeguarding the investors’ interests The Interest Determination Date pertaining to an Interest Reset Date for a LIBOR Note (the “LIBOR Interest Determination Date”) will be the second Business Day preceding such Interest Reset Date. The Interest Determination Date pertaining to an Interest Reset Date for a Treasury Rate Note (the “Treasury Interest Determination Date”) will be the day of the week in which such Interest Reset Date falls and on which Treasury bills would normally be auctioned. Treasury bills are usually sold at auction on the Monday of each week, unless that day is a legal holiday, in which case the auction is usually held on the following Tuesday, 124 except that such auction may be on the preceding Friday. If, as the result of a legal holiday, an auction is so held on the preceding Friday, such Friday will be the Treasury Interest Determination Date pertaining to the Interest Reset Date occurring in the next succeeding week. If an auction date falls on any Interest Reset Date for a Treasury Rate Note, then such Interest Reset Date will instead be the first Business Day immediately following such auction date. All percentages resulting from any calculations referred to in this offering memorandum will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five onemillionths of a percentage point rounded upward (e.g., 9.876545% (or 0.09876545) being rounded to 9.87655% (or 0.0987655)), and all Specified Currency amounts used in or resulting from such calculations will be rounded to the nearest cent (with one-half cent rounded upward) or nearest equivalent in Specified Currencies other than U.S. dollars. In addition to any Maximum Rate which may be applicable to any Floating Rate Note pursuant to the above provisions, the interest rate on Floating Rate Notes will in no event be higher than the maximum interest rate permitted by applicable law. Upon the request of the holder of any Floating Rate Note, the relevant Calculation Agent will provide the interest rate then in effect, and, if determined, the interest rate which will become effective on the next Interest Reset Date with respect to such Floating Rate Note. The relevant Calculation Agent’s determination of any interest rate will be final and binding in the absence of manifest error. Upon request of the Bank, the relevant Calculation Agent will cause notice of the rate of interest and the amount of interest for each interest period and the relevant Interest Payment Date to be given to the Bank (and, as applicable, to the trustee, if so determined in the applicable pricing supplement) as soon as possible after their determination but in no event later than the fourth Business Day thereafter and, in the case of notes listed on the Luxembourg Stock Exchange for trading on the EuroMTF, no later than the first day of the relevant Interest Reset Period, and otherwise within 30 days of the relevant Payment Date. Such notice will be in accordance with the provisions of the notes relating to notices to holders of notes. See “Notices”. The amount of interest and the Interest Payment Date may subsequently be amended (or appropriate alternative arrangements may be made by way of adjustment) without notice in the event of an extension or shortening of the Interest Reset Period. The manner in which the interest rate for any Floating Rate Note that is not a LIBOR Note or a Treasury Rate Note will be determined as set forth in the applicable pricing supplement. LIBOR Notes LIBOR Notes will bear interest at the interest rates (calculated with reference to LIBOR and the Spread and/or Spread Multiplier, if any, subject to the Maximum Rate or the Minimum Rate, if any), and will be payable on the dates, specified on the face of the LIBOR Note and in the applicable pricing supplement. LIBOR with respect to any Interest Reset Date will be determined by the Calculation Agent in accordance with the following provisions. On the relevant LIBOR Interest Determination Date, LIBOR will be determined on the basis of either of the following, as specified in the applicable pricing supplement: (a) the offered rates for deposits in the Specified Currency having the specified Index Maturity, commencing on the next succeeding Interest Reset Date, which appear on the display designated as page “LIBOR01” or “LIBOR02” as applicable, on the Reuters Monitor Money Rates Service (or such other page as may replace such pages on that service for the purpose of displaying London interbank offered rates of major banks for deposits in the Specified Currency) (each a “Reuters Screen LIBOR Page”) as of 11:00 A.M., London time, on such LIBOR Interest Determination Date. If at least two such offered rates appear on the Reuters Screen LIBOR Page, LIBOR with respect to such Interest Reset Date will be the arithmetic mean of such offered rates as determined by the Calculation Agent. If fewer than two offered rates appear, LIBOR with respect to such Interest Reset Date will be determined as described in (c) below; or 125 (b) the offered rates for deposits in the Specified Currency having the specified Index Maturity, commencing on the next succeeding Interest Reset Date, which appear on the display designated as page “BBAM1” on the Bloomberg Service (or such other page as may replace such page on that service for the purpose of displaying London interbank offered rates of major banks for deposits in the Specified Currency) (each, a “Bloomberg Page”) as of 11:00 A.M., London time, on such LIBOR Interest Determination Date. If no such offered rate appears, LIBOR with respect to such Interest Reset Date will be determined as described in (c) below. If neither a Reuters Screen LIBOR Page nor Bloomberg is specified in the applicable pricing supplement, LIBOR will be determined as if a Reuters Screen LIBOR Page had been so specified. (c) With respect to a LIBOR Interest Determination Date on which fewer than two offered rates for the applicable Index Maturity appear on a Reuters Screen LIBOR Page as described in (a) above, or on which no rate appears on the Bloomberg page as described in (b) above, as applicable, LIBOR will be determined on the basis of the rates at approximately 11:00 A.M., London time, on such LIBOR Interest Determination Date at which deposits in the Specified Currency having the specified Index Maturity are offered to prime banks in the London interbank market by four major banks in the London interbank market selected by the Bank commencing on the second Business Day immediately following such LIBOR Interest Determination Date and in a principal amount equal to an amount of not less than US$1 million (or its approximate equivalent in a Specified Currency other than U.S. dollars) that in the Bank’s judgment is representative for a single transaction in such market at such time (a “Representative Amount”). The Calculation Agent will request the principal London office of each of such banks to provide a quotation of its rate. If at least two such quotations are provided, LIBOR with respect to such Interest Reset Date will be the arithmetic mean of such quotations. If fewer than two quotations are provided, LIBOR with respect to such Interest Reset Date will be the arithmetic mean of the rates quoted at approximately 11:00 A.M., New York City time, on such LIBOR Interest Determination Date by three major banks in New York City, selected by the Bank, for loans in the Specified Currency to leading European banks having the specified Index Maturity commencing on the Interest Reset Date and in a Representative Amount; provided, however, that if fewer than three banks selected as aforesaid by the Bank are quoting as mentioned in this sentence, LIBOR with respect to such Interest Reset Date will be LIBOR in effect on such LIBOR Interest Determination Date. Treasury Rate Notes Treasury Rate Notes will bear interest at the interest rates (calculated with reference to the Treasury Rate and the Spread and/or Spread Multiplier, if any, subject to the Maximum Rate or Minimum Rate, if any) and will be payable on the dates specified in the applicable pricing supplement. The “Calculation Date” with respect to a Treasury Interest Determination Date will be the tenth day after such Treasury Interest Determination Date or, if any such day is not a Business Day, the next succeeding Business Day, unless the applicable pricing supplement establishes any change that provides increased protection of the investors’ interests. Unless otherwise indicated in the applicable pricing supplement and in such case to the extent that the investors’ interests are safeguarded, “Treasury Rate” means, with respect to any Interest Reset Date, the rate for the auction on the relevant Treasury Interest Determination Date of direct obligations of the United States (“Treasury Bills”) having the Index Maturity specified in the applicable pricing supplement, as such rate appears on the display of (i) Reuters Monitor Money Rates Service (or any successor service) on page “RTRTSY1” or “RTRTSY2,” as applicable (or any other pages as may replace such pages), or (ii) Bloomberg Services (or any successor service) on page “BTMM” or “PX1,” as applicable (or any other pages as may replace such pages). In the event that such rate does not appear on any such page by 3:00 p.m., New York City time, on the Calculation Date pertaining to such Treasury Interest Determination Date, then the Treasury Rate for such Interest Reset Date shall be the rate on such date as published in H.15 Daily Update under the heading “U.S. government securities—Treasury bills— Auction high.” In the event that the foregoing rates do not so appear or are not so published by 3:00 p.m., New York City time, on the Calculation Date pertaining to such Treasury Interest Determination Date, then the Treasury Rate for such Interest Reset Date shall be the “Investment Rate” (expressed as a bond equivalent yield, on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis) as announced by the United States Department of the Treasury for the auction held on such Treasury Interest Determination Date, currently available on the worldwide web at: http://www.publicdebt.treas.gov/AI/OFBills or such website as may replace it in the future. In the event 126 that the results of the auction of Treasury Bills having the Index Maturity specified on the face of the note and in the applicable pricing supplement are not published or reported as provided above by 3:00 p.m., New York City time, on such Calculation Date or if no such auction is held on such Treasury Interest Determination Date, then the Treasury Rate shall be calculated by the Calculation Agent and shall be the rate for such Treasury Interest Determination Date for the issue of Treasury Bills with a remaining maturity closest to the specified Index Maturity (expressed as a bond equivalent yield, on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis) as published in H.15(519) under the heading “U.S. government securities—Treasury bills (secondary market).” In the event that the foregoing rates do not so appear or are not so published by 3:00 p.m., New York City time, on the Calculation Date pertaining to such Treasury Interest Determination Date, then the Treasury Rate for such Interest Reset Date shall be the rate for such Treasury Interest Determination Date for the issue of Treasury Bills with a remaining maturity closest to the specified Index Maturity, as published in H.15 Daily Update or another recognized electronic source used for the purpose of displaying such rate under the heading “U.S. government securities—Treasury bills (secondary market).” In the event that the foregoing rates do not so appear or are not so published by 3:00 p.m., New York City time, on the Calculation Date pertaining to such Treasury Interest Determination Date, then the Treasury Rate shall be calculated by the Calculation Agent and shall be a yield to maturity (expressed as a bond equivalent yield, on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis) of the arithmetic mean of the secondary market bid rates, at approximately 3:30 p.m., New York City time, on such Treasury Interest Determination Date, quoted by three leading United States government securities dealers selected by the Bank for the issue of Treasury Bills with a remaining maturity closest to the specified Index Maturity; provided that if the dealers selected are not quoting as mentioned in this sentence, the Treasury Rate for such Interest Reset Date shall be the Treasury Rate in effect on such Treasury Interest Determination Date. Payment of Principal and Interest General Interest (and principal, if any, payable other than at Stated Maturity or upon acceleration or redemption) will be payable in immediately available funds to the person in whose name a note is registered at the close of business on the Regular Record Date next preceding each Interest Payment Date notwithstanding the cancellation of such notes upon any transfer or exchange thereof subsequent to such Record Date and prior to such Interest Payment Date; provided, however, that interest payable at Stated Maturity or upon acceleration or redemption will be payable to the person to whom principal will be payable; provided further that if and to the extent the Bank defaults in the payment of the interest (including Additional Amounts) due on such Interest Payment Date, such defaulted interest (including Additional Amounts) will be paid to the person in whose names such notes are registered at the end of a subsequent record date established by the Bank by notice given by mail by or on behalf of the Bank to the holders of the notes not less than 15 days preceding such subsequent record date, such record date to be not less than 15 days preceding the date of payment in respect of such defaulted interest. Unless otherwise specified in the note or the applicable pricing supplement, the first payment of interest on any note originally issued between a Regular Record Date and an Interest Payment Date will be made on the Interest Payment Date following the next succeeding Regular Record Date to the registered owner at the close of business on such next succeeding Regular Record Date. Unless otherwise indicated in the applicable pricing supplement and in such case to the extent that the investors’ interests are safeguarded, the “Regular Record Date” with respect to any note will be the date 15 calendar days prior to each Interest Payment Date, whether or not such date will be a Business Day. Payment of the principal of and any premium, interest, Additional Amounts and other amounts on or in respect of any Registered Note at Stated Maturity or upon early redemption or acceleration will be made in immediately available funds to the person in whose name such note is registered upon surrender of such note at the specified office of any other Paying Agent or, as applicable, the offices of the trustee specified in the applicable pricing supplement, provided that the Registered Note is presented to the Paying Agent in time for the Paying Agent to make such payments in such funds in accordance with its normal procedures. Payments of the principal of and any premium, interest, Additional Amounts and other amounts on or in respect of Registered Notes to be made other than at Stated Maturity or upon redemption will be made by check mailed on the due date for such payments to the address of the person entitled thereto as it appears in the Register; provided that (a) the applicable Depositary, as holder of the Global Notes, shall be entitled to receive payments of interest by wire transfer of immediately available funds, (b) a holder of US$1 million (or the approximate equivalent thereof in a Specified Currency other 127 than U.S. dollars) in aggregate principal or face amount of notes of the same series shall be entitled to receive payments of interest by wire transfer of immediately available funds to an account maintained by such holder at a bank located in the United States as may have been appropriately designated by such person to the Bank in writing no later than 15 days prior to the date such payment is due and (c) to the extent that the holder of a Registered Note issued and denominated in a Specified Currency other than U.S. dollars elects to receive payment of principal and interest at Stated Maturity or upon early redemption in such Specified Currency, such payment, except in circumstances described in the applicable pricing supplement, shall be made by wire transfer of immediately available funds to an account specified in writing not less than 15 days prior to Stated Maturity by the holder to the Bank. Payments of interest on any Fixed Rate Note or Floating Rate Note with respect to any Interest Payment Date will include interest accrued to but excluding such Interest Payment Date; provided, however, that, unless otherwise specified in the applicable pricing supplement, if the Interest Reset Dates with respect to any Floating Rate note are daily or weekly, interest payable on such note on any Interest Payment Date, other than interest payable on the date on which principal on any such note is payable, will include interest accrued to but excluding the day following the next preceding Interest Reset Date. With respect to a Floating Rate Note, accrued interest from the date of issue or from the last date to which interest has been paid is calculated by multiplying the principal or face amount of such Floating Rate Note by an accrued interest factor. Such accrued interest factor is computed by adding the interest factor calculated for each day from the date of issue, or from the last date to which interest has been paid, to but excluding the date for which accrued interest is being calculated. The interest factor (expressed as a decimal) for each such day is computed by dividing the interest rate (expressed as a decimal) applicable to such date by 360, in the case of LIBOR notes, or by the actual number of days in the year, in the case of Treasury Rate Notes. Interest on Fixed Rate Notes will be calculated on the basis of a 360-day year consisting of twelve months of 30 days each and, in the case of an incomplete month, the number of days elapsed. If any Interest Payment Date (other than the Stated Maturity) for any Floating Rate Note would otherwise be a day that is not a Business Day in the relevant locations specified in the pricing supplement and the place of payment, such Interest Payment Date will be the next Business Day succeeding such Business Day (except that, in the case of a LIBOR Note, if such Business Day is in the next succeeding calendar month, such Interest Payment Date will be the next Business Day preceding such Business Day). If the Stated Maturity for any Fixed Rate Note or Floating Rate Note or the Interest Payment Date for any Fixed Rate Note falls on a day which is not a Business Day in the relevant locations specified in the pricing supplement and the place of payment, payment of principal (and premium, if any) and interest with respect to such note will be made on the next succeeding Business Day in the place of payment with the same force and effect as if made on the due date and no interest on such payment will accrue from and after such due date. Specified Currency Other than U.S. Dollars If any note is to be denominated in a Specified Currency other than U.S. dollars, certain provisions with respect thereto will be set forth in the applicable pricing supplement, which will specify the foreign currency or currency unit in which the principal or any premium or interest with respect to such note is to be paid, along with any other terms relating to the non-U.S. dollar denomination. If the Bank offers Indexed Notes or Dual Currency Notes, the applicable pricing supplement and such Indexed Notes or Dual Currency Notes will set forth the method by and the terms on which the amount of principal (payable on or prior to Stated Maturity), interest and/or any premium will be determined, any additional tax consequences to the holder of such note, a description of certain risks associated with investment in such note and other information relating to such note. Unless otherwise specified in the applicable pricing supplement and in such case to the extent that the investors’ interests are safeguarded, notes denominated in a Specified Currency other than U.S. dollars will provide that, in the event of an official redenomination of the Specified Currency, the Bank’s obligations with respect to payments on such notes will, in all cases, be deemed immediately following such redenomination to provide for payment of that amount of the redenominated Specified Currency representing the amount of such obligations immediately before such redenomination. 128 If the principal of or any premium, interest, Additional Amounts or other amounts on any note are payable in a Specified Currency other than U.S. dollars and such Specified Currency is not available due to the imposition of exchange controls or other circumstances beyond the Bank’s control, or is no longer used by the government of the country issuing such currency or for settlement of transactions by public institutions of or within the international banking community, the Bank will be entitled, to the extent permitted by Argentine law, to satisfy the Bank’s obligations to the holder of such notes by making such payment in U.S. dollars on the basis of (i) in the case of interest payments, the Exchange Rate Agent’s bid (U.S. dollar offer) quotation for such Specified Currency, and, in the case of principal payments, the Exchange Rate Agent’s offer (U.S. dollar bid) quotation for such Specified Currency, in each case at or prior to 11:00 a.m., New York City time, on the second Business Day next preceding the applicable payment date or the date by which the U.S. Dollar Equivalent must be determined, or (ii) if no such rate is quoted for any reason, the rate determined by the Exchange Rate Agent based on an average of quotations given to the Exchange Rate Agent by commercial banks which conduct foreign exchange operations, or based on such other method as the Exchange Rate Agent may reasonably determine to calculate a market exchange rate, on the second Business Day next preceding the applicable payment date or the date by which the U.S. Dollar Equivalent must be determined (such rate determined as set forth in clauses (i) (ii) above, the “Exchange Rate”). In the event that the Exchange Rate is not available on the second Business Day next preceding the applicable payment date, the rate at which the amount due shall be converted into U.S. dollars shall be such rate as may be agreed to at such time by the Bank and the Exchange Rate Agent. Unless otherwise specified, the exchange rate agent (the “Exchange Rate Agent”) with respect to notes denominated in a Specified Currency other than U.S. dollars will be specified in the applicable pricing supplement. Payments of the principal and any premium, interest, Additional Amounts or other amounts to holders of a note denominated in a Specified Currency other than U.S. dollars who hold the note through DTC will, to the extent permitted by Argentine law, be made in U.S. dollars. However, any DTC holder of a note denominated in a Specified Currency other than U.S. dollars may elect to receive payments by wire transfer in such Specified Currency other than U.S. dollars by delivering a written notice to the DTC participant through which it holds its beneficial interest, not later than the Regular Record Date, in the case of an interest payment, or at least 15 calendar days before the Stated Maturity, specifying wire transfer instructions to an account denominated in the Specified Currency. The DTC participant must notify DTC of the election and wire transfer instructions on or before the twelfth Business Day before the applicable payment of the principal. If so specified in a note denominated in a Specified Currency other than U.S. dollars and the applicable pricing supplement, and except as provided in the next following paragraph, payments of principal and any premium, interest, Additional Amounts or other amounts with respect to such note will, to the extent permitted by Argentine law, be made in U.S. dollars if the holder of such note on the relevant Regular Record Date or at Stated Maturity, as the case may be, has transmitted a written request for such payment in U.S. dollars to the Bank and the applicable Paying Agent on or prior to such Regular Record Date or the date 15 days prior to Stated Maturity, as the case may be. Such request may be in writing (mailed or hand delivered) or by facsimile transmission. Holders of notes denominated in a Specified Currency other than U.S. dollars that are registered in the name of a broker or nominee should contact such broker or nominee to determine whether and how an election to receive payments in U.S. dollars may be made. The U.S. dollar amount to be received by a holder of a note denominated in a Specified Currency other than U.S. dollars who elects to receive payment in U.S. dollars will be based on the Exchange Rate on the second Business Day next preceding the applicable payment date. If Exchange Rate quotations are available on the second Business Day preceding the date of payment of principal or any premium, interest, Additional Amounts or other amounts with respect to any note, such payment will be made in the Specified Currency. All currency exchange costs associated with any payment in U.S. dollars on any such note denominated in a Specified Currency other than U.S. dollars will be borne by the holder thereof by deductions from such payment of such currency exchange being effected on behalf of the holder by the Exchange Rate Agent. Unless otherwise specified in the applicable pricing supplement, (i) a note denominated in Euro may only be presented for payment on a day on which the TARGET system is operating and (ii) if interest is required to be calculated for a period of less than one year, it will be calculated on the basis of the actual number of days elapsed divided by 365 (or, if any of the days elapsed fall in a leap year, the 129 sum of (A) the number of those days falling in a leap year divided by 366 and (B) the number of those days falling in a non-leap year divided by 365). Redemption and Repurchase Redemption for Taxation Reasons The notes of any series may be redeemed at the Bank’s option in whole, but not in part, at any time, on giving not less than 30 nor more than 60 days’ written notice (which will be irrevocable) to the holders and, if applicable, the CNV, in writing, of the principal amount thereof (or, in the case of Original Issue Discount Notes, at the Amortized Face Amount (as defined below) thereof), together with any accrued but unpaid interest and any Additional Amounts to the date fixed for redemption (which date, in the case of Floating Rate Notes, must be an Interest Payment Date), if, as a result of any change in, or amendment to, the laws (or any regulations or rules issued thereunder) of Argentina or any political subdivision of or any taxing authority in Argentina or any change in the application, administration or official interpretation of such laws, regulations or rules, including, without limitation, the holding of a court of competent jurisdiction, the Bank has or will become obligated to pay Additional Amounts and/or Argentine Taxes on or in respect of such notes, which change or amendment becomes effective on or after the date of issuance of the notes of such series, and the Bank determines in good faith that such obligation is material and cannot be avoided by the Bank taking reasonable measures available to it. The applicable pricing supplement will establish the specific procedures for redemption of the notes for tax reasons, which shall supersede, supplement and/or modify the terms and conditions of the general procedure herein described, always safeguarding the investors’ interests. In addition, any notices by the Bank to the holders will be made to the CNV through the Financial Information Highway (www.cnv.gob.ar) as a “Material Event”. Redemption at the Option of the Bank The Bank may, subject to compliance with all relevant laws and regulations, having given (unless otherwise specified in the applicable pricing supplement) not more than 60 nor less than 30 days’ notice to the holders of the notes in accordance with the provisions governing the giving of notices set forth below (which notice will be irrevocable) and to the Trustee (15 days prior to the delivery of such notice to the holders) and, if applicable, the Argentine Securities Commission, redeem all or only some of the notes then outstanding on the dates (the “Optional Redemption Date(s)”) and at the amounts (the “Optional Redemption Amount(s)”) specified in, or determined in the manner specified in, the applicable pricing supplement together with accrued interest (if any) to the date fixed for redemption (which date, in the case of Floating Rate Notes, must be an Interest Payment Date). In the event of a redemption of only some of a series of notes, such redemption must be of a principal amount being the “Minimum Redemption Amount” or a “Higher Redemption Amount,” in each case if so indicated in the applicable pricing supplement. In the case of a partial redemption of Certificated Notes, such notes to be redeemed will be determined on a pro rata basis, by lot, or otherwise in accordance with the procedures of the depositary, not more than 60 days prior to the date fixed for redemption. In the case of a partial redemption of notes which are represented by a Global Note, the relevant notes will be selected in accordance with the rules of the relevant clearing system or systems, as the case may be. If the notes are listed on the Luxembourg Stock Exchange for trading on the EuroMTF or on any other securities exchange and the rules of the Luxembourg Stock Exchange or such other securities exchange so require, as applicable, the Bank will, once in each year in which there has been a partial redemption of the notes, cause to be published in a leading newspaper of general circulation in Luxembourg or as specified by such other securities exchange a notice specifying the aggregate principal amount of notes outstanding and a list of the notes drawn for redemption but not surrendered. The applicable pricing supplement will establish the specific detailed procedures for redemption of the notes at the option of the Bank, which shall supersede, supplement and/or modify the terms and conditions of the general procedure herein described, always safeguarding the investors’ interests. In addition, any notices by the Bank to the holders will be made to the CNV through the Financial Information Highway (www.cnv.gob.ar) as a “Material Event”. 130 Redemption at the Option of the Holder Upon the holder of any note giving to the Bank (unless otherwise specified in the applicable pricing supplement) not more than 60 nor less than 30 days’ notice in accordance with the provisions governing the giving of notices set forth below, which notice will be irrevocable, the Bank will, subject to compliance with all relevant laws and regulations, upon the expiry of such notice, redeem such note at such price or prices as specified in the applicable pricing supplement on the Optional Redemption Date and at the Optional Redemption Amount specified in or determined in the manner specified in the applicable pricing supplement, in whole but not in part, together with accrued interest (if any) to the date fixed for redemption. Partial redemption will be made on a pro rata basis, by lot, or otherwise, provided that the applicable pricing supplements will establish the specific procedures for redemption of the notes that may be issued, which shall supersede, supplement and/or modify these general terms and conditions, always safeguarding the investors’ interests. In addition, any notices by the Bank to the holders will be made through the CNV’s Financial Information Highway (www.cnv.gob.ar) as a “Material Event”. Only the registered holder of a Global Note can exercise a right to repayment in respect thereof. In order to ensure that such entity will timely exercise a right to repayment with respect to a particular note, the beneficial owners of such notes must instruct the broker or other direct or indirect participant through which it holds an interest in such note to notify DTC, Euroclear or Clearstream, Luxembourg, as the case may be, of its desire to exercise a right to repayment. Different firms have different deadlines for accepting instructions from their customers and, accordingly, each beneficial owner should consult the broker or other direct or indirect participant through which it holds an interest in a note in order to ascertain the deadline by which such an instruction must be given in order for timely notice to be delivered to DTC, Euroclear or Clearstream, Luxembourg, as the case may be. The applicable pricing supplement will establish the specific detailed procedures for redemption of the notes at the option of the holder, which shall supersede, supplement and/or modify the terms and conditions of the general procedure herein described, always safeguarding the investors’ interests. In addition, any notices by the Bank to the holders will be made to the CNV through the Financial Information Highway (www.cnv.gob.ar) as a “Material Event”. Redemption of Original Issue Discount Notes In the event of acceleration of maturity or redemption prior to maturity of an Original Issue Discount Note, the amount payable thereon in lieu of the principal amount due at the Stated Maturity will be the amount (the “Amortized Face Amount”) equal to the sum of (i) the issue price (as defined in “Taxation”) of such note and (ii) the product of the accrual yield specified in the applicable pricing supplement (compounded annually) and the issue price from (and including) the issue date to (but excluding) the Optional Redemption Date (or, in the case of an early redemption for taxation reasons, the date fixed for redemption) and computed in accordance with generally accepted United States bond yield computation principles, but in no event will the Amortized Face Amount exceed the principal amount of such note due at Stated Maturity thereof. The applicable pricing supplement will establish the specific detailed procedures for redemption of the Original Discount Notes, which shall supersede, supplement and/or modify the terms and conditions of the general procedure herein described, always safeguarding the investors’ interests. In addition, any notices by the Bank to the holders will be made to the CNV through the Financial Information Highway (www.cnv.gob.ar) as a “Material Event”. Repurchase of Notes The Bank and its Subsidiaries may at any time purchase or otherwise acquire any note in the open market or otherwise at any price and may resell or otherwise dispose of such note at any time; provided that in determining at any time whether the holders of the requisite principal amount of the notes outstanding have given any request, demand, authorization, direction, notice, consent or waiver, notes then owned by the Bank or any of its subsidiaries will be disregarded and deemed not outstanding. 131 Cancellation Any notes redeemed in full by the Bank will be immediately canceled and may not be reissued or resold. If notice of redemption has been given in the manner set forth herein and in the applicable pricing supplement, a series of notes to be redeemed will become due and payable on the redemption date specified in such notice, and upon presentation and surrender of the notes at the place or places specified in such notice, the notes will be paid and redeemed by the Bank at the places and in the manner and currency therein specified and at the redemption price therein specified together with accrued interest and Additional Amounts, if any, to the redemption date. From and after the redemption date, if monies for the redemption of notes called for redemption will have been made available at the corporate trust office of the Trustee for redemption on the redemption date, the notes called for redemption will cease to bear interest (and, in the case of Original Issue Discount Notes, cease to increase the Amortized Face Amount payable in respect thereof), and the only right of the holders of such notes will be to receive payment of the redemption price together with accrued interest and Additional Amounts, if any, to the redemption date as aforesaid. Additional Amounts Unless otherwise set forth in the applicable pricing supplement, all taxes, duties, rates, contributions, withholdings, transfer expenses, charges and/or liens (“Taxes”) that may be levied on the acts, contracts and transactions related to the issue, subscription, placement and enforcement of the notes of each tranche and/or series will be fully and exclusively borne by the Bank. The Bank will pay interest under the notes without any kind of deduction or withholding for or on account of Taxes in effect as of the date of subscription or which may be imposed in future, whatever their origin or cause may be, except to those persons who are subject to tax inflation adjustment in accordance with Title VI of the Income Tax Law, who shall be subject to the withholdings set forth by law (the “Permitted Withholdings”). If the Bank were compelled by law to pay or withhold any such amounts, it will pay (at its sole expense) such additional amounts (“Additional Amounts”) as may be necessary to ensure payment of the deductions or withholdings in question. Therefore, once such deductions or withholdings are made, the holders will receive the payment of interest under the notes free and clear of Taxes, as if such deductions or withholdings had not been made, except for the Permitted Withholdings. The additional amounts shall be regarded to all effects as an amount payable under the notes, except that no additional amounts will be paid on the amounts outstanding under any of the notes in the following cases: (i) when such Taxes would not have been imposed but for the fact that the holder of the note has a connection with Argentina other than the mere holding of such note and the receipt of any payments in respect thereof; or (ii) when such Taxes would not have been imposed but for the failure to comply with any certification, identification, information or reporting requirements regarding the nationality, residence or identity of the holder or owner of an interest in the note, as required by the Bank at least thirty (30) days before the applicable interest payment date or principal payment date, as applicable, if such compliance is required by the laws or regulations of Argentina or any political subdivision or tax authority thereof as a precondition to exemption from, or reduction in the rate of such Taxes; (iii) in respect of any estate, inheritance, gift, sales, transfer, personal assets or similar tax, assessment or other governmental charge; (iv) to or on behalf of a holder or beneficial owner of a note in respect of Argentine taxes payable other than by withholding from payment of principal of, premium, if any, or interest on the notes; (v) in respect of Taxes imposed by reason of the fact that the note was presented for payment more than thirty (30) days after the later of the date on which such payment became due and the date on which payment thereof has been duly provided for and notice of such payment is given to the holders, except to the extent that the holder of such note would have been entitled to such additional amounts had the note been presented on any day during such 30-day period; or (vi) any combination of items (i) to (v) above; nor will additional amounts be paid with respect to any payment of the principal of, or any premium, if any, or interest on, any notes to any holder or beneficial owner of a note who is a fiduciary or partnership or other passthrough entity or other than the sole beneficial owner of such payment to the extent such payment would be required by the laws of Argentina to be included in the income for tax purposes of a beneficiary or settlor with respect to such fiduciary or a member of such partnership or other pass-through entity or beneficial owner who would not have been entitled to such Additional Amounts had it been the holder of such notes. 132 Listing The Bank may apply to have the notes of any series listed on Luxembourg stock exchange for trading on the EuroMTF, on the BCBA or on any other securities exchange or self-regulated market of Argentina or abroad. However, no assurance may be given that these applications will be accepted. In addition, notes may be issued under this Program that are not listed on any stock exchange, and the applicable pricing supplement relating to a series will specify whether the notes of such series will be listed or not on the Luxembourg stock exchange for trading on the EuroMTF, on the BCBA or on any other securities exchange. Transfer Restrictions The Bank has not registered the notes under the Securities Act; therefore, the notes may not be transferred except in compliance with certain transfer restrictions. Registration Rights If so specified in the applicable pricing supplement, the Bank may grant registration rights to the holders of any series of notes. Meetings, Modification and Waiver Noteholders’ meetings may be called and held at any time to deal with and resolve upon any matters subject to the noteholders’ authority. Such meetings will be held in compliance with the provisions of the Negotiable Obligations Law, the applicable rules of the Argentine Securities Commission and other laws in force. The notice, quorum, majorities and further aspects of such meetings will be governed by such laws. Repayment of Monies; Prescription All claims against the Bank for payment of principal of or interest on or in respect of any note (including Additional Amounts) will prescribe unless made within 3 years of the due date for payment of such principal or interest or the date payment thereof became enforceable, as applicable. Covenants The Bank may assume covenants in connection with each series and/or tranche of notes to be issued under the Program, which will be specified in the applicable pricing supplement relating to each series and/or tranche. Events of Default Below is a general description of some of the events of default, which may be replaced, modified and/or supplemented in the applicable pricing supplement relating to each series and/or tranche to be issued, always safeguarding the investors’ interests. In case one or more of the following events (each an “Event of Default”) (whether voluntary or involuntary) will have occurred and be continuing with respect to the notes of any tranche and/or series: (i) the Bank fails to pay any principal or interest (or Additional Amounts, if any) on the notes on the date when it becomes due and payable in accordance with the terms thereof, and such failure continues for a period of ten (10) days (in the case of principal) or fifteen (15) days (in the case of interest or Additional Amounts, if any); (ii) the Bank fails to pay when due interest on or principal of any of the Bank’s indebtedness in a past due amount of at least US$ 50,000,000 (or the equivalent thereof at the time of determination) and such failure continues after the terms set forth in (i) above, or any other event of default occurs under any agreement or instrument relating to any such indebtedness in an aggregate principal amount of at least US$ 50,000,000 (or the equivalent thereof at the time of determination) which results in the acceleration of the maturity thereof; 133 (iii) (a) a court having jurisdiction enters a final decree or order for the appointment of an administrator, receiver, trustee or intervenor for the Bank for all or substantially all of its property and such final decree or order remains unstayed and in effect for a period of ninety (90) consecutive days; (b) the Central Bank (x) initiates a proceeding under Section 34, 35 or 35(bis) of the FIL, requesting the Bank to submit a plan under such Section, or (y) orders a temporary, total or partial suspension of the activities of the Bank or a significant subsidiary pursuant to Article 49 of the Central Bank Charter; (iv) the Bank (a) submits a restructuring plan under the FIL, the Argentine Bankruptcy Law or any other applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (b) consents to the appointment of or taking possession by an administrator, receiver, trustee or intervenor for it for all or substantially all of its properties, or (c) effects any general assignment for the benefit of creditors; (v) it becomes unlawful for the Bank to perform or comply with its payment obligations under the notes of each series and/or tranche. then the holders of not less than 25% in aggregate principal amount of the notes of such series and/or tranche, by written notice to the Bank, may declare all the notes of such series then outstanding to be immediately due and payable; provided that in the case of any of the Events of Default described in paragraphs (ii) y (iv) above with respect to the Bank, all notes will, without any notice to the Bank or any other act by the Trustee (if one is appointed) or any holder of any notes, become immediately due and payable, and provided further that none of the events or circumstances described above will constitute an Event of Default if they arise from or are otherwise related to Indebtedness outstanding as of the date of the indenture dated January 14, 2004. In the event an Event of Default set forth in clause (ii) above has occurred and is continuing with respect to the notes of any series and/or tranche, such Event of Default will be automatically rescinded and annulled once the event of default or payment default triggering such Event of Default pursuant to clause (ii) is remedied or cured by the Bank or waived by the holders of the relevant Indebtedness. No such rescission and annulment will affect any subsequent Event of Default or impair any right consequent thereto. Upon any such declaration of acceleration, the principal of the notes so accelerated and the interest accrued thereon and all other amounts payable with respect to such notes will become and be immediately due and payable. If the Event of Default or Events of Default giving rise to any such declaration of acceleration are cured following such declaration, such declaration may be rescinded by the holders of such notes. Paying Agents; Transfer Agents; Registrars The notes may or not be issued under indentures and/or agency agreements entered into from time to time by the Bank with entities acting as trustees and/or agents. Such trustees and/or agents will perform their duties only with respect to the series specified in the applicable pricing supplement and will have such rights and obligations as therein specified. The appointment of trustees and agents will be set out in the applicable pricing supplements, who shall be identified in the last page of the applicable pricing supplement. Notices Notices to holders of notes will be deemed to be validly given if published for 1 day in the BCBA’s Gazette and the CNV’s Financial Information Highway as a “Material Event” at www.cnv.gob.ar, for as long as the notes of any tranche and/or series are listed on such exchange, or in the applicable reporting body of the exchange or self-regulated market where they are listed, and to the extent required by law, in the Official Gazette of the Republic of Argentina (“Official Gazette”). If the notes of any tranche and/or series are not listed, notices may be sent to their holders, at the Bank’s option, by publications made for 1 day in a wide circulation newspaper of the relevant jurisdiction or if the notice should be sent to only some of the holders, individually at the domiciles recorded in the applicable register relating to the tranche and/or series in question. Any such notices will be deemed given on the day following the last date on which publication was made and/or received. The cost of any publication and/or notice will be borne by the Bank. 134 Judgment Currency Indemnity If a judgment or order given or made by any court for the payment of any amount in respect of any note is expressed in a currency (the “judgment currency”) other than the currency (the “denomination currency”) in which such notes are denominated or in which such amount is payable, the Bank will indemnify the relevant holder against any deficiency arising or resulting from any variation in rates of exchange between the date as of which the amount in the denomination currency is notionally converted into the amount in the judgment currency for the purposes of such judgment or order and the date of actual payment thereof. This indemnity will constitute a separate and independent obligation from the other obligations contained in the terms and conditions of the notes, will give rise to a separate and independent cause of action, will apply irrespective of any indulgence granted from time to time and will continue in full force and effect notwithstanding any judgment or order for a liquidated sum or sums in respect of amounts due in respect of the relevant note under any such judgment or order. Summary Action Pursuant to Section 29 of the Negotiable Obligations Law, the notes that qualify as obligaciones negociables entitle their holders to file a summary action (“acción ejecutiva”); therefore, in accordance with the Capital Markets Law, any depositary is entitled to issue certificates evidencing the notes represented by global securities to any beneficial holder. These certificates entitle their beneficial holders to file a legal action before any competent court of Argentina, including a summary action, to enforce collection of any sums outstanding under the notes. Governing Law The Negotiable Obligations Law establishes the requirements for the notes to qualify as obligaciones negociables thereunder, and such law, together with the Argentine Companies Law, as amended, and other Argentine laws and regulations will govern the Bank’s capacity and corporate authorization to execute and deliver the notes and the Argentine Securities Commission’s authorization for the creation of the Program and the offer of the notes. All matters with respect to the notes will be exclusively governed by, and construed in accordance with, the laws of Argentina. However, such matters with respect to the notes may be governed by, and construed in accordance with, the laws of the State of New York or the Argentine laws, or the laws of any other jurisdiction if so specified in the applicable pricing supplement. b) Plan of Distribution The Bank may offer notes in any of the following manners: (i) through dealers; (ii) directly to one or more purchasers; or (iii) through agents. The applicable pricing supplement will set out the terms of the offer of any notes, including the purchase price of such notes and the use of the proceeds of such sale, any subscription discount or concession allowed or reallowed or paid to the dealers, any securities market where such notes may be listed and any restriction on the sale and delivery of notes. The placement methods to be used by the Bank will be determined upon placement of each tranche and/or series in accordance with the applicable laws then in effect, and will be detailed in the applicable pricing supplement. The Bank reserves the right to withdraw, cancel or modify any offer of notes contemplated herein or in any pricing supplement, by publishing a notice in the same media through which such offering of notes has been announced and in one wide circulation newspaper of Argentina. The Bank may reject offers to purchase notes in part, provided that such rejection is made ratably. In the event that dealers are appointed, each dealer will be entitled to reject in part any offer to purchase notes received by it in its capacity as agent, provided that it does so ratably. No placement agreements have been entered into; therefore, there are no subscription commitments in connection with the notes. If to specified in the applicable pricing supplement, the Bank will authorize agents or dealers to solicit bids by certain specific institutions for the purchase of notes at the public offering price set forth in such pricing supplement. Such agreements will be subject only to the conditions set forth in the pricing supplement, which will specify the commissions payable for requiring such agreements. 135 Any dealer and/or agent involved in the distribution of notes may be regarded as an underwriter, and any discount or commission received by them for the sale or resale of notes may be regarded as underwriting discounts and commissions in accordance with the Negotiable Obligations Law. Agents and/or dealers may be clients, conduct business or provide services to the Bank or its affiliates in the ordinary course of business. Subscription and Sale The following text may be supplemented by the information contained in the applicable pricing supplements relating to each series and/or tranche, which will supersede, supplement and/or modify these general terms and conditions, always safeguarding the investors’ interests. In addition, any dealers that agree to purchase from the Bank notes of any series will be specified in the applicable pricing supplement. The Bank may from time to time sell notes directly, or through one or more dealers. If the Bank resolves to appoint a dealer with respect to a series and/or tranche of notes issued under the Program, the Bank will enter into a placement agreement with the dealer. Republic of Argentina The creation of the Program and the public offering have been authorized by the CNV pursuant to Resolution No. 16,573, dated May 24, 2011, provided, however, that any updates of or amendments to the information included in the Offering Memorandum, including the annual updating required by the CNV, must be approved before any additional offer of notes is made using such updated or amended Offering Memorandum. Placement The Bank may from time to time sell notes directly or through one or more dealers appointed by it from time to time in the applicable pricing supplement. Placement may be made on a continuous basis, through syndicated placements or to any other person or institution. Each series and/or tranche of notes issued under the Program will be placed by auction or open public call for bids, as determined in the applicable pricing supplement pursuant to the CNV Rules. The above mentioned auction or open public call for bids shall be carried out through an IT system authorized by the CNV in accordance with the provisions of General Resolution 597/11 of the CNV. Such system will ensure equal treatment among investors and transparency, in accordance with the CNV Rules. As a general rule, all bids will be firm and binding. Exceptionally, non-binding bids may be allowed up to a certain preset time limit prior to the closing of the auction or public call for bids. Placement Efforts In connection with their placement in Argentina, each series and/or tranche of notes will be offered and placed by such dealer as appointed in the applicable pricing supplement, to investors in Argentina in accordance with the provisions of Chapter VI, Section 57 and related provisions of the CNV Rules, by distributing this Offering Memorandum and/or the applicable pricing supplement to potential investors. Investors will be invited to subscribe notes by means of the publication of notices in public communication media and/or by invitations made by telephone and/or postal service and/or electronic mail, or other similar procedures as specified in each pricing supplement. The dealer will distribute among potential investors, personally and/or by mail, copies of this Offering Memorandum and the applicable pricing supplement. This notwithstanding, any investors interested in obtaining a copy of this Offering Memorandum and/or the applicable pricing supplement relating to each issuance may withdraw it at the offices of the Bank and/or the dealer, at such domicile and times as specified in the applicable pricing supplement. In addition, the dealer may carry out road shows to disclose the terms and conditions of any series and/or tranche of notes to be issued under the Program, and may receive from such investors 136 expressions of interest in the purchase of notes during the subscription period set forth in each pricing supplement. Allocation If investors submit bids for subscription of notes for identical prices and in an amount in excess of such which is pending allocation, partial allocations will be made on a proportional or pro rata basis. This notwithstanding, each pricing supplement may provide weighting formulas for the allocation of the notes, always provided that no bids are excluded. General Provisions Purchasers of the notes may be required to pay, in addition to the purchase price, stamp taxes and other charges pursuant to the laws and practices of the country where the purchase is made. c) Markets The Notes issued under the Program may be listed or not on one or more stock exchanges or self-regulated entities of Argentina or abroad, as specified in the applicable pricing supplement. d) Clearing and Settlement It will be as specified in the applicable pricing supplement. 137 ADDITIONAL INFORMATION a) Description of Capital Stock Pursuant to the Bank’s Bylaws, the issued capital stock as of the date of this Offering Memorandum amounts to Ps. 1,500,000,000, represented by 1,500,000,000 common, book-entry shares of one peso (Ps. 1) par value per share. The capital stock issued for each Class of shares is: Class A Shares: Ps.658,530,880 Class B Shares: Ps.75,000,000 Class C Shares: Ps.75,000,000 Class D Shares: Ps.691,469,120 On February 14, 2007, the change in par value of the Bank’s shares of stock became effective. This change in par value, which did not involve a change in the Bank’s capital stock, was voted upon at the General Ordinary and Extraordinary Shareholders’ Meeting held on July 21, 2006. The referred Shareholders’ Meeting decided that the Bank would maintain its fully-subscribed and paid-in capital of Ps. 1,500,000,000, represented by 1,500,000,000 common book-entry shares of one peso (Ps.1) par value each and entitled to one vote per share, except for the multiple voting right conferred upon Class D shares. All the issued shares are fully paid in. No change has taken place in the last year, in relation to the quantity of shares. In addition, the capital stock has been fully paid-in. The capital stock has remained constant in the last 3 years and there has been a non-substantial variation in the number of shares that compose the different classes. Pursuant to the Privatization Law and the Bank’s Bylaws, the Bank’s capital stock is divided among the following classes of shares: 1. Class A Shares, which represent shares owned directly and indirectly by the Argentine Government, and currently comprise 43.9% of the Bank’s outstanding shares; 2. Class B Shares, which represent shares currently held by Banco Nación, as trustee for the PPP, but will be offered to the Bank’s employees pursuant to the PPP, under the regime set forth by Law No. 23,696, and which currently comprise 5% of the Bank’s outstanding shares. Any Class B shares not acquired by the Bank’s employees under the PPP shall be automatically converted into Class D shares. 3. Class C Shares, currently held by the Assistance Trust Trustee, which represent shares to be acquired by legal entities engaged in housing construction or real estate activities through a special program yet to be implemented, and which currently comprise 5% of the Bank’s outstanding shares. Any Class C shares not acquired by those legal entities under the relevant acquisition program shall be automatically converted into Class D shares; and 4. Class D Shares, which will represent any shares transferred under unlimited and unconditional ownership to the private capital not included in the foregoing categories of owners. Any Class A Shares sold will be converted into Class D shares. Class D shares will not change their class if they are eventually subscribed or acquired by the National State, another public company or personnel participating in the PPP, or by third parties under the Class C shares acquisition program. A certain number of Class D shares is held in the form of ADSs. Class D Shares currently comprise approximately 46.10% of the Bank’s capital stock. 6.06% of the total number of Class D shares, equivalent to 90,095,000 Class D shares, is currently held in trust by First Trust of New York, as Option Trustee, which are held in trust for purposes of disposing, from time to time and throughout a period that ended on February 2, 2004, of the ADSs remaining after the exercise of the Options, pursuant to the instructions received from the Selling Shareholder. 138 Since the privatization, there has not occurred any increase of capital or issuance of new shares. Voting Rights General As discussed below, holders of Class A and Class D Shares have special voting rights relating to certain relevant corporate decisions. Whenever such special rights do not apply (with respect to Class A Shares and Class D Shares) and in all cases (with respect to Class B Shares and Class C Shares), each share of common stock entitles the holder to one vote. Pursuant to CNV Rules, the Bank will not be allowed to issue multiple voting shares once it has been admitted to the public offering system. Within the framework of the Privatization Law, any action that would prejudice the rights of holders of a particular class of shares, but not the rights of holders of other classes of shares, or affect the rights of holders of a particular class of shares in a different manner than the rights of holders of other classes of shares, must be approved by the holders of such class of shares at an Extraordinary Shareholders’ Meeting. The Bank may issue voting or nonvoting preferred shares. Such preferred shares may be divided into Classes A, B, C and D. In such case, holders of voting preferred shares will exercise voting rights and be subject to the same ownership, conversion and transfer restrictions as holders of common shares of the same class. The Bank currently has no preferred shares issued or outstanding. Class A Shares Holders of Class A Shares have the right to elect at least two regular Directors and two alternates, notwithstanding the number of shares comprising the class at any given time. The holders of Class A Shares also have the right, as described in the following paragraph, to approve certain transactions involving the Bank and certain acquisitions of shares. Class A Shares sold by the Argentine Government or the Assistance Trust Trustee are automatically converted to Class C or D Shares, as the case may be. Under the Privatization Law and the Bank’s Bylaws, the Argentine Government must always hold at least one Class A Share. In addition, the referred Law also provides that the Argentine Government will exercise the voting rights of Class A Shares held by the Assistance Trust trustee. Under the Bank’s Bylaws, the affirmative vote of the holders of Class A Shares is required, regardless of the percentage of those shares in the Bank’s capital stock, in order to: • approve mergers or spin-offs; • approve an acquisition of shares constituting a Control Acquisition (as defined below) and, therefore, resulting in the Bank being subject to a control situation (as defined under the Argentine Corporate Law, the Central Bank rules or the Bank’s Bylaws); • transfer to third parties a substantial part of the loan portfolio of the Bank which causes the Bank to cease or substantially reduce its residential loan and mortgage activities; • change the Bank’s corporate purpose; • transfer the Bank’s corporate domicile outside of Argentina; and • voluntarily dissolve the Bank. Class B Shares Upon acquisition of Class B Shares by the Bank’s employees under the PPP, the holders of such shares will have the right to elect one member to the board of directors and one alternate, as long as such class represents more than 2% of the capital stock of the Bank issued at the time the respective 139 shareholders’ meeting is convened. Until such time, such director will be elected by Class A Shares. The Privatization Law provides that the Argentine Government will exercise the voting rights of Class B Shares prior to such shares being offered and sold. Class B Shares acquired by the Bank’s employees and thereafter transferred outside the PPP will be automatically converted to Class D Shares. Any Class B Shares not acquired by the Bank’s employees pursuant to the PPP (at the time of its implementation) will be converted into Class A Shares. Each Class B Share is entitled to one vote. Class C Shares Upon transfer of Class C Shares to companies engaged in housing construction or real estate activities, the holders of such shares will have the right to elect one regular Director and one alternate, as long as such class represents more than 3% of the capital stock of the Bank. Until such time, such directors will be elected by Class A shareholders. The Privatization Law provides that the Argentine Government will exercise the voting rights of Class C Shares held by the Assistance Trust Trustee prior to such shares being offered and sold. Only companies which have been engaged in housing construction or real estate activities for at least one year are eligible to purchase Class D Shares. Class C Shares transferred to persons other than companies engaged in housing construction or real estate activities will be converted automatically to Class D Shares. Each Class C Share is entitled to one vote. Class D Shares The holders of Class D Shares shall have the right to elect nine Directors and their respective alternates. In addition, for so long as Class A Shares represent more than 42% of the Bank’s capital, Class D Shares shall be entitled to three votes per share, except that holders of Class D Shares will be entitled to one vote per share in the case of a vote on: • a fundamental change in the Bank’s corporate purpose; • a change of the Bank’s domicile outside of Argentina; • the Bank’s dissolution prior to the expiration of the Bank’s corporate existence provided in the Bylaws; • a merger or spin-off in which the Bank is not the surviving corporation; • a total or partial recapitalization following a mandatory reduction of capital; and • approval of voluntary reserves other than legal reserves when their amount exceeds the Bank’s capital stock and legal reserves. In addition, irrespective of the percentage of the Bank’s outstanding capital stock represented by Class A Shares, the affirmative vote of the holders of Class A Shares is required to adopt certain relevant decisions. See “—Class A Shares” for further information. Pursuant to the regulations in force, once the Bank has been authorized to make a public offering of any or all of its capital stock, it will not be allowed to issue multiple voting shares. Class D Shares underlying the ADSs held by the Option Trustee The Class D Shares underlying the ADSs shares owned by the option trustee shall be voted by the latter pursuant to the instructions received from the selling shareholder. Registration Rights Pursuant to a Registration Rights Agreement, holders or beneficial owners of ADSs or Class D Shares representing at least 3% of the Bank’s outstanding stock (“Registrable Securities”) may require that the Bank, at its own cost, file with the SEC a registration statement with respect to Class D Shares or 140 ADSs (a “Demand Registration Right”) and use its best efforts to cause the ADSs to be approved for listing on the New York Stock Exchange (“NYSE”); except in the following cases when the ADSs or Class D Shares have ceased to be Registrable Securities: (i) a registration statement with respect to the offering of such securities by the holder thereof shall have been declared effective under the Securities Act and such securities have been disposed of by such holder pursuant to such registration statement, (ii) such securities have been sold to the public pursuant to, or are eligible for sale to the public without volume or manner of sale restrictions under, Rule 144(k) (or any similar provision then in force, but not Rule 144A) promulgated under the Securities Act, (iii) such securities shall have been otherwise transferred and new certificates for such securities not bearing a legend restricting further transfer shall have been delivered by the Bank or its transfer agent and subsequent disposition of such securities shall not require registration or qualification under the Securities Act or any similar state law then in force or (iv) such securities shall have ceased to be outstanding. The Demand Registration Rights are exercisable up to four times at any time after the earlier of (i) May 2, 2000 and (ii) five months after the completion of any public offering of the Bank’s capital stock in the United States. We will not be required to effect more than one demand registration in any twelve-month period. In certain instances, the Argentine Government acting through Banco Nación has the right to postpone the filing of any registration statement requested to be filed pursuant to a Demand Registration Right. No Demand Registration Right has been exercised as of the date of this offering memorandum. Certain Provisions Relating to Acquisitions of Shares Certain Provisions of the Privatization Law and the Bylaws Pursuant to the Privatization Law and the Bank’s Bylaws, each individual or legal entity that belongs to the same “economic group” may not own more than 5% of the Bank’s capital stock. Although the Privatization Law does not define the term “economic group”, the Bank will apply the meaning given to that term in the Central Bank rules. Furthermore, pursuant to the Privatization Law, no individual or legal entity may be entitled to more than 5% of the Bank’s capital stock. In accordance with the terms of the Privatization Law, the Ministry of Economy and Public Finance may set forth the other terms and conditions for the offering of shares. Certain Provisions Relating to the Central Bank The Privatization Law and the supplementary regulations applicable thereto require that significant acquisitions be approved in advance by the Central Bank. Accordingly, under the Argentine Banking GAAP, Significant Acquisition means any purchase of stock which entitles the purchaser to five percent (5%) or more of the Bank’s votes. In addition, any acquisition, other than a Significant Acquisition, of 2% or more of the capital stock of a financial institution shall be reported by the Bank to the Central Bank. Notice of Certain Acquisitions Pursuant to the Bank’s Bylaws, any person who, directly or indirectly, through or together with its affiliates and persons acting in concert with it, acquires Class D Shares or securities convertible into Class D Shares that would result in such person controlling more than 3% of Class D Shares, shall be required to notify the Bank within five days of such acquisition, in addition to complying with all the requirements imposed by any regulatory authority in Argentina and/or other jurisdictions where the Bank’s Class D Shares are listed and/or traded. Such notice shall include the name or names of the person or persons, if any, acting in concert with it, the date of the acquisition, the number of shares acquired, the price at which the acquisition was made and a statement as to whether it is the intention of the persons to acquire a greater equity interest in, or control of, the Bank. Each subsequent acquisition by such person or persons shall require a similar notice under the same terms. Qualified tied Majority Any actions taken at any Shareholders’ Meeting of the Bank, either Ordinary or Extraordinary, General or Special, may be taken by an absolute majority of shareholders present therein, except that: 141 (i) the affirmative vote of 75% of the shares entitled to vote both on first and second call (without regard to multiple voting rights) is required for the approval of certain actions by the Bank, namely (a) the delisting of the Bank’s shares from the Buenos Aires Stock Exchange and/or the NYSE, (b) the transfer of the Bank’s domicile outside Argentina; (c) a fundamental change in the Bank’s corporate purpose and (d) certain split-ups resulting in the transfer of 25% or more of the Bank’s assets; (ii) the affirmative vote of 66% of the shares entitled to vote both on first and second call (without regard to multiple voting rights) is required to approve certain amendments to the Bank’s Bylaws, namely those which would (a) amend the Bank’s Bylaws to change the percentage of the Bank’s capital stock ownership, or the percentage that determines what constitutes a control acquisition; (b) amend the provisions of the Bank’s Bylaws requiring that tender offers required under the Bank’s Bylaws be all-cash offers for all outstanding shares and convertible securities at no less than a specific minimum price as provided for by the Bank’s Bylaws; (c) amend the provisions regarding the number, nomination, election and composition of the Board of Directors; (d) allow the granting of certain guarantees in favor of shareholders; (e) approve the substantial reduction or total cessation of the Bank’s housing loan operations; and (f) the provisions on number, nomination, election and composition of the board of directors; and (iii) the approval of an absolute majority of the shares (without regard to multiple voting rights) entitled to vote is required for (a) mergers or split-ups in which the Bank is not the surviving entity, and (b) early dissolution or partial or total reassessment of capital. b) Articles of Incorporation and Bylaws Incorporation; Corporate Purpose The Bank is a sociedad anónima incorporated under the Argentine laws and registered in the Public Registry of Commerce as of October 23, 1997 under Number 12,296, Book 122, Volume A of Corporations. Under the Bank’s Bylaws, the duration of the Bank is one hundred years as from the date of registration in the Public Registry of Commerce (until October 23, 2097). The Bank’s registered corporate office is located at Reconquista 151 (C1003ABC), City of Buenos Aires. Pursuant to Section 4 of the Bank’s Bylaws the purpose of the Bank is to carry on, either on its own account or through third parties, or in association with third parties, within Argentina or abroad, the following businesses: (a) banking activities contemplated in and permitted by the FIL and further supplementary and accessory laws, regulations and provisions governing the banking business for all commercial banks; and the servicing of the needs of housing mortgage loans; (b) insuring the risks derived from the transactions performed or property financed by it, even if not given as collateral, imposing insurance on the beneficiaries of its transactions and insuring the risks derived from the transactions set forth in Section 10 of Law No. 21,581 (the “National Housing Fund Law”), and Law No. 24,626 (the “Mandatory Insurance System Law”); (c) performing all securities transactions contemplated in the applicable laws and regulations that govern such business, within the guidelines set forth by the CNV, acting as a stock company (sociedad de bolsa) in authorized stock markets or as a broker in any other self-regulated market; (d) purchasing, selling, constructing, leasing and managing real estate and/or entering into brokerage and agency transactions and any other transaction as may be necessary to perform its banking activities; (e) acting as trustee in accordance with the provisions of the Trust Law. According to the Bank’s Bylaws and Section 17 of the Privatization Law, the Bank must, for the term of ten years from July 22, 1997, conduct at least the following activities: (i) finance the construction and purchase of homes within the country, either per se or through third parties, ensuring a harmonic regional distribution of credit, so that credit is accessible for several sectors of the community; (ii) maintain credit lines aimed at financing the construction of homes in small municipalities, allocating annually to these activities not less than 10% of all construction credits granted, being required to contemplate an equitable geographic distribution; and (iii) preserve the creation of the special fund provided for in Section 13 of Law No. 24,143 (the “Repayment of Credits and Existing Debts among Banco Hipotecario Nacional, the Central Bank and the Secretariat of Economy Law”), which provides that the Bank shall create a special fund aimed at subsidizing the reimbursement services of borrowers affected by serious situations of economic 142 emergency and that cannot be resolved through the renegotiation of the credit. Such fund shall be composed by 2% of the amounts received as interest on housing loans. The Bank shall regulate this operation subject to the provisions of the Argentine Banking GAAP. It shall also administrate minor accounts pursuant to the conditions established in Section 33 of Law No. 21,963 (“National Savings and Insurance Fund Law”), applying the unattachability of savings account balances according to Section 34 of the referred Law. Relations between the Directors and the Bank; Conflict of Interest Section 14 of the Bank’s Bylaws provides that the Board of Directors shall determine the compensation of the members that perform executive, technical and administrative duties or special commissions of a level consistent with the one prevailing in the market, with interested Directors abstaining and with the subsequent ratification of such decision through a shareholders’ meeting. In addition, Section 6.8 of the Regulation of the Board of Directors establishes that a Director with an interest contrary to or competing with the Bank shall inform the Bank of such a situation before the matter is considered in order for the affected Director to leave the meeting until the directors finish considering the matter that the referred Director shall abstain from considering. Failure to comply with the aforesaid obligation shall imply calling a Shareholders’ Meeting to decide: (i) the eventual adoption of punishments; (ii) removal or suspension of the Director’s office, or (iii) initiation of action against the Director (Section 10 of the Board of Directors’ Regulations). Pursuant to Section 10 of the Regulation of the board of directors, the breach of this obligation shall be evaluated by the board of directors, which may apply penalties to the breaching director. In this sense, Section 272 of Argentine Corporate Law establishes that “whenever a director has a conflict of interests contrary to that of the company, they shall report it to the Board of Directors and the statutory auditors and shall abstain from considering such matter under penalty of incurring in liability under Section 59”, i.e., under penalty of being jointly and severally liable for the damages caused and/or derived from their actions or omissions. Shareholder rights and obligations Participation in the Bank’s Liquidation Upon liquidation of the Bank, one or more liquidators may be appointed to wind up its assets and businesses. In such case, in the event of liquidation of the Bank’s assets, the proceeds will be applied to satisfy the payment of the Bank’s debts and liabilities, whereas any remaining amounts will be distributed among the shareholders pro rata to their shareholdings, subject to the preferential rights of any preferred shares, should there be at that time any issued and outstanding preferred shares. Reduction of Capital Capital reductions may be voluntary or mandatory. Voluntary reductions of capital shall be approved by an Extraordinary Shareholders’ Meeting, which shall take place only after notice thereof shall have been given in accordance with the applicable rules at that time and after the shareholders’ notice is published and creditors are given an opportunity to obtain payment or collateralization of their claims. According to Section 206 of Argentine Corporate Law, reductions of capital are mandatory when losses have exceeded reserves and 50% of the capital stock of a company. The Bank’s shares are subject to redemption in connection with a reduction in the capital stock that requires approval by majority vote of an Extraordinary Shareholders’ Meeting. Any shares so redeemed must be cancelled by the Bank. 143 Acquisition of its own shares by the issuer According to Section 221 of the Argentine Corporate Law and the CNV Rules, corporations may acquire their own shares, as long as they are admitted to be listed by a self-regulated entity. Once such shares have been fully paid for, shares may be acquired with net profits and free or voluntary reserves resulting from the latest financial statements approved by the Board of Directors. The decision of a company to acquire its own shares must be (i) adopted by the Board of Directors, prior to a report of the Audit Committee or of the control body, (ii) relayed to the CNV and other self-regulated entities, and (iii) published in the bulletin of such self-regulated entities or in a wide circulation newspaper. The Board of Directors’ resolution must establish the purpose of the acquisition, the maximum amount to be invested, the maximum number of shares or the maximum percentage of capital that may be acquired and the maximum price to be paid for the shares. The Board of Directors must prove to the CNV that it has sufficient liquidity to purchase the shares, and that the payment of shares does not affect the company’s solvency. The total amount of shares acquired and already held by the company must not exceed 10% of the company’s capital stock. The shares acquired by the company exceeding said limits must be disposed of within ninety days from the date of the acquisition causing the excess. The shares acquired according to these provisions must be disposed of by the company within a year from the date of their acquisition, unless an Ordinary Shareholders’ Meeting authorizes an extension. At the moment of transferring them, the company shall carry out a preemptive right offering the shares to the shareholders according to the terms established in Section 221 of Argentine Corporate Law and its supplementary and accessory regulations. The rights of the shares acquired by the company shall be suspended until the shares are sold to a third party and shall not be considered for the calculation of the quorum and majorities. Once the term is over, and there has not been a shareholders’ meeting resolution extending the term, the company’s capital shall be decreased by law in an amount equal to the par value of the repurchased shares remaining in the portfolio, which shall be cancelled. Finally, the company cannot acquire its own shares: (i) if the company knew of the existence of a public offering of its shares; (ii) before the end of the first day following the publication of the company’s decision to acquire its own shares; or (iii) if the shares have not been fully paid in. On January 29, 2009, due to the expiration of the hedge agreement (“Total Return Swap”) entered into on January 29, 2004 with Deutsche Bank AG, the latter transferred to the Bank, 71,100,000 Class “D” common shares of one peso (Ps. 1) par value each issued by the Bank. As from such time, the shares became treasury stock of the Bank under the terms and conditions provided in Section 221 of the Argentine Corporate Law. Accordingly, on January 12, 2010, the Board of Directors of the Bank resolved: (a) to submit to the General Ordinary Shareholders’ Meeting the decision to deliver the treasury Class D shares as payment to the DAAs’ holders, up to the amount of their credits and according to the share value then prevailing, and (b) to analyze possible alternatives for the General Ordinary Shareholders’ Meeting to decide on the allocation of the remaining shares. The General Ordinary Shareholders’ Meeting held on April 30, 2010 resolved to postpone for a year as from January 31, 2010 the term for the realization of the Bank’s treasury stock. Furthermore, at the referred meeting, the shareholders resolved to delegate to the Board of Directors the decision to pay with treasury stock the DAA coupons arising from the debt restructuring, as appropriate, according to the contractual valuation calculations and their actual market value, with the shareholders having a preemptive right thereon under the same conditions. On June 16, 2010, the Board of Directors resolved to make a preemptive offer for sale of part of the treasury stock held as of that time for 36.0 million class D shares, the balance of which was delivered as payment to the holders of the referred DAA coupons, due on August 3, 2010. 144 On July 26, 2010. within the framework of such offer, approximately 26.9 million class D shares were disposed of and the proceeds thereof and the remaining shares referred to in the preceding paragraph were made available to the holders of the DAA coupons on August 3, 2010. Shareholders’ Meetings Notice of Shareholders’ Meetings Pursuant to Sections 21 and 22 of the Bank’s Bylaws, Ordinary and Extraordinary Shareholders’ Meetings of the Bank shall be called to consider the matters established in Sections 234 and 235 of the Argentine Corporate Law. Ordinary shareholders’ meetings on first and second call may be called and held simultaneously. Shareholders’ Meetings, either Ordinary or Extraordinary, General or Special, shall be called by means of notices published in the Official Gazette, in one of the major newspapers of Argentina and in the newsletters of the stock exchanges and securities markets of the country where the Banks’ shares are listed for a five-day term. According to the Capital Markets Law, the minimum term for calling a meeting is 20 days and the maximum term is 45 days. The board of directors shall order the publications to be made abroad to comply with the laws and practices in effect in the jurisdictions of the self-regulated markets and stock exchanges on which the Bank’s shares are then listed. The Board of Directors may use the services of companies specializing in communications with shareholders and use other dissemination media to let them know its opinion on the subject matters to be dealt with at the relevant meeting. The cost of such services and dissemination shall be borne by the Bank. Quorum Requirements The quorum for Ordinary Shareholders’ Meetings on first call shall be a majority of the shareholders with the right to vote. The quorum for Extraordinary Shareholders’ Meetings on first call shall be 60% of the shareholders with the right to vote. The quorum for Ordinary and Extraordinary Shareholders’ Meetings on second call shall be the Bank’s shareholders present entitled to vote. Resolutions in Ordinary and Extraordinary Shareholders’ Meetings shall be adopted by the majority of the present votes, except for the cases where the Bank’s Bylaws establish special majorities or require the approval of Class A Shares. See “Voting Rights – Class A Shares” and “Certain Provisions Relating to Acquisitions of Shares – Qualified tied Majority.” At any Ordinary or Extraordinary Shareholders’ Meetings, shareholders may be represented by proxies by granting a private instrument of proxy (the signature of which must be attested by a court officer, a notary public or a bank). In order to participate at Shareholders’ Meeting, shareholders shall request to Caja de Valores a certificate of shares and deposit it in the Bank three days prior to the Shareholders’ Meeting or within such term as determined by the Bank in accordance with the then applicable regulations in force. Resolutions Affecting the Rights of a Class of Shares Pursuant to Section 24(v) of the Bank’s Bylaws and Section 250 of the Argentine Corporate Law, whenever a Shareholders’ Meeting is required to adopt resolutions affecting the rights of a class of shares, the consent or ratification of such class shall be required, which consent or ratification shall be submitted to a Special Meeting of Shareholders of such class. Capital Increases; Issuance of Shares The Bank’s Bylaws provide that the capital stock may be increased up to five times its current amount by resolution at an Ordinary Shareholders’ Meeting as provided for by Section 188 of the Argentine Corporate Law. In addition, companies under the public offering regime in Argentina, such as the Bank, may increase their capital stock more than five times its current amount without amending their Bylaws. 145 The shareholders’ meeting that approves a capital increase must set forth the terms of the shares to be issued, and may delegate to the Board of Directors the authority to determine the time of such issuance and the payment terms and conditions and any other delegation authorized by Argentine Corporate Law. Notwithstanding any changes that may arise from the exercise of preemptive rights and accretion rights as provided in the Bylaws, any issuance of common or preferred stock is to be made by classes maintaining the existing proportion among the different classes as of the date of commencement of the subscription period. The Bank’s Bylaws also provide that any convertible securities issued by the Bank can only be convertible into Class D Shares and the issuance thereof must be authorized by a Special Meeting of Class D Shareholders. Restrictions on Control Acquisitions Required Approvals and Tender Offers Pursuant to the Bank’s Bylaws, each acquisition of shares or convertible securities as a result of which the acquiror, directly or indirectly through or together with its affiliates (collectively, an “Acquiror”), would own or control Class D Shares that, combined with such Acquiror’s prior Class D Shares, would represent 30% or more of the outstanding capital stock of the Bank (collectively, “Control Acquisitions”), must be carried out in accordance with the procedure described in this subsection, except for acquisitions by an Acquiror owning or controlling more than 50% of the Bank’s capital prior to such acquisition. Any transaction that would result in the Acquiror holding a controlling interest in the Bank, as defined under the Argentine Corporate Law, also must be approved in advance by the holders of Class A Shares. Prior to consummating any Control Acquisition, an Acquiror must obtain the approval of the holders of Class A Shares, and make a Public Tender Offer (“PTO”) for all outstanding shares and securities convertible into shares of the Bank. The Acquiror will be required to provide the Bank written notice of and certain specified information with respect to any such tender offer, as well as the terms and conditions of any agreement or proposed agreement which, if consummated, would result in a Control Acquisition (a “Proposed Agreement”), at least 15 business days prior to the commencement of the offer. The Bank will send each shareholder and holder of convertible securities a copy of such notice, at the Acquiror’s expense. The Acquiror is required to publish a notice containing substantially the same information in a newspaper of general circulation in the City of Buenos Aires, New York City and any other city in which the Bank’s securities are traded on an exchange or other securities market, as well as in the informative bulletins of those exchanges or securities markets. The notice must be published at least once per week beginning on the date notice is provided to the Bank, until the offer expires. The Board of Directors shall call a Special Meeting of Class A Shareholders for the tenth Business Day following the receipt of the Acquiror’s notice for the purpose of considering whether consummation of the tender offer will result in a benefit for the Bank or for the general interest. If the Special Meeting of Class A Shareholders is not held, or if Class A shareholders disapprove the tender offer, neither the PTO nor the Proposed Agreement may be consummated. The PTO must be carried out in accordance with a procedure specified in the Bank’s Bylaws and in accordance with any additional or stricter requirements of jurisdictions, self-regulated markets or exchanges in which the offer is made or in which the Bank’s securities are traded. Under the Bank’s Bylaws, the tender offer must provide for the same price in cash for all shares tendered. Such price may not be less than the highest of the following (the “Minimum Price”): (i) the highest price paid by or on behalf of the Acquiror for Class D Shares or convertible securities during the two years prior to the notice provided to the Bank, adjusted for any stock split, stock dividend, subdivision or reclassification affecting the Class; 146 (ii) the highest selling closing price for Class D Shares on the Bolsa de Comercio de Buenos Aires during the 30-day period immediately preceding the notice provided to the Bank, adjusted for any stock split, stock dividend, subdivision or reclassification affecting the Class; (iii) the price resulting from clause (ii) above, multiplied by a fraction, the numerator of which shall be the highest price paid by or on behalf of the Acquiror for Class D Shares during the two years immediately preceding the date of the notice provided to the Bank and the denominator of which shall be the closing price for Class D Shares on the Bolsa de Comercio de Buenos Aires on the date immediately preceding the first day of such two-year period on which the Acquiror acquired any interest in or right to any Class D Shares, adjusted for any stock split, stock dividend, subdivision or reclassification affecting the Class; and (iv) the net earnings per Class D Share during the four most recent full fiscal quarters immediately preceding the date of the notice provided to the Bank, multiplied by the higher of (a) the price/earnings ratio during such period for Class D Shares (if any) and (b) the highest price/earnings ratio for the Bank in the two-year period immediately preceding the date of the notice provided to the Bank, in each case determined in accordance with standard practices in the financial community. Any such offer must remain open for a minimum of 90 days following the provision of notice to the shareholders or first publication of the offer, and shareholders shall have the right to withdraw tendered shares at any time until the closing of the offer. Following the closing of such PTO, the Acquiror will be obliged to acquire all tendered shares or convertible securities, provided that if the number of shares tendered is less than the minimum, if any, upon which such tender offer was conditioned, the Acquiror may withdraw the tender offer. The Acquiror may consummate any Proposed Agreement within 30 days following the closing of the tender offer, provided that if such tender offer was conditioned on the acquisition of a minimum number of shares, the Proposed Agreement may be consummated only if such minimum was reached. If no Proposed Agreement existed, the Acquiror may acquire the number of shares indicated in the notice provided to the Bank on the terms indicated in such notice to the extent such number of shares were not acquired in the tender offer, provided that any condition relating to a minimum number of shares tendered has been met. Restrictions on Related Party Transactions Pursuant to the Bank’s Bylaws, any merger, consolidation or other combination with substantially the same effect involving the Bank and an Acquiror that has previously carried out a Control Acquisition, or by any other person or persons, if such transaction would have substantially the same effects as a Control Acquisition (a “Related Party Transaction”), must be carried out in accordance with the provisions described below. Each tendering shareholder must receive the same price per share in any Related Party Transaction, which price shall not be less than the highest of the following: (i) the highest price per share paid by or on behalf of the party seeking to carry out the Related Party Transaction (an “Interested Shareholder”) for (a) shares of the Class to be transferred in the Related Party Transaction within the two-year period immediately preceding the announcement of the Related Party Transaction or (b) shares of the Class acquired in any Control Acquisition, in each case adjusted for any stock split, stock dividend, subdivision or other reclassification affecting the Class; (ii) the highest closing sale price of shares of the Class on the Bolsa de Comercio de Buenos Aires during the 30 days immediately preceding the announcement of the Related Party Transaction or the date of any Control Acquisition by the Interested Shareholder, adjusted for any stock split, stock dividend, subdivision or reclassification affecting the Class; (iii) the price per share resulting from clause (ii), multiplied by a fraction, the numerator of which shall be the highest price paid by or on behalf of the Interested Shareholder for any share of the Class during the two years immediately preceding the announcement of the Related Party Transaction, and the denominator of which shall be the closing sale price for shares of the Class on the date immediately preceding the first day in the two-year period 147 referred to above on which the Interested Shareholder acquired any interest or right in shares of the Class, in each case as adjusted for any stock split, stock dividend, subdivision or reclassification affecting the Class; and (iv) the net earnings per share of the shares of the Class during the four most recent full fiscal quarters preceding the announcement of the Related Party Transaction multiplied by the higher of (a) the price/earnings ratio during such period for the shares of the Class (if any) and (b) the highest price/earnings ratio for the Bank in the two-year period preceding the announcement of the Related Party Transaction, in each case determined in accordance with standard practices in the financial community. Any such offer must remain open for a minimum of 90 days following the service of notice to the shareholders or the first publication of the offer, and shareholders shall have the right to withdraw tendered shares at any time until the closing of the offer. Following the closing of such PTO, the Acquiror will be obliged to acquire all tendered shares or convertible securities, provided that if the number of shares tendered is less than the minimum, if any, upon which such tender offer was conditioned, the Acquiror may withdraw the tender offer. The Acquiror may consummate any Proposed Agreement within 30 days following the closing of the tender offer, provided that if such tender offer was conditioned on the acquisition of a minimum number of shares, the Proposed Agreement may be consummated only if such minimum was reached. If no Proposed Agreement existed, the Acquiror may acquire the number of shares indicated in the notice provided to the Bank on the terms indicated in such notice to the extent such number of shares were not acquired in the tender offer, provided that any condition relating to a minimum number of shares tendered has been met. Acquisitions by the Argentine Government The threshold levels at which an acquisition of shares by the Argentine Government is deemed to be a Control Acquisition, and the sanctions applicable to Control Acquisitions carried out by the Argentine Government in violation of the procedures described above, are different than those applicable to acquisitions of shares by other persons. Acquisitions of shares by the Argentine Government which result in (i) the Argentine Government owning or controlling an aggregate of 49% or more of the Bank’s outstanding capital stock or (ii) acquisitions by the Argentine Government of 8% or more of the outstanding Class D Shares, provided that Class A Shares represent at least 5% of the outstanding capital of the Bank as of October 23, 1997, will require the Argentine Government to make a tender offer for all the outstanding Class D Shares. Acquisitions by the Argentine Government which do not satisfy the requirements of (i) or (ii) above are subject to the threshold percentages described with respect to Control Acquisitions. See “―Required Approvals and Tender Offers.” With respect to acquisitions by the Argentine Government deemed to be Control Acquisitions, the required tender offer need only be conducted for all outstanding Class D Shares. Any Control Acquisitions carried out by the Argentine Government other than in accordance with the procedure described above will result in the cancellation of the voting, dividend and other distribution rights of the shares so acquired, except for certain indirect acquisitions (e.g., through foreclosure or liquidation proceedings), and after which the Argentine Government does not own or control 49% or more of the outstanding capital stock or more than 50% of the outstanding Class D Shares, in which case only the voting rights of the Argentine Government with respect to the shares so acquired will be withdrawn. Dividend Distribution Policy The declaration, amount and payment of dividends on the Bank’s capital stock are determined by majority vote of the shareholders and are based generally but not necessarily on the annual recommendation of the Board of Directors. The Board of Directors submits the financial statements of the Bank for the preceding fiscal year, together with the reports thereon by the Board of the Directors and the Supervisory Committee, to the Annual Ordinary Shareholders’ Meeting for approval. The shareholders, once they have approved the financial statements, determine the allocation of the Bank’s realized net profits for such year. The Bank is required to allocate a percentage of net income (currently 20%) to the legal reserve. If the legal reserve is subsequently impaired, dividends may not be paid until the legal reserve has been fully reestablished, which percentage shall not be available for distribution. Under the 148 Bank’s Bylaws, after the allocation to the legal reserve has been made and after segregating an amount of the annual net income for the required payment of fees to the members of the Board of Directors and of the Supervisory Committee, an amount of the annual net income will be segregated to pay dividends on preferred stock, if any. The remainder of the annual net income may be distributed as dividends on common stock or retained as a voluntary reserve, contingency reserve or other account, or any combination thereof, all as determined by the shareholders’ meeting. Following the implementation of the PPP and for a period that shall not exceed 10 years counted as from such implementation, , up to 0.50% of the Bank’s net income for each fiscal year shall be paid to the beneficiaries of the PPP, through a charge to income. Under the law, dividends may be lawfully declared and paid by the Bank only out of the balance of its net income for the relevant fiscal year after complying with the requirements set forth above, plus retained earnings for prior fiscal years, if any, reflected in the Bank’s annual audited financial statements approved at an Ordinary Shareholders’ Meeting. Under CNV Rules and the Bank’s Bylaws, cash dividends must be paid to shareholders within 30 days of the shareholders’ meeting approving the dividend. Payment of dividends in shares requires authorization from the CNV, which authorization must be requested within ten days after the shareholders’ meeting approving the dividend. The Bank must make payment available to shareholders within three months after the CNV’s authorization. Payment of dividends in shares and cash also must be made available to shareholders within three months of such notice. In addition, the amount, if any, of dividends that holders of ADSs will receive in US dollars will be affected by, among other things, any exchange control policies applicable in Argentina. c) Significant Agreements As of the date hereof, the Bank has no significant agreements other than those executed in the ordinary course of business that should be reported in this Offering Memorandum. d) Exchange Controls Exchange Rates From April 1, 1991 until the end of 2001, Law No. 23,928 (the “Convertibility Law”) established a system under which the Central Bank was obliged to sell U.S. Dollars at a fixed rate of one Peso per U.S. Dollar. On January 6, 2002, Law No. 25,561 (the “Public Emergency Law”) was enacted, formally abandoning over ten years of U.S. Dollar-Peso fixed parity and eliminating the requirement that the Central Bank’s reserves in gold and in foreign currency should be at all times equivalent to 100% of the monetary base. The Public Emergency Law, which has been extended until December 31, 2013 by Law No. 26,729, grants the Argentine Executive Branch the power to set the exchange rate between the Peso and foreign currencies and issue regulations related to the foreign exchange market. Following a brief period during which the Argentine Government established a temporary dual exchange rate system pursuant to the Public Emergency Law, the Peso was allowed to float since February 2002. As a result, the Central Bank has intervened on several occasions since that date by selling U.S. Dollars in order to lower the exchange rate. However, The Central Bank’s ability to support the Peso by selling U.S. Dollars is restricted to its U.S. Dollar reserves. Since June 30, 2002, the value of the Peso has varied significantly compares to the U.S. Dollar, decreasing in value to an exchange rate of Ps.5.0448 per US$1.00 as of February 28, 2013. The following table sets forth the annual high, low, average and period-end exchange rates for the stated periods, expressed in Pesos per U.S. Dollar and not adjusted for inflation. The Bank cannot assure that the Peso will not depreciate again in the future. The Federal Reserve Bank of New York does not report a noon buying rate for Pesos. Exchange Rates Low(1) High(1) 2005 2006 3.0523 3.1072 2.8592 3.0305 149 Average(1)(2) 2.9232 3.0741 Period-end(3) 3.0315 3.0695 2007 2008 2009 2010 2011 2012 January 2013 February 2013 March 2013(4) (1) (2) (3) (4) 3.1797 3.4537 3.8545 3.9857 4.3035 4.9173 4.9768 5.0448 5.0788 3.0553 3.0128 3.4497 3.7942 3.9715 4.3048 4.9228 4.9825 5.0475 3.1156 3.1614 3.7301 3.9127 4.1302 4.5515 4.9486 5.0111 5.0629 3.1510 3.4537 3.7967 3.9758 4.3032 4.9173 4.9768 5.0448 5.0788 Reference exchange rate as published by the Central Bank. Based on daily averages. Exchange rate used in the Bank’s financial statements. As of March 13, 2013. Exchange Market Controls Regulations governing Foreign Exchange Transactions All foreign exchange transactions are to be conducted through the single and free-floating foreign exchange market (hereinafter, “MULC” as per the initials in Spanish) where the Central Bank oversees the purchases and sales of foreign currency. Pursuant to Decree No. 260/2002, the Argentine government implemented an exchange market where all exchange transactions are conducted. Such transactions are subject to regulations and requirements imposed by the Central Bank. Pursuant to Communication “A” 3471, as amended, the Central Bank established certain restrictions and requirements applicable to foreign exchange transactions, and in the event of violations thereof criminal penalties may be imposed. Inflow and Outflow of Funds Inflow of Funds Pursuant to the Argentine Law on Foreign Investments (Ley de Inversiones Extranjeras de Argentina) No. 21,382, as amended, and unified as per Decree No. 1853/1993, the purchase of shares in an Argentine company by an individual or legal entity domiciled abroad or in an Argentine company owned by “foreign investors” (as defined in the Law on Foreign Investments) is a foreign investment. Communication “A” 5265 disclosed new regulations applicable to financial indebtedness. Financial Indebtedness to foreign creditors means such debts to non-residents which do not derive from an Argentine foreign trade transaction or in the event that they derive from an Argentine foreign trade transaction do not qualify under exchange regulations as a foreign trade debt. Foreign Bonds and other debt securities are those which meet the following conditions: a. b. c. d. they are issued abroad in accordance with the regulations in force in the country of issuance and such issuance is governed by foreign laws, they are offered and subscribed for mostly abroad, for which purpose the issuance is to comply with the regulations in force in the country of subscription, they are fully paid up abroad, principal and interest services are payable abroad. These also include bonds and other debt securities delivered in exchange for other bonds or securities which meet all the foregoing conditions, and/or in exchange for other notes with non-residents deriving from an Argentine foreign debt. Obligation to transfer and settle the funds in the local exchange market The new foreign financial indebtedness transactions in the financial sector, the non-financial 150 private sector and local governments, provided that they are not related to compounding of interest, must relate to settlement of foreign currency on the MULC. The foregoing also applies to indebtedness incurred under issuance of debt securities meeting foreign debt eligibility requirements, financial loans – including securities swap transactions-, foreign financial credit facilities, and any other transaction involving a disbursement of funds by the foreign creditor thus resulting in a financial indebtedness to a non-resident, except where the exception set forth in Section 3 of Decree No. 753/04 applies. The obligation to channel and settle through the exchange market new financial indebtedness must be fulfilled within 30 calendar days from the date of disbursement of funds. The proceeds from the exchange settlement must be credited into a demand account held by the client with a local financial institution. Issuances of local debt securities of the financial sector and the non-financial private sector that are denominated in foreign currency, with principal and interest payments not solely payable in pesos in Argentina are to be subscribed in foreign currency and the proceeds must be settled through the MULC within 30 calendar days from the date of payment of the funds. It is only possible to make a subscription in Pesos for bonds issued in foreign currency or to issue bonds in foreign currency in exchange for bonds or indebtedness denominated in Pesos, where payments under the new issuance of indebtedness issued in foreign currency are solely payable in Pesos within the country. Minimum terms of financial indebtedness Any new financial indebtedness channeled through the local exchange market and any renewals of financial debt to non-residents from the financial sector and from the private, non-financial sector, must be agreed upon, maintained and renewed for terms of at least 365 calendar days and they may not be repaid before the lapse of said term, irrespective of the manner of discharge of the liability to the foreign creditor and of whether said cancellation is effected with or without access to the local exchange market. Primary issuances of publicly traded debt securities listed on self-regulated markets and the correspondent balances of institutions authorized to trade in foreign exchange transactions are exempted from the foregoing requirements provided that they are not credit facilities, in which case they must fulfill the requirements applicable to channeling of financial loans. The minimum term required for renewals of financial indebtedness to foreign creditors is to be deemed completed upon payments of principal on the notes issued to implement foreign debt refinancing agreements. 365-day term non-interest bearing deposits denominated in foreign currency – Decree No. 616/2005 Pursuant to the provisions of Decree No. 616/2005 dated June 9, 2005, Communication “A” 4359 provided for regulations governing non-interest bearing deposits with local financial institutions, with the characteristics set forth in Communication “A” 4360, to be made in Dollars at 30% of the equivalent amount in such currency of the total amount of the transaction that gives rise to such deposit whenever there is a transfer of foreign currency through the exchange market as from June 10, 2005 for the following reasons: a. Financial indebtedness incurred by the financial sector and by the private, non-financial sector, except for primary issuances of publicly traded debt securities listed on self-regulated markets. Deposits made for transfer of foreign currency from financial loans may be released provided that evidence is shown of the capitalization of such loans by direct investors in the company incurring in the indebtedness and a record is submitted acknowledging the filing of an application for registration with the Public Registry of Commerce of the final capitalization of the contribution. In these cases, the remaining requirements set forth in exchange regulations must be fulfilled so that the inflow of foreign funds on account of direct investments is exempted from the non-interest bearing deposit (Communication “A” 4762). 151 b. Primary issuance of shares by resident companies whose shares are neither registered for public offering nor listed on any self-regulated market, to the extent they do not qualify as direct investment funds. c. Portfolio investments by non-residents to be applied to holdings of local currency and financial assets and liabilities in the financial sector and in the private, non-financial sector, to the extent they do not relate to the primary subscription for publicly traded debt securities listed on self-regulated markets and/or to the primary subscription for shares of resident companies whose shares are publicly traded and listed on self-regulated markets. d. Portfolio investments by non-residents to be applied to the acquisition of rights in secondary markets concerning securities issued by the public sector. Exemption from the non-interest bearing deposit requirement The following transactions, among others, are exempted from the non-interest bearing deposit requirement: 1. Foreign currency settlements by residents resulting from foreign currency-denominated loans granted by local financial institutions. 2. Inflows of foreign currency into the foreign exchange market originating in direct investment contributions in Argentina and sales of ownership interests in local companies to direct investors. 3. Inflows originating in investments made by non-residents to be used in the purchase of real property, provided that they fulfill certain conditions. 4. Other financial indebtedness to foreign creditors of the financial sector and of the private, nonfinancial sector, to the extent the proceeds from the foreign exchange settlement are simultaneously applied, net of taxes and expenses, to: (i) the acquisition of foreign currency to repay principal of external debt and/or (ii) the formation of long-term off-shore assets (Communication “A” 4377). 5. Other financial indebtedness to foreign creditors of the private, non-financial sector, to the extent it has been incurred and repaid over an average term of not less than two years, including in the calculation thereof the payment of both principal and interest, and the loan proceeds are applied to investments in non-financial assets (Communication “A” 4377). 6. Repatriation of off-shore assets owned by residents provided that certain conditions are met. 7. Funds from foreign financing acquired and repaid within no less than two years in average, including in the calculation thereof payment of principal and interest, and that have been granted to the non-financial private sector or the financial sector provided that they are used in the provision of financing services and/or small enterprise training and/or improvements in the single family dwelling. 8. Purchases of foreign currency intended to be used in portfolio investments for a specific purpose, to the extent that such application is recorded at the time it is made. 9. Sales of off-shore assets owned by residents from the private sector to be used in the primary subscription for securities issued by the Argentine Government, the proceeds of which are used in the purchase of foreign currency for debt servicing purposes. 10. Foreign exchange trading transactions originating in the sale on the local exchange market of foreign currency transferred on account of repatriation of portfolio investments held by residents carried out by stock brokers residing in the country, provided that the proceeds resulting from such transactions are used within 24 business hours following the date of exchange settlement in payment of purchases of securities issued by no-residents listed in the country or abroad, in transactions entered into with the public sector no more than 72 business hours in advance, and 152 to be settled in foreign currency in the country. 11. Payments from non-residents to local financial institutions as enforcement of financial guarantees and collection of financial debts. In such cases, prior authorization is required from the Central Bank not to make the otherwise mandatory deposit. 12. Inflows of foreign currency through the local exchange market by insurers in compliance with Resolution No. 36,162/2011 issued by the Argentine Superintendency of Insurance. Foreign Exchange Transaction Consultation System On October 28, 2011, General Resolution No. 3210/11 issued by the Argentine Tax Authority (Administración Federal de Ingresos Públicos - “AFIP”) established the Foreign Exchange Transaction Consultation System (the “Consultation System”) through which the entities authorized by the Central Bank to enter into foreign exchange transactions are required to request information on and register, through a computerized system, the amount in Pesos of each foreign exchange transaction at the time it is made. This consultation and registration system is applicable to the sale of foreign currency —foreign currency or bills—irrespective of the purpose or intended use so as to confirm whether the transaction is "Validated" or shows "Inconsistencies". Pursuant to Communication “A” 5237, later superseded by Communication “A” 5245, in the events of sales of foreign currency for the formation of off-shore assets by residents without an obligation with respect to a subsequent specific application, the entities authorized to enter into foreign exchange transactions shall only provide access to the MULC for those transactions with clients who obtain a validation and who fulfill any other requirements set forth in applicable foreign exchange regulations. The following entities, among others, are exempted from the Consultation Requirement: a) international agencies and institutions providing services as official export credit agencies, diplomatic and consular offices, bilateral agencies created under International Treaties, and b) local governments. Sales of foreign currency that do not relate to formation of off-shore assets by residents without a specific application are also exempt from the requirements of the Consultation System. Notwithstanding the foregoing, the financial institutions must confirm that all other MULC requirements are duly met. On August 6, 2012, the AFIP Resolution No. 3210 was superseded by AFIP Resolution No. 3356. This resolution establishes stricter restrictions on access to the foreign exchange market, especially in relation to the outflow of residents’ funds. Both resolutions (3210 and 3356) are related to Communication “A” 5239 (currently repealed) and 5245. Outflow of Funds Payment for Services Argentine residents may have access to the local exchange market to make transfers abroad for payment of services rendered by non residents on the terms agreed upon between the parties, in accordance with applicable legal laws and regulations. For such purposes, documents must be submittted supporting the genuineness of the transaction in connection with the item, provision of service by the non resident to the resident and amount to be transferred abroad. If the nature of the service sought to be paid is not directly related to the business conducted by the client, the entity authorized to engage in foreign exchange transactions should require certain minimum documents specified in the rules to certify the existence of a debt to a foreign creditor. In any event, the intervening entity is required to verify, among other things, compliance with registration requirements applicable to effective agreements at the national level and request any documents it deems appropriate to verify the truth of the representations made by the client. For payments of the services included in item 3.4. of Communication “A” 5377 (including, without limitation, royalties, business, professional and technical services, commercial commissions) if 153 the payee is an individual or legal entity related to the local debtor, either directly or indirectly (pursuant to the criteria set forth in Communication “C” 40.209) or is an individual or legal entity residing or organized or domiciled in associated colonies, jurisdictions, territories or States included in the list set forth in Decree No. 1344/98 implementing the Income Tax Law No. 20,628 as amended; or where the payment to the foreign creditor is to be made into an account held in such jurisdictions, prior authorization from the Central Bank is required. Such prior authorization requirement is not applicable to agreements that do not create in the calendar year at the level of the exchange market and debtor, payments and/or new debts higher than US$ 100,000 or its equivalent amount. Current profits and transfers Access to the local exchange market is permitted for payment of interest on outstanding debts or debts that are discharged concurrently with payment of interest to the extent that the foreign exchange rules allow access to the local exchange market for payment of principal due under such debt and provided that all general conditions established for making such payments of principal are met. Such access is for any outstanding amounts accrued from the date of settlement of the foreign currency resulting from such indebtedness to a foreign creditor, or from the actual date of disbursement of the funds if they were credited in correspondent accounts of entities authorized to settle such funds through the local exchange market, within 48 business hours from the date of disbursement. The exchange settlement for the purchase of foreign currency can be made no more than 5 business days prior to the date of maturity of each interest payment installment computed in arrears, or for the accrued amount at any time of the current interest period. In any case and if applicable the declaration of Evaluation of issuances of securities and foreign liabilities of the private sector that give rise to payment of interest must be submitted, with a validation of data reported for the obligation referred to above and of the “Evaluation of direct investments”, in the event that the foreign creditor is a member of the same business group. The entities authorized to enter into foreign exchange transactions may authorize and proceed to make payments abroad of profits and dividends to non-resident shareholders and holders of ADRs and BDRs, for financial statements ended and certified by external auditors in compliance with the formal requirements applicable to certification of the annual balance sheet. If applicable, the declaration of Evaluation of issuances of securities and foreign liabilities of the private sector must be submitted, with a validation of data reported for the obligation to make payment of profits and dividends and of the Evaluation of direct investments. In the events of payments for “Rents or leases of real property located in the country and owned by non-residents” and “Other rents payable abroad”, access to the local exchange market will be subject to approval from the Central Bank if the payee is an individual or legal entity related to the local debtor, either directly or indirectly, in accordance with the definition of related entities or is an individual or legal entity residing or organized or domiciled in associated colonies, jurisdictions, territories or States included in the list set forth in Decree No. 1344/98 implementing the Income Tax Law No. 20,628 as amended; or where the payment to the foreign creditor is to be made into an account held in such jurisdictions. In these cases, such prior authorization requirement is not applicable to agreements that do not create in the calendar year at the level of the exchange market and debtor, payments and/or debts higher than US$ 100,000 or its equivalent amount. In any event, the agreements shall be registered with the mandatory registers at the national level in force due to the specific nature of the item, and/or for the tax consequences of these transfers abroad. To make donations, the donee must be a governmental entity, an international organization and/or its affiliates and/or a foreign institution established in the country and internationally known for its charitable actions, and they should be used in support of natural disasters, health-related emergencies or other humanitarian situations that are known to the public at large. For this type of donations, access will be also provided to diplomatic missions, consular offices and other international offices accredited in the country. Any other cases are subject to prior authorization from the Central Bank. 154 Argentine residents have access to the foreign exchange market for transfer abroad of funds for family support, pension and retirement benefits, scholarships and education expenses, payments of fines imposed on individuals for events that occurred abroad and other transactions qualified as current transfers in accordance with international guidelines. Transfers for family support must consist in transfers directed -as clients of the intermediary entity- by resident individuals or diplomatic personnel accredited in the country, in favor of non-resident individuals. Prior authorization from the Central Bank shall be required to enter into transactions for family support if an amount equivalent to US$ 1500 is exceeded per client in a given calendar month at all entities authorized to engage in foreign exchange transactions. The transfers for scholarships and education expenses must be transfers made by residents to foreign educational institutions. The entities granting scholarships to residents for them to study abroad can also make transfers abroad in the event that the beneficiaries are scholarship holders for the amounts allocated to cover expenses in the country where they will study. Sales of foreign exchange to residents for services, rents, scholarships and education expenses, and donations must be made by issuing a check drawn by the client or debited from the client's demand account held with a local financial institution, by using any of the available payment methods. Such requirement will also apply to transfers for family support exceeding US$ 300 or its equivalent amount per client in a given calendar month at all entities authorized to engage in foreign exchange transactions. This requirement is not applicable to purchases of foreign currency-denominated bills, the acquisition of which had required a tax validation of the funds used in the foreign exchange transaction. Foreign Financial Indebtedness Communication “A” 5265 as amended by “A” 5337 disclosed new regulations applicable to financial indebtedness. Debtors from the financial sector and from the non-financial private sector have access to the local exchange market for payments of principal on their financial debts to foreign creditors: 1. At any time within 30 calendar days prior to maturity, to the extent the applicable minimum stay-period has been complied with. 2. Prior to terms beyond 30 calendar days, either in whole or in part, to the extent the applicable minimum stay-period has been complied with and any of the following conditions has been met: 2.1. the amount in foreign currency applied to the prepayment of the debt to foreign creditors may not exceed the current value of the debt portion being repaid, or 2.2 should such payment be financed with new indebtedness, either in whole or in part, or should it be part of a debt-restructuring process with foreign creditors, the terms of the new indebtedness and any net cash payment being made must not imply an increase in the current value of the debt. The method for calculation of the present value is specified in the rules. 3. Any number of days in advance as operationally required for payment to the creditor at maturity, in the case of principal installments that must be paid subject to compliance with specific conditions expressly stipulated in the foreign re-financing agreements executed and implemented with foreign creditors as from February 11, 2002. Access to the foreign exchange market for service of interest and principal on bonds and other foreign securities is, in any event, irrespective of the holder’s residence. Access to the foreign exchange market is only permitted for payment under services of debt securities that are locally issued, publicly traded and listed on self-regulated markets, if they are issued and subscribed for in foreign currency, and the funds are intended to finance infrastructure works in the country. For the other securities issued locally, irrespective of the condition of issuance, the debtor has no access to the local foreign exchange market for servicing purposes. The local banking institutions may have access to the foreign exchange market without the prior 155 consent of the Central Bank to discharge their liabilities due to non residents for cancellation of financial stand-bys, when the transaction that is being secured can automatically have access to the foreign exchange market or when the granting thereof allows for execution or maintenance of a work or other kind of commercial transaction abroad directly or indirectly including the supply of property and/or services of Argentine residents related to execution thereof. Sales of Foreign Currency to Non-residents Communication “A” 4662, as amended by Communications “A” 4692, “A” 4832, “A” 5011, “A” 5163, “A” 5237 and “A” 5241, governs access to the foreign exchange market by non-residents (as per the definitions contained in the IMF’s Balance of Payments Manual, fifth edition, chapter IV). In this respect, no prior Central Bank’s approval is required for any of the following transactions conducted by non-residents insofar as all the requirements imposed in each case have been met: 1. Purchase of foreign currencies for remittances abroad in the following events, without limitation, when transactions are made by, or pertain to collections in Argentina of: 1.1. International agencies and institutions providing services as official export credit agencies. 1.2. Diplomatic and consular offices and diplomatic personnel accredited in the country for transfers made in discharging their duties. 1.3. Missions in Argentina of Courts, Authorities or Offices, Special Missions, Commissions or Bilateral Agencies created by International Treaties or Agreements to which Argentina is a party, to the extent such transactions are conducted in the course of their duties. 1.4. Payments of Argentine imports on demand. 1.5. Foreign debts of residents for Argentine imports of goods, provided that the exchange settlement takes place within 20 business days following the date of collection. 1.6. Services, rents and other current transfers to foreign creditors. 1.7. Financial indebtedness originated in foreign loans from non residents. 1.8. Income from Bonds and Loans guaranteed by the Argentine Government issued in local currency. 1.9. Inheritances, in accordance with the declaration of heirs. 1.10. Repatriations of direct investments in the private, non-financial sector, in companies which are not the controlling companies of local financial institutions and/or in real estate, provided that the investor has maintained such investment in Argentina for at least 365 calendar days, and the beneficiary does not fall within the scope of item I of Communication "A" 4940, for the following purposes: 1.10.1. Sale of the direct investment. 1.10.2. Final liquidation of the direct investment. 1.10.3. Capital reduction decided by the local company. 1.10.4. Reimbursement of irrevocable contributions by the local company. Transactions involving repatriations of direct investments which are subject to the established requirements and cannot provide evidence of compliance as of the date of access to the local foreign exchange market require the Central Bank's prior authorization. 1.11. Collections of services or proceeds of sales of other portfolio investments (and their 156 profits) which in the aggregate do not exceed the equivalent of US$ 500,000 per calendar month per individual or legal entity, in all the institutions authorized to conduct foreign exchange transactions. These portfolio investment repatriations include, but are not limited to, portfolio investments in shares and ownership interests in local companies, investments in mutual funds and local trusts, purchases of portfolios of loans granted to residents by local banks, purchases of invoices and promissory notes for local business transactions, investments in local bonds issued in pesos and in foreign currency payable locally, as well as purchases of other internal receivables. For payments of principal and interest on government securities issued by the Argentine Government in foreign currency and other bonds issued by residents in foreign currency, which in accordance with current regulations are payable abroad, which are deposited by non-residents into local depositary accounts, the non-resident may choose among the following alternatives: collection in foreign currency-denominated bills, that the funds be credited to a local foreign currency-denominated account held in its name or retransfer of the funds to an account of its own held abroad. In these cases, no exchange form is executed. If following payment of the services, the beneficiary of the funds desires to convert the funds so collected in foreign currency into local currency, a purchase is required to be completed through the foreign exchange market based on general regulations on non-residents' portfolio investments. Financial Derivatives Communication “A” 4805 amended foreign exchange regulations governing settlement and cancellations of futures, forwards and other derivatives transactions entered in the financial sector and the non-financial private sector. The regulations establish the following: For transactions performed and settled in the country: settlements and cancellations of futures transactions on self-regulated markets, forwards, options and any other type of derivatives, the settlements of which are performed in the country by netting in local currency are not subject to previous compliance with requirements as concerns foreign exchange regulations. These local transactions are those executed under Argentine laws, irrespective of the contracting parties' residence, which in no event may imply present or future obligations to make payments by transfer abroad. Inflows by non residents through the local exchange market to meet liabilities under these agreements are subject to the deposit set forth in Decree No. 616/2005. For transactions entered into with foreign persons: the Central Bank’s prior authorization is not required for settlement and access to the foreign exchange market for payment of premiums, creation of guarantees and any appropriate cancellations of transactions involving futures, forwards, options and other hedging derivatives. Any other transaction involving futures, forwards, options and other derivatives transactions with foreign persons require the Central Bank’s prior authorization, both for performance and to obtain access to the foreign exchange market for subsequent cancellation, even if future access to the local foreign exchange market is not anticipated. With respect to admitted foreign transactions, access to the MULC is conditional upon undertaking a commitment to transfer and settle on such market and within 5 business days following the closing of the transaction the funds payable to the local client as a result of such transaction, or as a result of the release of funds under the guarantees so set up. Such transfers and the inflow of funds under the General Exchange Position of local financial institutions due to the release of guarantees created for passive repo transactions are not subject to the obligation to make the non-interest bearing deposit. The transactions performed with foreign persons with access to the foreign exchange market for hedging purposes, shall only be made: (1) on institutionalized and international financial markets, (2) with foreign banks that meet the requirements set forth in Communication “A” 4560 as supplemented, or (3) with financial institutions qualified under regulations for this type of transactions, provided that they are controlled by banks that meet the requirements under the foregoing section. Formation of Off-shore Assets by Residents 157 Communication “A” 5236 dated October 27, 2011 has rearranged applicable regulations concerning access to the local foreign exchange market for the formation of off-shore assets, with and without specific allocation, by resident individuals and legal entities other than entities authorized to deal in foreign exchange and other estates domiciled in Argentina, as well as by local governments. Such regulations authorize access to the foreign exchange market to form off-shore assets provided that the conditions applicable to each case are met, and the other transactions are subject to the Central Bank’s prior approval. Capital Markets Securities-related transactions carried out through Stock Exchanges and self-regulated Securities Markets must be paid using one of the following mechanisms: (a) in Pesos, by using the different methods available for payment, (b) in foreign currency through electronic fund transfers from and to sight accounts in local financial institutions, and (c) through wire transfers against foreign accounts. Under no circumstance shall the settlement of these securities purchase and sale transactions be made in foreign currency bills or through deposits in escrow accounts or in third-party accounts. The institutions under the supervision of this Central Bank must comply with the requirements set forth in Resolution No. 554/09 issued by the Argentine Securities Commission when it comes to all transactions consisting in the purchase and sale of securities with non-residents and performed under any conditions, unless they relate to transactions involving foreign financing received by the local entity. In this sense, upon entering into a transaction with foreign intermediaries, prior to conducting a transaction consisting in the purchase and sale of securities such requirements must be met with respect to the foreign intermediary and the client on whose behalf the transaction is performed. Following issuance of Communication “A” 4864 dated November 3, 2008, access to the foreign exchange market by financial institutions for transactions consisting in the purchase and sale of securities on Stock Exchanges and self-regulated Markets, on the terms set forth in Communication “A” 5314 shall be subject to the Central Bank’s prior authorization if it is not possible to show that the traded security has remained in the seller’s portfolio for a period of at least 72 business hours from the date of settlement of the transaction resulting in the incorporation of the securities into the seller’s portfolio. For further details on foreign exchange regulations applicable in Argentina, investors should seek advice from their professional advisors and fully read Decree No. 616/2005, MEP Resolution No. 365/2005 and the Argentine Criminal Law on Foreign Exchange Matters No. 19,359, as regulated and supplemented. Interested parties may have access to such laws and regulations through the website of the Ministry of Economy and Public Finance (http://www.infoleg.gov.ar) or the Argentine Central Bank (http://www.bcra.gov.ar). e) Taxation Argentine Tax Considerations The following summary is based upon tax laws of Argentina as in effect on the date of this Offering Memorandum and is subject to any changes in Argentine laws that may come into effect after such date. Interested persons are advised to consult their own tax advisers as to the consequences of participating in the tender offer of the notes taking into account special circumstances not contemplated in this summary, including, without limitations, those arising from the receipt of interest payments and the sale, redemption and disposition of the notes. In addition, it is worth mentioning that Argentine tax laws 158 have been amended on several occasions in the past and may be restated, provide for the abolishment of exemptions, reinstate taxes and be otherwise amended with the ensuing increase or elimination of the yield of the investments. Prospective purchasers of the notes are advised to consult their own tax advisers as to the consequences under the tax laws of the country of which they are residents of any investment in the notes, including, without limitation, those arising from the receipt of interest payments and the sale, redemption and disposition of the notes. Income Tax Interest Except as described below, interest payments on the notes (including original issue discount, if any) will be exempt from Argentine income tax, provided that the notes are issued in accordance with the Negotiable Obligations Law, and qualify for tax exempt treatment under Article 36 of such law. Under Article 36, interest on the notes shall be exempt if the following conditions (the “Article 36 Conditions”) are satisfied: (a) the notes must be placed through a public offering authorized by the CNV in compliance with Resolution 1738/2004 issued by AFIP, as amended and supplemented (the "AFIP Resolution”); (b) the issuer shall guarantee that, pursuant to the corporate resolutions authorizing the offer, the proceeds of the issue of such notes shall be allocated to (i) investments in tangible assets situated in Argentina, (ii) working capital to be used in Argentina, (iii) refinancing of debts, (iv) capital contributions to the issuer’s controlled or affiliated companies, provided that such companies use the proceeds of such contributions exclusively for the purposes set forth in (i), (ii) or (iii) above, or (v) making loans in accordance with Argentine Banking GAAP to the extent that the issuer is a financial entity under the FIL, provided that the borrowers under such loans allocate the funds so obtained for the purposes described in (i), (ii) or (iii) above; In the case of liabilities restructuring with notes, the tax benefit is only applicable to those issued under a restructuring of notes that were elegible for the tax benefit (pursuant to Section 56 of CNV Resolution 470/04). (c) the issuer shall provide evidence to the CNV, in the time and manner prescribed by regulations, that the proceeds of the issuance have been used for the purposes described in (b). (d) The minimum term for total repayment of the notes may not be less than two (2) years. Should the terms of issue of the notes provide for partial repayments, then the following additional conditions shall be complied with: a) the first repayment shall not occur before six (6) months have elapsed and the amount thereof may not exceed twenty-five percent (25%) of the amount of the issue; b) the second repayment shall not occur before twelve (12) months have elapsed and the amount thereof may not exceed twenty-five percent (25%) of the amount of the issue; c) the total amount to be repaid during the first eighteen (18) months may not exceed seventy-five percent (75%) of the aggregate amount of the issue. In such regard Section 79 -paragraph two- of Decree No. 2284/1991 published in the Official Gazette on November 1, 1991 set aside the repayment minimum term requirements set forth in paragraph 4 of Section 36 of Law No. 23,576 (as amended by Law No. 23,962), without prejudice to the powers of the Argentine Central Bank. The AFIP Resolution provides an interpretation of “public offering placement” which mainly states the following matters: • Whether a securities offering is a “public offering placement” is to be construed exclusively under Argentine law (Article 16 of the Public Offering Law). Under the Argentine Public Offering Law, notes offered under Rule 144A or Regulation S of the 159 U.S. laws may qualify as public offerings as such term is defined by the Argentine Public Offering Law. • Public offering efforts should be properly carried out and documentation of such efforts should be kept by the issuer. • Public offering efforts may be conducted not only in Argentina but also abroad. • Offerings may be made to the “general public” or to a “specified group of investors” (such as qualified institutional investors). • The offering may be underwritten pursuant to an “underwriting agreement”. The notes placed under such agreement will be considered as placed by means of a public offering to the extent that the underwriter effectively makes public offering efforts in accordance with the Argentine Public Offering Law. • The refinancing of “bridge loans” is an accepted use of proceeds from the offering. Accordingly, each series of notes shall be issued in compliance with the Article 36 Conditions and placed by means of a public offering as defined in the AFIP Resolution. The CNV has authorized the establishment of this Program, pursuant to Resolution No. 16,573, dated May 24, 2011. For that purpose, after the issuance of a series of notes, the documents required by CNV Resolution No. 368/01, as amended, and the AFIP Resolution, shall be filed with the CNV. Upon approval of such filing by the CNV, and provided that Article 36 Conditions are met, the notes would qualify for the tax-exempt treatment set forth under Articles 36 and 36bis of the Negotiable Obligations Law. However, in accordance with Article 38 of the Negotiable Obligations Law, if the issuer does not fulfill or comply with the Article 36 Conditions, the issuer will be liable for the payment of taxes payable by the holders of the notes which would have been otherwise exempt, calculated at the maximum rate contemplated by article 90 of the Income Tax Law (35%). AFIP has regulated by means of General Resolution No. 1516/2003, as amended by General Resolution No. 1578/2003, the procedure for payment of income tax by the issuer in the event it is concluded that the issuer has failed to comply with any of the requirements of Article 36 of the Negotiable Obligations Law. Consequently, the specified exemptions will benefit the holders of the notes regardless of any subsequent violation or non-compliance by the issuer, and holders of the notes will be entitled to receive the full amount due as if no withholding had been required. See “Description of the Notes—Additional Amounts.” According to Decree No. 1,076 of July 2, 1992, as amended by Decree No. 1,157 of July 10, 1992, both ratified by Argentine Law No. 24,307 of December 30, 1993 (“Decree No. 1,076”), taxpayers subject to the tax adjustment for inflation rules pursuant to Title VI of the Argentine Income Tax Law (“ITL”) (in general, entities organized or incorporated under Argentine law, Argentine branches of foreign entities, sole proprietorships and individuals carrying on certain commercial activities in Argentina) (“Excluded Holders”) do not enjoy the aforementioned exemption under Article 36 and Article 36 bis of the Negotiable Obligations Law. As a result thereof, payments of interest on the notes to Excluded Holders are subject to income tax in Argentina at the general rate of 35% on their net worldwide income. Although in certain cases payments of interest to Excluded Holders (except to financial entities subject to the FIL) are also subject to a 35% withholding tax on account of the income tax mentioned above, when the debtor is an Argentine financial institution under Law 21,526, such withholding tax will not be applicable (Article 81, paragraph a) of the ITL). Any withholding made shall be considered as a payment on account of the income tax of the noteholder and shall become due unless the beneficiary alleges the existence of an exemption event and provided that such events shall be evidenced by means of any of the formal requirements established by the relevant tax authority. Argentine law provides that, in general, tax exemptions do not apply when, as a result of the application of an exemption, funds may be transferred to foreign tax authorities (Articles 21 of the ITL and 106 of the Argentine Tax Procedure Law). This principle, however, does not apply to holders of notes who are foreign beneficiaries. 160 Therefore, the exemption established under Article 36 and Article 36 bis of the Negotiable Obligations Law is applicable only to: (i) resident and non-resident individuals (including undivided estates) and (ii) foreign beneficiaries (either individuals or legal entities). The exemption is not applicable to local companies ("Excluded Holders") pursuant to Article 4 of Decree No. 1076/1992. Capital Gains If the Article 36 Conditions are fully complied with, resident and non-resident individuals and foreign entities without a permanent establishment in Argentina are not subject to taxation on capital gains derived from the sale or other disposition of the notes. However, even if the Article 36 Conditions are not met, Decree No. 2,284/91, as ratified by Law No. 24,307, provides that foreign beneficiaries are not subject to taxation on capital gains derived from the sale or other disposition of the notes. Pursuant to Decree No. 1,076, Excluded Holders are subject to taxation on capital gains derived from the sale or other disposition of the notes as prescribed by Argentine tax regulations. Value Added Tax To the extent that the Article 36 Conditions are met, financial transactions and transactions related to the issuance, placement, purchase, transfer, payment of principal and/or interest or redemption of the Notes will be exempted from value added tax in Argentina. It should be mentioned that Article 38 of the Negotiable Obligations Law provides that, if the issuer fails to comply with the Article 36 Conditions, it shall be liable for the payment of any applicable taxes. In this case, the applicable rate shall be 21%, except for the special cases contemplated by the Value Added Tax Law. Personal Assets Tax Individuals domiciled and undivided estates located in Argentina whose personal assets exceed in the aggregate the amount of $ 305,000.- are subject to pay the Argentine Personal Assets Tax. This tax is determined by application of an increasing progressive rate depending on the taxable assets. Therefore, individuals domiciled and undivided estates located in the country are required to include Trust Securities as part of the taxable assets. This tax is levied on all taxable assets existing as of December 31 of each year in accordance with the following rates: Total value of taxable assets Applicable Rate From $ 305,000 to 750,000 0.50 % From $ 750,000 to 2,000,000 0.75 % From $ 2,000,000 to 5,000,000 1.00 % More than $ 5,000,000 1.25 % As regards the securities held by individuals domiciled or undivided estates located abroad the Substitute Taxpayer System (“Régimen de Responsables Sustitutos”) set forth in Article 26 of the Personal Assets Law shall apply. Under such system any individual or legal entity that owns, possesses, uses, enjoys, disposes of, holds, is depository of, manages or keeps in custody such securities shall remit as single and final payment 1.25% of the value thereof as of December 31 of each year, without computing the minimum non-taxable amount. However, the tax shall not be paid if the amount to be remitted is lower than $ 255.75.- (Argentine Pesos two hundred and fifty-five, and 75 cents). Individuals domiciled and undivided estates located in Argentina or abroad that are deemed to be “direct holders” of the Notes are subject to pay the Personal Assets Tax on the market value (or cost of acquisition plus any accrued and outstanding interest, in the case of unlisted Notes) of their holdings of such Notes as of December 31 of each year. 161 Notwithstanding the foregoing, although securities, such as the notes, owned by individuals domiciled or undivided estates located outside Argentina would be technically subject to the Personal Assets Tax, according to the provisions of Decree No. 127/96, a procedure for the collection of such tax has not been established in respect of such securities. The companies and other entities organized or incorporated in Argentina and Argentine branches and permanent representative offices in Argentina of foreign companies and other foreign entities in general shall not be subject to pay the Personal Assets Tax for their holdings of Notes. In general, there will be a conclusive presumption that the Notes that as of December 31 of each year are held by legal entities and other entities not organized in Argentina (except for Argentine branches and their permanent representative offices) are indirectly held by individuals domiciled or undivided estates located in Argentina and accordingly they will be subject to payment of the personal assets tax. However, the legal presumption shall not apply (i) if the Notes are authorized by the CNV for public offering in Argentina and are traded on one or more Argentine or foreign self-regulated market; (ii) the capital stock of such legal entity or other entity consists of registered shares; (iii) if the main business of such legal entity or other entity does not consist in making investments outside its jurisdiction of incorporation and in general it is not subject to any restriction on the performance of commercial activities and businesses in such jurisdiction of incorporation; or (iv) such legal entity or other entity is an exempt company (such as insurance companies, mutual investment funds, or retirement and pension funds or banks or financial institutions incorporated or set up in a country whose central bank has adopted the standards established by the Basel Committee). In the case of foreign companies and other foreign entities presumed to be owned by individuals domiciled or located in Argentina and subject to payment of the Personal Assets Tax, as described above, the tax will be applied at the rate of 2.5% of the cost of acquisition plus accrued and unpaid interest and we will be responsible as substitute taxpayer for payment of such tax. Argentine Executive Branch Decree No. 127 of February 9, 1996 as well as General Resolution (AFIP) No. 2151/06 provide that the Substitute Taxpayer, i.e. the entity bound to pay the tax, shall be the issuer of the securities. The PAT also authorizes the Substitute Taxpayer to recover the amount paid, without limitations, through withholdings or the sale of the assets that triggered such payment. However, Decree No. 812/1996, dated July 24, 1996, establishes that this legal presumption shall not apply to shares and corporate debt securities, such as the Notes, whose public offering has been authorized by the CNV and which are tradable on Argentine or foreign stock exchanges or securities markets. In order to ensure that this legal presumption will not apply and, accordingly, that the issuer shall not be liable as Substitute Taxpayer in respect of the notes, the issuer shall keep in its records a duly certified copy of the CNV’S resolution whereby such agency has authorized the public offering of shares or corporate debt securities, and evidence that such certificate or authorization was effective as of December 31 of the year in which the PAT liability accrued, as required by AFIP Resolution N° 2,151/06. Tax on Presumed Minimum Income The tax on minimum presumed income (the “PMIT”) is levied on the potential income from the ownership of certain income-generating assets. Corporations domiciled in Argentina, business, companies, foundations, sole proprietorships, trusts (except for financial trusts created under articles 19 and 20 of the Trust Law), certain mutual funds created in Argentina and permanent business establishments owned by foreign persons, among other taxpayers, are subject to the tax at a 1% rate applicable over the total value of assets, including the notes, above the aggregate amount of Ps.200,000. The taxable base shall be the market value of the notes if the notes are listed on a self regulated securities market, and the adjusted acquisition cost if they are not listed. This tax will be payable only if the income tax assessed for any fiscal year does not equal or exceed the amount owed under the PMIT. In such case, only the difference between the PMIT assessed for such fiscal year and the income tax assessed for the 162 same fiscal year shall be paid. Any PMIT paid will be applied as a credit towards income tax to be paid in the immediately following ten fiscal years. Tax on Debits and Credits in Bank Accounts Law No. 25,413 (published in the Official Gazette on March 26, 2001), as amended, establishes, with certain exceptions, a tax on debits and credits in checking accounts held in financial institutions located in Argentina and on other transactions that are used as a substitute for the use of checking accounts. The general tax rate is 0.6% for each debit and credit, and such rate is duplicated for transactions not involving bank accounts and understood to replace bank credits and debits. Pursuant to Decree No. 380/2001, as amended by Decree No. 534/04, effective as of May 1, 2004, 34% of the tax paid on the taxable events levied at the 0.6% general tax rate under article 1 a) of the aforementioned Law (only credits) and 17% of the tax paid on taxable events levied at the 1.2% tax rate under paragraphs b) and c) of the aforementioned Law will be considered as a payment on account of the income tax, the tax on presumed minimum income or the special contribution over the capital of cooperative associations (or advances of such taxes) by the bank accountholders. The amounts credited as payments on account will be offset, with no distinction, against income tax, PMIT or the special contribution over the capital of cooperative associations. The amount in excess may not be offset against other taxes or transferred in favor of third parties, but may be carried forward, until its exhaustion, to other fiscal periods in which the above-mentioned taxes are payable. Turnover Tax Turnover tax is a local tax levied on any habitual activities for profit carried out in a provincial jurisdiction and/or in the City of Buenos Aires. The taxable base is the gross amounts invoiced for the business conducted in the relevant jurisdiction. Investors regularly engaged in activities, or presumed to be engaged in activities, in any jurisdiction where they receive revenues from interest arising from the holding of notes, or from their sale or conveyance, might be subject to turnover tax at rates that vary according to the specific laws of each Argentine province, unless an exemption applies. Article 155, paragraph (1) of the Tax Code of the City of Buenos Aires establishes that income resulting from any transaction with notes issued pursuant to the Negotiable Obligations Law such as interest income, accrued adjustments and the selling value in the event of transfer is exempted from the turnover tax to the extent the income tax exemption is applicable on such notes. Article 207, item (c) of the Tax Code of the Province of Buenos Aires establishes that income resulting from any transaction with notes issued pursuant to the Negotiable Obligations Law and Law No. 23,962, as amended, such as interest income, accrued adjustments and the selling value in the event of transfer is exempted from the turnover tax to the extent the income tax exemption applies. Stamp Tax The Stamp Tax is a local tax generally levied on gratuitous acts carried out within the territory of a jurisdiction or those carried out outside a given jurisdiction but with effects in such jurisdiction. Article 430, paragraph 50) of the Tax Code of the City of Buenos Aires exempts from stamp tax all acts, contracts and transactions related to the issuance, subscription, placement and transfer of notes issued under Law No. 23,576. This exemption applies to capital increases intended to issue shares to be delivered upon conversion of the notes as well as to the furnishing of any kind of personal guarantees or security interests in favor of investors or third parties securing the issuance, be they prior to, simultaneous with or subsequent to such issuance. In the City of Buenos Aires, all instruments, acts and transactions related to the issuance of debt securities of the issuer and any other securities intended for public offering under the Capital Markets 163 Law issued by companies authorized by the CNV to engage in public offerings are exempt from stamp tax. This exemption also applies to the collaterals related to such issuances. However, the exemption shall become ineffective if, within a period of 90 calendar days, the issuer fails to request authorization for the public offering of the securities before the CNV and/or if the placement of such securities does not take place within 180 calendar days after the relevant authorization is granted. The acts and/or instruments related to the trading of shares and other securities duly admitted for public offering by the CNV are also exempt from stamp tax in the City of Buenos Aires. This exemption shall also become ineffective upon the occurrence of the circumstances described in the second sentence of the paragraph above. In turn, in the Province of Buenos Aires, pursuant to Article 297, paragraph 46) of the Tax Code of the Province of Buenos Aires, all acts, contracts and transactions, including deliveries or receipts of moneys, associated to the issuance, subscription, placement and transfer of notes issued under the Negotiable Obligations Law are exempt from stamp tax. This exemption applies to capital increases intended to issue shares to be delivered upon conversion of the notes as well as to the furnishing of any kind of personal guarantees or the creation of security interests in favor of investors or third parties securing the issuance, be they prior to, simultaneous with or subsequent to such issuance. In the Province of Buenos Aires, all instruments, acts and transactions related to the issuance of debt securities of the issuer and any other securities intended for public offering under the Capital Markets Law issued by companies duly authorized by the CNV are exempt from stamp tax. This exemption also applies to the furnishing of any kind of personal guarantees or security interests in favor of investors or third parties securing the issuance, be they prior to, simultaneous with or subsequent to such issuance. However, the exemption shall become ineffective if, within a period of 90 calendar days, the issuer fails to request authorization for the public offering of the securities before the CNV and/or if the placement of such securities does not take place within 180 calendar days after the relevant authorization is granted. Additionally, the acts related to the trading of securities duly admitted for public offering by the CNV are also exempt from stamp tax in the Province of Buenos Aires. This exemption shall also become ineffective upon the occurrence of the circumstances described in the second sentence of the paragraph above. Considering the autonomy of each provincial jurisdiction as regards tax matters, it will be necessary to analyze the possible effects that may be triggered by these transactions and the tax treatment contemplated in the rest of the provincial jurisdictions. Transfer Tax There are no taxes on the sale and/or transfer of the Notes. Argentina does not levy any provincial tax or any tax on gifts, donations, inheritances, donors, legatees or donees. Notwithstanding the above, as regards transfer taxes, the Province of Buenos Aires established a Free Transfer of Property Tax (Law No. 14,044) (“FTPT”), effective as from January 1, 2010, the main characteristics of which are: The FTPT applies on enrichments from any free transfers of assets, including inheritances, legacies, donations, etc. Individuals and legal entities are both subject to the FTPT. Taxpayers domiciled in the Province of Buenos Aires are subject to the FTPT on assets located in the Province of Buenos Aires and outside it, and taxpayers domiciled in other provinces are subject to the FTPT exclusively on their assets located in the Province of Buenos Aires. The following assets, among others, are deemed to be situated in the Province of Buenos Aires, when (i) the securities, notes, shares, ownership interests and other equity securities are issued by legal entities of the public sector and/or the private sector or by companies domiciled in the Province of Buenos Aires; (ii) the securities, notes, shares as well as any other securities are in the Province of Buenos Aires, at the time of the transfer, even if the securities had been issued by legal entities and/or companies of the 164 private sector, domiciled in other jurisdictions; and (iii) the securities, notes, shares and other equity securities or equivalent instruments, at the time of the transfer, were located in a different jurisdiction, and had also been issued by legal entities and/or companies also domiciled in other jurisdictions, in which case they shall pay in proportion to the assets of the issuer situated in the Province of Buenos Aires. Gratuitous transfers are exempt from FTPT when the total value of the assets, without computing deductions, exemptions and exclusions, is equal to, or less than, Ps. 50,000. In the case of transfers involving parents, children and spouses, such amount shall be Ps. 200,000. Applicable rates range progressively from 4% to 21.92505% depending on the degree of kinship and the relevant taxable base. Gratuitous transfers of notes may be subject to the FTPT to the extent that such gratuitous conveyance, without computing deductions, exemptions and exclusions, exceed Ps. 50,000. In the case of parents, children and spouses, such amount shall be Ps. 200,000. Transfer of assets are exempt from the FTPT when the total amount of the transferred assets is equal to or less than Ps. 3,000,00 (excluding exemptions, deductions, etc.). The tax rate ranges between 5% up to 10.5% depending on the taxable base and the degree of kinship involved. Free transfers of notes might be subject to the FTPT if they involve conveyances of assets in excess of Ps. 3,000,000. Court Tax In the event that it were necessary to file enforcement proceedings in relation to the notes in Argentina, a court tax (currently at a rate of 3%) will be imposed on the amount of any claim brought before the Argentine courts of the City of Buenos Aires. Funds Sourced from Low or No Tax Jurisdictions Executive Branch Decree No. 1,344/98, as amended, provides that following countries, territories and regimes shall be deemed low- or no-tax-jurisdictions: Anguilla (non-autonomous territory of the UK); Antigua and Barbuda; the Netherlands Antilles; Aruba; Ascension Island; Bahamas; Barbados; Belize; Bermudas (non-autonomous territory of the UK); Brunei Darussalan; Campione D’ Italia; Gibraltar; Commonwealth of Dominica (associated state); United Arab Emirates; Bahrain; Associated State of Grenada (independent state); Puerto Rico; Kuwait; Qatar; Saint Kitts and Nevis; Rules applicable to holding corporations in Luxembourg; Greenland; Guam (non-autonomous territory of US); Hong Kong (territory of China); the Azores; Channel Islands (Guernsey; Jersey; Alderney; Great Stark Island; Herm; Little Sark; Brechou; Jethou Lihou); Cayman Islands; Christmas Island; Cocos (Keeling) Island; Cook Islands; Isle of Man (territory of the UK); Norfolk Island; Turks and Caicos Islands (non-autonomous territory of UK); Pacific Islands; Salomon Islands; Saint Pierre and Miquelon Island; Qeshm Islands; British Virgin Island; US Virgin Islands; Kiribati; Labuan; Macau; Madeira (Portugal); Montserrat (nonautonomous territory of the UK); Niue; Patau; Pitcairn; French Polynesia; Andorra; Liechtenstein; Monaco; Rules applicable to financial corporations (governed by Uruguayan Law No. 11,073); Kingdom of Tonga; Jordan; Swaziland Kingdom; Republic of Albania; Republic of Angola; Republic of Cape Verde; Republic of Cyprus; Republic of Djibouti; Republic of Guyana; Republic of Panama; Republic of Trinidad & Tobago; Republic of Liberia; Republic of Seychelles; Republic of Mauritius; Republic of Tunisia; Republic of Maldives; Republic of the Marshall Islands; Republic of Nauru; Republic of Sri Lanka; Republic of Vanuatu; Republic of Yemen; Republic of Malta; Saint Helena; Saint Lucia; Saint Vincent and the Grenadines; American Samoa (non-autonomous territory of the US); Western Samoa; Republic of San Marino; Oman; Archipelago of Svalbard; Tuvalu; Tristan da Cunha; Trieste (Italy); Tokelau; Ostrava (city of the Czech Republic). Pursuant to a legal presumption set forth in article 18.1 of Law No. 11,683, as amended, incoming funds from low- or no- tax jurisdictions, irrespective of their nature, reason or the type of transaction, will be deemed to be unjustified asset increases for the local recipient and will be taxed as follows: 165 (a) income tax at a 35% rate will be assessed upon the issuer on 110% of the amount of the transfer; and (b) value added tax at a 21% rate will also be assessed upon the issuer on 110% of the amount of the transfer. The Argentine taxpayer may rebut such legal presumption by duly evidencing before the Argentine Tax Authority that the funds arise from activities effectively performed by the Argentine taxpayer or a third party in such jurisdictions, or that such funds have been previously declared. Accordingly, the Notes may not be (i) originally acquired by a person domiciled or organized in a low-tax jurisdiction, or (ii) purchased by a person through a bank account opened in a low-tax jurisdiction. Pursuant to Argentine law, no-tax jurisdictions are those listed in Article 21.7 of the regulatory decree of the Income Tax Law. Public Offering and Tax Exemption The AFIP Resolution was published in the Official Gazette on September 14, 2004. Until such date, there were doubts about the position that may be adopted by the Argentine tax authorities in connection with the tax benefits granted to securities placed through a public offering, including both originally issued securities (the existing notes) and securities tendered under an exchange offer, including exchange offers made under reorganization proceedings or APEs. Such Resolution defined some aspects, among others: It provides that, in the case of placements of securities abroad, the “placement through public offering” requirement shall be construed under the Argentine law (Capital Markets Law) and not under foreign laws, for which reason “the provisions contained in the laws or regulations of such foreign markets” as well as “the name given to the offer by foreign laws” shall be irrelevant. Securities offered under Rule 144A / Regulation S of the United States Securities Law may be placed by means of a public offering (in compliance with Argentine laws). For securities to be regarded as “placed through a public offering”, it will be necessary to prove that “actual placement efforts”, as defined in the Capital Markets Law, were made. In other words, the CNV’s authorization shall not be enough but it will not be necessary to attain a given result, such as a criterion of minimum dispersion of the investment. In short, a “placement through a public offering” is a best efforts obligation rather than an obligation to achieve a given result. Public offering efforts may be made both in Argentina and abroad. The offering may be targeted to the “general public” or to “a specific group of investors”, and even to “institutional investors only”, thus clarifying that the offering must not necessarily be targeted to the general public. The execution of an underwriting agreement is valid to comply with the public offering requirement, provided that evidence is provided that the underwriter offered the securities through the mechanisms contemplated by the Capital Markets Law. Use of the proceeds of the issue of notes to refinance liabilities, including “bridge loans”, is expressly admitted. The Resolution does not require that the securities be listed on self-regulated markets in order to qualify as placed through a public offering (although the whereases of the Resolution provide that listing of the securities on an Argentine self-regulated entity will help to weight the issuer’s intention to offer the securities to the public). In the case of exchanges of notes by other notes under reorganization proceedings, the benefits attaching to the notes originally placed through a public offering shall extend to the new notes offered in 166 exchange thereof, to the extent that the underwriters of the latter have also been the holders of the originally issued notes. The Resolution provides that the issuer shall exert its best efforts for the securities to qualify for tax benefits. Tax Treaties Argentina has entered into tax treaties with several countries. In such regard, the taxation regulations described above could be changed to the benefit of the investor by applying treaties to avoid double taxation. THE ABOVE SUMMARY DOES NOT CONSTITUTE A FULL DISCUSSION OF ALL TAX CONSEQUENCES RELATED TO THE OWNERSHIP OF THE NOTES. HOLDERS AND PROSPECTIVE PURCHASERS OF NOTES ARE URGED TO CONSULT THEIR OWN TAX ADVISERS ABOUT THE TAX CONSEQUENCES APPLICABLE TO THEIR SPECIFIC SITUATION. 167 LEGAL MATTERS The validity of the creation of the Program and the issuance of each series and/or tranche of notes thereunder and certain matters in connection with Argentine law will be passed upon by Zang, Bergel & Viñes Law Firm, Argentine counsel to the Bank. Saúl Zang, a director of the Bank, Pablo Vergara del Carril, a director of the Bank and Ernesto Manuel Viñes, director and general counsel of the Bank, are each partners of Zang, Bergel & Viñes Law Firm. In addition, Mr. Saul Zang is vice-president of IRSA Inversiones y Representaciones Sociedad Anónima, one of the Bank’s principal shareholders. ADVISORS AND AUDITORS Legal Advisors with respect to the Issue The Bank’s legal advisors as regards the Argentine law are Zang, Bergel & Viñes Law Firm, located at Florida 537, 18th Floor, City of Buenos Aires, (C1005AAAK), Argentina. Auditors The audited financial statements of the Bank included in this Offering Memorandum have been audited by Price Waterhouse & Co. S.R.L., member of the firm PricewaterhouseCoopers, an independent chartered accountants’ firm, as described in their reports attached hereto, which accountants are enrolled in the Professional Council in Economic Sciences of the City of Buenos Aires, Volume 1, Page 17, and domiciled at Bouchard 557, 7th Floor (C1106ABG) City of Buenos Aires, Argentina. At the Shareholders’ Meetings held on May 23, 2008, April 29, 2009, April 30, 2010 and April 13, 2011, the following accountants were appointed: Marcelo A. Trama C.P.C.E. Ciudad Autónoma de Buenos Aires Volume 125 – Page 69 and Carlos Horacio Rivarola C.P.C.E. Ciudad Autónoma de Buenos Aires Volume 124 Page 225, to act as regular and alternate independent auditors, respectively. At the Ordinary General Shareholders' Meeting dated March 27, 2012 Accountant Marcelo Alejandro Trama (CPCE Autonomous City of Buenos Aires Volume 252 – Folio 159) was designated as regular external auditor and Accountant Carlos Horacio Rivarola was reelected as alternate external auditor. SUPPLEMENTARY INFORMATION 1. The creation of the Program and the issuance of the notes were authorized by the General Ordinary and Extraordinary Shareholders’ Meeting held on May 23, 2008 and by the Bank’s Board’s Meeting held on February 9, 2011, March 14, 2012 and February 15, 2013. The renewal of the delegation of powers to the board of directors was approved by resolution of the General Ordinary Shareholders’ Meeting held on March 27, 2012. In addition, the referred Board’s resolution dated February 9, 2011 approved the reduction of the Program’s amount originally approved by the General Ordinary and Extraordinary Shareholders’ Meeting of the Bank dated May 23, 2008 for up to US$ 2,000,000,000 (or its equivalent in pesos) to an amount of up to US$ 500,000,000 (or its equivalent in pesos). 2. Except as disclosed in this Offering Memorandum, there has been no material adverse change in the Bank’s financial condition since December 31, 2012, the date of the latest audited financial statements included in this Offering Memorandum. 3. Except as disclosed in this Offering Memorandum, the Bank is not involved in any litigation or arbitration proceedings relating to claims or amounts that are material in the context of the offerings under the Program, nor so far as we are aware there is any such litigation or arbitration pending or threatened. 4. The Bank may file an application for the listing and/or trading of the notes of one or more series and/or tranches on Argentine and foreign stock exchanges, securities exchanges and over-thecounter markets, as specified in the applicable pricing supplement. 168 BANCO HIPOTECARIO S.A. Reconquista 151 (C1003ABC) City of Buenos Aires, Argentina AUDITORS Price Waterhouse & Co. S.R.L. Bouchard 557, 7th Floor (C1106ABG) City of Buenos Aires, Argentina. LEGAL ADVISORS TO THE BANK As regards Argentine law Zang, Bergel & Viñes Law Firm Florida 537 – 18th Floor - Galería Jardín (C1005AAK) City of Buenos Aires Argentina 169
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