Banco Nacional de Crédito, C.A., Banco Universal. Report of Independent Accountants and Financial Statements June 30, 2012 and December 31, 2011

Transcription

1 Banco Nacional de Crédito, C.A., Banco Universal Report of Independent Accountants and Financial Statements

2

3

4 Balance sheet Assets Cash and due from banks (Notes 3, 4, and 29) 4,016,330,948 3,805,219,062 Cash 364,058, ,373,293 Central Bank of Venezuela 2,890,758,618 2,661,343,748 Venezuelan banks and other financial institutions 143, ,110 Foreign and correspondent banks 252,117, ,466,241 Pending cash items 509,252, ,808,670 Investment securities (Note 5) 4,759,818,786 3,364,343,317 Investments in available-for-sale securities 1,638,028,205 1,906,250,749 Investments in held-to-maturity securities 2,330,649,916 1,078,027,814 Restricted investments 16,410,925 11,216,160 Investments in other securities 774,810, ,929,000 (Provision for investment securities) (80,406) (80,406) Loan portfolio (Note 6) 9,587,800,957 7,411,273,482 Current 9,805,019,256 7,504,661,031 Rescheduled 33,049,065 32,195,504 Overdue 25,679, ,750,607 In litigation 9,798,584 9,333,096 (Allowance for losses on loan portfolio) (285,744,979) (304,666,756) Interest and commissions receivable (Note 7) 146,263,681 87,876,938 Interest receivable on investment securities 76,143,759 38,807,309 Interest receivable on loan portfolio 92,033,829 75,735,012 Commissions receivable 610, ,307 (Provision for interest receivable and other) (22,524,300) (27,279,690) Investment in subsidiaries, affiliates and branches (Note 8) - - Available-for-sale assets (Note 9) 68,594,931 43,187,255 Property and equipment (Note 10) 403,819, ,509,402 Other assets (Notes 11 and 12) 187,511, ,814,230 Total assets 19,170,140,489 15,229,223,686 Memorandum accounts (Note 22) Contingent debtor accounts 595,110, ,383,994 Assets received in trust 787,135, ,571,853 Debtor accounts from other special trust services (Housing Loan System) 354,214, ,734,523 Other debtor memorandum accounts 28,053,448,525 23,023,648,137 29,789,908,996 24,477,338,507 The accompanying notes are an integral part of the financial statements 1

5 Balance sheet Liabilities and Equity Customer deposits (Note 13) 17,592,988,123 13,772,164,171 Demand deposits 9,907,855,350 7,000,020,191 Non-interest-bearing checking accounts 7,756,548,057 5,268,310,893 Interest-bearing checking accounts 2,151,307,293 1,731,709,298 Other demand deposits 4,171,980,470 3,454,059,835 Savings deposits 2,691,770,792 2,312,970,806 Time deposits 650,396, ,257,127 Restricted customer deposits 170,985, ,856,212 Borrowings (Note 14) 1,765,183 1,977,912 Venezuelan financial institutions, up to one year 1,151,823 1,326,220 Foreign financial institutions, up to one year 613, ,692 Other liabilities from financial intermediation (Note 15) 32,723,687 96,772,017 Interest and commissions payable (Note 16) 13,646,949 21,670,561 Expenses payable on customer deposits 13,182,403 21,268,033 Expenses payable on other liabilities 464, ,528 Accruals and other liabilities (Note 17) 270,563, ,369,909 Total liabilities 17,911,687,847 14,106,954,570 Equity (Note 25) Capital stock 345,403, ,403,396 Convertible bonds (Note 24) 100,000, ,000,000 Paid-in surplus 74,377,322 74,377,322 Capital reserves 236,392, ,629,256 Retained earnings 403,097, ,618,494 Exchange gain from holding foreign currency assets and liabilities 133,111, ,767,875 Net unrealized gain (loss) on investments in available-for-sale securities (Note 5) (33,929,480) 19,472,773 Total equity 1,258,452,642 1,122,269,116 Total liabilities and equity 19,170,140,489 15,229,223,686 The accompanying notes are an integral part of the financial statements 2

6 Income statement Six-month periods ended Interest income 996,796, ,031,057 Income from cash and due from banks 49,132 57,360 Income from investment securities 231,856, ,484,258 Income from loan portfolio 688,855, ,826,177 Income from other accounts receivable 76,034,888 77,663,262 Interest expense (307,547,860) (278,421,292) Expenses from customer deposits 298,907, ,886,940 Expenses from borrowings (Note 14) 39,731 60,992 Expenses from convertible bonds (Note 24) 8,311,726 8,285,324 Other interest expense 289, ,036 Gross financial margin 689,248, ,609,765 Income from financial assets recovered (Note 6) 6,454,603 4,296,963 Expenses from uncollectible and impaired financial assets Expenses from uncollectible loans and other accounts receivable (Notes 6 and 7) (140,661,664) (68,849,092) Net financial margin 555,041, ,057,636 Other operating income (Note 19) 241,526, ,583,978 Other operating expenses (Note 20) (106,827,318) (49,882,416) Financial intermediation margin 689,740, ,759,198 Operating expenses (471,865,591) (369,944,689) Salaries and employee benefits (Note 2-j) 140,063, ,704,855 General and administrative expenses (Note 21) 238,317, ,386,667 Fees paid to the Deposit Guarantee and Bank Protection Fund (FOGADE) (Note 27) 85,840,431 55,136,887 Fees paid to the Superintendency of Banking Sector Institutions (Note 28) 7,644,327 5,716,280 Gross operating margin 217,875, ,814,509 Income from available-for-sale assets (Note 9) 312,965 38,649 Sundry operating income (Note 19) 4,335,432 3,211,369 Expenses from available-for-sale assets (Note 9) (9,813,011) (4,638,033) Sundry operating expenses (Note 20) (22,655,296) (15,795,088) Net operating margin 190,055, ,631,406 Extraordinary income 1,570,561 10,977,487 Extraordinary expenses (2,026,967 ) (3,688,804) Gross income before tax 189,598, ,920,089 Income tax (Note 18) (1,083,584 ) (613,620) Net income 188,515, ,306,469 Appropriation of net income Legal reserve 37,703,031 24,661,294 Retained earnings 150,812,124 98,645, ,515, ,306,469 Provision for the Law on Narcotic and Psychotropic Substances (LOSEP) (Notes 1 and 20) 1,922,375 1,274,005 The accompanying notes are an integral part of the financial statements 3

7 Statement of changes in equity Six-month periods ended Exchange gain (loss) from holding Unrealized Share Retained earnings foreign gain (loss) on Paid-in premium Non- currency investment capital Convertible and paid-in Capital Unappropriated Restricted distributable assets and securities Total stock bonds surplus reserves surplus surplus surplus Total liabilities (Note 5) equity Balances at June 30, ,403, ,000,000 74,377, ,180,595 37,546, ,006,402 3,207, ,760, ,897,172 (2,016,333) 1,000,602,838 Exchange gain from holding foreign currency assets and liabilities (Notes 4 and 25) ,941,749-34,941,749 Allowance for losses on loan portfolio and provision for interest receivable and other (Note 25) (58,071,046) - (58,071,046) Gain on sale of investments and adjustment of investments in available-for-sale securities to market value ,489,106 21,489,106 Net income ,306, ,306, ,306,469 Appropriation to legal reserve (Note 25) ,661,294 (24,661,294) - - (24,661,294) Creation of the social contingency fund (Note 25) ,454,033 (3,454,033) - - (3,454,033) Reclassification of net income of the Curacao Branch (Note 25) (2,767,923) - 2,767, Reclassification to restricted surplus of 50% of net income for the period (Note 25) (47,938,626) 47,938, Reserve fund for convertible bonds (Note 24) ,333,334 (8,333,334) - - (8,333,334) Balances at December 31, ,403, ,000,000 74,377, ,629,256 73,698, ,945,028 5,975, ,618, ,767,875 19,472,773 1,122,269,116 Exchange loss from holding foreign currency assets and liabilities (Notes 4 and 25) (656,392) - ( ) Gain on sale of investments and adjustment of investments in available-for-sale securities to market value (53,402,253) (53,402,253) Net income ,515, ,515, ,515,155 Appropriation to legal reserve (Note 25) ,703,031 (37,703,031) - - (37,703,031) Creation of the social contingency fund (Note 25) ,727, ,727,016 Reclassification of net income of the Curacao Branch (Note 25) (5,316,575) - 5,316, Reclassification to restricted surplus of 50% of net income for the period (Note 25) (72,747,775) 72,747, Reserve fund for convertible bonds (Note 24) ,333,334 (8,333,334) - - (8,333,334) Balances at June 30, ,403, ,000,000 74,377, ,392, ,112, ,692,803 11,291, ,097, ,111,483 (33,929,480) 1,258,452,642 Net income per share (Note 2-n) Six-month periods ended Weighted average of outstanding shares 345,403, ,403,396 Income per share The accompanying notes are an integral part of the financial statements 4

8 Cash flow statement Six-month periods ended Cash flows from operating activities Net income 188,515, ,306,469 Adjustments to reconcile net income to net cash provided by operating activities Allowance for losses on loan portfolio 140,661,664 68,657,684 Provision for interest receivable and other - 191,408 Provision for other assets 2,866,960 4,460,139 Depreciation of property and equipment and amortization of available-for-sale and other assets 36,327,269 25,310,531 Accrual for length-of-service benefits 18,655,306 11,349,497 Transfers to trust fund and payment of length-of-service benefits (13,614,721) (10,263,523) Income tax provision 1,817,689 2,834,906 Deferred tax asset (734,105) (2,221,286) Net change in Overnight deposits - 103,105,324 Interest and commissions receivable (65,262,792) (32,831,580) Other assets (32,151,898) (35,323,681) Accruals and other liabilities 48,617,497 37,933,159 Net cash provided by operating activities 325,698, ,509,047 Cash flows from financing activities Net change in Customer deposits 3,820,823,952 4,209,932,321 Borrowings (212,729) (4,342,001) Other liabilities from financial intermediation (64,048,330) 96,276,184 Interest and commissions payable (8,023,612 ) (890,861) Net cash provided by financing activities 3,748,539,281 4,300,975,643 Cash flows from investing activities Loans granted during the period (8,873,812,663) (7,841,341,940) Loans collected during the period 6,564,206,282 5,753,550,924 Net change in Investments in available-for-sale securities 214,538,693 (800,157,991) Investments in held-to-maturity securities (1,252,985,379) 6,272,745 Restricted investments (3,467,749) (9,818) Investments in other securities (405,881,146) (359,502,611) Available-for-sale assets (34,599,917) (41,684,886) Property and equipment (71,123,540 ) (58,929,591) Net cash used in investing activities (3,863,125,419) (3,341,803,168) Cash and due from banks Net change 211,111,886 1,255,681,522 At the beginning of the period 3,805,219,062 2,549,537,540 At the end of the period 4,016,330,948 3,805,219,062 Supplementary information on non-cash activities Write-off of loans - principal 152,000,685 4,428,509 Write-off of interest receivable on loans 11,619, ,831 Reclassification of excess in (Notes 6 and 7) Allowance for losses on loan portfolio to provision for interest receivable and other (6,864,531) (9,539,979) Allowance for losses on loan portfolio to provision for contingent loans (718,225) (2,457,370) Net change in unrealized loss on investment in available-for-sale securities (53,402,253) 21,489,106 Creation of the social contingency fund 1,727,017 3,454,033 Increase in provision charged to exchange gain in equity Loan portfolio (Note 6) - 55,000,000 Interest receivable (Note 7) - 3,071,046 Effect of exchange fluctuations on Investments in available-for-sale securities 281,598 12,095,511 Investments in held-to-maturity securities 363,277 22,405,240 Interest receivable on investment securities 11, ,998 The accompanying notes are an integral part of the financial statements 5

9 1. Activities and regulatory environment Banco Nacional de Crédito, C.A., Banco Universal (the Bank) was authorized to operate as a commercial bank in Venezuela in February 2003 under the name Banco Tequendama, C.A. and as a universal bank on December 2, Its business objective is to provide financial intermediation consisting in the procurement of funds for the purpose of granting credits or loans and investing in securities. As described in Note 26, the Bank conducts transactions with related companies. The Bank is incorporated and domiciled in the Bolivarian Republic of Venezuela. Its legal address is: Avenida Vollmer, Torre Sur del Centro Empresarial Caracas, Urbanización San Bernardino, ZP Most of the Bank s assets are located in the Bolivarian Republic of Venezuela. At June 30, 2012, the Bank has 143 offices, a branch in Curacao, a main office, six regional offices and 2,277 employees. The Bank s shares are traded on the Caracas Stock Exchange (Note 25). The Bank s financial statements at were approved for issue by the Board of Directors on July 11, 2012 and January 11, 2012, respectively. In August 2003, the Superintendency of Banking Sector Institutions (SUDEBAN) issued Resolution No dated August 4, 2003, published in Official Gazette No. 37,748 on August 7, 2003, authorizing the Bank s fiduciary operations. The Law on Banking Sector Institutions was issued by the Venezuelan government on December 28, 2010 and amended and reissued on March 2, According to the temporary provisions of the new Law, banks have a 135-day deadline to submit to SUDEBAN a plan to conform to the new legislation. On May 11, 2011, the Bank filed the adjustment plan with SUDEBAN. Through Notice No. SBI-II- GGIBPV-GIBPV of June 3, 2011, SUDEBAN made some observations regarding the adjustment plan presented by Bank management and clarified certain issues set out in the Law. On December 21, 2011, the Bank informed SUDEBAN about its progress in the implementation of the adjustment plan and requested a 180-day extension to comply with certain articles of the Law. Through Notice No. SIB-II-GGIBPV-GIBPV of January 20, 2012, SUDEBAN granted the extension requested by the Bank. In July 2012, the Bank sent SUDEBAN a status report on the adjustment plan, which is in the final stages. The Bank s activities are ruled by the Law on Banking Sector Institutions and the Stock Market Law, as well as the rules and instructions of SUDEBAN, the Higher Authority of the National Financial System (OSFIN), the Central Bank of Venezuela (Banco Central de Venezuela - BCV) and the Venezuelan Securities Superintendency (SNV). The Law of the National Financial System is aimed at regulating, supervising, controlling and coordinating the National Financial System in order to ensure that financial resources are used and invested for the public interest and for economic and social development with a view to creating a social and democratic State ruled by Law and Justice. The National Financial System is formed by the group of public, private and communal financial institutions and any other form of organization operating in the banking sector, the insurance sector, the stock market and any other sector or group of financial institutions that the policy-making body deems should form part of the system. Individuals and corporations that are users of the financial institutions belonging to the system are also included. 6

10 The National Financial System establishes rules for citizens to participate in the supervision of the financial management and social controllership of the parties to the National Financial System, protects user rights, and promotes collaboration among the sectors of the productive economy, including the popular and communal sectors. Curacao Branch The banking activities of the Bank s Curacao Branch (the Branch) are regulated by the Law of Banks of Curacao and St. Maarten. The Branch is not an economically independent entity and conducts transactions following the Bank s guidelines. The Branch operates under an off-shore license granted by the Federal Control Office for the Credit Banking System of Curacao and St. Maarten and SUDEBAN in Venezuela. Capital assigned to the Branch has been contributed by the Bank (Note 8). Other laws that regulate the Bank s activities are described below: Agricultural Loan Law The Agricultural Loan Law requires the People s Power Ministry for the Economy and Finance and the People s Power Ministry for Agriculture and Land to jointly fix within the first month of each year the minimum percentage of the loan portfolio to be earmarked by each universal bank to finance agriculture. On February 16, 2012, through a joint Resolution, the aforementioned ministries established the minimum percentages of the loan portfolio to be earmarked by each universal bank to finance agriculture during This percentage is calculated based on the gross loan portfolio at December 31, 2011 and 2010 of each universal bank, and must be applied as follows: 20% in February; 21% in March and April; 22% in May; 24% in June; 25% in July, August, September, October and November; and 24% in December (Note 6). The total amount of the quarterly agricultural loan portfolio of each public or private universal bank must be distributed as follows: Area Activity Percentage Strategic Primary agricultural production minimum Agroindustrial investments maximum Marketing maximum Non-strategic Primary agricultural production maximum Agroindustrial investments 4.50 maximum Marketing 4.50 maximum Total agricultural portfolio This Resolution also established that commercial and universal banks must grant medium and longterm loans representing a least 10% of the total agricultural loan portfolio. In addition, this Resolution requires the number of new individual and company borrowers of the agricultural loan portfolio to be increased by 30% with respect to total agricultural borrowers at prior year end. Of this percentage, at least half must be individual borrowers. Universal banks must distinguish between agricultural loan borrowers maintained at prior year end and new borrowers for a given year subject to measurement. Moreover, the Resolution establishes how the total quarterly balance of each bank s agricultural loan portfolio must be distributed among strategic and non-strategic areas (Note 6). 7

11 According to the Resolution, only 5% of loans earmarked for strategic primary agricultural production may be granted without guarantees to borrowers meeting the following conditions: 1. Borrowers must be individuals who are small producers. 2. Borrowers may not have another current agricultural loan with any public or private universal bank at the loan application date. 3. The primary production project must be viable. To comply with the aforementioned percentages, financial institutions may alternatively place funds with public banks or contribute them to the Fund for Social Agricultural Development (FONDAS) as capital contributions to the Sociedad de Garantías Recíprocas para el Sector Agropecuario, Forestal, Pesquero y Afines, S.A. (S.G.R. SOGARSA, S.A.), provided that the receiving entity ultimately uses the funds to grant agricultural loans, in accordance with the terms and conditions approved by the Agricultural Loan Monitoring Committee. Any such funds that are not used directly by the receiving entity for agricultural loans may be returned at the Bank s request after it has solved the loan deficit that motivated the contribution of funds in the first place, but in no event before the financial instrument agreed between the parties matures. Public and private universal banks that deposited or invested money in the previously mentioned institutions must inform SUDEBAN within the first 15 continuous days of the following month. Also, these banks must keep up to date and available to the regulatory body all files and information regarding these transactions. Law on Benefits and Payment Facilities for Agricultural Debts on Strategic Crops for Food Security and Sovereignty The Law on Benefits and Payment Facilities for Agricultural Debts on Strategic Crops for Food Security and Sovereignty was enacted on August 3, Subsequently, on September 17, 2009 and on April 1, 2011, through a joint Resolution, the People s Power Ministry for Planning and Finance and the People s Power Ministry for Agriculture and Land established the special terms and conditions for debt restructuring and the procedures and requirements for filing and issuing response notices for debt restructuring requests. Agricultural Aid Law On May 23, 2012, the Venezuelan President enacted the Agricultural Aid Law to meet the needs of producers, farmers and fishermen who were affected by the floods that hit the country in late This Law will benefit individuals or legal entities that had received agricultural loans to sow crops, purchase raw materials, machinery, equipment and livestock, build and improve infrastructure, reactivate distribution centers and finance working capital in relation to the production of strategic crops. The beneficiaries who received loans to finance the strategic crops defined under the Law shall be granted partial or full debt relief by public and private banks. Law for Creating, Supporting, Promoting and Developing the Microfinancial Business Sector This Law establishes that the Bank must earmark 3% of its gross loan portfolio at prior semester closing for microcredits or contributions to institutions that create, support, promote and develop the microfinancial and small business sector in Venezuela. 8

12 Special Law for Home Mortgagor Protection This Law requires banks and other financial institutions regulated by Law on Banking Sector Institutions to grant mortgage loans for acquisition, construction or subcontracted construction, enlargement or remodeling of primary residences, based on a percentage of their annual loan portfolio, excluding loans granted under the Housing Loan Law. Under this Law, loans will bear a social interest rate. The BCV, through an Official Notice, established special social interest rates applicable as from September 2011 for primary residence mortgages and construction loans, granted or to be granted from the financial institutions own resources as follows: a. The maximum annual social interest rate to be applied to loans granted under the Special Law for Home Mortgagor Protection is 11.42%. b. The maximum annual social interest rate applicable to mortgage loans for the acquisition of primary residences, granted or to be granted from the financial institutions own resources varies between 4.66% and 9.16%, depending on the monthly family income. c. The maximum annual social interest rate applicable to mortgage loans for the construction of primary residences, granted or to be granted from the financial institutions own resources, is 10.50%. d. The maximum annual social interest rate applicable to loans granted under the Housing Loan Law varies between 1.40% and 4.60%, depending on the monthly family income. The People s Power Ministry for Housing established that maximum monthly installments for mortgage loan payments shall not exceed 35% of the monthly family income. Mortgage loans may be granted for up to the full value of the real property pledged, based on its appraisal value and the monthly family income. In May 2011, the People s Power Ministry for Housing fixed the minimum percentage of the annual gross loan portfolio to be earmarked by each universal bank from its own resources for mortgages at 12% for the acquisition, construction, remodeling or subcontracted construction of primary residences. This percentage was distributed based on the gross loan portfolio at December 31, 2010 taking into account the financed activity and the monthly family income of the loan applicants. Compliance with the aforementioned percentages will be measured each year at December 31. 9

13 On July 19, 2011, through Resolution No. 104, the People s Power Ministry for Housing fixed the minimum percentage of the annual gross loan portfolio to be earmarked by each universal bank for mortgages at 12% for the acquisition and construction of primary residences. This percentage was distributed based on the gross loan portfolio at December 31, 2010 as follows: Type of Required Financed activity Monthly family income residence % Construction of housing Under or equal to three minimum salaries 4.00 Between three and five minimum salaries 1.00 Under or equal to four minimum salaries 1.60 Over four minimum salaries 0.40 Acquisition of primary residence Under or equal to four minimum salaries New 2.56 Under or equal to four minimum salaries Used 0.64 Over four minimum salaries New 0.64 Over four minimum salaries Used 0.16 Improvement and expansion of primary residence Under or equal to five minimum salaries Subcontracted construction of primary residence Under or equal to five minimum salaries Total mortgage portfolio The distribution of the percentage for the construction of residences shall be defined by the Higher Authority of the National Housing System. Through Official Gazette No. 39,890 of March 23, 2012, the People s Power Ministry for Housing fixed the minimum percentage of the annual gross loan portfolio to be earmarked by each universal bank from its own resources for mortgage loans at 15% for the construction, acquisition, improvement, expansion or subcontracted construction of primary residences. This percentage shall be distributed based on the gross loan portfolio at December 31, 2011 as follows: Required Financed activity Monthly family income Market % Construction of housing Earmarked placements 5.45 Between three and six minimum salaries Between six and eight minimum salaries Between eight and fifteen minimum salaries Acquisition of primary residence Between three and six minimum salaries Primary 2.20 Between three and six minimum salaries Secondary 0.70 Between six and fifteen minimum salaries Primary 0.75 Between six and fifteen minimum salaries Secondary 0.25 Improvement and expansion of - primary residence Under or equal to five minimum salaries Subcontracted construction of primary residence Under five minimum salaries Total mortgage portfolio The measurement of long-term mortgage loans for the acquisition of primary residences is calculated based on: a) the balances of long-term mortgage loans granted at December 31 of the year preceding the year subject to measurement and b) loans actually granted in The measurement of shortterm mortgage loans granted for construction of primary residences is calculated based on actual payments made during On August 2, 2011, the People s Power Ministry for Housing issued Resolution No. 121 containing the guidelines for granting loans for the subcontracted construction, expansion or improvement of primary residences. 10

14 In addition, this Resolution establishes the financing conditions for each type of loan regardless of the source of funds. Some of these conditions are: maximum debt capacity of the loan applicant or coapplicant, required guarantees, and the general requirements for the loan applicant and co-applicant. On September 6, 2011, the People s Power Ministry for Planning and Finance set the annual social interest rates at between 1.4% and 4.66%. Compliance with and distribution of the aforementioned percentages are measured at December 31 of each year. Tourism Law On August 27, 2009, the Tourism Law was published in Official Gazette No. 39,251. The Tourism Law requires the People s Power Ministry for Tourism to fix within the first month of each year the percentage of the gross loan portfolio to be earmarked by banks to finance tourism, ranging between 2.5% and 7%. Short, medium and long-term loans must be included in the loan portfolio percentage. The interest rate may only be modified for the benefit of the loan applicant and loans shall be repaid in equal consecutive monthly installments. In addition, this Law establishes amortization periods between 5 and 15 years depending on the activities to be conducted by loan applicants. This Law also establishes special conditions in respect of terms, interest rates and subsidies, among others, for projects to be executed in tourist areas, potential tourist areas or endogenous tourist development areas. In addition, tourism guarantees are created within the National System for Reciprocal Guarantees for loans granted. In addition, the total monthly balance of each bank s tourism loan portfolio must be distributed as follows: Segment Required percentage A 40 B 35 C 25 Through a Resolution issued on February 23, 2012 (February 28, 2011 at December 31, 2011), the People s Power Ministry for Tourism established at 3% the minimum percentage of the gross loan portfolio to be earmarked by each universal bank to finance tourism. This percentage is calculated based on the gross loan portfolio balance at December 31, 2011 and 2010 and must be applied as follows: 1.5% at June 30, 2012 and 3% at December 31, 2012 (Note 6). Through a joint Resolution on April 13, 2010, published in Official Gazette No. 39,402, the People s Power Ministries for Tourism and for Planning and Finance established the grace periods for tourism loans. These grace periods range from one to three years depending on the activity that is being financed. Loans for tourism projects to be developed in tourist areas will have the maximum grace periods considering the type of activity to be developed. Manufacturing loans The Manufacturing Loan Law published on April 17, 2012 requires the people s power ministries in charge of finance and industries to jointly fix within the first month of each year, and with the binding opinion of SUDEBAN and the BCV, the terms, conditions, periods and minimum percentage of the loan portfolio to be earmarked by each universal bank to finance agriculture. In no event may the minimum percentage fall below 10% of each bank s gross loan portfolio for the immediately prior year (10% at December 31, 2011). 11

15 BCV regulations The BCV has established regulations on lending and deposit rates to be applied by banks and restrictions on certain service fees. In July 2011 the BCV established maximum rates to be charged for commissions, fees or surcharges on each type of transaction. Regarding lending rates, the BCV established that banks may not charge for lending operations, except for consumer loans, an annual interest or discount rate higher than the rate periodically set by the BCV s Board of Directors for discount, rediscount, repurchase and advance operations, reduced by 5.5%, except in the case of agricultural, tourism, manufacturing and mortgage loans for primary residences (Note 6). As from June 5, 2009, the annual interest rate to be charged by the BCV on discount, rediscount and advance operations, except as regards operations conducted under special regimes, was set at 29.5%. Regarding deposit rates, the BCV established that the interest rate to be paid by banks on savings deposits, including liquid asset accounts, shall not be lower than 12.5% per annum. In addition, interest rates to be paid by banks on time deposits and certificates of deposit may not be lower than 14.5% per annum, regardless of their maturity. This rate will not be applicable to time deposits received by development banks whose main objective is to foster, finance or promote microfinancial activities when the depositor is another bank or financial institution. Likewise, the BCV established that banks may not charge commissions, fees or surcharges to their customers for transactions, operations or services directly related to savings accounts. Banks may charge a commission amounting to the existing balance of dormant savings and current accounts that have been closed if it is below Bs 1. In addition, banks may not charge commissions, fees or surcharges for operations other than those published by the BCV. Through Resolution No of November 23, 2010 and Resolution No of July 13, 2011, the BCV established that banks may only charge their customers up to Bs 5 for the second plus savings account books issued in the year. Likewise, banks may fix by mutual agreement with their customers the amounts to be charged for commissions, fees or surcharges for providing specialized products or services, as defined in these Resolutions. However, the BCV must approve all amounts before collection. In July 2007, the Constitutional Chamber of the Supreme Tribunal of Justice ruled partly in favor of the lawsuit filed by the National Users and Consumers Alliance (ANAUCO) against the Venezuelan Banking Association (ABV), the National Banking Council (CBN), SUDEBAN and the BCV. As part of this process, the BCV established that banks may not charge an annual interest rate in excess of 29% or under 17% for credit card lending operations. Moreover, banks may not charge customers commissions, fees or charges for maintaining or renewing credit cards, collecting balances owed, issuing statements or issuing classic or similar credit cards, or for claims filed by credit card holders, whether legitimate or otherwise. Furthermore, the aforementioned Resolution requires banks to pay on amounts credited in excess of the total credit card debt or on any amounts in favor of the cardholder (except for prepaid instruments) annual interest not below that established by the BCV for savings deposits. The BCV established the maximum discount rates and commissions to be charged by banks to affiliated businesses for authorizing and processing point-of-sale operations through credit, debit and prepaid cards or any other financing or electronic payment instrument. 12

16 On October 26, 2010, the BCV issued Resolution No to modify legal reserve rules and establish that financial institutions must deposit the whole of the minimum reserve at the BCV, equal to the sum of the amounts resulting from applying: - 17% of total net liabilities - 17% of total investments assigned - 17% of increases in net liabilities recorded at July 14, Through Resolution No issued on June 30, 2011, the BCV reduced by 3 percentage points the 17% minimum legal reserve that banks are required to maintain at the BCV, as per the previous Resolution of October 26, 2010, provided that they use the available resources to purchase instruments issued within the framework of Venezuela s Great Housing Mission. The terms and conditions of these investments will be as established by the BCV (Note 5-d). Through Resolution No published in June 2010, the BCV issued the rules for conducting exchange operations. According to these rules, the trading in bolivars of securities denominated in foreign currency issued or to be issued by the Bolivarian Republic of Venezuela, its decentralized agencies or any other issuer may only be conducted through the System for Transactions with Securities in Foreign Currency (SITME). These purchase and sale transactions in bolivars shall be conducted within a certain price band by universal banks, commercial banks, and savings and loan institutions following the terms and conditions established by the BCV. In August 2010, Resolution No was issued to allow the BCV s participation in foreign currency trading operations. Subsequently, through Circular No. SBIF-II-GGNR-GNP of June 14, 2010, SUDEBAN decided to establish a regulatory exception for authorization requests provided for in the Accounting Manual for Banks, Other Financial Institutions, and Savings and Loan Entities (Accounting Manual) relating to the assignment of National Public Debt Bonds in foreign currency issued by the Bolivarian Republic of Venezuela, its decentralized agencies or any other issuer in circumstances other than those expressly described in the Accounting Manual. This regulatory exception only applies to held-to-maturity securities negotiated through SITME. To qualify for the exception, the transactions must be notified to SUDEBAN, which must receive documentation supporting the transactions together with the approval of the institution s treasury committee or whoever may be acting in its stead (Note 5). Through Resolution No , the BCV established that duly authorized universal banks may operate as brokers or intermediaries on the currency market and advertise this activity, in accordance with the BCV s guidelines, terms and conditions. Other regulations Law for the Advancement of Science, Technology and Innovation This Law establishes that the country s major corporations will annually earmark 0.5% of gross income generated in Venezuela in the prior year. For the six-month periods ended June 30, 2012 and December 31, 2011, the Bank recorded expenses in this connection of Bs 3,266,966 and Bs 3,029,934 respectively, included under sundry operating expenses (Note 20). In December 2010, the Venezuelan government enacted the Reform of the Law for the Advancement of Science, Technology and Innovation, which became effective on December 16, This legal instrument creates the National Fund for Science, Technology and Innovation (FONACIT), which shall be responsible for administering, collecting, controlling, verifying, and quantitatively and qualitatively determining the contributions for science, technology and innovation and their applications. Likewise, the Reform indicates that taxpayers may apply to use the contributions to science, technology and 13

17 innovation, provided that they develop annual projects, plans, programs and activities for the priority areas defined by the national authority responsible for matters related to science, technology and innovation and their applications and submit them within the first quarter of each year. Subsequently, also within the first quarter of each year, users of the contributions for science, technology and innovation must submit to FONACIT a technical and administrative report of the activities conducted in this connection during the prior year. The Partial Regulations of the Law for the Advancement of Science, Technology and Innovation were published on November 8, These regulations govern the contributions, financing and its results, and research, technology and innovation ethics, and require the payment and declaration of contributions within the second quarter after the closing of the period in which gross income was generated. Antidrug Law The Antidrug Law was published in Official Gazette No. 39,510 on September 15, This Law requires all private corporations, consortia and business-oriented public entities with 50 or more employees to contribute 1% of their annual operating income to the National Antidrug Fund (FONA) within 60 days of their respective year end. Companies belonging to economic groups will make contributions on a consolidated basis. The FONA shall use these contributions to finance plans, projects and programs for the prevention of illegal drug traffic. The contributions to the FONA shall be distributed as follows: 40% for prevention projects for the contributor s employees and their families; 25% for child welfare protection programs; 25% for antidrug traffic programs; and 10% to finance the FONA s operating costs. In addition, companies are required to employ rehabilitated individuals to facilitate their social reintegration. The Antidrug Law repeals the Law on Narcotic and Psychotropic Substances published in Official Gazette No. 38,337 on December 16, 2005, and its Partial Regulations of June 5, 1996, published in Official Gazette No. 35,986 on June 21, In Official Gazette No. 39,643 of March 28, 2011 was published Resolution No , which established the regulations for payment of contributions and special contributions according to applicable Laws. This Resolution also established that the Antidrug Law will be effective for periods beginning after September 15, 2010, date in which the Law was enacted, and for periods that began before that date will apply the Law on Narcotic and Psychotropic Substances. For the six-month periods ended, the Bank recorded expenses in this connection of Bs 1,922,375 and Bs 1,274,005, respectively, included under sundry operating expenses (Note 20). Exchange Offenses Law A Reform of the Exchange Offenses Law was published on May 17, 2010 to include in the legal definition of foreign currency securities denominated in foreign currency or which can be traded in such. The Reform also grants the BCV exclusive control over foreign currency trading, regardless of the amount of the transaction, whether through money or the purchase of securities that are intended to be sold prior to their maturity date. Law against Organized Crime and Terrorism Financing The Law against Organized Crime and Terrorism Financing was published in Official Gazette No. 39,912 on April 30, 2012 to prevent, investigate, prosecute, typify and punish offenses involving organized criminal groups and terrorism. The Bank is analyzing whether it must conform to any of this Law s requirements. 14

18 Sports and Physical Education Law The Sports and Physical Education Law was passed in August This Law seeks to regulate physical education and the sponsorship, organization and management of sporting activities as public services. Companies subject to this Law must contribute 1% of their net income to the activities contemplated therein. The first Partial Regulations to this Law were published on February 28, 2012 to establish the method for declaring and paying this contribution, the former within 190 days of period end. Through Circular No. SIB-II-GGR-GNP of May 4, 2012, SUDEBAN established regulations on how this contribution must be paid and recorded. New Labor Law The new Labor Law was published in Official Gazette No. 39,916 on May 7, This Law incorporates certain changes to the previous Labor Law of June 19, 1997 and its Reform of May 6, 2011, particularly with respect to the calculation of certain employee benefits, such as vacation bonus, profit sharing, maternity leave, and the retrospective accrual of length-of-service benefits. In addition, the new Law reduces working hours and extends job security for new parents. This Law became effective upon its publication in the Official Gazette. At June 30, 2012, the Bank set aside a provision of Bs 5,930,754 to cover retrospective length-of-service benefits, recorded against expenses for the period (Note 17). 2. Basis of preparation The accompanying financial statements at have been prepared based on the accounting rules and instructions of SUDEBAN included in the Accounting Manual, which differ in certain material respects from generally accepted accounting principles (VEN NIF) published by the Venezuelan Federation of Public Accountants (FCCPV), of mandatory application in Venezuela as from January 1, VEN NIF are mainly based on International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), except for certain criteria concerning adjustments for inflation and the valuation of foreign currency assets and liabilities, among others. Through Resolution No of December 28, 2010, SUDEBAN deferred the presentation of consolidated or combined financial statements prepared under VEN NIF as supplementary information and established that, until otherwise stated, consolidated or combined financial statements and their notes must continue to be presented as supplementary information in accordance with generally accepted accounting principles in effect at December 31, 2007 (VEN GAAP). At, the main differences identified by management between the accounting rules and instructions of SUDEBAN and VEN NIF that affect the Bank are the following: 1) VEN NIF Adoption Bulletin No. 2 (BA VEN NIF 2) establishes criteria for applying International Accounting Standard No. 29 (IAS 29), Financial reporting in hyperinflationary economies in Venezuela and requires that the effects of inflation on the financial statements be recognized in accordance with IAS 29, provided that inflation for the year exceeds one digit. SUDEBAN has stipulated that inflation-adjusted financial statements must be provided as supplementary information. For purposes of additional analysis, the Bank has prepared inflation-adjusted financial statements using the General Price Level (GPL) method. The inflation rate for the six-month period ended June 30, 2012 was 7.49% (12.88% for the six-month period ended December 31, 2011) (Note 34). 15

19 2) The Accounting Manual establishes that interest earned on overdue or in-litigation loans shall not be recognized as income but shall be recorded under memorandum accounts, as shall all subsequent interest earned. VEN NIF establish that for financial instruments carried at amortized cost, the amount of the impairment is the difference between the instrument s carrying amount and the present value of estimated future cash flows generated by the instrument, discounted at the original effective interest rate. Impairment exists when the present value of an instrument s future cash flows is lower than the carrying amount, in which case interest income shall be recognized taking into account the discount rate applied to future cash flows for determining impairment losses. 3) The Accounting Manual establishes that loans whose original repayment schedule, term, or other conditions have been modified at the request of the debtor must be reclassified within rescheduled loans. VEN NIF provide no specific guidance. However, they do state that impairment losses on financial assets carried at amortized cost shall be charged to the results for the period in which they are incurred. In addition, the Accounting Manual establishes that loans classified as overdue must be written off within 24 months after inclusion in this category. Loans in litigation must be fully provided for after 24 months in the in-litigation category. In addition, overdue monthly loan installments that have been repaid must be classified to the category to which they pertained before being classified as overdue. Likewise, when a debtor repays pending loan installments of a loan in litigation, thereby terminating the lawsuit, the loan must be reclassified to the category to which it pertained before being classified as in litigation or overdue. According to VEN NIF, accounts receivable are recorded based on their recoverable amount. 4) Assets received as payment are recorded at the lower of cost and market value and amortized using the straight-line method over one to three years. Idle assets must be written out of asset accounts after 24 months. In accordance with VEN NIF, assets received as payment are stated at the lower of cost and market value, and are classified as available-for-sale assets or investment property depending on their use. Investment properties are depreciated over their expected income-generating term. 5) The Accounting Manual establishes that property and equipment is initially recorded at acquisition or construction cost, as applicable. However, VEN NIF allows property and equipment to be revalued, and any increase in value is credited to equity under revaluation surplus. 6) Significant leasehold improvements are recorded as amortizable expenses and included under other assets. According to VEN NIF, they must be shown as part of property and equipment. Gains or losses on the sale of personal and real property are shown in the income statement. 7) The Bank computes a deferred tax asset or liability in respect of temporary differences between the tax bases and carrying amounts in the financial statements, except for provisions for losses on other than high risk or unrecoverable loans. A deferred tax asset is not recognized for any amount exceeding future taxable income. In accordance with VEN NIF, a deferred tax asset is recognized in respect of all temporary differences between the carrying amount of assets and liabilities and their tax bases, provided that its realization is assured beyond any reasonable doubt. 8) The Bank presents convertible bonds as part of equity (Note 24). In accordance with VEN NIF, convertible bonds must be presented as a financial instrument forming part of the Bank s liabilities. 16

20 9) Other assets include deferred expenses incurred by the Bank during the currency redenomination process, which are amortized as from April 2008 using the straight-line method (Note 12). Other assets also include deferred personnel, general, administrative and operating expenses related to the acquisition of Stanford Bank, S.A., which will be amortized over 15 years as from January 1, 2010 (Note 11). In accordance with VEN NIF, these types of costs may not be deferred and must be recorded in the income statement as incurred. 10) In conformity with SUDEBAN rules, the Bank sets aside the general allowance for the loan portfolio with a charge to the results for the period. VEN NIF require that these allowances be recorded as a restricted amount of retained earnings in equity, provided that they do not meet conditions established in IAS 37, Provisions, contingent liabilities and contingent assets. 11) At, the Bank, in conformity with SUDEBAN rules, maintains a general 1% allowance of the loan portfolio balance, except for the balance of the microcredit portfolio, for which it maintains a general 2% allowance. VEN NIF require that the Bank first assess whether objective evidence of impairment exists individually for loans that are individually significant, or collectively for loans that are not individually significant. Impairment losses shall be recognized in the results for the period. 12) SUDEBAN rules require foreign currency balances and transactions to be measured at the prevailing official exchange rate established by the BCV of Bs 4.30/US$1, except for foreign currency securities issued by the Bolivarian Republic of Venezuela or by state-owned companies, which are measured at the average exchange rate of securities traded through SITME the last day of each month. In conformity with VEN NIF, foreign currency transactions and balances shall be measured and recorded taking into consideration a comprehensive assessment of the entity s financial position, its monetary position in foreign currency and the financial impact of the applicable exchange regulations. In addition, instructions issued by the FCCPV on this matter state that: - Foreign currency items shall be measured: a) at the official exchange rates established in the different exchange agreements issued by the BCV and the Venezuelan government, or b) on the basis of best estimates of future cash flows in bolivars expected to be required or received to settle liabilities or realize assets at the transaction or balance sheet date, using the exchange or settlement mechanisms permitted under Venezuelan law (e.g., SITME). - Assets in foreign currency required to be sold to the BCV shall be measured at the official exchange rates established by the BCV. - Assets in foreign currency not required to be sold to the BCV shall be measured: a) on the basis of the liabilities that are not reasonably expected to be settled with foreign currency purchased from the Venezuelan government at the official exchange rate, or b) on the basis of best estimates of future cash flows in bolivars expected to be received to realize these assets at the transaction or balance sheet date, using the exchange or settlement mechanisms permitted under Venezuelan law (e.g., SITME). 13) Investments in trading securities may not remain in this category for more than 90 days after they have been classified. In conformity with VEN NIF, these investments may remain in this category indefinitely. 17