GRUPO FINANCIERO INTERACCIONES, S.A.B. DE C.V. AND SUBSIDIARIES. Consolidated Financial Statements

Transcription

1 GRUPO FINANCIERO INTERACCIONES, S.A.B. DE C.V. AND SUBSIDIARIES Consolidated Financial Statements As of December 31, 2016 and 2015 with Report of Independent Auditors

2 GRUPO FINANCIERO INTERACCIONES, S.A.B. DE C.V. AND SUBSIDIARIES Consolidated Financial Statements As of December 31, 2016 and 2015 Contents: Report of Independent Auditors Audited Consolidated Financial Statements: Consolidated Balance sheets Consolidated Statements of Income Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements

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4 2. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the "Auditor s responsibilities for the audit of the consolidated financial statements" section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements. Assessment of key assumptions considered in the calculation of the loan-loss reserve We considered the loan-loss reserve to be a key audit matter since for the calculation of the reserve, the Group s Management considered various assumptions and factors to determine loss severity and probability of default of the loan portfolio by applying the required methodologies for each type of loan, as established by the Commission. We also deemed the loan-loss reserve to be a key audit matter because it is an integral component of the loan portfolio, which the Group considers its principal asset in view of the fact that it is the result of its main business activity. As of December 31, 2016, the Group s loan-loss reserve is Ps. 1,469 million and is a result of the loan activities of the subsidiary Banco Interacciones, S.A. See Notes 2, 7 and 8 to the accompanying consolidated financial statements for a discussion of the Group s policies and Management s analyses of the loan-loss reserve.

5 3. How our audit addressed the key audit matter We analyzed the risk considerations related to the calculation of the loan-loss reserve and we determined the procedures and scope for our review. We performed a walkthrough of the loanloss reserve calculation in order to understand the design and operation of the key controls related to it. We performed substantive tests on a representative sample of loans where we assessed the calculation of the respective loan-loss reserve. A description of the main audit procedures that we applied is as follows: 1) we verified the arithmetical accuracy of the calculations made by Management; 2) we compared the loan balances against the operating systems of the loan portfolio and the respective support documentation; 3) we evaluated the assumptions and factors considered by Management to calculate the probability of default; 4) we evaluated the calculation of loss severity, including the supporting documentation of the associated guarantees; and 5) we assessed the disclosures required by the accounting rules related to the loan-loss reserve described in the accompanying consolidated financial statements. Other information Management is responsible for the other information. The other information comprises the information included in the Annual Report required by the General Dispositions Applicable to Securities Issuers and Other Securities Market Participants, issued by the Commission, but does not include the consolidated financial statements and our auditor s report thereon. We expect to obtain the other information after the date of this auditor s report. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information when we have access to it and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. When we read and consider the Annual Report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance and to issue a statement on the Annual Report required by the Commission that contains a description of the matter.

6 4. Responsibilities of Management and of those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the accompanying consolidated financial statements, in accordance with the regulatory accounting framework for controlling companies of financial groups established by the Commission, as described in Note 2, and for such internal control as Management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, Management is responsible for assessing the Group s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless Management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group s financial reporting process. Auditor s responsibilities for the audit of the consolidated financial statements The objectives of our audit are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

7 5. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management. Conclude on the appropriateness of Management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

8 6. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor s report is Jorge E. Peña. Our audit opinion and the accompanying financial statements and footnotes have been translated from the original Spanish version into English for convenience purposes only. Mancera, S.C. A Member Practice of Ernst & Young Global Limited Jorge E. Peña Mexico City April 25, 2017

9 GRUPO FINANCIERO INTERACCIONES, S.A.B. DE C.V. AND SUBSIDIARIES Consolidated Balance Sheets As of December 31, 2016 and 2015 (Amounts in millions of Mexican pesos) (Notes 1 and 2) Assets Liabilities Cash and cash equivalents (Note 3) Ps. 12,929 Ps. 6,204 Core deposits Demand deposits (Note 15a) Ps. 49,643 Ps. 34,415 Investments in securities (Note 4) Time deposits (Note 15b) Held-for-trading 91,094 94,777 General public 16,445 16,264 Available-for-sale 12,191 3,419 Money market transactions 18,353 16,687 Held-to-maturity 2,113 2,066 34,798 32, , ,262 Debt securities issued (Note 15c) 16,655 14,309 Assets under security repurchase agreements (Note 5) ,096 81,675 Interbank and other borrowings (Note 16) Derivatives Demand loans Held-for-trading Short-term 7,199 4,620 Long-term 11,237 10,916 Performing loan portfolio 18,936 15,536 Commercial loans Business or commercial activity 24,793 23,783 Technical reserves (Note 17) 1,495 2,536 Financial entities 487 1,920 Government entities 89,518 71,190 Liabilities under security repurchase agreements (Note 5) 93,597 88,065 Consumer loans Home mortgage loans Collateral securities sold or pledged as collateral Total performing loan portfolio 114,977 97,172 Securities lending Non-performing loan portfolio Derivatives (Note 6) Commercial loans Held-for-trading Business or commercial activity Home mortgage loans 7 9 Accounts payable to reinsurers and rebounders Total non-performing loan portfolio Total loan portfolio (Note 7) 115,034 97,286 Other accounts payable Income tax payable Loan-loss reserve (Note 8) ( 1,469) ( 1,620) Employee profit sharing payable Loan portfolio, net 113,565 95,666 Balance payable under open transactions (Note 18) 701 1,422 Amounts owed under margin accounts Sundry creditors and other accounts payable (Note 19) 2,374 2,578 Accounts receivable due from insurance and bonding companies, net ,643 4,454 Insurance receivables, net Outstanding subordinated debt (Note 20) 3,561 3,557 Accounts receivable due from insurers and rebounders (Note 9) 1,063 1,765 Deferred taxes and deferred employee profit sharing, net 16 - Deferred credits and advance payments Other accounts receivable, net (Note 10) 3,605 3,225 Total liabilities 224, ,371 Foreclosed and repossessed assets, net (Note 11) Equity (Note 22) Contributed capital Property, furniture and equipment, net (Note 12) Share capital 2,344 2,346 Share premium 1,861 1,921 Equity investments (Note 13) ,205 4,267 Earned capital Deferred taxes, net (Note 23) Capital reserves Retained earnings 7,922 6,520 Other assets (Note 14) Unrealized gain on available-for-sale securities Deferred charges, prepaid expenses and intangible assets 1, Foreign currency translation reserve 5 4 Other short- and long-term assets Gain from holding non-monetary assets - 5 1, Net income 2,596 2,278 11,470 9,700 Total equity 15,675 13,967 Total assets Ps. 240,068 Ps. 210,338 Total liabilities and equity Ps. 240,068 Ps. 210,338 Memorandum accounts Transactions on behalf of others Proprietary transactions Clients current accounts Loan commitments Ps. 1,335 Ps. 2,077 Clients banks Ps. 1,279 Ps. 480 Property held in trust or under mandate (Note 26a) Receivables from unsettled client transactions ( 421) 1 Trusts 77,710 69, Mandates Securities held for safekeeping Property held for safekeeping or managed (Note 26b) 40,354 24,043 Clients securities received for safekeeping (Note 26c) 71,675 86,610 Collateral securities received (Note 26d) 12,510 9,138 Transactions conducted on behalf of clients Collateral securities received and sold or pledged as collateral (Note 26e) 5,126 - Collateral securities pledged on behalf of clients 492 1,098 Uncollected accrued interest on non-performing loans ,141 Other memorandum accounts 5,648 3,410 Ps. 73,065 Ps. 88,232 Ps. 143,852 Ps.109,666 The accompanying notes are an integral part of these financial statements. The Group s historical share capital at December 31, 2016 and 2015 is Ps. 762.

10 GRUPO FINANCIERO INTERACCIONES, S.A.B. DE C.V. AND SUBSIDIARIES Consolidated Statements of Income For the Periods from January 1 to December 31, 2016 and 2015 (Amounts in millions of Mexican pesos) (Notes 1 and 2) Interest income (Note 27a) Ps. 12,309 Ps. 9,222 Premium income, net Interest expense (Note 27b) 9,118 6,679 Net decrease/(increase) in technical reserves 90 ( 16) Losses, claims and other contractual obligations, net ( 120) ( 438) Net interest income 3,344 2,652 Loan-loss reserve (Note 8) 1,125 1,176 Net interest income adjusted for credit risk 2,219 1,476 Commissions and fees income (Note 27c) 4,662 5,209 Commissions and fees expense (Note 27d) 1,452 2,069 Net trading (loss)/income (Note 27e) ( 7) 375 Other operating income (Note 28) Administrative and promotional expenses 2,868 2,675 Operating income 3,299 3,085 Share of income of unconsolidated subsidiaries and associates (Note 13) 5 5 Income before income tax 3,304 3,090 Current income tax (Note 23) 661 1,237 Deferred income tax, net (Note 23) 47 ( 425) Net income Ps. 2,596 Ps. 2,278 The accompanying notes are an integral part of these financial statements.

11 GRUPO FINANCIERO INTERACCIONES, S.A.B. DE C.V. AND SUBSIDIARIES Consolidated Statements of Changes in Equity For the Periods from January 1, to December 31, 2016 and 2015 (Amounts in millions of Mexican pesos) (Notes 1, 2 and 22) Contributed capital Earned capital Unrealized gain on available-forsale securities Foreign currency translation reserve Gain from holding nonmonetary assets Net income Total Share capital Share premium Capital reserves Retained earnings Balance at December 31, 2014 Ps. 2,345 Ps. 1,888 Ps. 460 Ps. 5,121 Ps. 424 Ps. - Ps. 33 Ps. 1,936 Ps. 12,207 Resolutions adopted by shareholders: Creation of reserves 97 ( 97) - Appropriation of net income of 2014 to retained earnings 1,936 ( 1,936) - Dividends paid to shareholders ( 461) ( 461) , ( 1,936) ( 461) Recognition of comprehensive income: Net income 2,278 2,278 Unrealized gain on available-for-sale securities ( 88) ( 88) Foreign currency translation reserve 4 4 Loss from holding non-monetary assets ( 28) ( 28) Share buybacks Other ( 88) 4 ( 28) 2,278 2,221 Balance at December 31, ,346 1, , ,278 13,967 Resolutions adopted by shareholders: Creation of reserves 114 ( 114) - Appropriation of net income of 2015 to retained earnings 2,278 ( 2,278) - Dividends paid to shareholders ( 778) ( 778) , ( 2,278) ( 778) Recognition of comprehensive income: Net income 2,596 2,596 Unrealized gain on available-for-sale securities ( 60) ( 60) Foreign currency translation reserve 1 1 Loss from holding non-monetary assets ( 5) ( 5) Share buybacks ( 2) ( 60) ( 62) Other ( 2) ( 60) - 16 ( 60) 1 ( 5) 2,596 2,486 Balance at December 31, 2016 Ps. 2,344 Ps. 1,861 Ps. 671 Ps. 7,922 Ps. 276 Ps. 5 Ps. - Ps. 2,596 Ps. 15,675 The accompanying notes are an integral part of these financial statements.

12 GRUPO FINANCIERO INTERACCIONES, S.A.B. DE C.V. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Periods from January 1 to December 31, 2016 and 2015 (Amounts in millions of Mexican pesos) (Notes 1 and 3) Net income Ps. 2,596 Ps. 2,278 Adjustment of items not affecting cash flows: Depreciation of property, furniture and equipment Amortization of intangible assets Provisions Current and deferred income tax Technical reserves ( 90) 16 Share of income/(loss) of subsidiaries and associates 13 ( 5) Other 13 ( 4) 749 1,400 Operating activities Investments in securities ( 5,196) ( 39,091) Assets under security repurchase agreements 611 ( 561) Derivatives (asset) ( 101) - Loan portfolio, net ( 17,900) ( 15,289) Accounts receivable due from insurance and bonding companies, net 42 ( 2) Insurance receivables, net Accounts receivable due from reinsurers and rebounders 703 1,535 Foreclosed and repossessed assets Other operating assets 587 ( 1,455) Core deposits 19,425 11,513 Interbank and other borrowings 2, Liabilities under security repurchase agreements 5,532 41,210 Derivatives (liability) 407 ( 28) Accounts payable to reinsurers and rebounders, net 101 ( 270) Subordinated debt with characteristics of debt 4 1,001 Securities sold or pledged as collateral Income tax paid ( 1,689) ( 1,396) Other operating liabilities ( 1,902) ( 1,399) Net cash flows from/(used in) operating activities 4,462 ( 3,666) Investing activities Proceeds from sale of property, furniture and equipment Purchase of property, furniture and equipment ( 11) ( 14) Purchase of shares of subsidiaries ( 104) - Purchase of intangible assets ( 127) ( 46) Net cash flows (used in)/from investing activities ( 242) 453 Financing activities Purchase of share buybacks ( 497) ( 285) Proceeds from share buybacks Dividends paid ( 778) ( 461) Net cash flows used in financing activities ( 840) ( 428) Net increase in cash and cash equivalents 6, Cash and cash equivalents at beginning of year 6,204 6,167 Cash and cash equivalents at end of year Ps. 12,929 Ps. 6,204 The accompanying notes are an integral part of these financial statements.

13 GRUPO FINANCIERO INTERACCIONES, S.A.B. DE C.V. AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 2016 and 2015 (Amounts in millions of Mexican pesos, except for foreign currency and exchange rates) 1. Description of the business and relevant events a) Description of the business Grupo Financiero Interacciones, S.A.B. de C.V. (the Group) was incorporated on October 28, 1992 and started up operations in December The Group is the holding company of the companies below in Note 2b and is primarily engaged in all kinds of financial activities related to buying, selling, and holding equity securities. The Group s head offices are located in the Cuauhtemoc district of Mexico City at Avenida Paseo de la Reforma #383, 15th floor. The Group s business activities are regulated by the Law to Regulate Financial Groups (LRAF, Spanish acronym) and the regulations issued by the Mexican Banking and Securities Commission (CNBV, Spanish acronym). The Group was authorized to operate as a financial group in terms of official communication No issued by the Ministry of Finance and Public Credit on October 15, In accordance with Article 119 of the LRAF, the Group signed a statutory responsibility agreement under which it assumes unlimited subordinate liability for the performance of the obligations of its subsidiaries and for the losses that they may incur as a result of their activities. The Group s liability in this regard is limited to the equity of each entity. b) Approval of issuance of the financial statements On April 25, 2017, the accompanying consolidated financial statements and these notes were authorized for issuance by the Group s Board of Directors, under the responsibility of the following group officers: Carlos Rojo Macedo, General Director; Alejandro Frigolet Vázquez- Vela, Assistant Corporate Finance and Administrative Director; Juan José Cadena Orozco, Director of Accounting and Financial Reporting; and Carlos Alberto Andrade Téllez, Corporate Internal Audit Director. The accompanying consolidated financial statements shall be subject to further approval of the shareholders. As part of its inspection and oversight powers, the CNBV has the right to demand any changes and/or corrections to the Group s financial statements that it considers necessary prior to their publication. c) Relevant events

14 2. - Merger of Marina Capital, S.A. de C.V. At an extraordinary general shareholders meeting held on March 23, 2016, Banco Interacciones s shareholders agreed to have Banco Interacciones acquire Marina Capital, S.A. and for the acquired company to be merged into Banco Interacciones. Marina Capital was a Mexican company that operated as a mutual fund in international markets and which rendered no services to the general public. On December 31, 2015, the assets and equity of Marina Capital were Ps. 2,152 and Ps. 23, respectively. Due to the acquisition and subsequent merger of Marina Capital, S.A., all of the rights, obligations, property, contracts, agreements, assets, liabilities, shares, privileges, and guarantees and all other components that comprise the merged company s equity were transferred to Banco Interacciones (surviving company). The fair value of the consideration paid by Banco Interacciones for Marina Capital, S.A. was Ps. 45, which Banco Interacciones had paid in advance in However, since the merger did not take effect until 2016, Banco Interacciones s payment for this acquisition is not reflected in its statements of cash flows. The accounting effects of the acquisition and merger of Marina Capital, S.A. into Banco Interacciones at December 31, 2016 are as follows: a) The Bank determined goodwill of Ps. 32 related to the acquisition b) The Bank acquired cash totaling Ps. 54, which was deposited into and held as restricted by a foreign bank. c) The Bank absorbed a clearing account of Ps. 435 d) The Bank acquired a position of Ps. 493 in held-for-trading securities comprised of U.S. treasury bonds and a short position of Ps. (493) for instruments that Banco Interacciones is required to deliver under a securities lending transaction, which is presented as a liability under collateral securities received or pledged as collateral. e) Amounts owed under margin accounts of Ps Acquisition of Inmobiliaria Interdiseño, Inmobiliaria Interorbe, and Inmobiliaria Mobinter Inmobiliaria Interdiseño, S.A. de C.V. was incorporated on January 27, 1989 and it is mainly engaged in owning and managing real estate, as well as in planning, repairing, and building the buildings or part of the buildings that house the offices of its majority shareholder or other companies of the majority shareholders. On September 5, 2016, through official communication No /113941/2016, the Bank obtained authorization to acquire its stake in Interdiseño, S.A. de C.V. Inmobiliaria Interorbe and Inmobiliaria Mobinter are primarily engaged in leasing property, furniture and equipment to companies that are part of the Group; however, for the year ended December 31, 2016, the only assets that these companies had were parking spaces.

15 3. In November 2016, Banco Interacciones finalized the sale for a final sale price of Ps The Bank acquired a 99.94% equity interest in the subsidiary, which is represented by 498,109 shares of the subsidiary variable share capital. This acquisition gave rise to goodwill of Ps. 56. The most significant changes to Banco Interacciones s consolidated financial statements resulting from the acquisition of Inmobiliaria Interdiseño at December 31, 2016 are as follows: 1) Other accounts receivable - Ps. 58 2) Fixed assets, net - Ps ) Other accounts payable - Ps ) Interbank loans - Ps ) Equity - Ps. 32 6) Earnings - Ps. (14) Inmobiliaria Interin, S.A. de C.V. was incorporated on 26 January 1989 and is mainly engaged in owning and managing real estate, as well as in planning, repairing, and building the buildings, or part of the buildings that house the offices of its majority shareholder or other companies of the majority shareholders. On 26 February 2016, Board of Directors of Casa de Bolsa, S.A. de C.V., Grupo Financiero Interacciones (the Brokerage) authorized the acquisition of Inmobiliaria Interin, S.A. de C.V. On 5 September 2016, through official communication No /113990/2016, the Brokerage obtained authorization to acquire its stake in this company. In November 2016, the Brokerage finalized the sale for a final sale price of Ps. 2. The Brokerage acquired a 99.89% equity interest in the subsidiary, which is represented by 909,938 shares of the subsidiary variable share capital. The most significant changes to the Brokerage s consolidated financial statements resulting from the acquisition of Inmobiliaria Interin at December 31, 2016 are as follows: 1) Other accounts receivable - Ps. 11 2) Fixed assets, net - Ps. 95 3) Other accounts payable - Ps. 90 4) Equity - Ps. (6) 5) Earnings - Ps. (3)

16 4. 2. Summary of Significant Accounting Policies a) Basis of preparation and presentation of financial information The accompanying consolidated financial statements were prepared in accordance with the accounting standards for controlling companies of financial groups issued by the CNBV. Under these accounting standards, the controlling companies of financial groups are required to observe the Mexican Financial Reporting Standards (Mexican FRS), as issued or adopted by the Mexican Financial Reporting Standards Board (Consejo Mexicano de Normas de Información Financiera, A.C. or CINIF), and any other accounting rules issued by the CNBV for adoption by such entities. The CNBV s own accounting standards include rules with respect to accounting valuations, recognition, and disclosures and financial statement presentation applicable to certain captions in the financial statements. b) Consolidation of financial statements The accompanying consolidated financial statements at and for the years ended December 31, 2016 and 2015 include the financial statements of Banco Interacciones, S.A., Institución de Banca Múltiple, Grupo Financiero Interacciones and subsidiaries (Banco Interacciones); Interacciones Casa de Bolsa, S.A. de C.V., Grupo Financiero Interacciones and subsidiaries (the Brokerage); Aseguradora Interacciones, S.A. de C.V., Grupo Financiero Interacciones (Aseguradora); and Servicios Corporativos Interacciones, S.A. de C.V., Grupo Financiero Interacciones (Servicios Corporativos). The financial statements of the Group and its subsidiaries have been prepared at the same reporting date and for the same reporting period. All significant intercompany balances and transactions have been eliminated on consolidation. Highlights of the condensed financial information of each of the subsidiaries at and for the years ended December 31, 2016 and 2015 are as follows (does not include the elimination of intercompany transactions): 2016 Subsidiary Equity interest Total assets Total liabilities Equity Operating income Consolidated: Banco Interacciones % Ps.202,889 Ps.189,066 Ps. 13,823 Ps. 3,006 Interacciones Casa de Bolsa % 34,977 33,841 1, Aseguradora Interacciones % 2,403 1, Servicios Corporativos Interacciones % Ps.240,323 Ps.224,866 Ps. 15,457 Ps. 3,324

17 Subsidiary Equity interest Total assets Total liabilities Equity Operating income Consolidated: Banco Interacciones % Ps.182,147 Ps.170,571 Ps. 11,576 Ps. 2,932 Interacciones Casa de Bolsa % 48,310 46,672 1, Aseguradora Interacciones % 3,516 3, Servicios Corporativos Interacciones % Ps.234,032 Ps.220,369 Ps. 13,663 Ps. 5,531 - Banco Interacciones On September 8, 1993, the authorization for Banco Interacciones incorporation and startup of operations was published in the Official Gazette. The Bank is regulated by, among other legislation, the Mexican Credit Institutions Act, which comprises the regulations for the banking and credit services industry in Mexico. The consolidated financial statements of Banco Interacciones include the financial statements of Banco Interacciones and those of its 99%-owned subsidiaries Inmobiliaria Interorbe, S.A. de C.V.; Inmobiliaria Mobinter, S.A. de C.V.; Inmobiliaria Interdiseño, S.A. de C.V.; Interacciones Sociedad Operadora de Fondos de Inversión, S.A. de C.V.; and Estrategia en Finanzas & Infraestructura, S.A. de C.V. The financial statements of Banco Interacciones have been prepared in accordance with the regulatory accounting framework for credit institutions issued by the CNBV, which are part of the CNBV s General Dispositions for Credit Institutions. - Interacciones Casa de Bolsa Interacciones Casa de Bolsa (the Brokerage firm) is primarily engaged in providing securities brokerage services in terms of the Mexican Securities Trading Act and in accordance with the general rules issued by the CNBV, under authorization No granted by the CNBV on October 19, The Brokerage firm s consolidated financial statements at and for the years ended December 31, 2016 and 2015 include the financial statements of Interfinancial Services, Ltd.; Intertrading Holdings, Inc.; and Inmobiliaria Interin, S.A. de C.V. (subsidiaries) in which The Brokerage firm holds a 100% equity interest. These companies operate in the financial sector. The Brokerage firm s financial statements were prepared in accordance with the accounting standards for brokerage firms issued by the CNBV, which are set forth in the General Dispositions applicable to Brokerage Firms (Circular Única applicable to brokerage firms).

18 6. - Aseguradora Interacciones Aseguradora Interacciones, S.A. de C.V. (the Aseguradora ) is authorized to act as an insurance company in the terms of the Mexican Stock and Mutual Insurance Companies Act. Aseguradora is engaged in writing life, automobile, accident and health and property and casualty insurance policies in the following lines of business: civil and professional liability, maritime and transport, fire, crop, sundry, earthquake and other catastrophic risks and financial reinsurance. The Aseguradora is also authorized to engage in reinsurance business. The National Insurance and Bonding Commission (CNSF, Spanish acronym) oversees and regulates Aseguradora s activities, and issues the applicable accounting criteria. - Servicios Corporativos Interacciones Servicios Corporativos Interacciones S.A. de C.V. (Servicios Corporativos), was incorporated on December 2, 1992 primarily to provide all kinds of technical assistance and advisory services, as well as commercial, accounting, administrative, industrial and financial services. The financial statements of Servicios Corporativos were prepared under Mexican FRS. c) Business combinations and goodwill In accordance with Mexican FRS B-7 Business Combinations, the net assets acquired in business combinations are to be valued at their fair value, with certain exceptions. This standard requires that goodwill be recognized in full for both the controlling and non-controlling portion of the equity interest, since both must be measured at fair value. Acquisitions of businesses and associates are recognized using the purchase method. The acquisition of non-controlling interests is considered a transaction between entities under common control and any difference between the purchase price and the book value of the net assets acquired is assessed as an equity transaction. Goodwill represents the difference between the acquisition cost and the fair value of the net assets acquired at the purchase date. Goodwill is considered to have an indefinite life and is therefore not amortized, but instead is subject to impairment testing at the end of the reporting period, or whenever there are indicators of impairment. Contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes in the fair value of contingent considerations classified as assets or liabilities are recognized in either profit or loss as a change to other comprehensive income. Contingent consideration that is classified as equity is not remeasured and subsequent settlement is accounted for within equity. Impairment losses are recognized when the carrying amount of goodwill exceeds its recoverable amount (the higher of the asset s net selling price and its value in use). For the year ended December 31, 2016, the Group recognized no loss from impairment in the value of goodwill.

19 7. d) Consolidated statements of cash flows The Group prepares its consolidated statements of cash flows using the indirect method, which adjusts accrual basis net income or loss for the effects of non-cash transactions, movements in operating cash flow balances, and cash flows from investing and financing activities. e) Recognition of the effects of inflation In 2016 and 2015, the Group operated in a non-inflationary economic environment, as defined under Mexican FRS B-10, since the cumulative inflation rate for the three years prior to 2016 and 2015 of 9.89% and 10.55%, respectively, did not exceed 26%. As a result, beginning January 1, 2008, the Group ceased to recognize the effects of inflation on its financial information. Consequently, only non-monetary items acquired before December 1, 2007, recognize the effects of inflation from the date they were acquired, contributed or initially recognized through December 31, Such non-monetary items include fixed assets, intangibles, share capital, capital reserves and retained earnings. f) Presentation of financial statements CNBV regulations require that amounts shown in the consolidated financial statements of credit institutions be expressed in millions of Mexican pesos. Consequently, items with balances of less than one million Mexican pesos, as reflected in the Group s accounting records, have been excluded from their respective captions in the consolidated financial statements. g) Significant accounting estimates and assumptions The preparation of the Group s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities, and the accompanying disclosures, including the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the affected asset or liability in future periods. The key assumptions concerning future events and circumstances and other key sources of uncertainty at the reporting date that represent a significant risk of causing the need for a material adjustment to the carrying amounts of assets and liabilities in subsequent periods, are described below. The Group based its assumptions and estimates on the best available information at the time the financial statements were prepared. Nevertheless, existing estimates and assumptions about future events and circumstances may change due to market events beyond the Group s control. Such changes are reflected in the assumptions as they occur.

20 8. Fair value measurement of financial instruments Where the fair values of financial assets and financial liabilities recorded on the consolidated statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are derived from observable market data where possible, but if this is not available, judgment is required to establish fair value. These judgments include considerations of liquidity and model inputs such as volatility for longer dated derivatives and discount rates, prepayment rates, and default rate assumptions for securities. Loan-loss reserve To calculate its loan-loss reserve, the Group individually assesses its outstanding commercial loans based on the classification of borrowers established in the CNBV s grading methodology. This assessment requires management s judgment in analyzing the quantitative and qualitative factors of borrowers to assign credit scores to each borrower. This credit score is a key factor for estimating the probability of default based on the expected loss formula and consequently, for determining the applicable reserve rate applied and the risk grade for each loan. Actual results could differ from the assessment of these factors. Impairment of investment in securities The Group reviews its debt securities classified as available-for-sale and held-to-maturity investments at each reporting date to assess whether they are impaired. The Group also records impairment charges on these equity investments when there has been a significant or prolonged decline in the fair value below their cost. Interpreting the meaning of what may be deemed to be significant or prolonged requires judgment by management. Nevertheless, the Group evaluates, among other factors, the historical changes in the pricing and terms of each instrument, as well as the size of differences between the fair value and acquisition cost of its investments. Deferred income tax assets The Group periodically evaluates the possibility of recovering its deferred tax assets based on the amount of taxable income it expects to generate in future years and when necessary, it creates a valuation allowance for those assets that do not have a high probability of being realized. Judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits, together with future tax-planning strategies.

21 9. Allowance for foreclosed or repossessed assets The Group creates an allowance for foreclosed or repossessed assets in accordance with the CNBV valuation rules for this allowance, which require that the allowance be calculated considering the specified allowance percentages and the length of time that has passed since the foreclosure or repossession of the assets took place. The Group s Management also measures the carrying amounts of these assets considering its expectations regarding their recoverability and the net realizable value of each asset. The factors underlying the calculations of these allowances (i.e., percentages and terms) and management s other analyses considered for estimating the amount of the allowance may differ from actual results. Technical reserves Long-term life insurance contracts The Group s liabilities for life insurance contracts, which represent the expected value of future benefits resulting from policies in force, are determined based on actuarial calculations using assumptions established when the products are first registered with the CNSF or using assumptions that have been subsequently updated. All of the assumptions are registered with and authorized by the CNSF. The assumptions used include discount and mortality rates, expected morbidity, expected longevity, returns on investments, costs, surrenders, and the future value of payouts and other amounts paid to the insured parties or their beneficiaries. The liabilities recorded for insurance contracts are subject to adequacy testing, which reflects management s best estimate of future cash flows associated with the Group s long-term insurance contracts. Due to the complexity of these valuations, the underlying assumptions they depend on and their long-term nature, the reserve created for these benefits is very sensitive to changes in the assumptions. Claims reserves for the property and casualty, accident and health lines To calculate its claims reserves for the property and casualty, accident and health lines, the Group calculates estimates of (i) the expected ultimate cost of claims reported at the reporting date, and (ii) the expected ultimate cost of the reserve for claims incurred but not reported (IBNR) at the reporting date. It can take a significant period of time to determine the ultimate cost of claims with certainty. The ultimate cost of outstanding claims is estimated using actuarial claims projection techniques that comprise the methodologies registered with the CNSF, such as the Chain Ladder method.

22 10. The main assumption underlying these techniques is that the Group s past claims development experience can be used to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and incurred claims, average costs per claim, and claim numbers based on the observed development of earlier years and expected loss ratios. As a result, the accuracy of the valuation results is dependent on there being no significant changes in the Group s current loss experience and loss development. h) Cash and cash equivalents Cash and cash equivalents principally consist of bank deposits and highly liquid investments with maturities of less than 90 days. These investments are stated at cost plus unpaid accrued interest at the date of the consolidated statement of financial position, which is similar to their market value. Call money financing extended or acquired in the interbank market and whose repayment period may not exceed three business days are presented in the statement of financial position as part of the caption Cash and cash equivalents; and in the case of financing extended, and Demand loans in the case of loans received. Interest expense and income under these short-term loans is recognized on an accrual basis in the income statement under the caption Net interest income. Bills of exchange with immediate guaranteed collection are recognized as part of Other cash equivalents if they are collectible within two business days (for bills of exchange issued in Mexico) or five business days (for bills of exchange issued abroad) after the date of the transaction that gave rise to them. Bills of exchange that are not recovered within these terms are transferred to the Loan portfolio or Other accounts receivable caption, depending on the nature of the source transaction. For all bills of exchange transferred to the Other accounts receivable caption, an allowance for the full amount of the debt is created within 15 business days after the transfer. i) Recognition of transactions The Group s transactions involving securities, derivatives, security repurchase agreements and security loans, among others (both proprietary and on customers behalf), are recognized at the time the respective agreements are entered into, irrespective of the settlement date. j) Unrealized gain or loss on financial instruments In determining the fair value of both proprietary and customer positions in derivative financial instruments, the Group uses the prices, rates and other market information provided by a CNBVauthorized price supplier.

23 11. k) Open transactions - Securities trading The related amount receivable or payable under open securities transactions is recognized in the corresponding clearing account at the agreed on price at the time of the trade. The difference between the market price of the securities and the agreed on price is recognized in the consolidated income statement as part of the caption Net trading (loss)/income. - FOREX trading The Group buys and sells currency futures with 24-, 48- and 72-hour terms. Dollars bought and sold are recorded in assets or liabilities at the transaction s inception date. Dollar amounts are translated into Mexican pesos using the FIX exchange rate published by Banco de México in the Official Gazette one business day after either the date of the related transactions or the financial statement reporting date. When it is agreed that settlement shall be within a maximum of two bank-working days from the trade date, the traded currency is recorded as a restricted liquid asset (in the case of buy transactions) and a liquid asset outlay (in the case of sell transactions), with a respective credit or debit against the corresponding clearing account. Gains or losses on FOREX trading are recognized in the income statement as part of the caption Net trading (loss)/income. Debit balances in clearing accounts that are not recovered within 90 calendar days subsequent to the trade date are reclassified as overdue debt under the caption other accounts receivable and the Group creates an allowance account for the entire balance. For securities and FOREX transactions that are not paid for immediately in cash or where settlement is not on a same-day basis, the related amount receivable or payable is recorded in Mexican pesos in clearing accounts, until the respective payment is made. Debit and credit balances in clearing accounts are included as part of in the consolidated statement of financial position Other accounts receivable and Sundry creditors and other accounts payable, as the case may be, and may be offset only if and when the Group has the contractual right to do so and intends to settle the net amount, or to simultaneously realize the asset and settle the liability. l) Investments in securities Investments in securities include investments in debt and equity instruments. These investments are classified based on Management s intention with regard to holding each investment at the time they are acquired. Each classification is governed by specific rules with respect to the way the investment is measured, valued and presented in the financial statements, as described below:

24 12. - Held-for-trading securities These instruments are acquired to earn returns from the appreciation in their value realized through short-term trading transactions. At the end of each month, held-for-trading securities are valued at fair value, and the related gain or loss is recognized in the consolidated income statement as part of the caption Net trading (loss)/income. At the time the instruments are sold, the unrealized gain or loss is reclassified in the consolidated income statement as securities trading income or loss, as the case may be. - Available-for-sale securities These are debt securities and equity instruments that are not acquired to earn returns from price differences resulting from short-term trading activities and the Group neither has the intention nor the ability to hold the debt securities to their maturity. Therefore, these instruments are residual in nature (i.e., they are acquired for purposes different from those of the held-for-trading or held-to-maturity securities). Available-for-sale securities are measured at fair value, and the related gain or loss, net of income tax, is recognized in the consolidated statement of changes in equity as part of the caption Unrealized gain on available-for-sale securities. At the time the instruments are sold, the cumulative unrealized gain or loss is reclassified in the income statement as securities trading gains or losses under the caption Net trading (loss)/income. - Held-to-maturity securities Held-to-maturity financial investments are debt instruments with fixed or determinable payments and fixed maturities, which the Group has the intention and ability to hold to maturity. Held-to-maturity securities are valued at their amortized cost, which means that accrued interest includes the amortization of the premium or discount (included in the fair value, if applicable, at which they were initially recognized) and the transaction costs. In accordance with the CNBV s accounting rules, the Group may not classify any financial assets as held-to-maturity if in the current-year or the two immediately preceding years it has sold or reclassified held-to-maturity securities before maturity, regardless of whether the financial assets it intends to classify as held-to-maturity and those that were sold or reclassified before maturity share similar characteristics, except under the following conditions: within 28 days prior to either the instrument s maturity or, when applicable, the date of the repurchase option of the security by the issuer, or after more than 85% of the original nominal value of the security has accrued or, when applicable, has been earned by the Group. During the years ended December 31, 2016 and 2015, the Group has not sold any held-tomaturity securities.