Mercantil, C.A. Banco Universal (Subsidiary of Mercantil Servicios Financieros, C.A.)
Report of Independent Accountants and Financial Statements June 30, 2017 and December 31, 2016
Mercantil, C.A. Banco Universal Index to the financial statements June 30, 2017 and December 31, 2016
Pages
I - Report of independent accountants 1 - 2 II - Financial statements 1 - 5 III - Notes to the financial statements 1 - Operations and regulatory environment 6 - 8 2 - Basis of preparation 8 - 15 3 - Cash and due from banks 16 4 - Investment securities 16 - 21 5 - Loan portfolio 22 - 24 6 - Interest and commissions receivable 24 7 - Investments in subsidiaries and affiliates 25 - 28 8 - Available-for-sale assets 28 9 - Property and equipment 28 - 29 10 - Other assets 29 - 30 11 - Deposits 30 - 31 12 - Deposits and liabilities with Banco Nacional de Vivienda y Hábitat (BANAVIH) 31 13 - Borrowings 31 - 32 14 - Other liabilities from financial intermediation 32 15 - Interest and commissions payable 32 16 - Accruals and other liabilities 32 - 33 17 - Taxes 33 - 34 18 - Employee benefits and employee benefit plan 34 - 38 19 - General and administrative expenses 38 20 - Other operating income 39 21 - Other operating expenses 39 22 - Extraordinary expenses 39 23 - Equity 39 - 41 24 - Financial assets and liabilities in foreign currency 42 - 43 25 - Memorandum accounts 44 - 49 26 - Credit-related commitments 49 - 50 27 - Balances and transactions with related companies 50 - 53 28 - Fundación Mercantil 53 29 - Maturity of financial assets and liabilities 54 30 - Fair value of financial instruments 54 - 55 31 - Risk management 56 - 57 32 - Liabilities and contingencies 57 - 58 33 - Money laundering prevention and terrorism financing 58 34 - Investments and loans granted in excess of legal limits 58 35 - Legal contributions 58 - 59
Mercantil, C.A. Banco Universal (Subsidiary of Mercantil Servicios Financieros, C.A.) Balance sheet June 30, 2017 and December 31, 2016
June 30, December 31, 2017 2016 (In bolivars)
Assets Cash and due from banks (Note 3) 1,055,589,598,743 568,394,325,205 Cash 33,057,452,265 24,762,307,200 Central Bank of Venezuela 972,678,681,932 523,286,245,760 Venezuelan banks and other financial institutions 150,000 152,000 Foreign and correspondent banks 477,377,389 474,871,065 Pending cash items 49,375,937,157 19,870,749,180 Investment securities (Note 4) 132,658,267,936 131,670,732,915 Deposits with the Central Bank of Venezuela and overnight deposits 22,442,734,000 15,917,071,000 Investments in available-for-sale securities 40,260,883,689 43,342,710,853 Investments in held-to-maturity securities 31,556,798,568 32,151,090,061 Restricted investments 817,039,623 783,529,945 Investments in other securities 37,580,812,056 39,476,331,056 Loan portfolio (Note 5) 1,243,159,095,852 595,301,689,832 Current 1,275,722,195,617 611,782,048,569 Rescheduled 1,120,699,661 1,034,017,279 Overdue 2,567,022,172 1,934,763,298 In litigation 135,822,670 103,251,530 (Allowance for losses on loan portfolio) (36,386,644,268) (19,552,390,844) Interest and commissions receivable (Note 6) 10,078,243,645 6,471,397,290 Interest receivable on investment securities 2,396,515,283 1,652,800,563 Interest receivable on loan portfolio 7,534,255,900 4,720,441,473 Commissions receivable 268,068,971 216,632,840 (Provision for interest receivable and other) (120,596,509) (118,477,586) Investments in subsidiaries and affiliates (Note 7) 4,310,560,630 4,329,863,212 Available-for-sale assets (Note 8) 28,633,216 38,712,975 Property and equipment (Note 9) 68,690,399,175 5,186,781,944 Other assets (Note 10) 45,760,530,125 23,247,898,819 Total assets 2,560,275,329,322 1,334,641,402,192
Memorandum accounts (Note 25) Contingent debtor accounts 39,081,211,452 3,105,533,108 Assets received in trust 70,398,309,240 46,105,061,092 Other special trust services 6,729,853 7,052,161 Other debtor memorandum accounts 2,675,851,499,187 1,390,803,091,112 Other debtor control accounts 3,678,722 3,680,014 2,785,341,428,454 1,440,024,417,487
The accompanying notes are an integral part of the financial statements
1
Mercantil, C.A. Banco Universal (Subsidiary of Mercantil Servicios Financieros, C.A.) Balance sheet June 30, 2017 and December 31, 2016
June 30, December 31, 2017 2016 (In bolivars)
Liabilities and Equity Liabilities Deposits (Note 11) 2,317,182,661,211 1,226,342,084,953 Demand deposits 1,857,369,066,416 929,238,397,295 Non-interest-bearing checking accounts 1,524,770,226,288 753,419,258,080 Interest-bearing checking accounts 314,763,360,247 150,559,595,347 Checking accounts under Exchange Agreement No. 20 110,080,002 90,710,233 Demand deposits and certificates 17,725,399,879 25,168,833,635 Other demand deposits 36,754,716,516 12,493,876,115 Savings deposits 422,234,208,398 283,822,443,756 Time deposits 166,945,067 311,063,967 Restricted deposits 657,724,814 476,303,820 Deposits and liabilities with Banco Nacional de Vivienda y Hábitat (Note 12) 9,684,027 186,227 Borrowings (Note 13) 247,575,592 205,848,259 Venezuelan financial institutions, up to one year 110,904,594 73,750,368 Foreign financial institutions, up to one year 136,670,998 132,097,891 Other liabilities from financial intermediation (Note 14) 71,202,806 3,530,966 Interest and commissions payable (Note 15) 6,733,357 27,433,028 Expenses payable on deposits 6,733,357 27,433,028 Accruals and other liabilities (Note 16) 92,190,364,163 46,713,017,158 Total liabilities 2,409,708,221,156 1,273,292,100,591 Equity (Note 23) Capital stock 292,415,038 292,415,038 Contributions pending capitalization 17,739,895,414 8,854,223,503 Capital reserves 311,422,016 309,959,940 Equity adjustments 62,913,051,830 (703,263) Retained earnings 69,127,352,347 51,591,474,335 Unrealized gain on investment securities (Note 4) 182,971,521 301,932,048 Total equity 150,567,108,166 61,349,301,601 Total liabilities and equity 2,560,275,329,322 1,334,641,402,192
The accompanying notes are an integral part of the financial statements
2
Mercantil, C.A. Banco Universal Income statement Six-month periods ended June 30, 2017 and December 31, 2016
June 30, December 31, 2017 2016 (In bolivars)
Interest income 122,511,923,921 67,851,749,894 Income from cash and due from banks 504,228 261,623 Income from investment securities 4,196,820,808 3,700,161,565 Income from loan portfolio 109,466,251,351 64,070,798,696 Income from other accounts receivable 6,966,316,434 20,990,784 Other interest income 1,882,031,100 59,537,226 Interest expense (21,196,625,213) (15,119,336,582) Expenses from deposits (20,004,840,682) (14,993,213,684) Expenses from borrowings - (199,223) Expenses from other liabilities from financial intermediation (1,035,582,848) (124,046,128) Other interest expense (156,201,683) (1,877,547) Gross financial margin 101,315,298,708 52,732,413,312 Income from financial assets recovered (Note 5) 704,742,074 564,090,521 Expenses from uncollectible accounts and write-down of financial assets (Notes 2 and 5) (18,163,751,898) (8,855,562,386) Uncollectible loans and other accounts receivable (18,163,751,898) (8,855,562,386) Net financial margin 83,856,288,884 44,440,941,447 Other operating income (Note 20) 38,586,836,199 20,986,463,656 Other operating expenses (Note 21) (18,524,333,065) (7,783,131,820) Financial intermediation margin 103,918,792,018 57,644,273,283 Operating expenses (72,709,064,409) (39,005,013,215) Salaries and employee benefits (24,075,686,666) (12,530,857,948) General and administrative expenses (Note 19) (38,762,025,025) (21,361,347,389) Fees paid to the Social Bank Deposit Protection Fund (Note 35) (8,892,624,962) (4,565,903,673) Fees paid to the Superintendency of Banking Sector Institutions (Note 35) (978,727,756) (546,904,205) Gross operating margin 31,209,727,609 18,639,260,068 Income from available-for-sale assets (Note 8) 35,926,339 482,109,187 Sundry operating income 2,124,607,532 270,715,478 Expenses from available-for-sale assets (Note 8) (11,159,227) (4,538,795) Sundry operating expenses (3,664,043,291) (2,448,681,543) Net operating margin 29,695,058,962 16,938,864,395 Extraordinary expenses (Note 22) (366,943,933) (245,989,609) Gross income before tax 29,328,115,029 16,692,874,786 Income tax (Note 17) (9,159,039,600) (6,186,603,517) Net income 20,169,075,429 10,506,271,269
Appropriation of net income Legal reserve - 24,354,805
Provision for the Antidrug Law (Notes 16 and 33) 299,950,091 171,099,640
The accompanying notes are an integral part of the financial statements
3
Mercantil, C.A. Banco Universal Statement of changes in equity Six-month periods ended June 30, 2017 and December 31, 2016
Retained earnings Unappropriated surplus Capital reserves Employee Contributions Other benefit plan Unrealized Capital pending Legal mandatory Equity Restricted Unappropriated remeasurement gain (loss) on Total stock capitalization reserve reserves adjustments surplus earnings (Note 2-k) investments equity (In bolivars)
Balances at June 30, 2016 268,060,233 2,890,220,542 268,060,233 14,743,313 810,444,234 23,023,338,344 18,909,757,761 (820,736,645) 516,077,658 45,879,965,673 Net income ------10,506,271,269 - - 10,506,271,269 Reserve for the Social Contingency Fund - - - 2,801,589 - - (2,801,589) - - - Capital increase (Note 23) 24,354,805 (24,354,805) ------Contributions pending capitalization (Note 23) - 5,988,357,766 ------5,988,357,766 Legal reserve - - 24,354,805 - - - (24,354,805) - - - Unrealized loss on investments (Note 4) ------(214,145,610) (214,145,610) Employee benefit plan remeasurement ------62,395,242 (62,395,242) - - Restricted surplus from equity in subsidiaries and affiliates (Note 7) - - - - - (38,312,354) 38,312,354 - - - Translation adjustment of net assets of subsidiaries abroad - - - - 20,109 - - - - 20,109 Adjustment from exchange differences - - - - (811,167,606) - - - - (811,167,606) Reclassification of 50% of net income to restricted surplus (Note 23) - - - - - 5,258,713,614 (5,258,713,614) - - - Balances at December 31, 2016 292,415,038 8,854,223,503 292,415,038 17,544,902 (703,263) 28,243,739,604 24,230,866,618 (883,131,887) 301,932,048 61,349,301,601 Net income ------20,169,075,429 - - 20,169,075,429 Reserve for the Social Contingency Fund - - - 1,462,076 - - (1,462,076) - - - Contributions pending capitalization - 8,885,671,911 ------8,885,671,911 Unrealized loss on investments (Note 4) ------(118,960,527) (118,960,527) Restricted surplus from equity in - subsidiaries and affiliates (Note 7) - - - - - (22,860,427) 22,860,427 - - - Translation adjustment of net assets of subsidiaries abroad - - - - (82,440) - - - - (82,440) Adjustment from revaluation of property and equipment (Note 9) - - - - 62,913,837,533 - - - - 62,913,837,533 Reclassification of 50% of net income to restricted surplus (Note 23) - - - - - 10,095,236,890 (10,095,236,890) - - - Cash dividends declared on common shares ------(2,631,735,341) - - (2,631,735,341) Balances at June 30, 2017 292,415,038 17,739,895,414 292,415,038 19,006,978 62,913,051,830 38,316,116,067 31,694,368,167 (883,131,887) 182,971,521 150,567,108,166
Income per share (Note 2)
Six-month periods ended June 30, December 31, 2017 2016
Outstanding common shares 292,415,038 292,415,038
Net income per share Bs 68.9741 Bs 35.9293
The accompanying notes are an integral part of the financial statements
4
Mercantil, C.A. Banco Universal Cash flow statement Six-month periods ended June 30, 2017 and December 31, 2016
June 30, December 31, 2017 2016 (In bolivars)
Cash flows from operating activities Net income 20,169,075,429 10,506,271,269 Adjustments to reconcile net income to net cash provided by operating activities Equity in subsidiaries and affiliates, net 22,860,427 38,312,354 Release of exchange adjustment - (811,167,606) Allowance for losses on loan portfolio 18,118,533,189 8,799,984,470 Provision for interest receivable 45,094,164 55,387,454 Write-offs of uncollectible accounts and decrease in branch provision for doubtful accounts (1,311,746,576) (2,127,347,468) Income tax provision 9,728,762,400 4,257,874,503 Deferred income tax (569,722,800) 1,928,729,014 Provision for other assets 33,303,804 11,274,063 Write-offs against the provision for other assets (4,436,581) (8,440) Release of provision for other assets (127,742) (319,173) Other provisions 3,343,120,834 1,614,234,348 Depreciation of property and equipment 851,626,129 424,691,465 Amortization of deferred expenses and goodwill 1,057,148,605 914,113,583 Amortization of available-for-sale assets 11,159,227 4,538,795 Accrual for length-of-service benefits 3,069,585,294 2,133,750,857 Payment of length-of-service benefits (464,441,736) (1,004,374,069) Net change in Deposits with the Central Bank of Venezuela and overnight deposits (6,525,663,000) (6,445,228,000) Interest and commissions receivable (3,624,473,708) (1,673,943,333) Other assets (23,598,519,392) (6,894,671,608) Interest and commissions payable (20,699,671) (105,236,057) Accruals and other liabilities 30,370,043,012 17,519,372,375 Net cash provided by operating activities 50,700,481,308 29,146,238,796 Cash flows from financing activities Net change in Deposits 1,090,840,576,258 595,011,977,589 Deposits and liabilities with Banco Nacional de Vivienda y Hábitat 9,497,800 (609,622) Borrowings 41,727,333 571,495 Other liabilities from financial intermediation 67,671,840 2,097,688 Capital increase - 24,354,805 Contributions pending capitalization 8,885,671,911 5,964,002,961 Cash dividends paid (2,631,735,341) - Net cash provided by financing activities 1,097,213,409,801 601,002,394,916 Cash flows from investing activities Loans granted during the period (1,503,521,525,606) (644,648,826,227) Loans collected during the period 838,829,866,162 432,588,757,617 Net change in Available-for-sale investments 2,962,866,637 (22,311,075,780) Held-to-maturity investments 594,291,493 (22,523,692,604) Restricted investments (33,509,678) (6,068,649) Investments in other securities 1,895,519,000 57,985,000 Investments in subsidiaries and affiliates (3,640,284) (182,657,589) Available-for-sale assets (1,079,468) (42,839,002) Property and equipment (1,441,405,827) (1,721,079,156) Net cash used in investing activities (660,718,617,571) (258,789,496,390) Cash and due from banks Net change 487,195,273,538 371,359,137,322 At the beginning of the period 568,394,325,205 197,035,187,883 At the end of the period 1,055,589,598,743 568,394,325,205
Supplementary information on non-cash activities 82,440 (20,109) Translation adjustment of net assets of subsidiaries abroad 118,960,527 214,145,610 Adjustment of available-for-sale investments to market value
Adjustment from revaluation of property and equipment (62,913,837,533) -
Taxes paid 4,648,783,659 308,572
Interest paid 21,217,324,884 15,224,572,639
Reclassification of provisions Interest and commissions receivable to allowance for losses on loan portfolio 27,466,811 7,687,348
The accompanying notes are an integral part of the financial statements
5 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
1. Operations and regulatory environment
Reporting entity Mercantil, C.A. Banco Universal (the Bank), founded in 1925 in the Bolivarian Republic of Venezuela, and its subsidiaries operate in the financial services sector in Venezuela and abroad. The Bank’s primary activities consist in providing financial intermediation services to individuals and corporations through its main office in Caracas, agencies throughout the country and its branch in Curacao.
Most of the Bank’s assets are located in Venezuela. At June 30, 2017, the Bank and its branch in Curacao have 5,864 employees.
The Bank’s financial statements at June 30, 2017 and December 31, 2016 were approved by the Board of Directors on July 11 and January 10, 2017, respectively, and approved for issue by the Audit Committee on August 15 and February 14, 2017, respectively.
Regulatory environment Law of the National Financial System This Law aims to supervise and coordinate the National Financial System, which is formed by the group of public, private and communal financial institutions and any other form of organization operating in the banking sector, the insurance sector, the stock market and any other sector or group of financial institutions that the policy-making body deems should form part of the system in order to ensure that financial resources are used and invested for the public interest and for economic and social development.
This Law prohibits institutions belonging to the National Financial System from forming financial groups with each other or with companies from other sectors of the national economy or to associate with international financial groups for purposes other than those defined in the Law.
Law on Banking Sector Institutions This Law, among other things, considers banking as a public service; defines financial intermediation as fundraising for investment in loan portfolios and securities issued or guaranteed by the Venezuelan government or government agencies; limits the bank’s assets and transactions with a single debtor and defines “debtor” in relation to this limitation; regulates the formation and functions of the Board of Directors; establishes disqualification instances to act as directors; regulates the formation of financial groups; establishes a social contribution to finance projects developed by communal councils and establishes prohibitions.
Income Tax Law Venezuelan Income Tax Law requires, among other things, a 40% proportional income tax for institutions engaged in banking, financial, insurance and reinsurance activities; these institutions and special taxpayers are excluded from the inflation adjustment for tax purposes set forth in this Law. The Law establishes that net operating losses may be carried forward for three years and offset up to a maximum of 25% of annual income (Note 17).
Law on Tax on Large Financial Transactions The Law on Tax on Large Financial Transactions applies to incorporated and unincorporated entities qualified by the Tax Administration as special taxpayers. The tax rate is equivalent to 0.75% applicable to debits made from bank accounts and operations without the mediation of financial institutions.
Sports and Physical Education Law Companies subject to this Law must contribute 1% of their net or accounting profit to the activities contemplated therein. This Law seeks to regulate physical education and the sponsorship, organization and management of sporting activities as public services.
6 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
New Labor Law (LOTTT) The new Labor Law extends job security, establishes the retrospective accrual of length-of-service benefits, and improves the indemnity for termination of employment. Based on actuarial studies, the impact of these changes has been estimated and recorded (Note 18).
In addition, the LOTTT regulates certain legal benefits such as working hours, rest days, holidays, vacation, profit sharing, absences and leave. The Bank’s collective labor agreement also establishes the legal benefits that match or exceed benefits established in the Law.
Branch and agency The Bank’s branch and agency abroad, which have not been incorporated separately from the Bank, are subject to specific requirements of regulatory agencies in the countries where they operate regarding prior consultation for certain transactions, quality of assets, and capital and liquidity levels, as explained below:
Mercantil, C.A. Banco Universal - Curacao Branch This branch operates in Curacao. It is supervised and controlled by the Central Bank of Curacao and Saint Marteen and the Superintendency of Banking Sector Institutions (SUDEBAN) in Venezuela.
Mercantil, C.A. Banco Universal - Coral Gables, FL agency (United States of America) This agency is subject to banking regulations in the State of Florida. In addition, it is supervised and regulated by the Federal Reserve Bank and SUDEBAN in Venezuela.
The Board of Directors resolved to close the Bank’s agency in Coral Gables FL, which was approved by SUDEBAN and notified to the Federal Reserve Bank. The agency ceased operations in November 2016.
Central Bank of Venezuela (BCV) Deposit and lending rates are regulated by the BCV. The BCV sets maximum and minimum interest rates for deposits and credit operations based on reference rates. In this regard, at June 30, 2017 and December 31, 2016, the annual interest rate for lending operations may not exceed 24% and 29% for credit card transactions. Financial institutions may only charge an additional 3% per annum on amounts overdue from clients.
The maximum interest rates for directed loan portfolios at June 30, 2017 and December 31, 2016 are as follows:
June 30, 2017 December 31, 2016 Agriculture 13% 13% Microcredits 24% 24% Tourism 7.27% or 10.27% 8.62% or 11.62% Mortgages 4.66% to 10.66% 4.66% to 10.66% Manufacturing i) 18% as the maximum interest rate for credit i) 18% as the maximum interest rate for credit operations for this sector; and ii) an annual operations for this sector; and ii) an annual interest rate not greater than 16.20% of the interest rate not greater than 16.20% of the previous rate for loans earmarked for small and previous rate for loans earmarked for small medium industries, state-owned industries, and medium industries, state-owned community industries, as well as joint ventures industries, community industries, as well as for manufacturing. joint ventures for manufacturing.
7 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
The annual interest rates on savings deposits may not fall below 16% calculated on daily balances up to Bs 20,000 and 12.50% on daily balances greater than Bs 20,000. Annual interest rates on time deposits may not fall below 14.50%.
The annual interest rate to be charged by the BCV on discount, rediscount and advance operations, except as regards those conducted under special regimes, was set at 29.50%.
The BCV has regulated service fees charged by banks to customers in respect of savings and current accounts, and leasing, international, and credit and debit card transactions.
2. Basis of preparation
The accompanying financial statements include the accounts of the Bank and its branch abroad and have been prepared based on the Accounting Manual for Banking Institutions (Accounting Manual) and the accounting rules and instructions of SUDEBAN, which differ in certain significant respects from accounting principles generally accepted in Venezuela (VEN NIF).
The Venezuelan Federation of Public Accountants (FCCPV) approved the adoption of VEN NIF as the accounting principles of mandatory application in Venezuela as from January 1, 2008. These standards are mainly based on International Financial Reporting Standards (IFRS) and their interpretations issued by the International Accounting Standards Board (IASB), except for certain criteria concerning adjustments for inflation, among others.
The main differences with VEN NIF applicable to the Bank are:
1) Consolidation The accompanying financial statements show investments in over 50%-owned subsidiaries under the equity method. In accordance with VEN NIF, these subsidiaries and special purpose entities controlled by the Bank or of which the Bank is considered the main beneficiary of their income must be consolidated. If the financial statements were presented on a consolidated basis, assets and liabilities at June 30, 2017 would decrease by Bs 21,348,000 (Bs 62,226,000 at December 31, 2016). A summary of the subsidiaries’ financial statements is shown in Note 7.
2) Inflation-adjusted financial statements VEN NIF require that the effects of inflation on the financial statements be recognized provided that inflation for the year exceeds one digit. SUDEBAN has stipulated that inflation-adjusted financial statements must be provided as supplementary information. At December 31, 2016, the inflation rates for 2016 are not available; therefore, the Bank has not prepared this supplementary information at June 30, 2017 and December 31, 2016.
3) Foreign currency Foreign currency transactions, mainly in U.S. dollars, are recorded at the official exchange rate in effect at the transaction date and adjusted to the official rate prevailing at year end. The assets, liabilities and equity of the branch abroad are translated at the prevailing official exchange rate. Income accounts are translated at the average official exchange rate for the period. VEN NIF establish two options to measure transactions and balances in foreign currency: a) at the official exchange rates established in the exchange agreements issued by the BCV or b) on the basis of best estimates of future cash flows in bolivars expected to be obtained using the exchange or settlement mechanisms permitted under Venezuelan law. VEN NIF establish that exchange gains and losses on available-for-sale or held-to- maturity securities must be included in the income statement.
8 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
4) Investments in trading and available-for-sale securities According to SUDEBAN rules, investments in trading securities may remain in this category for only 90 days from the date they were classified as held for trading and investments in available-for-sale securities may not remain in this category for more than one year as from the date they were classified as available for sale, except for securities issued and guaranteed by the Venezuelan government and investments in shares of mutual guarantee companies. Under VEN NIF, they may remain in these categories indefinitely.
5) Discounts or premiums on held-to-maturity investments Discounts or premiums on held-to-maturity investments are amortized over the term of the security with a debit or credit to gain or loss on investment securities under other operating income or other operating expenses, respectively. Under VEN NIF, they are accounted for as part of the security’s yield and, therefore, must be recognized under interest income.
6) Permanent losses on investment securities When permanent losses arising from impairment in the fair value of investment securities are recorded, any subsequent recovery in fair value does not affect the new cost basis. Under VEN NIF, any recovery of previously expensed impairment losses on debt securities may be recognized as income.
7) Valuation of reclassified securities a) Reclassification of held-to-maturity securities to available-for-sale securities According to VEN NIF, when held-to-maturity securities for significant amounts are reclassified to available-for-sale securities and such transfer is due to a change in their original intended use not qualified as an isolated, external, nonrecurring or unusual event affecting the Bank, all investments remaining in this category must be reclassified to available-for-sale securities. According to SUDEBAN rules, reclassifications of held-to-maturity securities must be approved by SUDEBAN.
b) Reclassification of available-for-sale securities to held-to-maturity securities SUDEBAN rules establish that available-for-sale investments reclassified to the held-to-maturity category must be recorded at their fair value at the reclassification date. Unrealized gains or losses are maintained separately in equity and are amortized over the investment’s remaining life as an adjustment to yield. Under VEN NIF, the fair value of the investment at the reclassification date becomes the new amortized cost basis, and any gain or loss previously recognized in equity is accounted for as follows: a) gains or losses on fixed maturity investments, as well as any difference between the new amortized cost and value at maturity, are taken to profit and loss and amortized over the investment’s remaining life and; b) gains or losses on non-maturity investments will remain in equity until the asset is sold or otherwise disposed of, when they shall be recognized in profit or loss.
8) Investments in other securities Investments in other securities include investment trusts, as well as investments not classified under any of the other categories defined by the Accounting Manual. According to VEN NIF, investments in other securities are recorded under three categories: at fair value through profit or loss, available for sale and held to maturity.
9) Rescheduled loans The Accounting Manual establishes that loans whose original payment schedule, term or other conditions have been modified at the request of the debtor must be reclassified within rescheduled loans. VEN NIF provide no specific guidance. However, they do state that impairment losses on financial assets carried at amortized cost shall be charged to the results for the year in which they are incurred.
10) Overdue and in-litigation loans Loans classified as overdue must be written off within 24 months after inclusion in this category. In-litigation loans are those in the legal collection process. Loans in litigation must be fully provided for after 24 months in the in-litigation category. In addition, overdue monthly loan installments that have
9 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
been repaid must be reclassified to the category to which they pertained before being classified as overdue. Likewise, when a debtor repays pending loan installments of a loan in litigation, thereby terminating the lawsuit, the Bank must reclassify the loan to the category to which it pertained before being classified as in litigation. Under VEN NIF, they are recorded based on collectibility.
11) Allowance for losses on loan portfolio Allowances for losses on the loan portfolio are determined based on a collectibility assessment for individual loans, a global risk assessment for loans not assessed individually and a general allowance of 1% over loan balances at month end, except for microcredits, which are subject to a general 2% allowance. In addition to the minimum general and specific allowances required for the loan portfolio, SUDEBAN established a general countercyclical allowance equivalent to 0.75% of the gross loan portfolio balance. VEN NIF require the allowance for losses on the loan portfolio to be determined based on asset recoverability, considering the fair value of guarantees, and do not provide for a general allowance, which would have to be accounted for as a reduction of retained earnings in the statement of changes in equity.
12) Assets received as payment and idle assets Assets received as payment must be recorded at the lower of assigned value, book value, market value or appraisal value not older than one year, and are amortized using the straight-line method over 1 to 3 years. Assets idle for more than 24 months are written out of asset accounts. In accordance with VEN NIF, assets received as payment are recorded at the lower of cost and market value and are classified as property and equipment or non-current assets held for sale depending on their use.
13) Property and equipment Under VEN NIF, depreciation is recorded in the results based on the remaining useful life of the revalued asset. Depreciation expense may subsequently be reclassified to unappropriated earnings. When an item of property and equipment is revalued, all items belonging to the same class of assets, net of deferred income tax, should also be revalued.
The Bank assesses possible impairment in the value of its long-lived assets when events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized in the results for the period for the amount by which the asset’s carrying amount exceeds fair value. According to VEN NIF, the recoverable amount of an asset or group of assets to be held and used is the higher of fair value less costs to sell and value in use (value in use is the present value of estimated future cash flows to be obtained from an asset or Cash Generating Unit (CGU)).
The CGU represents the lowest level within the entity that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
14) Leasehold improvements Significant leasehold improvements are recorded as amortizable expenses and included under other assets. According to VEN NIF, leasehold improvements are recorded within property and equipment.
15) Goodwill Goodwill relates to the excess of cost over book value of shares and contributions pending capitalization at the date of acquisition and is being amortized using the straight-line method over 20 years (Note 10). As from 2008, goodwill must be amortized over no more than 5 years. According to VEN NIF, goodwill should not be amortized but tested for impairment annually or sooner whenever events or circumstances indicate that the value of the respective reporting unit may be impaired. Impairment is determined comparing the book value to the recoverable amount of the CGU, and if the carrying amount exceeds the recoverable amount, an impairment loss is recognized in the income statement.
10 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
16) Provisions The Accounting Manual establishes timeframes to record provisions for bank reconciling items, pending items and accounts receivable forming part of other assets, interest receivable and disposal of certain assets, among others.
According to VEN NIF, provisions are recorded based on the probability of collection or recovery. No timeframes are established for creating provisions for these items.
17) Deferred tax The Bank recognizes a deferred tax asset or liability in respect of temporary differences between the tax and the book balance sheets, except for: a) provisions for losses on other than unrecoverable loans, and b) revaluation of property and equipment. A deferred tax asset is not recognized for any amount exceeding future taxable income. In accordance with VEN NIF, a deferred tax asset or liability is calculated in respect of all temporary differences between the tax balance sheet and the accounting balance sheet (Note 17).
18) Employee benefit plan remeasurement VEN NIF establish that the effect due to experience and changes in actuarial assumptions must be recognized in equity. In accordance with the rules and instructions of SUDEBAN, employee benefit plan remeasurement is recognized in the income statement.
19) Employee stock option plan The Bank has a long-term stock option plan allowing certain key officers to purchase shares of Mercantil Servicios Financieros, C.A. (MERCANTIL) (Note 18). The Bank makes contributions to Fundación BMA for share purchases and records them in the results for the year in which they are made. According to VEN NIF, the related expense is recorded at the fair value of options granted to employees and amortized over the vesting period. The effect of shares purchased for the stock option plan on the financial statements is also recognized.
20) Transactions with derivative instruments Contracted amounts in transactions with derivative instruments, mainly for futures trading, are shown under memorandum accounts instead of in the balance sheet as required by VEN NIF (Note 25).
21) Commissions collected Commissions collected on loans granted are shown as income when collected, whereas under VEN NIF, they are deferred and shown as income over the term of the loan.
22) Interest income Interest on loans, investments and accounts receivable is recorded as income when earned, except: a) interest receivable on loans more than 30 days overdue; b) interest on overdue or in-litigation loans, or other loans classified as real risk, high risk or unrecoverable; c) interest on current and rescheduled loans expected to be collected in 6 months or more and; d) overdue interest, which is recorded as income when collected. According to VEN NIF, interest is recorded as income when earned using the effective interest method.
In addition, interest accrued but not collected in respect of overdue loans is fully provided for. Interest on loan installments is fully provided for if repayment is more than 30 days past due. According to VEN NIF, interest is provided for based on collectibility.
23) Cash flows For purposes of the cash flow statement, the Bank considers cash and due from banks as cash equivalents. Under VEN NIF, investments and deposits maturing within 90 days are considered cash equivalents.
11 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Below is a summary of SUDEBAN rules and instructions that do not differ from VEN NIF:
a) Investment securities Investment securities are classified upon acquisition, based on their nature and intended use, as deposits with the BCV and overnight deposits, investments in trading securities, investments in available-for-sale securities, investments in held-to-maturity securities, investments in other securities and restricted investments. They are accounted for as described below:
Deposits with the Central Bank of Venezuela (BCV) and overnight deposits Excess liquidity deposited at the BCV, overnight deposits and debt securities issued by Venezuelan financial institutions are included in this category. These investments are recorded at realizable value, representing cost or par value. In addition, this category includes securities acquired under repurchase agreements, which are recorded at the agreed value.
Investments in available-for-sale securities Investments in available-for-sale debt and equity securities are recorded at fair value. Unrealized gains or losses, net of tax, resulting from differences in fair values are included in equity under unrealized gain (loss) on investments until they are sold. Investments in available-for-sale debt securities not listed on stock exchanges are recorded at fair value based principally on the present value of future cash flows of the securities.
Investments in held-to-maturity securities Investments in debt securities that the Bank has the firm intention and ability to hold until maturity are recorded at cost, which should not differ significantly from fair value at purchase, and are subsequently adjusted for amortization of discounts or premiums. Discounts or premiums are amortized over the term of the securities as a credit or debit to income from investment securities.
The Bank assesses at each balance sheet date, or sooner if circumstances require it, whether there is objective evidence that financial assets are impaired. An impairment in the fair value of held-to-maturity and available-for-sale securities is charged to the results for the period when management considers that it is other than temporary. Certain factors identified as indicators of impairment are, among others: 1) a prolonged period where fair value remains substantially below cost, 2) the financial difficulty and liquidity of the issuer, 3) a fall in the issuer’s credit rating, 4) the disappearance of an active market for the security, and 5) the Bank’s inability to hold the investment long enough to allow for recovery of fair value. For the six-month periods ended June 30, 2017 and December 31, 2016, the Bank has identified no other-than-temporary impairments in the value of its investments.
Restricted investments Restricted investments originating from other investment categories are measured using the same criteria used to record those investments from which they are derived.
b) Investments in subsidiaries and affiliates Investments in shares of 20% to 50%-owned affiliates are shown using the equity method and are recorded in investments in subsidiaries and affiliates (Note 7).
Investments in companies less than 20% owned that the Bank has the intention of holding, and over whose administration it has significant influence, are recorded under the equity method or at cost.
c) Investment securities acquired under resale agreements Securities acquired under resale agreements are recorded as deposits with the BCV and overnight deposits for the amount of funds transacted. The difference with respect to the resale price is recorded within interest income on an accrual basis (Note 4).
12 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
d) Loan portfolio As required by SUDEBAN, commercial loans and term, mortgage and credit card loan installments are classified as overdue if repayment is more than 30 days past due. Advances on negotiated letters of credit are classified as overdue if not repaid within 270 days after their due date. Furthermore, the entire principal balance of term, mortgage or credit card loans is classified as overdue if repayment of any installment is more than 90 days late. In addition, the entire balance of loans granted to small businesses is considered past due if repayment of at least one monthly installment is 60 days overdue or one weekly installment is 14 days overdue. In securities loans, the Bank acts as lender and the client as borrower.
e) Available-for-sale assets Available-for-sale assets other than personal and real property received as payment are recorded at the lower of cost and market value. Gains or losses from the sale of available-for-sale assets are included in income accounts.
f) Property and equipment Property and equipment is shown net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Gains or losses on the sale of personal and real property are shown in income accounts.
SUDEBAN Accounting Manual establishes that these assets shall be initially recorded at acquisition or construction cost, as applicable. Revaluation of these assets is allowed under the conditions previously authorized by SUDEBAN. Revaluation adjustment is recorded in equity. Revaluation is depreciated with a charge to results over the period established in the Accounting Manual.
g) Deferred expenses Deferred expenses are mainly in respect of office setup, office improvement and software expenses. These expenses are recorded at cost, net of accumulated amortization. Amortization is calculated using the straight-line method over four years.
h) Use of estimates in the preparation of financial statements The preparation of financial statements and their notes requires management to make reasonable estimates that affect the reported amounts of assets and liabilities, the amounts of gains and losses recorded during the period, and the disclosure of contingent assets and liabilities at the date of the financial statements.
The areas involving a higher degree of judgment or complexity, or areas where management’s assumptions or estimates are significant to the financial statements are the allowance for losses on the loan portfolio (Note 5), the income tax provision (Note 17), employee benefits (Note 18) and the determination of fair values (Note 30).
Below is a summary of the main bases used in the preparation of the financial statements:
Contingent loans The provision for contingent loans is determined based on a collectibility assessment aimed at quantifying the specific allowance for possible losses on each loan considering, among other things, economic conditions, client credit risk, credit history and the fair value of guarantees received. The Bank performs its review on a quarterly basis in accordance with SUDEBAN rules.
Loans of a similar nature are assessed as a whole to determine any applicable allowances.
Other assets The Bank assesses the collectibility of items recorded under other assets using the same criteria, where applicable, as those applied to the loan portfolio. Furthermore, the Bank sets aside provisions for those items that require them due to their nature or aging, or following SUDEBAN requirements.
13 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Provision for legal and tax claims The Bank sets aside a provision for legal and tax contingencies considered probable and reasonably quantifiable based on the opinion of its legal advisors and facts known at the assessment date (Notes 16 and 32).
i) Income tax The tax provision is based on management’s projection of tax results. The Bank records a deferred tax asset (liability) when, in the opinion of management, there is reasonable expectation that future tax results will allow its realization. Deferred tax asset (liability) must always be recognized (Note 17).
j) Employee benefits Accrual for length-of-service benefits Based on the provisions of the LOTTT and the Bank’s collective labor agreement, length-of-service benefits are a vested right of employees. Under the LOTTT, the Bank transfers guaranteed length-of- service benefits quarterly and annually to a trust fund on behalf of each employee. In addition, the LOTTT establishes that length-of-service benefits will be calculated retrospectively upon termination of employment considering the last salary earned by the employee and length of service. The LOTTT requires the payment to employees at employment termination of the higher of retrospective length-of- service benefits and total amounts accrued in the employee’s trust fund.
Due to the uncertainty involved in estimating an employee’s last salary, termination date and total amounts to be accrued in the employee’s trust fund at year end, the Bank uses actuarial methods to measure and record its obligation for length-of-service benefits based on assumptions that include discount rates, salary increase rates and employee turnover rates. These assumptions are reviewed annually and changes may affect the amount of the obligation.
In accordance with the LOTTT, the Bank calculates additional length-of-service benefits based on the last salary earned by the employee upon employment termination, using actuarial methods.
Indemnity Under the LOTTT, if an employee is terminated for reasons other than justified dismissal, the employee will be entitled to receive an additional indemnity equal to his or her accrued length-of-service benefits. This amount is recorded within salaries and employee benefits upon termination of employment.
Profit-sharing bonus and vacation leave As established in its collective labor agreement, the Bank grants profit-sharing bonuses and vacation leave to its employees that match or exceed the legal minimums, and accrues the related liabilities as incurred (Note 16).
Retirement pension plan The Bank has a long-term defined benefit plan covering all eligible employees which is managed by Fundación BMA. Related costs and liabilities are calculated using actuarial methods and are recorded in the results for the year. The net costs of the pension plan are based on actuarial assumptions that are revised annually, such as the discount rate of the obligation, the inflation rate and salary increases, and include service costs, interest expense and returns on plan assets. Important changes in assumptions may affect the amount of future contribution.
The Bank uses the projected unit credit method to calculate the present value of the Defined Benefit Obligation (DBO). The Bank makes annual contributions to the plan, except when the DBO is already covered by plan assets. Plan assets are recorded at fair value.
14 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Post-retirement benefits The Supplementary Defined Benefit Plan and the Supplementary Savings Plan include certain additional post-retirement benefits for the Bank’s employees meeting certain conditions in respect of age and length of service, mainly medical insurance. The related costs and liabilities are determined based on actuarial methods.
The effect due to experience and changes in actuarial assumptions in retirement pension plans and post-retirement benefits are recorded in the income statement. Past service costs of the pension plan are recorded in the income statement in the period in which the change occurs.
Defined contribution scheme The Bank maintains a defined contribution scheme called MERCANTIL Supplementary Savings Plan (Plan de Ahorro Previsional Complementario MERCANTIL) to replace the Supplementary Defined Benefit Plan (Plan Complementario de Pensiones de Jubilación). Contributions to the plan are recorded in the results for the period in which they are incurred. This Plan is a voluntary programmed savings scheme in the form of individual capitalization accounts that is managed by the Savings and Loan Fund of employees of Mercantil Servicios Financieros, C.A. Under this Plan, employees contribute between 1% and 5% of their basic monthly salary and the Bank doubles the employee’s contribution up to a maximum of 10% of said salary.
k) Stock option plan The Bank has a long-term stock option plan of MERCANTIL shares for certain key officers. Stock options are recorded as equity. The Bank determines the fair value of these options and amortizes the related expense over the vesting period. The fair value of each option is determined at the option grant date using the Black-Scholes-Merton valuation model and does not take into consideration cash dividends that will not be received by the participants.
l) Recognition of revenue, costs and expenses Income, costs and expenses are recorded as earned or incurred. Interest collected in advance is included within accruals and other liabilities as deferred income and recorded as income when earned (Note 16).
Interest on deposits, liabilities and borrowings is recorded as interest expense when incurred.
Income from financial leases and amortization costs of leased property are shown net in the income statement within income from the loan portfolio.
m) Assets received in trust The Bank acts as custodian, administrator and manager of third-party investments. Assets received in trust, shown under memorandum accounts, are measured using the same parameters used by the Bank to measure its own assets, except investments in debt securities that are recorded at cost, which should not differ significantly from fair value at purchase. Discounts or premiums are amortized over the term of the securities as a credit or debit to interest income, resulting in a lower or greater effective yield on investments. Debt securities in foreign currency are adjusted to the prevailing official exchange rate. Investments in equity securities in bolivars and foreign currency are recorded at cost. In accordance with certain trust agreements, investments in debt or equity securities included in these trusts are maintained at cost or market values.
n) Dividends Cash dividends are recorded as liabilities when approved at a Shareholders’ Meeting.
o) Net income per share Basic net income per share has been determined by dividing net income for the period by the weighted average of outstanding common shares during the period.
15 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
3. Cash and due from banks
The balances with the BCV included in cash and due from banks comprise the following:
June 30, December 31, 2017 2016 (In bolivars)
Legal reserve 565,506,768,707 238,770,063,878 Demand deposits 407,171,913,225 284,516,181,882 972,678,681,932 523,286,245,760
At June 30, 2017, the legal reserve in Venezuela is 21.5% of all deposits and 31% for marginal increases in deposits as from June 2017 (18.5% and 28%, respectively at December 31, 2016). Dematerialized Certificates of Participation issued by Fondo Simón Bolívar para la Reconstrucción matured during the six-month period ended June 30, 2017, and granted a 3% reduction of the legal reserve as from July 2011 (Note 4-e).
Legal reserve funds do not earn interest for the Bank and are not available for use. Demand deposits with the BCV relate to internal liquidity risk limits, and earn no interest. At June 30, 2017 and December 31, 2016, this balance includes the effect of recent high liquidity levels of the Venezuelan financial system.
The balance of pending cash items mainly relates to clearinghouse operations through the BCV.
4. Investment securities
Investment securities comprise the following:
June 30, December 31, 2017 2016 (In bolivars)
Investments Deposits with the BCV and overnight deposits 22,442,734,000 15,917,071,000 Available-for-sale securities 40,260,883,689 43,342,710,853 Held-to-maturity securities 31,556,798,568 32,151,090,061 Restricted investments 817,039,623 783,529,945 Other securities 37,580,812,056 39,476,331,056 132,658,267,936 131,670,732,915
a) Deposits with the Central Bank of Venezuela (BCV) and overnight deposits Deposits with the BCV and overnight deposits comprise the following:
Book value June 30, December 31, 2017 2016 (In bolivars)
Deposits with the BCV, maturing between July 2017 and March 2018 (maturing in January and September 30, 2016 at December 31, 2016) 22,418,234,000 (1) (a) 15,906,271,000 (1) (a) Investment securities under repurchase agreement acquired under resale agreements with the BCV, maturing in July 2017 (maturing in January,2017 at December 31, 2016) (Note 25) 24,500,000 (1) (a) 10,800,000 (1) (a) 22.442.734.000 15.917.071.000
(1) Shown at par value, which is considered as fair value.
Custodian of investments (a) Central Bank of Venezuela
16 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Deposits with the BCV and overnight deposits earn the following annual interest:
June 30, 2017 December 31, 2016 Minimum Maximum Minimum Maximum rate rate rate rate % % % %
Deposits with the BCV 6.00 8.50 6.00 7.25 Investment securities under repurchase agreement 6.00 6.00 6.00 6.00
b) Investments in available-for-sale securities Investments in available-for-sale securities comprise the following:
June 30, 2017 December 31, 2016 Book value Book value (equivalent (equivalent Acquisition Unrealized Unrealized to market Acquisition Unrealized Unrealized to market cost gain loss value) cost gain loss value)
(In bolivars)
Securities issued or guaranteed by the Venezuelan government National Public Debt Bonds, maturing between August 2017 and July 2033, with a par value of Bs 5,823,046,775 (maturing between March 2017 and July 2033, with a par value of Bs 6,950,508,812 at December 31, 2016) 7,045,796,129 141,472,026 (17,796,848) 7,169,471,307 (1) (a) 8,278,800,248 322,480,910 (16,850,986) 8,584,430,172 (1) (a) Fixed Interest Bonds (TIF) issued by the Bolivarian Republic of Venezuela, maturing between August 2018 and March 2032, with a par value of Bs 725,919,163 (maturing between February 2017 and March 2032, with a par value of Bs 570,281,126 at December 31, 2016) 901,562,939 49,950,017 (4,292,588) 947,220,368 (1) (a) 690,341,166 10,010,805 (13,977,511) 686,374,460 (1) (a) Principal and Interest Covered Bonds (TICC), maturing in March 2019, with a reference par value of US$20,170,732, payable in bolivars at the official exchange rate (maturing between April 2017 and March 2019, with a reference par value of US$107,859,528 at December 31, 2016) 173,189,055 28,518,265 - 201,707,320 (1) (a, f) 1,050,512,251 2,769,448 (106,226) 1,053,175,473 (1) (a, f) Sovereign Bonds issued by the Bolivarian Republic of Venezuela, with a par value of US$43,738,800, maturing between April 2020 and October 2024 (with a par value of US$26,711,300 at December 31, 2016) 191,913,790 7,388 (2,177,672) 189,743,506 (1) (d, g) 125,165,320 3,366 (1,263,306) 123,905,380 (1) (d, g) Debenture bonds issued by Petróleos de Venezuela, S.A. (PDVSA), maturing in July 2017, with a par value of Bs 186,530,000 191,368,731 - (2,224,886) 189,143,845 (1) (a) 191,368,731 - (2,224,886) 189,143,845 (1) (a) Treasury Notes issued by the Bolivarian Republic of Venezuela, with a par value of Bs 300,000,000 maturing between August and November 2017 (maturing between January and November 2017, with a par value of Bs 1,480,000,000 at December 31, 2016) 290,442,541 7,780,559 - 298,223,100 (1) (a, f) 1,452,367,576 20,188,129 (29,025) 1,472,526,680 (1) (a, f) 8,794,273,185 227,728,255 (26,491,994) 8,995,509,446 11,788,555,292 355,452,658 (34,451,940) 12,109,556,010 Equity in non-financial private-sector companies Sociedad de Garantías Recíprocas para la Pequeña y Mediana Empresa del Sector Turismo, S.A. (SOGATUR) 207,025,200 - - 207,025,200 (1) (b) 207,025,200 - - 207,025,200 (1) (b) Sociedad Nacional de Garantías Recíprocas para la Pequeña y Mediana Industria, S.A. (SOGAMPI) 1,000 - - 1,000 (1) (c) 1,000 - - 1,000 (1) (c) 207,026,200 - - 207,026,200 207,026,200 - - 207,026,200 Bonds and debt securities from decentralized administration entities 2017 Agriculture BANDES Certificates of Participation, with a par value of Bs 31,019,390,403 maturing in September 2017 31,019,390,403 - - 31,019,390,403 (1) (a) 31,019,390,403 - - 31,019,390,403 (1) (a) 31,019,390,403 - - 31,019,390,403 31,019,390,403 - - 31,019,390,403 Debt securities issued by foreign public and private-sector companies Debt securities issued and guaranteed by government agencies of the United States of America, maturing between September 2022 and November 2044, with a par value of US$3,896,743 (maturing in November 2044, with a par value of US$651,879 at December 31, 2016) 39,223,142 - (265,502) 38,957,640 (2) (d) 6,654,896 - (154,255) 6,500,641 (2) (d) Debt securities issued by foreign financial institutions, maturing in February 2017, with a par value of COL$71,518,026 - - - - 237,599 - - 237,599 (1) (e) 39,223,142 - (265,502) 38,957,640 6,892,495 - (154,255) 6,738,240 40,059,912,930 227,728,255 (26,757,496) 40,260,883,689 43,021,864,390 355,452,658 (34,606,195) 43,342,710,853
(1) Based on the present value of estimated future cash flows. (2) Market value based on prices listed on the stock exchange.
Custodians of investments (a) Central Bank of Venezuela. (b) Sociedad de Garantías Recíprocas para la Pequeña y Mediana Empresa del Sector Turismo, S.A. (SOGATUR). (c) Sociedad Nacional de Garantías Recíprocas para la Pequeña y Mediana Industria, S.A. (SOGAMPI). (d) Bank of New York, Inc. (e) Representation Office in Colombia. (f) Mercantil Bank (Panamá), S.A. (g) Clearstream Banking, S.A.
At June 30, 2017, the market value of securities issued and guaranteed by the Venezuelan government and owned by the Bank is lower than cost by Bs 26,492,000 (Bs 34,452,000 at December 31, 2016). This loss is included in equity as an unrealized gain (loss) on investments. The Bank believes that these losses arise from normal stock market fluctuations and, consequently, are temporary. Management does not expect to realize these securities at a price below their book value. The Bank has the ability to hold these securities for a sufficient period of time to recover unrealized losses.
17 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Investments in available-for-sale securities earn the following annual yield:
June 30, 2017 December 31, 2016 Minimum Maximum Minimum Maximum rate rate rate rate % % % %
National Public Debt Bonds in local currency 10.29 15.29 9.40 15.40 National Public Debt Bonds in local currency (Agriculture Bonds) 9.10 9.10 9.10 9.10 Fixed Interest Bonds (TIF) 9.88 16.50 9.88 18.00 Sovereign Bonds 8.25 8.25 8.25 8.25 Principal and Interest Covered Bonds (TICC) 5.25 5.25 5.25 6.25 Debt securities issued and guaranteed by government agencies of the United States of America 1.32 3.00 3.00 3.00 Debt securities from decentralized administration entities 4.00 4.00 4.00 4.00 Debt securities issued by foreign financial institutions - - 1.50 1.50
Below is the classification of the weighted average maturity of investments in available-for-sale securities:
June 30, December 31, 2017 2016 (Months)
National Public Debt Bonds in local currency 47 64 National Public Debt Bonds in local currency (Agriculture Bonds) 1 7 Fixed Interest Bonds (TIF) 118 82 Principal and Interest Covered Bonds (TICC) 21 27 Treasury Notes 4 3 Debt securities issued and guaranteed by government agencies of the United States of America 198 339 Sovereign Bonds 70 67 Debt securities issued by foreign financial institutions - 2 Debt securities from decentralized administration entities 3 9
Below is the classification of investments in available-for-sale securities according to maturity:
June 30, 2017 December 31, 2016 Book value Book value (equivalent (equivalent to market to market Cost value) Cost value) (In bolivars)
Up to 6 months 32,533,035,977 32,533,416,277 2,131,516,492 2,146,327,634 6 months to 1 year 7,750,103 7,961,676 31,639,755,239 31,643,979,103 1 to 5 years 3,956,818,402 3,984,287,218 2,574,615,012 2,654,883,672 5 to 10 years 1,734,042,004 1,770,679,841 4,019,430,552 4,091,236,182 Over 10 years 1,828,266,444 1,964,538,677 2,656,547,095 2,806,284,262 40,059,912,930 40,260,883,689 43,021,864,390 43,342,710,853
The equity account unrealized gain on investments comprises the following:
June 30, December 31, 2017 2016 (In bolivars)
Investments in available-for-sale securities 200,970,760 320,846,463 Investments in available-for-sale securities, reclassified from investments in held-to-maturity securities (9,944,946) (12,097,072) Investments in subsidiaries and affiliates (8,054,293) (6,817,343) 182,971,521 301,932,048
18 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
During the six-month period ended June 30, 2017, the Bank recorded gains and losses on sale of investments in available-for-sale securities of Bs 839,509,000 and Bs 167,347,000, respectively (Bs 1,039,735,000 y Bs 489,268,000, respectively, during the six-month period ended December 31, 2016) (Notes 20 and 21), which are shown under other operating income and other operating expenses, respectively. The Bank received cash payments of Bs 212,883,908,000 and US$648,535,000 for the aforementioned sales (Bs 187,946,133,000 during the six-month period ended December 31, 2016).
c) Investments in held-to-maturity securities Investments in held-to-maturity securities comprise the following:
June 30, 2017 December 31, 2016 Amortized Fair Amortized Fair Cost cost value Cost cost value (In bolivars)
Dematerialized Certificate of Participation issued by Fondo Simón Bolívar para la Reconstrucción, S.A., maturing between June 2023 and November 2024, with a par value of Bs 21,241,566,713 21,241,566,713 21,241,566,713 21,241,566,713 (1) (a) 21,241,566,713 21,241,566,713 21,241,566,713 (1) (a) Fixed Interest Bonds (TIF) issued by the Bolivarian Republic of Venezuela, maturing between April 2018 and March 2033, with a par value of Bs 4,593,333,324 5,264,806,477 5,055,772,674 5,778,490,131 (2) (a) 5,264,806,477 5,150,903,209 5,472,312,016 (2) (a) National Public Debt Bonds, maturing between April 2024 and June 2032, with a par value of Bs 4,294,367,092 5,384,998,615 5,259,459,181 5,646,126,006 (2) (a) 5,384,998,615 5,321,712,983 5,420,291,776 (2) (a) Debt securities issued by Fondo de Desarrollo Nacional FONDEN, S.A., maturing in April 2017, with a par value of Bs 435,300,000 - - - 460,025,475 436,907,156 460,025,475 (1) (a) 31,891,371,805 31,556,798,568 32,666,182,850 32,351,397,280 32,151,090,061 32,594,195,980
(1) Shown at par value, which is considered as fair value. (2) Fair value is determined from trading operations on the secondary market.
Custodian of investments (a) Central Bank of Venezuela.
Investments in held-to-maturity securities earn the following annual yield:
June 30, 2017 December 31, 2016 Minimum Maximum Minimum Maximum rate rate rate rate % % % %
Dematerialized Certificate of Participation issued by Fondo Simón Bolívar para la Reconstrucción, S.A. 4.66 6.05 4.66 6.05 National Public Debt Bonds 14.39 15.54 14.68 15.79 Fixed Interest Bonds (TIF) issued by the Bolivarian Republic of Venezuela 14.50 18.00 14.50 18.00 Debt securities issued by Fondo de Desarrollo Nacional FONDEN, S.A. - - 9.10 9.10
Below is the classification of the weighted average maturity of investments in held-to-maturity securities:
June 30, December 31, 2017 2016 (Months)
Dematerialized Certificate of Participation issued by Fondo Simón Bolívar para la Reconstrucción, S.A. 85 91 Fixed Interest Bonds (TIF) issued by the Bolivarian Republic of Venezuela 143 149 National Public Debt Bonds 112 118 Debt securities issued by Fondo de Desarrollo Nacional FONDEN, S.A. - 4
19 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Below is the classification of investments in held-to-maturity securities according to maturity:
June 30, 2017 December 31, 2016 Amortized Fair Amortized Fair cost value cost value (In bolivars)
Up to 6 months - - 436,907,156 460,025,475 6 months to 1 year 1,303,933,182 1,353,759,304 - - 1 to 5 years 608,215,198 695,269,503 1,990,988,020 2,083,116,703 5 to 10 years 26,135,011,867 26,483,108,116 26,063,865,914 26,066,280,821 Over 10 years 3,509,638,321 4,134,045,927 3,659,328,971 3,984,772,981 31,556,798,568 32,666,182,850 32,151,090,061 32,594,195,980
d) Restricted investments Restricted investments comprise the following:
June 30, 2017 December 31, 2016 Book value Book value (equivalent (equivalent to market to market Cost value) Cost value) (In bolivars)
As guarantee Trust fund for MasterCard transactions 664,906,328 664,906,328 (1) (c) 633,575,748 633,575,748 (1) (c) Trust fund for the Social Contingency Fund 26,119,263 26,119,263 (1) (c) 24,099,672 24,099,672 (1) (c) Certificates of deposit issued by Mercantil Bank, N.A., Deutsche Bank and Standard Chartered Bank, N.Y., maturing between August 2017 and February 2018, with a par value of US$12,632,986 (maturing between February and August 2017, with a par value of US$12,616,995 at December 31, 2016) 126,014,032 126,014,032 (2) (a, b, d) 125,854,525 125,854,525 (2) (a, b, d) 817,039,623 817,039,623 783,529,945 783,529.945
(1) Trust funds maintained with Banco Provincial, S.A. Banco Universal. (2) Shown at par value, which is considered as fair value.
Custodians of investments (a) Deutsche Bank AG, London. (b) Mercantil Bank, N.A. (c) Mercantil, C.A. Banco Universal. (d) Standard Chartered Bank, New York.
Restricted investments earn the following annual yield:
June 30, 2017 December 31, 2016 Minimum Maximum Minimum Maximum rate rate rate rate % % % %
Investment trust 10.00 10.00 10.00 10.00 Certificates of deposit 0.10 1.37 0.10 1.25
Below is the classification of the weighted average maturity of restricted investments:
June 30, December 31, 2017 2016 (Months)
Certificates of deposit 4 4
20 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Below is the classification of restricted investments according to maturity:
June 30, 2017 December 31, 2016 Fair Fair Cost value Cost value (In bolivars)
Up to 6 months 744,222,123 744,222,123 781,534,945 781,534,945 6 months to 1 year 72,817,500 72,817,500 1,995,000 1,995,000 817,039,623 817,039,623 783,529,945 783,529,945
e) Investments in other securities As required by the Venezuelan government, at June 30, 2017 and December 31, 2016, the Bank has investment securities issued by the Bolivarian Republic of Venezuela, public companies and decentralized entities to finance social projects for agricultural development and housing construction, as follows:
June 30, 2017 December 31, 2016 Weighted Weighted Book average Book average Yield value maturity value maturity Issuer Guarantee Maturity % (In bolivars) (months) (In bolivars) (months) Characteristics Investments in other securities Imputable to Fondo Simón Bolivarian mortgage portfolio Bolívar para la Republic compliance Reconstrucción, S.A. of Venezuela 2020-2028 4.66-6.48 37,580,812,056 78 37,580,812,056 85 (1, 2) (a) (Note 5) Reduces the legal - - - - 1,315,669,000 6 (5) (a) reserve (Note 3) Imputable to Banco Nacional de BANAVIHI’s mortgage portfolio Vivienda y Hábitat current loan compliance (BANAVIH) portfolio - - - - 579,850,000 59 (2) (a) (Note 5)
Total investments in other securities 37,580,812,056 39,476,331,056 Available-for-sale Investments Banco de Desarrollo Económico y Social de Reduces the legal Venezuela (BANDES) BANDES 2017 4 31,019,390,403 3 31,019,390,403 9 (6) (a) reserve (Note 3) Sociedad de Garantías Recíprocas para People’s Power Imputable to la Pequeña y Mediana Empresa del Ministry for tourism loan portfolio Sector Turismo, S.A. (SOGATUR) Tourism - - 207,025,200 - 207,025,200 - (4) (b) compliance Debenture bonds Imputable to Bolivarian agricultural loan Petróleos de Venezuela, S.A. Republic of portfolio compliance (PDVSA) Venezuela 2017 9.10 189,143,845 1 189,143,845 7 (2, 3) (a) (Notes 4-b and 5)
Total available-for-sale investments 31,415,559,448 31,415,559,448
Held-to-maturity investments Fondo Simón Bolivarian Bolívar para la Republic Reduces the legal Reconstrucción, S.A. of Venezuela 2023-2024 4.66 - 6.05 21,241,566,713 85 21,241,566,713 91 (2,7) (a) reserve (Note 3) Imputable to agricultural loan Fondo de Desarrollo portfolio compliance Nacional FONDEN, S.A. Debenture bonds - - - 436,907,156 4 (2) (a) (Notes 4-b and 5) Total held-to-maturity investments 21,241,566,713 21,678,473,869
Total investments required 90,237,938,217 92,570,364,373
(1) At June 30, 2017 and December 31, 3016, the Bank maintains Bs 37,580,812,000 in Bolivarian Housing Securities issued by Fondo Simón Bolívar para la Reconstrucción, S.A., of which the entire amount is imputable to the mortgage portfolio from previous years, to finance Venezuela’s Great Housing Mission.
(2) These securities may be traded with the BCV at 100% of their par value for purposes of liquidity injection and credit assistance. The Bank has the intention to hold them until maturity. These securities are recorded at cost; they are not currently traded on the Caracas Stock Exchange.
(3) These securities may be traded on the Bicentennial Public Stock Exchange at market value. They are available for sale and are recorded at the price quoted on the Bicentennial Public Stock Exchange.
(4) At June 30, 2017 and December 31, 2016, the Bank maintains Bs 207,025,200 in Class “B” shares of Sociedad de Garantías Recíprocas para la Pequeña y Mediana Empresa del Sector Turismo, S.A. (SOGATUR) imputable to tourism loan portfolio compliance.
(5) Reduced the legal reserve by 3% at December 31, 2016.
(6) At June 30, 2017 and December 31, 2016, the Bank purchased certificates of participation for Bs 31,019,390,000 issued by Banco de Desarrollo Económico y Social de Venezuela (BANDES) to grant national agricultural loans. This amount reduces the legal reserve until the business day previous to these certificates’ maturity date.
(7) At June 30, 2017 and December 31, 2016, reduces the legal reserve by Bs 21,241,567,000
Custodians of investments (a) Central Bank of Venezuela. (b) Sociedad de Garantías Recíprocas para la Pequeña y Mediana Empresa del Sector Turismo, S.A. (SOGATUR).
The Bank’s control environment includes policies and procedures to determine investment risks by type of issuer and economic sector. At June 30, 2017, the Bank has investment securities issued by the Venezuelan government and public entities, deposits with the BCV, securities issued by the government of the United States of America and government agencies and securities issued by the Venezuelan and international private sector, among others, representing 82.28%, 16.92%, 0.03% and 0.77%, respectively, of its investment securities portfolio (87.15%, 12.09%, 0.005% and 0.755%, respectively, at December 31, 2016).
21 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
5. Loan portfolio
The loan portfolio is classified as follows:
December 31 June 30, 2017 2016 Current % Rescheduled % Overdue % In litigation % Total % Total % (In bolivars)
Economic activity Commercial 561,389,867,249 44 750,806,028 67 487,497,946 19 90,606,866 66 562,718,778,089 44 247,416,581,218 40 Credit cards 244,507,614,126 19 - - 31,548,945 1 - - 244,539,163,071 19 143,708,307,676 23 Agriculture 218,515,855,998 17 39,663,562 4 25,435,500 1 20,000,000 15 218,600,955,060 17 101,482,725,311 17 Industrial 50,421,846,335 4 7,931,211 1 108,236,707 4 17,381,302 13 50,555,395,555 4 32,211,888,119 5 Services 66,005,393,552 5 13,758,944 1 76,954,607 3 7,825,815 6 66,103,932,918 5 35,738,656,272 6 Home purchases and improvements 15,076,878,739 1 128,074 - 86,216,496 3 5,268 - 15,163,228,577 1 11,893,361,776 2 Construction 19,332,309,382 2 1,966,398 - 379,636,202 15 - - 19,713,911,982 2 4,727,992,627 1 Car loans 16,877,135,385 1 - - 27,297,701 1 - - 16,904,433,086 1 14,058,657,953 2 Foreign trade 68,349 - - - 8,562,819 - - - 8,631,168 - 8,565,551 - Other 83,595,226,502 7 306,445,444 27 1,335,635,249 53 3,419 - 85,237,310,614 7 23,607,344,173 4 1,275,722,195,617 100 1,120,699,661 100 2,567,022,172 100 135,822,670 100 1,279,545,740,120 100 614,854,080,676 100
Guarantee Unsecured 438,629,399,400 34 191,327,738 17 427,532,890 17 1,860,750 1 439,250,120,778 34 219,902,240,330 36 Mortgage 123,046,980,946 10 387,655,356 35 492,286,947 19 8,687 - 123,926,931,936 10 83,151,132,189 14 Debenture 599,585,223,494 47 541,716,567 48 1,640,165,756 64 133,953,233 99 601,901,059,050 47 267,053,289,374 43 Pledge 114,460,591,777 9 - - 7,036,579 - - - 114,467,628,356 9 44,747,418,783 7 1,275,722,195,617 100 1,120,699,661 100 2,567,022,172 100 135,822,670 100 1,279,545,740,120 100 614,854,080,676 100
Maturity Up to 3 months 194,405,917,845 15 141,095,704 13 701,379,107 27 45,476,527 33 195,293,869,183 15 162,785,472,600 26 3 to 6 months 330,502,197,719 26 170,027,146 15 702,426,649 28 41,980,440 31 331,416,631,954 26 87,850,214,600 14 6 months to 1 year 533,546,125,943 42 221,363,619 20 722,795,757 28 48,357,016 36 534,538,642,335 42 162,345,158,475 27 1 to 2 years 41,132,883,567 3 246,279,984 21 65,472,081 3 - - 41,444,635,632 3 51,903,469,948 8 2 to 3 years 59,060,817,089 5 162,280,793 14 11,583,024 - - - 59,234,680,906 5 46,114,406,186 8 3 to 4 years 31,901,211,245 3 18,508,331 2 12,104,383 - - - 31,931,823,959 2 26,999,993,086 4 4 to 5 years 15,104,593,170 1 8,734,600 1 814,758 - - - 15,114,142,528 1 11,139,265,909 2 Over 5 years 70,068,449,039 5 152,409,484 14 350,446,413 14 8,687 - 70,571,313,623 6 65,716,099,872 11 1,275,722,195,617 100 1,120,699,661 100 2,567,022,172 100 135,822,670 100 1,279,545,740,120 100 614,854,080,676 100
Loan Promissory note 946,538,901,523 74 803,588,126 72 763,059,373 30 135,813,983 100 948,241,363,005 74 415,808,565,907 68 Credit cards, mortgage and vehicles 272,131,307,993 21 187,480,593 17 392,650,422 15 - - 272,711,439,008 21 163,787,158,396 27 Installment 21,103,346,979 2 129,630,942 11 110,183,006 4 8,687 - 21,343,169,614 2 17,295,071,281 3 Financial leases 104,001,562 ------104,001,562 - 166,644,748 - Factoring and discounts 1,186,670,607 ------1,186,670,607 - 470,750,626 - Checking accounts 974,866,979 - - - 41,930,666 2 - - 1,016,797,645 - 546,307,177 - Letters of credit 68,349 - - - 8,562,819 - - - 8,631,168 - 8,565,551 - Other 33,683,031,625 3 - - 1,250,635,886 49 - - 34,933,667,511 3 16,771,016,990 2 1,275,722,195,617 100 1,120,699,661 100 2,567,022,172 100 135,822,670 100 1,279,545,740,120 100 614,854,080,676 100
Geographic location Venezuela 1,275,702,195,617 100 1,120,699,661 100 2,567,022,172 100 135,822,670 100 1,279,525,740,120 100 614,854,016,972 100 Other Latin American countries 20,000,000 ------20,000,000 - 63,704 - 1,275,722,195,617 100 1,120,699,661 100 2,567,022,172 100 135,822,670 100 1,279,545,740,120 100 614,854,080,676 100
Below is the classification of the loan portfolio by type of risk of the Bank and branch abroad in accordance with parameters set by SUDEBAN:
June 30, 2017 December 31, 2016 In bolivars % In bolivars %
Risk Normal 1,272,610,078,377 100 608,591,246,187 100 Potential 2,137,461,228 - 2,332,257,430 - Real 2,725,178,770 - 2,472,157,860 - High 1,776,465,336 - 1,346,618,981 - Unrecoverable 296,556,409 - 111,800,218 - 1,279,545,740,120 100 614,854,080,676 100
22 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
At June 30, 2017, regulations require universal banks to earmark a minimum nominal percentage of 27.50% of their gross loan portfolio to finance loans for agriculture, small businesses and tourism (64.25% for agriculture, small businesses, tourism, mortgages and manufacturing at December 31, 2016), as follows:
June 30, 2017 Maximum Balance Number of annual maintained Earmarked Required Number of loans interest rate Activity in bolivars % % debtors granted % Calculation basis x Agriculture (a) 218,600,955,060 35.58 22.00 1,963 4,216 13.00 Gross loan portfolio at December 31, 2016 Small businesses 33,186,808,301 5.4 3.00 14,876 16,599 24.00 Gross loan portfolio at December 31, 2016 Between 4.66 Mortgages (b, e) 13,209,082,860 2.15 20.00 20,852 20,889 and 10.66 Gross loan portfolio at December 31, 2016 10.27 but 7.27 may be applied in some Average gross loan portfolio balance at December 31, Tourism (c) 15,637,737,414 3.4 2.50 69 196 cases 2016 and 2015 18 but 16.20 may be applied in some Manufacturing (d, e) 50,555,395,555 8.22 8.00 1,103 1.643 cases Gross loan portfolio at December 31, 2016
December 31, 2016 Maximum Balance Number of annual maintained Earmarked Required Number of loans interest rate Activity in bolivars % % debtors granted % Calculation basis x Agriculture (a) 101,482,725,312 42.04 26.00 2.088 4.159 13.00 Gross loan portfolio at December 31, 2015 Small businesses 15,618,458,159 3.88 3.00 10.775 10.999 24.00 Gross loan portfolio at June 30, 2016 Between 4.66 Mortgages (b, e) 11,215,922,175 3.53 20.00 22.464 22.464 and 10.66 Gross loan portfolio at December 31, 2015 11.62 but 8.62 may be applied in some Average gross loan portfolio balance at December 31, Tourism (c) 12,964,211,303 5.42 5.25 69 214 cases 2015 and 2014 18 but 16.20 may be applied in some Manufacturing (d, e) 32,211,888,119 10.15 10.00 1.434 2.288 cases Gross loan portfolio at December 31, 2015
a) In July 2012, Petróleos de Venezuela, S.A. PDVSA, issued non-convertible bearer bonds to strengthen and finance Venezuela’s Great Agro Mission of the Ezequiel Zamora Fund. These bonds may be imputed to the mandatory agricultural loan portfolio for an amount of up to 30% of the total loan portfolio, as authorized by the People’s Power Ministry for Productive Agriculture and Land in July 2012; the agricultural loan portfolio plus these investments amount to Bs 218,790,098,905 at June 30, 2017 (Bs 102,108,776,313 at December 31, 2016).
b) At June 30, 2017, the mortgage portfolio reached 2.15% of the total percentage to be used in December 2017 (20%) (3.53% at December 31, 2016), including new loans granted and the balance of loans at that date for the acquisition, self-construction, expansion and remodeling.
c) At June 30, 2017 and December 31, 2016, the Bank complies with the minimum percentage of the tourism loan portfolio (includes SOGATUR shares for Bs 207,025,200). The total tourism loan portfolio plus these investments amount to Bs 15,844,762,614 (Bs 13,171,236,503 at December 31, 2016).
d) In November 2016, the People’s Power Ministries for Industries and for Finance ratified the strategic development sectors to which at least 60% of the manufacturing loan portfolio resources shall be allocated, as well as the minimum percentage of 40% to finance small and medium-sized companies, joint ventures, and state companies whose main activities are included in the Venezuelan Economic Activities Classification (CAEV).
e) Measurement and compliance with these portfolios is required annually.
The Bank has allowances for losses on the loan portfolio exceeding the minimum requirements set by SUDEBAN. Below is the movement in the allowance for losses on the loan portfolio:
Six-month periods ended June 30, December 31, 2017 2016 (In bolivars)
Balance at the beginning of the year 19,552,390,844 12,872,066,494 Provided in the period 18,118,533,189 8,799,984,470 Write-offs of uncollectible accounts (1,311,746,576) (2,126,400,785) Decrease in branch allowance - (946,683) Reclassification to the provision for interest receivable 27,466,811 7,687,348 Balance at the end of the year 36,386,644,268 19,552,390,844
23 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
During the six-month period ended June 30, 2017, the Bank wrote off unrecoverable loans of Bs 1,311,747,000 (Bs 2,126,401,000 during the six-month period ended December 31, 2016), against the allowance for losses on loan portfolio. The Bank also collected loans written off as uncollectible in previous year for Bs 704,741,000 (Bs 564,091,000 during the six-month period ended December 31, 2016), included in the income statement under income from financial assets recovered.
Below is a breakdown of certain balances and transactions of the overdue and in-litigation loan:
Six-month periods ended June 30, December 31, 2017 2016 (In bolivars)
No earning interest (1) 2,702,844,842 2,038,014,828 Interest accrued but not recorded as income 987,949,884 765,610,515 Interest collected on uncollectible loans written off in previous years 704,741,211 563,142,851
(1) At June 30, 2017, Bs 8,562,819 corresponds to overdue letters of credit (Bs 8,502,553 at December 31, 2016).
The Bank’s control environment includes policies and procedures to determine credit risks by client and economic sector. Concentration of risk is limited since loans are granted to a variety of economic sectors and a large number of clients. At June 30, 2017 and December 31, 2016, the Bank’s loan portfolio does not have significant risk concentrations in terms of individual clients and groups of related companies.
6. Interest and commissions receivable
Interest and commissions receivable comprise the following:
June 30, December 31, 2017 2016 (In bolivars)
Interest receivable on investment securities Deposits with the Central Bank of Venezuela (BCV) and overnight deposits 273,468,199 76,056,635 Available for sale 1,091,899,349 520,554,086 Held to maturity 562,997,469 580,120,303 Interest receivable on investment securities 467,075,022 474,943,844 Restricted investments 1,075,244 1,125,695 2,396,515,283 1,652,800,563 Interest receivable on loan portfolio Current 7,384,771,883 4,565,007,952 Rescheduled 39,766,152 46,714,121 Overdue 109,717,865 108,719,400 7,534,255,900 4,720,441,473 Commissions receivable 268,068,971 216,632,840 Provision for interest receivable and other (120,596,509) (118,477,586) 10,078,243,645 6,471,397,290
24 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
7. Investments in subsidiaries and affiliates
Investments in subsidiaries and affiliates recorded at cost by the equity method comprise the following:
June 30, December 31, 2017 2016 (In bolivars)
Inversiones Platco, C.A., 573,985 fully paid common shares with a par value of Bs 100 each, equivalent to 50% of its capital stock 4,070,616,367 4,129,544,548 Inversiones y Valores Mercantil V, C.A., 31,724,500 fully paid common shares with a par value of Bs 1 each, equivalent to 100% of its capital stock 157,195,833 197,228,890 Proyecto Conexus, C.A., 500,000 fully paid common shares with a par value of Bs 1 each, equivalent to 33.33% of its capital stock 80,792,640 1,181,888 Corporación Andina de Fomento, 24 fully paid common shares with a par value of US$5,000 each, equivalent to 0.003% of its capital stock 1,011,833 1,1011,833 Society for Worldwide Interbank Financial Telecommunication (SWIFT), 27 fully paid common shares with a par value of €125 each, equivalent to 0.01% of its capital stock 611,920 564,016 Inmobiliaria Asociación Bancaria, C.A., 28,862 fully paid common shares with a par value of Bs 1 each, equivalent to 7.4% of its capital stock 167,370 167,370 Caja Venezolana de Valores, S.A., 2,596,824 fully paid common shares with a par value of Bs 3 each, equivalent to 18.01% of its capital stock 128,480 128,480 Banco Interamericano de Ahorro y Préstamo (BIAPE), 1,214 fully paid common shares with a par value of US$1 each, equivalent to 0.15% of its capital stock 24,737 24,737 Súper Octanos, C.A., 84,800 fully paid common shares with a par value of Bs 1 each, equivalent to 2% of its capital stock 16,960 16,960 Banco Latinoamericano de Comercio Exterior, S.A. (BLADEX), 32,376 fully paid common shares with a par value of US$1 each, equivalent to 0.19% of its capital stock 11,450 11,450 Mantex, S.A., 830 fully paid common shares with a par value of Bs 1 each, equivalent to 0.00051% of its capital stock 162 162 Provision for investments in subsidiaries and affiliates (17,122) (17,122) 4,310,560,630 4,329,863,212
During the six-month period ended June 30, 2017, the Bank recorded net losses of Bs 22,860,000 in respect of its equity in the results of subsidiaries and affiliates (net losses of Bs 38,312,000 during the six-month period ended December 31, 2016), shown under other operating income and other operating expenses, respectively (Notes 20 and 21).
During the six-month period ended December 31, 2016, the Bank made cash contributions for future capital increases of Bs 178,959,000 to its affiliate Inversiones Platco, C.A. for the acquisition of new equipment and spare parts.
25 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Below is a summary of the financial statements of the main subsidiaries and affiliates shown under the equity method, as well as the branch abroad:
a) Subsidiaries and affiliates
Balance sheet June 30, 2017 Inversiones y Valores Mercantil V, Proyectos Inversiones C.A. and Conexus, Platco, subsidiaries C.A. (1) C.A. (1) (In bolivars)
Assets Cash and due from banks 1,540,177 207,550,902 2,858,358,938 Investment securities 80,329,411 11,221,370 - Interest and commissions receivable 726,726 - - Investments in subsidiaries and affiliates abroad 98,456,000 - - Property and equipment 113,360 3,914,303 4,177,572,800 Other assets 12,321,558 138,422,189 11,083,511,091 Total assets 193,487,232 361,108,764 18,119,442,829
Liabilities and Equity Liabilities Other liabilities 36,291,401 118,731,330 9,978,210,095 Total liabilities 36,291,401 118,731,330 9,978,210,095 Equity 157,195,831 242,377,434 8,141,232,734 Total liabilities and equity 193,487,232 361,108,764 18,119,442,829
Income statement Six-month period ended June 30, 2017 Inversiones y Valores Mercantil V, Proyectos Inversiones C.A. and Conexus, Platco, subsidiaries C.A. C.A. (In bolivars)
Gross financial margin 1,936,584 13,952,203 41,897 Operating income, net (30,941,382) 268,839,540 12,879,799,171 Total expenses (9,461,510) (59,190,005) (12,997,697,429) Net income (loss) (38,466,308) 223,601,738 (117,856,361)
Equity method (38,466,308) 74,534,062 (58,928,181)
(1) Based on unaudited financial statements.
26 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Balance sheet December 31, 2016 Inversiones y Valores Mercantil V, Proyectos Inversiones C.A. and Conexus, Platco, subsidiaries C.A. (1) C.A. (1) (In bolivars)
Assets Cash and due from banks 2,296,520 23,708,742 1,414,095,793 Investment securities 99,065,721 2,772,536 - Interest and commissions receivable 749,960 - - Investments in subsidiaries and affiliates abroad 98,456,000 - - Property and equipment 159,482 285,891 4,864,802,100 Other assets 9,071,050 74,877,927 4,153,218,186 Total assets 209,798,733 101,645,096 10,432,116,079
Liabilities and Equity Liabilities Other liabilities 12,569,844 98,099,439 2,173,026,985 Total liabilities 12,569,844 98,099,439 2,173,026,985 Equity 197,228,889 3,545,657 8,259,089,094 Total liabilities and equity 209,798,733 101,645,096 10,432,116,079
Income statement Six-month period ended December 31, 2016 Inversiones y Valores Mercantil V, Proyectos Inversiones C.A. and Conexus, Platco, subsidiaries (2) C.A. (1) C.A. (1) (In bolivars)
Gross financial margin 5,235,901 11,727,946 10,268 Operating income, net 7,494,483 84,153,988 4,896,656,747 Total expenses (6,014,679) (96,272,570) (4,960,951,289) Net income (loss) 6,715,705 (390,636) (64,284,274)
Equity method (6,040,005) (130,213) (32,142,137)
(1) Based on unaudited financial statements. (2) Equity does not include Bs 12,756,000 in respect of the realization of the exchange difference
b) Branch and agency abroad (combined)
Balance sheet June 30, 2017 December 31, 2016 Thousands of Equivalent Thousands of Equivalent U.S. dollars in bolivars U.S. dollars in bolivars
Assets Cash and due from banks 16,187 161,468,130 15,307 152,689,126 Investment securities 44,550 444,865,559 115,511 1,154,837,042 Interest and commissions receivable 1,732 17,305,350 4,876 48,640,664 Other assets 347 3,461,459 21 208,204 Total assets 62,816 627,100,498 135,715 1,356,375,036
Liabilities and Equity Deposits 270 2,691,380 270 2,693,090 Interest and commissions payable 1 7,424 - 2,264 Accruals and other liabilities 10,964 109,363,796 133 1,327,194 Total liabilities 11,235 112,062,600 403 4,022,548 Equity 51,581 515,037,898 135,312 1,352,352,488 Total liabilities and equity 62,816 627,100,498 135,715 1,356,375,036
27 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Income statement Six-month period ended Six-month period ended June 30, 2017 December 31, 2016 Thousands of Equivalent Thousands of Equivalent U.S. dollars in bolivars U.S. dollars in bolivars
Gross financial margin 2,158 21,575,770 3,409 34,079,627 Other operating income, net 881 8,787,541 4,309 45,513,130 Total expenses (104,055) (1,040,162,171) (1,180) (11,769,812) Net income (loss) (101,016) (1,009,798,860) 6,538 67,822,945
8. Available-for-sale assets
Available-for-sale assets comprise the following:
December 31, June 30, 2016 Additions Disposals 2017
(In bolivars)
Idle assets 43,136,539 2,059,924 (1,120,522) 44,075,941 Amortization (4,423,564) (11,159,227) 140,066 (15,442,725) Net 38,712,975 (9,099,303) (980,456) 28,633,216
During the six-month period ended June 30, 2017, the Bank sold fully amortized assets received as payment that had been recorded under memorandum accounts at a gain of Bs 35,926,000 (Bs 482,109,000 during the six-month period ended December 31, 2016).
During the six-month period ended June 30, 2017, the Bank recorded amortization expense in respect of idle assets of Bs 11,159,000 (Bs 4,539,000 during the six-month period ended December 31, 2016), included in the income statement under expenses from available-for-sale assets.
Fully amortized available-for-sale assets are recorded under memorandum accounts (Note 25).
9. Property and equipment
Property and equipment comprises the following:
December 31, June 30, 2016 Additions Disposals Revaluation 2017 (In bolivars)
Costs Building and facilities - main office 4,917,671 - - 62,913,837,533 62,918,755,204 Buildings and facilities 739,854,464 - (656,638) - 739,197,826 Furniture and equipment 6,154,528,293 1,445,546,401 (4,104,853) - 7,595,969,841 Equipment for Chip Project 12,532,980 - - - 12,532,980 Vehicles 937,307 - - - 937,307 Land 2,550,166 - - - 2,550,166 Work in progress 48,296,285 - - - 48,296,285 Total 6,963,617,166 1,445,546,401 (4,761,491) 62,913,837,533 71,318,239,609
Accumulated depreciation Building and facilities - main office (3,383,015) (90,208) - (262,140,990) (265,614,213) Buildings and facilities (52,000,199) (9,264,554) 246,239 - (61,018,514) Furniture and equipment (1,707,981,721) (580,130,377) 374,678 - (2,287,737,420) Equipment for Chip Project (12,532,980) - - - (12,532,980) Vehicles (937,307) - - - (937,307) Total (1,776,835,222) (589,485,139) 620,917 (262,140,990) (2,627,840,434) Net 5,186,781,944 856,061,262 (4,140,574) 62,651,696,543 68,690,399,175
28 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Once SUDEBAN approval was received in April 2017, the Bank recorded the revaluation of its main office for the total amount of the primary equity (Tier I) at December 31, 2016 for Bs 62,913,837,000, increasing the value of property and equipment and revaluation adjustment of property and equipment, shown in equity for the same amount. During the six-month period ended June 30, 2017, the Bank recorded Bs 262,141,000 in the income statement in connection with the depreciation expense of revaluation.
During the six-month period ended June 30, 2017, the Bank recorded depreciation expense of Bs 851,626,000 (Bs 424,691,000 during the six-month period ended December 31, 2016), shown in the income statement under general and administrative expenses (Note 19).
Work in progress is mainly in respect of the construction or remodeling of Bank offices.
Below are the original useful lives and average remaining useful lives by type of asset:
Average Useful remaining life useful life (Years)
Building and facilities - main office 40 26 Buildings and facilities 40 37 Furniture and equipment 4-10 3
10. Other assets
Other assets comprise the following:
June 30, December 31, 2017 2016 (In bolivars)
Deferred expenses of office facilities, leasehold improvements and other, net of accumulated amortization of Bs 1,940,114,558 (Bs 1,350,202,190 at December 31, 2016) (Note 2) 15,062,308,608 7,785,432,973 Stationery and office supplies 6,918,069,232 2,573,718,888 Insurance and other prepaid expenses 5,924,124,461 970,957,012 Accounts receivable from other credit card companies 5,921,874,555 2,821,763,261 Advances to technology vendors, construction contractors and other 4,171,769,650 2,557,940,747 Prepaid taxes 2,481,526,477 3,329,974,852 Other accounts receivable 2,050,955,590 827,874,699 Software, net of accumulated amortization of Bs 854,334,484 (Bs 615,863,270 at December 31, 2016) 1,201,288,882 1,569,784,343 Pending items and main office, branches and agencies 869,056,974 397,933,271 Other items to be adjusted from transactions with derivative instruments 651,075,482 - Prepaid advertising 254,741,744 43,652,630 Advances and guarantee deposits 133,252,720 131,514,970 Deferred income tax (Note 17) 105,536,971 - Goodwill on acquisition of shareholding, net of accumulated amortization of Bs 108,258,467 (Bs 180,044,363 at December 31, 2016) 22,963,897 232,677,200 Other 61,273,690 45,223,300 Provision for other assets (69,288,808) (40,549,327) 45,760,530,125 23,247,898,819
The balance of pending items and main office, branches and agencies mainly comprises operations that, due to their nature, cannot be immediately imputed to a definitive account, as well as lending operations between Bank offices that are being identified and have not yet been definitively recorded at monthly cutoff. Most of these operations clear during the first few days of the following month. Debit transactions with these same characteristics are included under accruals and other liabilities (Note 16).
29 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
In addition, at June 30, 2017, pending items and main office, branches and agencies also comprise spot transactions not yet cleared for Bs 37,538,000 (Bs 44,519,000 at December 31, 2016) and recording and control of pending cards for Bs 362,000 (Bs 176,237,000 at December 31, 2016).
Prepaid taxes mainly include payment of income tax, withholding tax and municipal taxes.
Amortization of deferred expenses and goodwill during the six-month period ended June 30, 2017 amounted to Bs 1,057,149,000 (Bs 914,114,000 during the six-month period ended December 31, 2016) and is shown under general and administrative expenses (Note 19).
During the six-month period ended June 30, 2017, the Bank recorded expenses from the provision for other assets of Bs 33,304,000 (Bs 11,274,000 during the six-month period ended December 31, 2016), shown in the income statement under sundry operating expenses.
The movement in the provision for other assets is shown below:
June 30, December 31, 2017 2016 (In bolivars)
Balance at the beginning of the six-month period 40,549,327 29,602,877 Provided in the six-month period 33,303,804 11,274,063 Release of provision (127,742) (319,173) Write-offs of unrecoverable accounts (4,436,581) (8,440) Balance at the end of the six-month period 69,288,808 40,549,327
11. Deposits
Deposits comprise the following:
June 30, December 31, 2017 2016 (In bolivars)
Demand deposits 1,857,369,066,416 929,238,397,295 Other demand deposits Cashier’s checks 12,521,032,016 4,853,120,334 Trust liabilities (Note 25) 23,043,338,389 6,744,397,273 Other demand deposits 398,787,752 256,065,607 Certified checks 11,032,329 7,274,259 Advance collections from credit card holders (Note 25) 47,579,319 39,879,005 Judicial deposits 595,583,577 553,356,746 Housing savings fund liabilities 137,349,321 39,781,950 Reimbursable collections 13,813 941 36,754,716,516 12,493,876,115 Savings deposits 422,234,208,398 283,822,443,756 Time deposits 166,945,067 311,063,967 Restricted deposits Dormant savings accounts 460,866,479 342,709,926 Dormant checking accounts 195,665,805 132,403,568 Guarantee time deposits 1,161,873 1,161,646 Other restricted deposits 30,657 28,680 657,724,814 476,303,820 2,317,182,661,211 1,226,342,084,953
30 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Deposits bear interest at the rates shown below:
June 30, 2017 December 31, 2016 Deposits Deposits Deposits Deposits in bolivars in U.S. dollars in bolivars in U.S. dollars Minimum Maximum Minimum Maximum Minimum Maximum Minimum Maximum rate rate rate rate rate rate rate rate % % % % % % % %
Type of deposit Interest-bearing checking accounts 0.01 1.00 0.02 0.02 0.01 1.00 0.02 0.02 Savings deposits 12.50 16.00 - - 12.50 16.00 - - Time deposits 14.50 14.50 0.10 0.15 14.50 14.50 0.10 0.15 Restricted deposits 0.01 16.00 0.10 1.47 0.01 16.00 0.10 1.47
Below is the classification of time deposits by maturity
June 30, 2017 December 31, 2016 In bolivars % In bolivars %
Up to 30 days 40,152,573 24 109,874,274 35 31 to 60 days 27,587,229 16 61,528,042 20 61 to 90 days 19,421,525 12 58,126,003 19 91 to 180 days 52,138,430 31 80,394,480 26 181 to 360 days 27,645,310 17 1,083,976 - Over 360 days - - 57,192 - 166,945,067 100 311,063,967 100
At June 30, 2017, deposits include Bs 48,063,332,000 from the Venezuelan government and other government agencies, equivalent to 2.07% of total deposits (Bs 23,747,475,000, equivalent to 1.94% at December 31, 2016).
12. Deposits and liabilities with Banco Nacional de Vivienda y Hábitat (BANAVIH)
Deposits and liabilities with BANAVIH comprise the following:
June 30, December 31, 2017 2016 (In bolivars)
Interest-free demand deposits with BANAVIH 9,683,726 186,112 Other liabilities with BANAVIH 301 115 9,684,027 186,227
Funds received from BANAVIH are used to finance loans. Other liabilities with BANAVIH are in respect of funds received to subsidize the initial installment of loans granted. Demand deposits are in respect of funds received to be assigned by BANAVIH (Note 25).
13. Borrowings
Borrowings comprise the following:
x June 30, December 31, 2017 2016
(In bolivars) x Borrowings with Venezuelan financial institutions Demand deposits 110,904,594 73,750,368 Borrowings with foreign financial institutions Demand deposits 136,670,998 132,097,891
247,575,592 205,848,259
31 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Maturities of borrowings, up to one year, are as follows:
June 30, December 31, 2017 2016 (In bolivars)
Up to 6 months 247,575,592 205,848,259
14. Other liabilities from financial intermediation
Other liabilities from financial intermediation comprise the following:
June 30, December 31, 2017 2016 (In bolivars)
Other items to be adjusted from transactions with derivative instruments 69,691,660 - Liabilities with credit card merchants 1,463,707 3,483,527 Other 47,439 47,439 71,202,806 3,530,966
15. Interest and commissions payable
Interest and commissions payable comprise the following:
June 30, December 31, 2017 2016
(In bolivars)
Expenses payable on deposits Time deposits 6,320,092 24,753,064 Interest-bearing checking accounts 413,254 2,679,944 Other (Note 2) 11 20 6,733,357 27,433,028
16. Accruals and other liabilities
Accruals and other liabilities comprise the following:
June 30, December 31, 2017 2016 (In bolivars)
Suppliers and other accounts payable 37,663,629,703 20,819,898,953 Provision for contingencies and other 16,475,895,348 7,807,039,497 Income tax (Note 17) 9,728,762,400 8,306,623,053 Employee profit sharing, vacation and bonuses 8,446,049,218 3,744,595,845 Interest collected in advance on the loan portfolio and commissions 6,868,077,583 2,520,507,451 Collected and withheld taxes 6,088,078,232 2,057,410,386 Direct financial liabilities 3,804,093,857 - Accounts payable to Inversiones Platco, C.A. (Note 27) 1,016,298,741 37,694,753 Tax on large financial transactions and other 976,540,973 265,008,698 Labor contributions 357,039,716 137,840,147 Provision for the Antidrug Law (Note 33) 299,950,091 285,794,968 Commissions payable 195,178,386 83,967,746 Pending items and main office, branches and agencies 116,718,668 48,401,954 Deferred income from loan portfolio 93,918,233 80,272,165 Deferred gain on rights, sale of property and other 49,219,405 49,245,091 Sales option 9,575,830 3,156,119 Other accounts payable to clients 1,337,779 1,374,502 Deferred income tax (Note 17) - 464,185,830 92,190,364,163 46,713,017,158
32 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
At June 30, 2017 and December 31, 2016, the provision for contingencies and other mainly includes accrued expenses from unbilled services received, other accruals for human resources and the provision for cashier’s checks written off due to aging.
17. Taxes
a) Tax expense The tax expense comprises the following:
Six-month periods ended June 30, December 31, 2017 2016 (In bolivars)
Taxes Current In Venezuela 9,728,762,400 4,257,874,503 Deferred In Venezuela (569,722,800) 1,928,729,014 9,159,039,600 6,186,603,517
Venezuelan Income Tax Law This Law establishes, among other things, regulations concerning a proportional tax on dividends, worldwide income taxation, international fiscal transparency regulations and transfer pricing.
The Bank’s tax year ends on December 31. For the six-month period ended June 30, 2017, the main differences between income/loss recognized for accounting and tax purposes arise from shareholdings, provisions, prepaid expenses and accruals that are normally tax deductible in subsequent periods, nontaxable income and tax exempt income from National Public Debt Bonds and other securities issued by the Bolivarian Republic of Venezuela.
For the six-month period ended June 30, 2017, the Bank estimated an income tax expense of Bs 9,728,762,000.
At June 30, 2017, the Bank has extraterritorial tax losses of up to 25% of annual income amounting to Bs 163,273,682, of which Bs 75,982,000 may be carried forward until December 31, 2017, Bs 81,127,000 until December 31, 2018 and Bs 6,164,553 until December 31, 2019.
The following is a reconciliation between book expense and tax expense for the year ended December 31, 2016:
Statutory tax rate (%) 40 x (Thousands of bolivars)
Book income before tax 27,927,252 a Notional tax expense based on book income in Venezuela computed at the effective tax rate 11,170,901 Differences between notional tax expense and actual tax expense Net effect of shareholdings 38,024 Net effect of exemption of securities issued or guaranteed by the Venezuelan government (2,580,495) Other assets (1,364,143) Nondeductible provisions Loan portfolio, net 1,733,624 Other provisions 1,314,981 Other effects, net (2,362,762) 7,950,130
33 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Transfer pricing Venezuelan Income Tax Law establishes transfer-pricing regulations. According to these regulations, taxpayers that conduct transactions with related parties abroad are required to calculate income, costs and deductions applying the methodologies set out in the Law, report results obtained through a special return, and keep supporting documentation and information related to transfer-pricing calculation for these transactions. Accordingly, the Bank filed transfer-pricing returns for information purposes.
b) Deferred tax asset (liability) Below is a summary of deferred income tax.
The deferred tax asset at June 30, 2017 comprises the following:
(In bolivars)
Cash and due from banks 35,478,835 Loan portfolio (604,004,799) Property and equipment, office setup expenses and other (1,118,125,130) Other assets 1,763,233,164 Labor-related provisions 1,037,432,316 Income collected in advance (13,687,478) Other provisions (1,205,863,879) Deferred tax asset (Note 10) 105,536,971
The deferred tax liability at December 31, 2016 comprises the following:
(In bolivars)
Property and equipment, office setup expenses and other (193,250) Other assets 1,048,753,150 Other provisions (1,205,309,474) Loan portfolio (553,497,132) Income collected in advance (15,097,395) Labor-related provisions 1,189,529,931 Deferred tax liability (Note 16) 464,185,830
The Bank has a model which considers the historic financial performance, taxable income projections and the future realization of existing temporary differences, among others. This model is used to assess the recoverability of deferred tax assets or probable settlement of deferred tax liabilities. This assessment is based on approved business plans, among others, and includes management judgment on the assumptions used, which may vary from one six-month period to the next.
18. Employee benefits and employee benefit plan
a) Length-of-service benefits At December 31, 2016, date of the last actuarial study, the actual premises used to determine length-of- service benefit obligations are as follows:
Financial Discount rate (%) 7 Salary increase rate (%) -
Demographic Mortality table for active employees GAM (1971) Disability table PDT (1985)
34 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
At December 31, 2016, date of the last actuarial study, the additional length-of-service benefit obligation is as follows:
(In bolivars)
Balance at December 31, 2015 204,479 Service cost 13,866 Interest cost 268,380 Benefits paid (365,614) Remeasurement 1,334,043 Balance at December 31, 2016 1,455,154
The estimated net cost of the retrospective length-of-service benefit for the second semester of 2017 is Bs 5,034,563,000, calculated based on actuarial studies conducted in December 2016.
b) Supplementary Savings Plan Since 2006, the Bank maintains a plan for its employees and those of its Venezuelan subsidiaries entitled “Plan de Ahorro Previsional Complementario Mercantil” (Supplementary Savings Plan), which replaced the defined benefit plan entitled “Plan Complementario de Pensiones de Jubilación” (Supplementary Defined Benefit Plan). Only active employees have the option of subscribing to the new plan or remaining in the Supplementary Defined Benefit Plan.
For the six-month period ended June 30, 2017, expenses in connection with this plan amount to Bs 359,225,000 (Bs 175,566,000 for the six-month period ended December 31, 2016), calculated based on actuarial studies conducted in December 2016.
c) Supplementary Defined Benefit Plan and post-retirement benefits The Supplementary Defined Benefit Plan and post-retirement benefits for eligible employees are based on a minimum 10-year length-of-service period and a minimum retirement age. The retirement pension is based on the employee’s average annual salary over the last three years of employment preceding retirement and is payable at a maximum of 60% of this average salary.
For the six-month period ended June 30, 2017, expenses in connection with the Supplementary Defined Benefit Plan and post-retirement benefits amounted to Bs 250,000,000 (Bs 67,500,000 at December 31, 2016), calculated based on actuarial studies conducted in December 2016.
At December 31, 2016, date of the last actuarial study, assets, obligations and results of the Supplementary Defined Benefit Plan and post-retirement benefits for both plans are as follows:
Supplementary Post- Defined retirement Benefit Plan benefits (Thousands of bolivars)
Annual variation in projected benefit obligation Benefit obligation 440,576 535,121 Service cost 899 32,775 Interest cost 640,363 823,574 Remeasurement (92,386) 544,396 Benefits paid (113,462) (103,473) Projected benefit obligation 875,990 1,832,393
35 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Supplementary Post- Defined retirement Benefit Plan benefits (Thousands of bolivars)
Annual variation in restricted plan assets (1) Opening fair value of assets 86,920 98,453 Remeasurement and yield (153,349) 226,262 Bank contribution - 132,906 Transfer between plans 326,268 (326,268) Benefits paid (113,462) (103,472) Closing fair value of assets 146,377 27,881
Components of net benefit cost for the year Service cost 899 32,775 Interest cost 640,363 823,574 Yield from plan assets (159,638) (142,787) Net benefit cost 481,624 713,562
(1) The breakdown of plan assets is shown according to the accounting bases described in Note 2.
Financial position balances at December 31 are shown below:
Supplementary Defined Benefit Plan 2016 2015 2014 2013 2012 (Thousands of bolivars)
Financial position at year end Present value of obligations (DBO) (875,990) (440,576) (90,222) (67,248) (137,616) Assets of external fund supporting the plan 146,377 86,920 132,906 141,805 137,616 (Projected obligation)/excess of assets (729,613) (353,656) 42,684 74,557 -
Post-retirement benefits 2016 2015 2014 2013 2012 (Thousands of bolivars)
Financial position at year end Present value of obligations (DBO) (1,832,393) (535,121) (131,653) (119,540) (75,717) Assets of external fund supporting the plan 27,881 98,454 69,095 71,604 40,900 Projected obligation (1,804,512) (436,667) (62,558) (47,936) (34,817)
At December 31, 2016, date of the last actuarial study, the actual assumptions used to determine benefit obligations are as follows:
Supplementary Post- Defined retirement Benefit Plan benefits
Discount rate (%) 7 7 Increase in medical expenses (%) (1) - 10
(1) This assumption only applies to the post-retirement benefit plan.
36 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
At December 31, 2016, date of the last actuarial study, a hypothetical increase or decrease of 1% in the main actuarial assumptions would impact the value of the projected obligations of the plans as follows:
Supplementary Post- Defined Benefit Plan retirement benefits Increase Decrease Increase Decrease (Thousands of bolivars)
Discount rate 62,929 77,772 409,694 570,715 Increase in medical expenses - - 527,561 392,151
Below is a breakdown of the assets supporting the plans of MERCANTIL and its subsidiaries at December 31, 2016, date of the last actuarial study, shown in conformity with the accounting bases described in Note 2:
(Thousands of bolivars)
Cash and due from banks 2,741 Investments in available-for-sale securities (1) 168,921 Interest receivable 1,665 Other assets 931 Total assets 174,258
(1) Securities quoted in an active market.
At June 30, 2017, the fair value of these assets, in conformity with accounting standards applicable to Fundación BMA (VEN NIF), is Bs 18,069,207,000 (Bs 4,595,267,000 at December 31, 2016); these assets may be used for both plans and may only be distributed among their beneficiaries.
The Bank through its employee benefit plans is exposed to a variety of risks (market, credit and operational risks), which are minimized by applying risk management policies and procedures (Note 30).
The Bank’s policy to determine investment assets includes regular consultation with its internal advisors. The expected long-term rate of return on plan assets is updated periodically, taking into consideration asset allocations, historic returns and current economic conditions. The fair value of plan assets is affected by general market conditions. If actual returns on plan assets differ from expected returns, actual results may differ from initial estimates.
The average length of the Supplementary Defined Benefit Plan and post-retirement benefits is 6 and 34 years, respectively.
The projection of future undiscounted payments of the post-retirement benefit plans are as follows:
1 2 to 5 Over 5 year years years Total (Thousands of bolivars)
Supplementary Defined Benefit Plan 93,139 359,499 1,023,131 1,475,769 Post-retirement benefits 1,112,660 6,789,429 819,076,522 826,978,611 Total 1,205,799 7,148,928 820,099,653 828,454,380
37 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
d) Long-term stock option plan MERCANTIL and certain subsidiaries in Venezuela and abroad offer a stock option plan to eligible officers approved by the Board of Directors’ Compensation Committee. These shares are allotted over three-year periods and awarded annually. Fundación BMA manages the plan and sets up trust funds with the shares on behalf of members once these shares have been assigned and subsequently awarded to eligible officers based on individual allotments approved in accordance with plan regulations. During each administrative phase and until the shares are actually acquired by officers, cash dividends declared in respect of these shares are received by Fundación BMA and stock dividends by the participants.
According to the long-term nature of the plan, officers must be active employees of the Bank in order for shares to be awarded to them. At June 30, 2017 and December 31, 2016, the plan has no current phases. Plan restructuring is currently being analyzed for continuity purposes.
The Special Plan of Extraordinary Stock Recognition of MERCANTIL Employees was designed in 2015 and allocated 318,677 Class “A” common shares and 237,013 Class “B” common shares, which are partially restricted for sale for four years and employees may annually dispose of 25%.
At June 30, 2017, all program shares are available and deposited in the trust fund with Mercantil Seguros, C.A. that Fundación BMA set up for such purpose. A breakdown of these shares is shown below:
Number of shares Class “A” Class “B” Total
Trust fund 1,408,000 1,055,249 2,463,249
19. General and administrative expenses
General and administrative expenses comprise the following:
Six-month periods ended June 30, December 31, 2017 2016 (In bolivars)
Maintenance of property and equipment 8,926,618,583 5,104,824,258 Transportation and surveillance 8,277,662,073 3,296,419,378 Software licenses and maintenance 4,157,562,678 2,697,426,028 Taxes, fines and contributions 3,645,449,262 2,340,603,457 Sundry general expenses 3,644,365,362 1,893,398,619 Outsourcing, fees and other 2,931,978,168 1,544,862,860 Services and supplies 2,742,992,095 1,406,238,978 Transportation and communications 1,598,817,879 834,958,467 Depreciation of property and equipment (Note 9) 851,626,129 424,691,465 Amortization of deferred expenses 847,435,299 882,683,102 Leases 665,173,584 588,963,009 Amortization of goodwill (Note 10) 209,713,305 31,430,481 Advertising 183,534,759 227,257,160 Legal 26,256,874 5,950,498 Insurance for property and equipment 15,416,286 51,038,127 Other 37,422,689 30,601,502 38,762,025,025 21,361,347,389
38 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
20. Other operating income
Other operating income comprise the following:
Six-month periods ended June 30, December 31, 2017 2016 (In bolivars)
Service commissions 37,355,653,413 18,816,704,280 Gain on sale of investment securities 846,367,708 1,080,707,862 Trust fund commissions 305,075,442 206,026,621 Income from equity in subsidiaries and affiliates (Note 7) 74,534,062 - Exchange gain (Note 24) 5,205,574 883,024,893 38,586,836,199 20,986,463,656
21. Other operating expenses
Other operating expenses comprise the following:
Six-month periods ended June 30, December 31, 2017 2016 (In bolivars)
Service commissions 17,956,618,664 7,010,027,131 Loss on sale of investment securities 171,190,485 496,692,126 Amortization of premium on investment securities (Note 4) 159,776,481 163,688,063 Loss from equity in subsidiaries and affiliates (Note 7) 97,394,489 38,312,354 Exchange loss (Note 24) 31,447,579 74,412,146 Other 107,905,367 - 18,524,333,065 7,783,131,820
22. Extraordinary expenses
Extraordinary expenses comprise the following:
Six-month periods ended June 30, December 31, 2017 2016 (In bolivars)
Donations made by the Bank (Note 28) 188,043,816 91,297,422 Loss from claims 159,356,685 117,187,822 Loss from theft and fraud 12,193,242 33,010,577 Other 7,350,190 4,493,788 366,943,933 245,989,609
23. Equity
a) Capital stock At June 30, 2017 and December 31, 2016, the Bank’s paid-in capital amounts to Bs 292,415,038 and is represented by 159,480,029 Class “A” common shares and 132,935,009 Class “B” common shares with limited voting rights, all with a par value of Bs 1. At June 30, 2017, Mercantil Servicios Financieros, C.A. has 159,374,223 Class “A” common shares and 132,875,865 Class “B” common shares, representing 99.94% of the Bank’s capital stock.
39 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
The capital stock of Bs 292,415,038 is the result of the first phase of the capital stock increase agreed at the Special Shareholders’ Meeting of October 20, 2015, in respect of which 24,354,805 new shares were issued (13,281,513 Class “A” shares and 11,073,292 Class “B” shares), with a par value of Bs 1 each. This increase included the payment of a premium amounting to Bs 117.67 per share, to be recorded under premium on capital contributions for a total amount of Bs 2,865,829,904. Consequently, the Bank’s equity was increased by Bs 2,890,184,709. This increase was authorized by SUDEBAN in July 2016.
In September 2016, the second phase of the capital stock increase agreed at the Special Shareholders’ Meeting of October 20, 2015 was approved, in respect of which 36,534,426 new shares were issued (19,924,487 Class “A” and 16,609,939 Class “B” shares), with a par value of Bs 1. This increase included the payment of a premium amounting to Bs 162.91 per share, to be recorded under premium on capital contributions for a total amount of Bs 5,951,823,340. Consequently, the Bank’s equity was increased by Bs 5,988,357,766. To date, approval from SUDEBAN is pending.
At a Special Shareholders’ Meeting in March 2017 it was approved to increase subscribed and paid-in capital by up to Bs 80,000,000, divided into up to 44,000,000 Class “A” common shares and up to 36,000,000 Class “B” common shares, with a par value of Bs 1 each. SUDEBAN deadline to execute the increase was August 31, 2017. At the same Shareholders’ Meeting, the Bank’s Board of Directors was authorized to define, approve and decide on the other terms, conditions, characteristics and issues in connection with the issue.
The Board of Directors has approved two phases to increase subscribed and paid-in capital. The first phase in March 2017 for Bs 18,267,219, through the issue of up to 18,267,219 common shares with a par value of Bs 1 each, divided into 9,962,242 Class “A” common shares and 8,304,977 Class “B” common shares, including the payment of a premium amounting to Bs 219.45 per share, for a total amount of Bs 4,008,741,210. The second phase took place in April 2017 for up to Bs 20,876,825, divided into 11,385,421 Class “A” common shares and 9,491,404 Class “B” common shares, with a par value of Bs 1 each, including the payment of a premium amounting to Bs 231.73, for a total amount of Bs 4,837,786,657. Contributions made by shareholders in both phases are recorded under contributions pending capitalization, awaiting approval from SUDEBAN.
At a Special Shareholders’ Meeting in June de 2017, it was approved to increase capital through the capitalization of a share premium, taking the par value of shares from Bs 1 to Bs 10.80 each; this capitalization is awaiting approval from SUDEBAN.
At June 30, 2017 and December 31, 2016, the Bank complies with minimum paid-in capital requirements for universal banks of Bs 170,000,000.
b) Retained earnings and dividends on shares Below is a summary of dividends declared and paid on common shares:
Amount Date of approval at per share Type of dividend Shareholders’ Meeting in bolivars Payment date
Ordinary October 2016 9.00 May 2017
SUDEBAN establishes a requirement to set aside an equity reserve of 50% of income for each period to restricted surplus, exclusively for capital increase purposes. In February 2015, the concepts for which SUDEBAN could authorize the use of this reserve were expanded to include covering deficit or equity losses, creating provisions, offsetting deferred expenses, as well as costs and goodwill generated by mergers. During the six-month period ended June 30, 2017, the Bank reclassified to restricted surplus Bs 10,095,237,000 (Bs 5,258,714,000 during the six-month period ended December 31, 2016), equivalent to 50% of the Bank’s net individual income at that date.
40 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
At June 30, 2017, restricted surplus of Bs 38,316,116,000 (Bs 28,243,740,000 at December 31, 2016) includes Bs 8,673,000 in respect of losses from subsidiaries and affiliates (Bs 14,188,000 in respect of income from subsidiaries and affiliates at December 31, 2016. During the six-month period ended June 30, 2017, the Bank recorded losses from equity in subsidiaries and affiliates of Bs 22,860,000 (losses of Bs 38,312,000 at December 31, 2016).
c) Capital reserve Appropriation to legal reserve In accordance with its bylaws and the Law on Banking Sector Institutions, the Bank records biannually an appropriation to the legal reserve equivalent to 20% of net income for the six-month period until the reserve reaches 50% of its capital stock. When the legal reserve has reached this amount, the Bank’s appropriation to the legal reserve will be 10% of net income for each six-month period until the reserve reaches 100% of its capital stock.
Appropriation to other mandatory reserves SUDEBAN establishes a requirement for banks to set aside 0.5% of their capital stock biannually to the Social Contingency Fund, with a charge to unappropriated surplus, until the reserve reaches 10% of such capital (Notes 4 and 35).
d) Risk-based capital ratio Ratios required and maintained by the Bank, calculated based on its published financial statements in accordance with SUDEBAN rules, are shown below:
June 30, December 31, 2017 2016 Required Maintained Maintained % % % Equity to risk-weighted assets and contingent operations 12.00 14.36 13.08 Equity to total assets 9.00 12.53 11.15
In September 2013, SUDEBAN established that banking institutions should adapt the capital to risk asset ratio of 10% at December 31, 2014. In October 2014, SUDEBAN deferred compliance with this percentage, keeping it at 9%. During the year ended December 31, 2015, SUDEBAN granted an exception in the calculation of this ratio, allowing the exclusion from assets of the entire balance maintained at each month closing as legal reserve with the BCV. In April 2016, SUDEBAN granted a new exception in the calculation of the aforementioned ratio, which consists in excluding from total assets deposits and cash and due from banks of the Bank maintained with the BCV, as well as bonds and debt securities issued by the BCV and Petróleos de Venezuela, S.A. and including in equity the amounts for general allowance and countercyclical allowance for loan portfolio and microcredits. Likewise, SUDEBAN allowed to include these allowances in primary equity (Level I) for calculation of the capital to risk-weighted asset and contingent operation ratio.
In December 2016, SUDEBAN granted an exception to the banking system in the calculation of the capital adequacy ratio, by temporarily allowing deduction of pending cash items from total assets, as well as the variation of the sub-account bills and coins as compared to November 2016. To calculate risk- weighted ratio, pending cash items will be computed at 0% (formerly 50%). This exception has been extended by the regulatory entity on a monthly basis; the last one was made in August 2017.
41 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
24. Financial assets and liabilities in foreign currency
a) Exchange control regime Since February 2003, the Venezuelan government established an exchange control regime managed by the Commission for the Administration of Foreign Currency (CADIVI), currently National Foreign Trade Center (CENCOEX).
In March 2013, the Venezuelan government established the Supplementary Foreign Currency Administration System (SICAD), a foreign currency auction system through which individuals and companies may offer and purchase foreign currency when convened by the BCV, taking into consideration the Nation’s objectives and economic needs.
In March 2014, the Venezuelan government created the Alternative Currency Exchange System (SICAD II), a system that allowed the trade of foreign currency both in cash and securities.
SICAD II was eliminated in February 2015. A new exchange system, called the Marginal Foreign Exchange System (SIMADI), was established in which universal banks and exchange offices may trade foreign currency in cash. Purchase and sale exchange rates of foreign currency on this market will be freely agreed upon by the parties, prior authorization of the exchange rate and the client by the BCV.
A new protected exchange rate (DIPRO) for the food, health, sports, culture and academic sectors, among others, and a supplementary floating exchange rate (DICOM) for other areas of the economy, were established in March 2016. Furthermore, it was resolved that SIMADI would continue to operate until it is substituted by a new system to process transactions at the DICOM exchange rate. The BCV shall establish the operating conditions for DICOM.
The DICOM exchange rate system was established in May 2017. This is a foreign currency auction system through which the BCV, individuals and private-sector companies may offer and purchase foreign currency. Public entities may only participate as bidders. Companies may purchase, on a monthly basis, an amount equivalent to 30% of their average monthly gross income of the prior fiscal year, up to a maximum of US$400,000; individuals may purchase up to US$500 per quarter.
b) Applicable exchange rates The prevailing exchange rate from February 2013 through March 2016 was Bs 6.2842/US$1 (purchase) and Bs 6.30/US$1 (sale). In April 2016, the BCV established that as from the March 2016 period end, the financial statements and the recording of foreign currency assets and liabilities of entities belonging to the banking, insurance and securities sectors will be measured at the DIPRO exchange rate of Bs 9.9750/US$1 (purchase) and Bs 10/US$1 (sale).
At June 30, 2017 and December 31, 2016, the exchange rate resulting from the last SICAD auction was Bs 13.50/US$1.
At December 31, 2016, the daily variable average exchange rate based on supply and demand in SIMADI was Bs 672.0772/US$1.
At June 30, 2017, the DICOM exchange rate was Bs 2,633.40/US$1, which is the lowest bid price proposal by foreign currency buyers awarded in the last auction. Exchange rates in each auction are set based on a system of monitored currency bands.
42 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
c) Net global position in foreign currency The Bank’s balance sheet includes the following balances of financial assets and liabilities in foreign currency, denominated mainly in U.S. dollars, stated at the exchange rates described in Note 2:
June 30, 2017 December 31, 2016 Transaction Equivalent Transaction Equivalent Branch in in thousands Branch in in thousands abroad Venezuela Total of bolivars abroad Venezuela Total of bolivars (Thousands of U.S. dollars)
Assets Cash and due from banks 16,187 33,974 50,161 500,356 15,307 34,553 49,860 497,354 Investment securities 25,227 21,193 46,420 463,040 10,924 25,062 35,986 358,960 Loan portfolio - 10,865 10,865 108,378 - 20,859 20,859 208,069 Interest and commissions receivable 3 532 535 5,337 2 885 887 8,848 Investments in subsidiaries and affiliates - 166 166 1,656 - 162 162 1,616 Other assets 347 14,776 15,123 150,852 21 15,709 15,730 156,907 Total assets 41,764 81,506 123,270 1,229,619 26,254 97,230 123,484 1,231,754
Liabilities Customer deposits 270 11,036 11,306 112,777 270 9,094 9,364 93,406 Interest and commissions payable 1 - 1 10 - - - - Accruals and other liabilities 146 9,393 9,539 95,152 133 6,674 6,807 67,900 Total liabilities 417 20,429 20,846 207,939 403 15,768 16,171 161,306
The estimated effect of every Bs 1/US$1 increase in the exchange rate of Bs 9.975/US$1 at June 30, 2017 would be an increase in assets and equity of Bs 123,270,000 and Bs 102,424,000, respectively (an increase in assets and equity of Bs 123,484,000 and Bs 107,313,000, respectively, at December 31, 2016).
Below is a reconciliation of the Bank’s net monetary position in foreign currency:
June 30, December 31, 2017 2016 (Thousands of U.S. dollars)
Assets less liabilities, transaction in Venezuela 61,078 81,462 Foreign currency trade commitments (119) (387) To exclude Sovereign Bonds as per the BCV rules (8,911) (12,891) Computable portion of capital assigned to branch abroad as per the BCV 3,650 73,028 Position determined, computable as per the BCV rules 55,698 141,212 Maximum limit established by the BCV (30% of the previous month equity) 4,308,244 1,747,612 Margin in relation to authorized amount 4,252,546 1,606,400
The BCV excludes from the maximum limit that may be maintained by banks in foreign currency (30% of equity of the previous month) a portion of capital and income of the branch for US$47,932,000 and securities issued by the Bolivarian Republic of Venezuela for US$8,911,000 (Sovereign Bonds), with a reference value in foreign currency and payable in bolivars (TICC) of Bs 8,600,000 (Bs 7,435,000 at December 31, 2016).
During the six-month period ended June 30, 2017, the net exchange loss from revaluation of the foreign currency position amounted to Bs 26.242.000 (net exchange gain of Bs 808,613,000 during the six- month period ended December 31, 2016) (Notes 20 and 21).
43 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
25. Memorandum accounts
Memorandum accounts comprise the following:
June 30, December 31, 2017 2016 (In bolivars)
Contingent debtor accounts Guarantees granted (Notes 26 and 30) 893,571,228 851,267,604 Tourism loan commitments (Note 30) 38,858,203 887,911,331 Letters of credit (Notes 26 and 30) 123,641,433 126,177,934 Investment securities under repurchase agreement (Notes 4 and 30) 24,500,000 10,800,000 Other contingencies (Notes 26 and 30) 1,467,028,376 1,229,376,239 Transactions with derivative instruments 22,410,338,934 - Automatic lines of credit (Note 26) 14,123,273,278 - 39,081,211,452 3,105,533,108
Assets received in trust 70,398,309,240 46,105,061,092
Other special trust services 6,729,853 7,052,161
Other debtor memorandum accounts Guarantees received 1,342,904,171,580 732,526,160,725 Unused lines of credit (Notes 26 and 30) 149,235,076,457 87,473,305,343 Valuables received in custody (1) 21,424,021,765 22,640,916,002 Collections 205,365,628 204,888,773 Other control accounts Guarantees pending release 612,516,393,549 186,327,333,657 Returned checks 524,882,532,826 329,371,469,564 Rights for spot purchases of securities 7,843,719,957 14,165,706,169 Uncollectible accounts written off 4,873,308,517 4,196,020,914 Unconfirmed letters of credit (Note 5) 1,644,767,142 1,516,041,693 Interest receivable 988,346,679 765,916,246 Foreign currency purchase commitments 1,816,281 1,816,281 Credit card loans granted (CENCOEX) 42,223,081 42,223,081 Real property written off (Note 9) 27,150,573 27,477,235 Foreign currency sale commitments (307,454,003) (242,792,217) Other 9,570,059,155 11,786,607,646 1,162,082,863,757 547,957,820,269 2,675,851,499,187 1,390,803,091,112
Other debtor control accounts 3,678,722 3,680,014
(1) Valuables received in custody of the following institutions: BCV, Caja Venezolana de Valores, Clearstream Banking, S.A. and UBS International Bank.
44 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
a) Assets received in trust Trust fund accounts include the following balances according to the combined financial statements of the trust:
June 30, December 31, 2017 2016 (In bolivars)
Assets Cash and due from banks 23,211,458,988 6,906,101,465 Investments securities 14,001,131,751 16,472,290,054 Loan portfolio 32,904,053,305 22,444,166,588 Interest and commissions receivable 180,466,176 198,442,896 Assets received for administration 7,234,457 7,234,457 Other assets 93,964,563 76,825,632 Total assets 70,398,309,240 46,105,061,092
Liabilities and Equity Liabilities Fees and other accounts payable 268,291,603 216,893,122 Other liabilities 314,360 182,533 Total liabilities 268,605,963 217,075,655 Equity 70,129,703,277 45,887,985,437 Total liabilities and equity 70,398,309,240 46,105,061,092
Trust fund equity is classified as follows:
June 30, December 31, 2017 2016 (In bolivars)
Trust fund Length-of-service benefits 60,254,881,546 39,385,509,106 Savings fund 4,891,829,852 2,735,360,964 Administration 3,032,824,587 2,244,358,586 Guarantee and custody 1,412,100,346 1,042,985,725 Investment 538,066,946 479,771,056 70,129,703,277 45,887,985,437
Trust fund Private sector 47,849,220,335 31,488,738,570 Public sector 22,280,482,942 14,399,246,867 70,129,703,277 45,887,985,437
Investments in debt securities in bolivars and foreign currency are recorded at cost, which should be consistent with market value at the time of purchase. Discounts or premiums are amortized over the term of the securities as a credit or debit to interest income, resulting in a lower or greater effective yield on investments. Debt securities in foreign currency are adjusted to the prevailing official exchange rate. Investments in equity securities, in bolivars and foreign currency, are recorded at cost. In accordance with certain trust agreements, investments in debt or equity securities included in these trusts are maintained at amortized cost and adjusted at the prevailing official exchange rate.
At June 30, 2017 and December 31, 2016, trust funds do not exceed five time the Bank’s equity, in accordance with SUDEBAN Resolution No. 083-12 dated May 31, 2012.
At June 30, 2017, trust funds contributed by government entities represent 32%, and those by the private sector 68% (31% and 69%, respectively, at December 31, 2016).
45 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Investment securities included in trust fund accounts comprise the following:
June 30, 2017 December 31, 2016 Book Fair Book Fair value value value value (In bolivars)
1) Securities issued or guaranteed by the Venezuelan government National Public Debt Bonds, with annual yield at between 9.88% and 18%, maturing between November 2017 and July 2033, and a par value of Bs 9,907,629,523 (yield at between 9.40% and 18%, maturing between March 2017 and July 2033, and a par value of Bs 9,894,815,346 at December 31, 2016) 10,890,554,881 12,677,386,616 (1) (a) 10,900,228,181 12,141,416,050 (1) (a) Principal and Interest Covered Bonds (TICC), with 5.25% annual yield, maturing in March 2019, and a par value of US$3,367,138 payable in bolivars at the official exchange rate (yield at between5.25% and 6.25%, maturing between April 2017 and March 2019, and a par value of Bs 113,696,138 at December 31, 2016, payable in bolivars at the official exchange rate) 33,960,208 33,671,380 (1) (a) 1,134,485,638 1,135,260,279 (1) (a) Treasury Notes in foreign currency, with annual interest at between 7% and 7.65%, maturing between December 2018 and April 2025,and a par value of US$27,000 269,325 154,538 (1) (d) 269,325 156,437 (1) (d) 10,924,784,414 12,711,212,534 12,034,983,144 13,276,832,766 2) Debt securities issued by foreign public and private-sector agencies Debt securities issued and guaranteed by government agencies of the United States of America, maturing between July and September 2017, and a par value of US$4,875,500 (maturing in March 2017 and a par value of US$5,020,500 at December 31, 2016) 48,598,251 48,593,843 (2) (d) 50,036,561 50,022,347 (2) (d) Bonds issued by Petróleos Mexicanos (PEMEX), with 5.75% annual interest, maturing in March 2018 and a par value of US$1,050,000 10,690,993 10,731,195 (2) (d) 10,852,808 10,857,508 (2) (d) Bonds issued by foreign public-sector agencies (governments of Mexico, Colombia and Panama), with annual interest at between 5.13% and 11.75%, maturing between January 2017 and February 2020, and a par value of US$794,000 (maturing between January 2017 and February 2020, and a par value of US$1,524,000 at December 31, 2016) 8,488,718 8,646,488 (2) (d) 15,656,958 15,723,982 (2) (d) 67,777,962 67,971,526 76,546,327 76,603,837 3) Debt securities issued by Venezuelan private-sector companies Domínguez y Cía., S.A., with 17.50% annual interest, maturing in March 2020, and a par value of Bs 210,000,000 210,000,000 199,611,720 (1) (e) - - Toyota Services de Venezuela, C.A., with annual yield at between 13.92% and 18.50%, maturing between February 2018 and October 2021, and a par value of Bs 135,600,000 (annual yield at between 14.27% and 18.50%, maturing between February 2018 and October 2021, and a par value of Bs 135,600,000 at December 31, 2016) 135,600,000 128,136,210 (1) (e) 135,600,000 133,914,854 (1) (e) Automercados Plaza’s, C.A., with 18% annual yield, maturing in March 2020, and a par value of Bs 120,000,000 120,000,000 115,338,600 (1) (e) - - Envases Venezolanos, S.A., with annual yield at between 15.86% and 17.17%, maturing between December 2017 and February 2019, and a par value of Bs 100,000,000 (annual yield at between 16.32% and 17.94%, maturing between December 2017 and February 2019 at December 31, 2016) 100,000,000 96,931,400 (1) (e, f) 100,000,000 99,350,640 (1) (e, f) 565,600,000 540,017,930 235,600,000 233,265,494 4) Investments issued by Venezuelan non-financial public-sector companies Inversiones La Previsora, C.A., 22,150 common shares, with a par value of Bs 0.40 each 8,922 8,882 (3) (I) 8,922 8,882 (3) (I) Siderúrgica Venezolana, S.A. (SIVENSA), 1,658 common shares, with a par value of Bs 2 each 3,316 4,145,000 (4) (l) 3,316 2,321,199 (4) (l) C.A. Electricidad de Caracas, 1 common share, with a par value of Bs 0.1 - 1 (3) (e) - 1 (3) (e) 12,238 4,153,883 12,238 2,330,082 5) Investments issued by Venezuelan non-financial private-sector companies H.L. Boulton & Co., S.A., 637 common shares, with a par value of Bs 10 each 6,370 56,693 (4) (l) 6,370 56,693 (4) (i) 6) Investments in Venezuelan banks and other financial institutions Certificates of deposit Banesco, C.A. Banco Universal, with annual yield at between 0.05% and 0.10%, maturing between July and August 2017, and a par value of Bs 1,828,466,500 (annual interest at between 0.75% and 1%, maturing in January 2017, and a par value of Bs 2,424,796,602 at December 31, 2016) 1,828,466,500 1,828,466,500 (3) (c) 2,424,796,602 2,424,796,602 (3) (c) Banco Exterior, C.A. Banco Universal, with annual interest at between 0.05% and 4%, maturing between July and August 2017, and a par value of Bs 440,024,889 (0.50% annual interest, maturing in January 2017, and a par value of Bs 32,596,178 at December 31, 2016) 440,024,889 440,024,889 (3) (j) 32,596,178 32,596,178 (3) (j) Banco Plaza, C.A. Banco Universal, with 7.50% annual interest, maturing in July 2017, and a par value of Bs 50,585,035 (with 8.50% annual interest, maturing in January 2017, and a par value of Bs 54,613,200 at December 31, 2016) 50,585,035 50,585,035 (3) (i) 54,613,200 54,613,200 (3) (i) 100% Banco, Banco Universal, C.A., with 2% annual interest, maturing in July 2017, and a par value of Bs 50,077,778 (with 8.50% annual interest, maturing in January 2017, and a par value of Bs 55,099,739 at December 31, 2016) 50,077,778 50,077,778 (3) (h) 55,099,739 55,099,739 (3) (h) Bancrecer, S.A. Banco Microfinanciero, with 7.50% annual interest, maturing in July 2017, and a par value of Bs 20,234,014 (with 8.50% annual interest, maturing in January 2017, and a par value of Bs 22,175,451 at December 31, 2016) 20,234,014 20,234,014 (3) (k) 22,175,451 22,175,451 (3) (k) Banco del Caribe, C.A. Banco Universal, with 0.15% annual interest, maturing in July 2017, and a par value of Bs 9,734,861(1% annual interest, maturing in January 2017, and a par value of Bs 458,990,341 at December 31, 2016) 9,734,861 9,734,861 (3) (g) 458,990,341 458,990,341 (3) (g) BBVA Banco Provincial, S.A. Banco Universal, with annual interest at between 0.25% and 0.50%, maturing in January 2017, and a par value of Bs 1,033,035,621 at December 31, 2016) - - 1,033,035,621 1,033,035,621 (3) (f) Shares in Venezuelan banks Banco Venezolano de Crédito, C.A. Banco Universal, 48 common shares, with a par value of between Bs 100 and Bs 2,365 27,450 77,156 (5) (l) 27,450 77,156 (5) (l) Banco de Venezuela, S.A., Banco Universal, 378 common shares, with a par value of Bs 0.1 each 38 323,190 (4) (e) 38 94,500 (4) (e) 2,399,150,565 2,399,523,423 4,081,334,620 4,081,478,788 7) Investments in foreign banks and other financial institutions Certificates of deposit Black Rock Merrill Lynch Investment Managers, maturing in July 2017, and a par value of US$4,390,998 (maturing in January 2017, with a par value of US$4,391,715 at December 31, 2016) 43,800,202 43,800,202 (3) (b) 43,807,355 43,807,355 (3) (b) 14,001,131,751 15,766,736,191 16,472,290,054 17,714,375,015
(1) Based on the present value of estimated future cash flows. (2) Market value based on confirmation from custodian. (3) Shown at par value. (4) Market value based on prices listed on the Caracas Stock Exchange. (5) Delisted from the Caracas Stock Exchange; last quoted price used.
46 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Custodians of investment securities (a) Central Bank of Venezuela. (b) Merrill Lynch, Pierce, Fenner & Smith. (c) Banesco, C.A. Banco Universal. (d) Clearstream Banking, S.A. (e) Caja Venezolana de Valores, S.A. (f) BBVA, Banco Provincial Banco Universal. (g) Banco del Caribe, C.A, Banco Universal. (h) 100% Banco, Banco Universal, C.A. (i) Banco Plaza, C.A. Banco Universal. (j) Banco Exterior, C.A. Banco Universal. (k) Bancrecer, S.A, Banco Microfinanciero. (l) Other custodians.
At June 30, 2017, the market value of some securities issued by the Bolivarian Republic of Venezuela is lower than amortized cost by Bs 458,000 (Bs 31,069,000 at December 31, 2016). The trust fund considers that these losses are temporary since they relate to normal fluctuations of investments in the stock markets. Management expects that these securities will not be realized at a price lower than the book value. In addition, the trust fund has the ability to hold these securities for a sufficient period of time to recover unrealized losses.
Below is the classification of investment securities according to maturity:
June 30, 2017 December 31, 2016 Book Fair Book Fair value value value value (In bolivars)
Up to six months 2,925,750,808 2,944,421,029 5,286,059,756 5,291,835,674 Six months to one year 383,014,005 419,428,468 696,447,130 767,259,012 One to five years 3,775,758,474 4,441,167,028 2,564,238,058 2,984,230,993 Over five years 6,916,562,368 7,957,108,744 7,925,499,015 8,668,490,904 Without maturity 46,096 4,610,922 46,095 2,558,432 14,001,131,751 15,766,736,191 16,472,290,054 17,714,375,015
Investment securities are classified as follows:
June 30, December 31, 2017 2016 (In bolivars)
Non directed 13,810,263,787 16,274,008,333 Directed 190,867,964 198,281,721 14,001,131,751 16,472,290,054
Trust fund resources comprise the following:
June 30, 2017 December 31, 2016 Directed Non-directed Total % Directed Non-directed Total % (In bolivars) (In bolivars)
Securities issued or guaranteed by the Venezuelan government 133,925,408 10,790,859,007 10,924,784,415 78 105,836,831 11,929,146,313 12,034,983,144 73 Debt securities issued by foreign public or private-sector companies 13,096,258 54,681,703 67,777,961 1 48,591,439 27,954,887 76,546,326 1 Debt securities issued by Venezuelan public-sector companies 12,238 - 12,238 - 12,238 - 12,238 - Investments in Venezuelan private-sector companies and other investments 6,370 565,600,000 565,606,370 4 6,370 235,600,000 235,606,370 1 Deposits with other Venezuelan financial institutions 27,488 2,399,123,077 2,399,150,565 17 27,488 4,081,307,133 4,081,334,621 25 Deposits with other banks 43,800,202 - 43,800,202 - 43,807,355 - 43,807,355 - 190,867,964 13,810,263,787 14,001,131,751 100 198,281,721 16,274,008,333 16,472,290,054 100
The trust fund’s control environment includes policies and procedures to determine investment risks by entity and economic sector. In accordance with trust agreements, risks associated with investment securities of directed trusts are determined by the trustor.
47 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
The trust fund loan portfolio comprises the following:
June 30, December 31, 2017 2016 (In bolivars)
Loans to beneficiaries of Length-of-service benefit trust funds 32,393,655,314 21,913,296,262 Mortgage loans 509,396,249 529,868,557 Company loans 970,000 970,000 Loans to government agencies 31,742 31,769 32,904,053,305 22,444,166,588
Loans to beneficiaries of length-of-service benefit trust funds consist of loans granted to employees that are guaranteed by their length-of-service benefits, which are deposited in trust funds. These interest- free loans relate to trust fund plans of public and private-sector companies and have no fixed maturity.
The trust fund acts as trustee for termination benefit contracts of employees of the Bank and Mercantil Seguros, C.A. amounting to Bs 8,054,440,000 and Bs 1,171,003,000, respectively (Bs 5,334,440,000 and Bs 809,629,000, respectively, at December 31, 2016). The Bank is awaiting a response to a consultation made by SUDEBAN to the Supreme Tribunal of Justice about the obligation to place trust funds for employee termination benefits, as well as collective trust funds of related parties, in other financial institutions.
At June 30, 2017, loans to beneficiaries of length-of-service benefit trust funds include Bs 7,145,840,000 and Bs 1,053,528,000 in respect of loans granted to the Bank and Mercantil Seguros, C.A. employees, respectively (Bs 4,786,516,000 and Bs 731,403,000, respectively, at December 31, 2016).
At June 30, 2017, mortgage loans include Bs 508,987,000 in respect of guaranteed loans granted under the administration trust fund using resources from public entities (Bs 529,284,000 at December 31, 2016). This account also includes Bs 409,000 in respect of mortgage loans granted to beneficiaries of the length-of-service trust fund (Bs 584,000 at December 31, 2016).
Trust fund resources used to grant loans to companies (loan portfolio) are directed trusts and are recorded and valued as specified by SUDEBAN.
b) Financial instruments with off-balance sheet risks Transactions with derivative instruments The Bank enters into futures hedges for the purchase and sale of securities at a fixed price based on interest rates. Gains and losses resulting from these contracts for the six-month period ended June 30, 2017 amounted to Bs 1,862,191,000 and Bs 1,035,583,000, respectively (Bs 55,847,000 and Bs 124,046,000, respectively, during the year ended December 31, 2016), shown in the income statement under other interest income and other liabilities from financial intermediation, respectively.
The risk to which the Bank is exposed relates to noncompliance by counterparties with the terms laid down in the contracts, as well as variations in the price of securities and interest rates. The Bank’s control environment includes policies and procedures for rating exchange and interest rate risks and monitoring derivative financial instruments, as well as assessing credit risks related to other parties.
c) Debtor accounts from other special trust services (Venezuelan Housing Law) The Venezuelan Housing Policy Law appointed Banco Nacional de la Vivienda y Hábitat (BANAVIH) as the sole administrator of public and private funds to finance housing. Therefore, the financial institutions regulated by the General Law of Banks and Other Financial Institutions shall only act as financial operators that is, they shall collect contributions made to the Mandatory Housing Savings Fund and pay
48 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
them to the sole administrator, and grant loans after the required financial resources have been approved.
Assets, liabilities and results associated with resources from the Mandatory Housing Savings Fund are recorded under memorandum accounts.
During the six-month period ended June 30, 2017, the Bank recorded income from financial transactions of Bs 17,143,000, shown under income from other accounts receivable (Bs 13,468,000 during the six- month period ended December 31, 2016).
d) Other control accounts Other control accounts are mainly in respect of returned checks and guarantees pending release. At June 30, 2017 and December 31, 2016, these accounts also include US$5,408,000 equivalent to Bs 42,223,000 in respect of the balance receivable from CENCOEX for payments in foreign currency made by the Bank on behalf of the customers for credit card use abroad.
26. Credit-related commitments
The Bank has significant outstanding commitments related to letters of credit, guarantees granted, lines of credit and credit card limits to meet the needs of its customers and to manage its own risk resulting from interest rate variations. Since many of its credit limits may expire without being used, aggregate liabilities do not necessarily represent future cash requirements. Commitments to extend credit, letters of credit and guarantees granted by the Bank are recorded under memorandum accounts.
Guarantees granted After conducting a credit risk analysis, the Bank provides guarantees to certain customers within their line of credit. These guarantees are issued to a beneficiary and may be executed if the customer fails to comply with the terms of the agreement. These guarantees mature after more than one year and earn annual commissions between 0.50% and 5% of their value. Commissions are recorded monthly while the guarantees are in force.
Letters of credit Letters of credit usually mature within 90 days and are renewable. They are generally issued to finance a trade agreement for the shipment of goods from a seller to a buyer. The Bank charges a fee of 0.50% of the amount of the letter of credit and records the latter under assets once it is used by the customer. Unused letters of credit and other similar liabilities are included under memorandum accounts.
The Bank has trademark license agreements for the use of Visa, MasterCard and Diners Club International credit cards. Visa and MasterCard agreements require the Bank to deposit collateral in foreign financial institutions. In addition, at June 30, 2017, stand-by letters of credit were pledged for MasterCard International and Visa International transactions amounting to US$7,300,000 and US$5,132,000, respectively (US$7,300,000 and US$5,116,000 at December, 31, 2016) recorded under other control accounts (Note 25).
Lines of credit granted The Bank grants lines of credit to customers subject to prior credit risk assessment and obtention of any guarantees required by the Bank. These agreements are for a specific period, provided that the clients do not fail to comply with the terms set forth therein. However, the Bank may exercise its option to cancel a credit commitment with a particular customer at any time.
Credit cards are issued for 3 years and are renewable. However, the Bank reserves the right to cancel a credit commitment with a particular customer at any time. The nominal credit card interest rate is variable and for the six-month period ended June 30, 2017 and December 31, 2016 was 29% per annum, respectively.
49 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
The Bank’s exposure to credit loss in the event of noncompliance by customers with terms for credit extension, letters of credit and guarantees is represented by the notional contractual amounts of these credit-related instruments. Credit policies applied by the Bank for credit commitment obligations are the same as for granting loans.
The Bank evaluates customer eligibility before granting credit. The amount of collateral provided, if required by the Bank, is based on customer credit assessment. The type of collateral varies, but may include accounts receivable, inventories, property and equipment, and investment securities.
At June 30, 2017 and December 31, 2016, in accordance with the Accounting Manual for Banking Institutions, the Bank has set aside general and specific provisions for contingent debtor accounts amounting to Bs 10,747,000.
Automatic lines of credit The Bank has obligations with beneficiaries of automatic lines of credit, granted to beneficiaries through an agreement. These commitments are irrevocable.
27. Balances and transactions with related companies
In the ordinary course of business, the Bank conducts commercial transactions with its shareholder, subsidiaries, affiliates and related companies, the effects of which are included in the financial statements. Certain transactions may have taken place on terms other than those that would characterize transactions between unrelated companies.
Below is a breakdown of the Bank’s balances with related companies:
a) Balance sheet
June 30, December 31, 2017 2016 (In bolivars)
Assets Cash and due from banks 202,627,002 228,213,050 Mercantil Bank, N.A. 108,597,407 227,447,335 Mercantil Bank (Panamá), S.A. 93,833,329 576,100 Mercantil Bank (Schweiz), A.G. 196,266 189,615 Investment securities 1,995,000 1,995,000 Short-term deposits (Note 4) Mercantil Bank, N.A. 1,995,000 1,995,000 Investments in subsidiaries and affiliates (Note 7) 4,308,604,840 4,327,955,326 Inversiones Platco, C.A. 4,070,616,367 4,129,544,548 Inversiones y Valores Mercantil V, C.A. 157,195,833 197,228,890 Proyecto Conexus, C.A. 80,792,640 1,181,888 Other assets 276,674,870 220,140,897 Fideicomiso Mercantil, C.A. Banco Universal 267,797,370 216,407,318 Mercantil Financiadora de Primas, C.A. 8,877,500 3,557,500 Mercantil Bank (Curacao), N.V. - 176,079 Total assets 4,789,901,712 4,778,304,273
50 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
June 30, December 31, 2017 2016 (In bolivars)
Liabilities Deposits 31,637,850,580 12,546,991,814 Checking accounts 31,302,299,425 12,381,613,495 Non-interest-bearing checking accounts 7,342,642,388 5,562,916,222 Mercantil Seguros, C.A. 1,983,825,928 1,145,786,882 Mercantil Servicios Financieros, C.A. 1,926,527,907 805,929,121 Inversiones Platco, C.A. 1,194,523,441 474,039,875 Cestaticket Accor Services, C.A. 927,929,437 1,879,177,561 Servicio Panamericano de Protección, C.A. 608,427,339 541,201,507 Mercantil Financiadora de Primas, C.A. 292,500,710 198,357,274 Mercantil Planes Administrados, C.A. 161,856,755 338,236,193 Mercantil Inversiones y Valores, C.A. 69,197,877 95,602,735 Fundación BMA 46,994,304 10,678,142 Fundación Mercantil 32,888,319 23,973,041 Mercantil Merinvest, C.A. 27,474,633 3,158,366 Mercantil Sociedad Administradora de Entidades de Inversión Colectiva, C.A. 24,924,267 10,616,652 Mercantil Servicios de Inversión, C.A. 22,087,968 8,029,173 Inversiones y Valores Mercantil VI, C.A. 19,754,719 12,597,030 Mercantil Arte y Cultura, C.A. 1,735,402 5,687,242 Inversiones y Valores Mercantil V, C.A. 585,037 473,892 Servibien, C.A. 560,860 937,046 Mercantil Merinvest Casa de Bolsa, C.A. 480,120 8,074,246 Innovex, C.A. 333,906 360,244 Mercantil Bank (Panamá), S.A. 33,459 - Interest-bearing checking accounts 23,043,338,389 6,744,397,273 Fideicomiso Mercantil, C.A. Banco Universal 23,043,338,389 6,744,397,273 Demand deposits and certificates 916,318,648 74.300.000 Mercantil Planes Administrados, C.A. 550,000,000 - Mercantil Seguros, C.A. 309,268,648 - Inversiones y Valores Mercantil V, C.A. 57,050,000 74,300,000 Savings accounts 335,551,155 165,378,319 Fundación Mercantil 212,893,506 22,052,459 Mercantil Merinvest Casa de Bolsa, C.A. 121,298,812 142,045,418 Fundación BMA 1,358,837 1,280,442 Other liabilities 1,019,863,107 39,076,729 Inversiones Platco, C.A. (Notes 7 and 16) 1,016,298,741 37,694,753 Fundación BMA 2,086,431 706,887 Fundación Mercantil 1,413,852 592,835 Mercantil Inversiones y Valores, C.A. 60,027 60,027 Inversiones y Valores Mercantil V, C.A. 4,056 22,227 Total liabilities 32,657,713,687 12,586,068,543
51 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
b) Income statement
Six-month periods ended June 30, December 31, 2017 2016 (In bolivars)
Interest income 22,484 3,583,514 Income from cash and due from banks 22,484 49,551 Mercantil Bank, N.A. 22,484 49,551 Other interest income - 3,533,963 Mercantil Bank, N.A. - 3,533,963 Interest expense 8,441,686 180,439,233 Mercantil Merinvest Casa de Bolsa, C.A. 6,020,729 6,034,326 Fundación Mercantil 2,089,287 2,654,530 Mercantil Planes Administrados, C.A. 131,258 5,420,555 Inversiones y Valores Mercantil V, C.A. 103,602 6,342,515 Fundación BMA 82,829 223,500 Inversiones y Valores Mercantil VI, C.A. 13,976 229,252 Mercantil Servicios Financieros, C.A. 5 158,621,521 Mercantil Inversiones y Valores, C.A. - 861,905 Mercantil Arte y Cultura, C.A. - 50,075 Servibien, C.A. - 1,054 Operating income 582,228,994 337,088,687 Fideicomiso Mercantil, C.A. Banco Universal 305,075,442 206,026,611 Mercantil Financiadora de Primas, C.A. 197,585,555 124,638,230 Proyectos Conexus, C.A. 74,534,062 - Mercantil Bank (Panamá), S.A. 2,460,172 - Mercantil Bank, N.A. 2,383,227 - Mercantil Servicios Financieros, C.A. 125,693 6,327,739 Inversiones Platco, C.A. 22,521 10,741 Mercantil Inversiones y Valores, C.A. 16,361 21,632 Inversiones y Valores Mercantil V, C.A. 7,229 49,742 Mercantil Merinvest Casa de Bolsa, C.A. 6,579 3,500 Mercantil Arte y Cultura, C.A. 3,389 7,074 Mercantil Planes Administrados, C.A. 2,336 510 Fundación Mercantil 2,306 - Mercantil Merinvest, C.A. 2,046 - Fundación BMA 1,221 - Servibien, C.A. 855 2,908 Operating expenses 6,541,731,488 1,826,749,690 Inversiones Platco, C.A. 6,446,256,811 1,763,007,776 Mercantil Inversiones y Valores, C.A. 56,045,016 56,362,247 Inversiones y Valores Mercantil V, C.A. 38,466,308 6,040,005 Mercantil Bank (Curacao), N.V. 473,114 770,869 Mercantil Bank, N.A. 430,381 438,581 Mercantil Bank (Panamá), S.A. 59,858 - Proyecto Conexus, C.A. - 130,212 Extraordinary expenses 186,044,000 86,117,000 Fundación Mercantil (Note 28) 186,044,000 86,117,000
52 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
c) Trust fund
June 30, December 31, 2017 2016 (In bolivars)
Assets Cash and due from banks Mercantil, C.A. Banco Universal (Note 11) 23,043,338,389 6,744,397,273 Mercantil Bank, N.A. 44,458 59,553 Total assets 23,043,382,847 6,744,456,826
Liabilities Fees payable Mercantil, C.A. Banco Universal 267,797,370 216,407,318
d) Transactions The Bank’s significant transactions with related companies are described below:
Cash and due from banks, deposits and other liabilities from financial intermediation are mainly in respect of debit or credit balances of checking accounts at the Bank’s agencies or related banks abroad.
Other assets include interest receivable and other accounts receivable.
Expenses payable to Mercantil Bank, N.A. are mainly in respect of data processing, personnel administration and consulting services, and were incurred by the Bank’s offices abroad.
Mercantil Servicios de Inversión, C.A. (MSI), subsidiary of MERCANTIL, is authorized by the Venezuelan Securities Superintendency (SNV) to provide investment services and manage investment portfolios. The Bank has engaged MSI as a specialist to optimize yields on investments of trustors. For the provision of this service, the trust fund (principal), grants MSI (agent) special powers for portfolio management and disposal. Trustee responsibility is not delegated as part of the service for which MSI charges an annual commission on the portfolio collections. During the six-month period ended June 30, 2017, the Bank paid MSI Bs 24,311,000 in this connection (Bs 16,824,000 during the six-month period ended December 31, 2016).
At June 30, 2017 and December 31, 2016, fees payable include commissions payable to the Bank as set out in trust fund agreements signed by trustors and the trust fund. This commission is calculated on funds deposited in fiduciary funds and is deducted from each trustor’s individual investment; therefore, it is shown net of interest income. During the six-month period ended June 30, 2017, the Bank recorded income of Bs 305,075,000 and has Bs 267,797,000 receivable in respect of these commissions (Bs 206,027,000 and Bs 216,407,000, respectively, at December 31, 2016).
The other liabilities with Inversiones Platco, C.A. are mainly in respect of services for the processing of electronic payment means.
28. Fundación Mercantil
The Bank and other subsidiaries of MERCANTIL sponsor “Fundación Mercantil” founded in December 1988 to promote educational, cultural, artistic, social, religious and scientific programs, either directly or through donations and contributions to third parties. During the six-month period ended June 30, 2017, the Bank made contributions of Bs 186,044,000 (Bs 86,117,000 during the six-month period ended December 31, 2016), shown under extraordinary expenses (Note 22).
53 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
29. Maturity of financial assets and liabilities
The assets and liabilities are classified according to maturity as follows:
June 30, 2017 December 31, June 30, December 31, June 30, December 31, June 30, December 31, Beyond 2017 2018 2018 2019 2019 2020 2020 2020 Total (In bolivars)
Assets Cash and due from banks 1,055,589,598,743 ------1,055,589,598,743 Investment securities 48,126,374,600 9,185,736,358 73,254,226 630,490,574 15,127 1,796,763,565 2,888,346,049 69,957,287,437 132,658,267,936 Loan portfolio 526,710,501,137 534,538,642,335 22,794,549,598 18,650,086,034 26,655,606,408 32,579,074,498 22,352,276,771 95,265,003,339 1,279,545,740,120 Interest and commissions receivable 10,198,840,155 ------10,198,840,155 Total financial assets 1,640,625,314,635 543,724,378,693 22,867,803,824 19,280,576,608 26,655,621,535 34,375,838,063 25,240,622,820 165,222,290,776 2,477,992,446,954
Liabilities Customer deposits 2,317,155,015,913 27,645,310 ------2,317,182,661,223 Liabilities with BANAVIH 9,684,027 ------9,684,027 Borrowings - 247,575,593 ------247,575,593 Other liabilities from financial intermediation 71,202,806 ------71,202,806 Interest and commissions payable 6,733,357 ------6,733,357 Total financial liabilities 2,317,242,636,103 275,220,903 ------2,317,517,857,006
December 31, 2016 June 30, December 31, June 30, December 31, June 30, December 31, June 30, Beyond 2017 2017 2018 2018 2019 2019 2020 2020 Total (In bolivars)
Assets Cash and due from banks 568,394,325,205 ------568,394,325,205 Investment securities 20,497,509,735 31,745,974,103 1,383,086,821 25,610,011 1,391,205,035 15,232 985,528,018 75,641,803,960 131,670,732,915 Loan portfolio 250,635,687,208 162,345,158,472 25,799,351,476 26,104,118,470 12,205,341,690 33,909,064,499 9,171,829,825 94,683,529,036 614,854,080,676 Interest and commissions receivable 6,589,874,876 ------6,589,874,876 Total financial assets 846,117,397,024 194,091,132,575 27,182,438,297 26,129,728,481 13,596,546,725 33,909,079,731 10,157,357,843 170,325,332,996 1,321,509,013,672
Liabilities Customer deposits 1,226,340,943,785 1,083,976 57,192 - - - - - 1,226,342,084,953 Liabilities with BANAVIH 186,227 ------186,227 Borrowings 205,848,259 ------205,848,259 Other liabilities from financial intermediation 3,530,966 ------3,530,966 Interest and commissions payable 27,433,028 ------27,433,028 Total financial liabilities 1,226,577,942,265 1,083,976 57,192 - - - - - 1,226,579,083,433
30. Fair value of financial instruments
Below are the fair values of financial instruments maintained by the Bank:
June 30, 2017 December 31, 2016 Book Fair Book Fair value value value value (In bolivars)
Assets Cash and due from banks 1,055,589,598,743 1,055,589,598,743 568,394,325,205 568,394,325,205 Investment securities 132,658,267,936 133,767,652,218 131,670,732,915 132,113,838,834 Loan portfolio, net of provision 1,243,159,095,852 1,243,159,095,852 595,301,689,832 595,301,689,832 Interest and commissions receivable, net of provision 10,078,143,645 10,078,243,645 6,471,397,290 6,471,397,290 2,441,485,106,176 2,442,594,590,458 1,301,838,145,242 1,302,281,251,161
Liabilities Customer deposits 2,317,182,661,211 2,317,182,661,211 1,226,342,084,953 1,226,342,084,953 Deposits and liabilities with BANAVIH 9,684,027 9,684,027 186,227 186,227 Borrowings 247,575,592 247,575,592 205,848,259 205,848,259 Other liabilities from financial intermediation 71,202,806 71,202,806 3,530,966 3,530,966 Interest and commissions payable 6,733,357 6,733,357 27,433,028 27,433,028 2,317,517,856,993 2,317,517,856,993 1,226,579,083,433 1,226,579,083,433
Memorandum accounts Contingent debtor accounts 39,081,211,452 39,081,211,452 3,105,533,108 3,105,533,108
54 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
In the ordinary course of business, the Bank maintains financial instruments with off-balance sheet risks to meet the financial needs of its customers. The Bank’s main exposure is represented by the following commitments:
June 30, December 31, 2017 2016 (In bolivars)
Unused lines of credit 149,235,076,457 87,473,305,342 Transactions with derivative instruments 22,410,338,933 - Other contingencies 1,467,028,376 1,229,376,239 Guarantees granted 893,571,228 851,267,605 Letters of credit issued but not negotiated (Stand-by) 123,641,433 126,177,934 Tourism loan commitments 38,858,203 887,911,331 Investment securities acquired under repurchase agreements 24,500,000 10,800,000 174,193,014,630 90,578,838,451
The fair value of a financial instrument is defined as the amount for which the instrument could be exchanged between two knowledgeable, willing parties, other than in a forced transaction, involuntary liquidation or distress sale. Fair values for financial instruments with no available quoted market prices have been estimated using the present value of future cash flows of these financial instruments, based on the official exchange rate, or other valuation techniques and assumptions. These techniques are significantly affected by the assumptions used, including the discount rates, estimates of future cash flows, and the expectation of payments in advance. In addition, fair values presented do not purport to estimate the value of other income-generating activities or future business activities; that is, they do not represent the Bank’s value as a going concern.
Below is a summary of the most significant methods and assumptions used in estimating the fair values of financial instruments:
Short-term financial instruments Financial instruments, including derivatives, are recorded in the balance sheet under assets or liabilities at their respective market value. Short-term financial instruments, both assets and liabilities, are shown in the balance sheet at book value, which does not significantly differ from fair value due to their short- term maturity. These instruments include cash and due from banks, deposits with no fixed maturity and short-term maturity, other liabilities from financial intermediation with short-term maturity, and commissions and interest receivable and payable.
Investment securities The fair value of investment securities was determined using the present value of future cash flows of investment securities, quoted market prices, reference prices determined from trading operations on the secondary market and quoted market prices of financial instruments with similar characteristics. The equivalent in bolivars of the fair value of securities denominated in foreign currency was determined using the official exchange rate of Bs 9.975/US$1.
Loan portfolio Most of the Bank’s loan portfolio earns interest at variable rates that are revised frequently, generally between 30 and 90 days for most of the short-term portfolio. Allowances are made for loans with some risk of recovery. Therefore, in management’s opinion, the net book value of this loan portfolio approximates its fair value.
Deposits and long-term liabilities Deposits and long-term liabilities earn interest at variable rates. Therefore, Bank management considers fair value to be equivalent to book value.
55 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
31. Risk management
The Bank is mainly exposed to credit, market and operational risks. Below is the risk policy used by the Bank for each type of risk:
Credit risk Credit risk is the risk that a counterparty will default on its debts at maturity. The Bank monitors credit risk exposure by regularly analyzing the payment capabilities of its borrowers. The Bank structures the level of credit risk by establishing limits for individual or group borrowers. The Bank classifies risk exposure by risk category into direct, contingent and issuer risks.
Market risk Financial institutions encounter market risks when market conditions show adverse changes that affect the liquidity and value of financial instruments included in investment portfolios or contingent positions, including transactions with derivative instruments, and result in a loss for these financial institutions. Market risks mainly comprise two types of risk: price risk (including interest rate, foreign exchange and share price risks) and liquidity risk.
a) Price risk Price risk includes interest rate, foreign exchange and share price risks.
Interest rate risk is represented by changes in market interest rates with a potential impact on the Bank’s financial margin or equity.
To measure interest rate risk, the Bank monitors the variables affecting interest rate movements and financial assets and liabilities. The Bank regularly controls and mitigates existing exposure to risks.
Foreign exchange risk arises from fluctuations in the interest rates of international financial markets and variations in the exchange rates of other currencies with respect to the Venezuelan bolivar. The Bank sets limits on its individual currency and overall foreign exchange exposure, and on maximum and minimum positions.
b) Liquidity risk Liquidity risk is the risk that the Bank may not be able to meet its obligations with clients and financial market counterparties at any time or in any place or currency. To avoid this risk, the Bank conducts a daily review of its available resources.
To mitigate liquidity risk, the Bank sets limits as to the minimum funds that must be maintained in highly liquid instruments and interbank and financing facilities.
The Bank also conducts stress simulation tests to assess the behavior of assets and liabilities under different scenarios.
The Bank’s investment strategy is aimed at guaranteeing adequate liquidity levels. Excess cash is mainly invested in short-term instruments such as certificates of deposit with the BCV, debt securities issued by the Bolivarian Republic of Venezuela and other highly liquid financial obligations, within regulatory regulations.
Operational risk The Bank considers operational risk as the possibility of incurring direct or indirect losses as a result of inadequate or defective internal processes, deficient internal controls, human error, system failures or external events.
56 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
The operational risk management structure established by the Bank enables it to conduct internal processes for identification, assessment, quantification, monitoring and mitigation of operational risks across the organization. This structure also provides management with the information required to set priorities and aid the decision-making process.
Operational risk management at the Bank is a dynamic process conducted from a qualitative standpoint, by identifying risks and analyzing trigger factors, and from a quantitative standpoint, by identifying events, measuring their impact, monitoring the behavior of key risk indicators and analyzing scenarios. The information gathered from these processes serves as the basis to define and implement actions aimed at controlling and mitigating risks within the Bank.
32. Liabilities and contingencies
In the ordinary course of business, the Bank is defendant in various legal proceedings. The Bank is not aware of any other pending legal proceedings which could have a significant effect on its financial position or the results of its operations.
In tax matters, the Bank and its merged financial institutions have received additional income tax assessments from the Tax Authorities amounting to Bs 21,957,000, mainly due to disallowance of certain income considered nontaxable, expenses related to tax-exempt income, expenses for unpaid or late payment of withholdings, nondeductible expenses for uncollectible accounts, rejection of tax loss carryforwards and the calculation of inflation adjustment for tax purposes. The Bank also received additional tax assessments of Bs 3,341,000 in respect of withheld and late payments of value added tax (VAT). The Bank appealed alleging most of these assessments are not well grounded in law. The tax courts have not ruled on some of these assessments; those that went in favor of the Bank were appealed by the National Treasury and rulings are pending.
The Bank also received additional bank debit tax assessments amounting to Bs 23,508,000, which were appealed. In the opinion of Bank management and its legal advisors, these assessments are not well grounded in law.
In April 2008, the Bank was subject to a tax assessment of Bs 62,679,000 in respect of the proportional tax on dividends. In June 2008, the Bank filed a discharge claim with the Tax Authorities stating its legal arguments against this assessment. In December 2008, the National Integrated Customs and Tax Administration Service (SENIAT) confirmed this tax assessment and in January 2009 the Bank filed an appeal against the payment forms issued. In June 2011, SENIAT confirmed the tax assessment, which was appealed by the Bank in July 2011. In the opinion of Bank management and its legal advisors, there are legal grounds to uphold the inadmissibility of the assessment.
Bank management identified a maximum risk of Bs 51,804,000 in connection with the aforementioned assessments based on inadmissibility of monetary restatement and interest charges; hence a provision has been set aside to cover this amount.
In June 2008, the Bank was notified by BANAVIH, ascribed to the People’s Power Ministry for Housing, of an assessment of Bs 25,364,000 in respect of alleged differences in the contributions made under the Housing Loan Law. The Bank appealed this assessment in July 2008. In August 2008, BANAVIH ruled partially in favor of the Bank and reduced the assessment to Bs 11,647,000. However, in September 2008, the Bank appealed this decision. Simultaneously, since BANAVIH arrived at the ruling following procedures established in the Law on Administrative Proceedings instead of applying the procedures set out in the Master Tax Code, as required by the Instance Courts and the Supreme Tribunal of Justice, the Bank filed for and was awarded constitutional protection in December 2008 and February 2009, respectively. BANAVIH was ordered to follow the Master Tax Code to rule on the appeal filed by the Bank in September 2008, according to which the effects of the tax assessment would be suspended. In
57 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
the opinion of Bank management and its legal advisors, there are legal grounds to uphold the inadmissibility of the assessment.
In December 2012, the Bank was notified of a proceeding as joint guarantor filed in October 2011 amounting to Bs 3,338,000. A ruling was issued in October 2016, homologating the transaction and leaving the collateral without effect. The sentence is in the notification stage.
Bank management and its legal advisors believe that there are favorable expectations about the future resolution of this contingency, which they believe will not change next six-month period.
33. Money laundering prevention and terrorism financing
To comply with the Antidrug Law (formerly the Law on Narcotic and Psychotropic Substances), the Bank makes a contribution to the National Antidrug Fund (FONA) and develops programs or projects for employees and their families, approved by the National Antidrug Office (ONA), for the prevention of legal and illegal drug use (Note 16).
In addition, in compliance with SUDEBAN resolutions, the Bank has a Unit for the Prevention of Money Laundering and Terrorism Financing, and has appointed an Enforcement Officer for the Prevention and Control of Money Laundering and Terrorism Financing and a Committee for the Prevention and Control of Money Laundering and Terrorism Financing, designated by the Board of Directors in conformity with the Risk Management Integrated System (S.I.A.R.). This Unit is responsible for analyzing, monitoring and informing the Enforcement Officer of any possible money laundering and terrorism financing activities. Furthermore, the Bank has also appointed compliance officers for the different areas of the Bank exposed to risk, who are responsible for enforcing and supervising money laundering and terrorism financing prevention and monitoring regulations. Also, the Bank has an annual training program on money laundering and terrorism financing prevention for its employees.
34. Investments and loans granted in excess of legal limits
At June 30, 2017 and December 31, 2016, the Bank has not conducted transactions that exceed the limits set in the articles of the Law on Banking Sector Institutions.
35. Legal contributions
Social Bank Deposit Protection Fund (FOGADE) Venezuelan banks regulated by the Law on Banking Sector Institutions are required to pay fees to FOGADE. Among other things, FOGADE, guarantees customer deposits up to a given amount per depositor.
The Law on Banking Sector Institutions set the percentage of contributions to FOGADE at 0.75% of the bank’s total deposits at the previous six-month period closing.
These contributions will be paid through monthly premiums equivalent to one-sixth of this percentage. Contributions in this connection are shown under operating expenses.
Fee paid to the Superintendency of Banking Sector Institutions The Law on Banking Sector Institutions requires Venezuelan banks and financial institutions regulated by this Law to pay a special fee to support SUDEBAN operations.
At June 30, 2017 and December 31, 2016, the biannual fee is 0.08% of the average of the Bank’s assets for the last two months of the previous six-month period; it is payable monthly at one-sixth of the resulting amount for the six-month period. This fee is shown under operating expenses.
58 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2017 and December 31, 2016
Social Contingency Fund The Law on Banking Sector Institutions requires banks to create a trust fund representing 10% of their capital stock through biannual contributions of 0.5% of their capital. The purpose of this trust fund is to guarantee the payment of employee benefits in the event of the bank’s administrative liquidation. At June 30, 2017, the Bank maintains an investment of Bs 26,119,000, which includes contributions and interest at that date (Bs 24,100,000 at December 31, 2016) (Notes 4-d and 23).
Social contribution The Law on Banking Sector Institutions requires banks to earmark 5% of their gross pre-tax income to finance projects developed by communal councils and other forms of social organization. For the six- month period ended June 30, 2017, contributions in this connection amount to Bs 1,466,406,000 (Bs 834,644,000 at December 31, 2016).
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