Mercantil, C.A. Banco Universal (Subsidiary of Mercantil Servicios Financieros, C.A.)

Independent Auditor’s Report and Financial Statements June 30, 2019

Mercantil, C.A. Banco Universal Index to the financial statements June 30, 2019 and December 31, 2018

Pages

I - Independent Auditor’s Report 1 - 3 II - Financial statements 1 - 5 III - Notes to the financial statements 1 - Operations and regulatory environment 6 - 8 2 - Basis of preparation 8 - 16 3 - Cash and due from banks 16 4 - Investment securities 17 - 21 5 - Loan portfolio 22 - 24 6 - Interest and commissions receivable 24 7 - Investments in subsidiaries and affiliates 25 - 27 8 - Available-for-sale assets 27 9 - Property and equipment 28 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 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 - 37 19 - General and administrative expenses 38 20 - Other operating income 38 21 - Other operating expenses 39 22 - Extraordinary expenses 39 23 - Equity 39 - 42 24 - Financial assets and liabilities in foreign currency 42 - 44 25 - Memorandum accounts 44 - 49 26 - Credit-related commitments 50 - 51 27 - Balances and transactions with related companies 51 - 53 28 - Fundación Mercantil 54 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 33 - Money laundering prevention and terrorism financing 57 34 - Investments and loans granted in excess of legal limits 57 35 - Legal contributions 57 - 58

Mercantil, C.A. Banco Universal (Subsidiary of Mercantil Servicios Financieros, C.A.) Balance sheet June 30, 2019 and December 31, 2018

June 30, December 31, 2019 2018 (In bolivars)

Assets Cash and due from banks (Note 3) 1,083,644,477,045 74,958,012,463 Cash 28,704,474,214 2,534,565,048 Central Bank of Venezuela 800,978,447,635 43,349,590,754 Venezuelan banks and other financial institutions 8,892,646 150 Foreign and correspondent banks 246,943,798,761 27,301,929,964 Pending cash items 7,008,863,789 1,771,926,547 Investment securities (Note 4) 197,602,876,211 13,839,246,209 Deposits with the Central Bank of Venezuela and overnight deposits - 50,078,010 Investments in available-for-sale securities 147,217,122,131 5,771,511,975 Investments in held-to-maturity securities 314,936 315,855 Restricted investments 50,373,213,894 8,005,102,663 Investments in other securities 12,225,250 12,237,706 Loan portfolio (Note 5) 269,466,875,780 47,107,862,424 Current 273,187,602,832 48,045,696,715 Rescheduled 91,255 104,154 Overdue 1,579,747,071 211,671,908 (Allowance for losses on loan portfolio) (5,300,565,378) (1,149,610,353) Interest and commissions receivable (Note 6) 3,568,095,302 336,035,528 Interest receivable on investment securities 694,567,968 88,061,337 Interest receivable on loan portfolio 1,816,136,980 154,024,318 Commissions receivable 1,057,995,027 95,153,683 (Provision for interest receivable and other) (604,673) (1,203,810) Investments in subsidiaries and affiliates (Note 7) 8,409,864,951 372,779,852 Property and equipment (Note 9) 4,508,346 1,548,964 Other assets (Note 10) 129,925,966,442 7,695,026,520 Total assets 1,692,622,664,077 144,310,511,960

Memorandum accounts (Note 25) Contingent debtor accounts 267,293,757,026 38,853,397,071 Assets received in trust 201,351,726,989 17,631,390,152 Other debtor memorandum accounts 4,282,196,832,111 464,278,882,868 Other debtor control accounts 37 37 4,750,842,316,163 520,763,670,128

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, 2019 and December 31, 2018

June 30, December 31, 2019 2018 (In bolivars)

Liabilities and Equity Liabilities Deposits (Note 11) 979,090,802,540 91,091,750,414 Demand deposits 830,758,646,397 76,935,489,578 Non-interest-bearing checking accounts 619,048,949,991 58,319,813,826 Interest-bearing checking accounts 136,162,732,815 12,237,834,875 Checking accounts under Exchange Agreement No. 20 56,588,101,296 5,942,006,183 Demand deposits and certificates 18,958,862,295 435,834,694 Other demand deposits 32,779,391,747 1,637,172,404 Savings deposits 115,533,951,976 12,517,081,116 Time deposits 748 783 Restricted deposits 18,811,672 2,006,533 Deposits and liabilities with Banco Nacional de Vivienda y Hábitat (Note 12) 9,748 1,022 Borrowings (Note 13) 68,235,539,929 1,376,853 Venezuelan financial institutions, up to one year 68,235,527,371 1,367,981 Foreign financial institutions, up to one year 12,558 8,872 Other liabilities from financial intermediation (Note 14) 1,650,929 334,414 Interest and commissions payable (Note 15) 692,724,743 22,932 Expenses payable on deposits 11,249,743 22,932 Expenses payable on borrowings 681,475,000 - Accruals and other liabilities (Note 16) 246,924,842,140 14,369,206,704 Total liabilities 1,294,945,570,029 105,462,692,339

Equity (Note 23) Capital stock 2,924 2,924 Contributions pending capitalization 633,084 633,084 Capital reserves 3,173 3,158 Equity adjustments 377,565,995,333 37,156,702,429 Retained earnings 18,841,149,229 1,743,882,728 Unrealized gain (loss) on investment securities (Note 4) 1,269,310,305 (53,404,702) Total equity 397,677,094,048 38,847,819,621 Total liabilities and equity 1,692,622,664,077 144,310,511,960

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, 2019 and December 31, 2018

June 30, December 31, 2019 2018 (In bolivars)

Interest income 62,189,273,054 4,483,191,662 Income from cash and due from banks 1,523,044,481 4,008,516 Income from investment securities 3,248,219,883 57,953,599 Income from loan portfolio 36,381,873,340 2,577,573,168 Income from other accounts receivable 21,036,135,345 1,843,656,334 Other interest income 5 45 Interest expense (15,372,378,936) (199,058,778) Expenses from deposits (7,969,920,420) (164,635,574) Expenses from liabilities with the Central Bank of Venezuela (2,681,844,314) - Expenses from borrowings (4,292,940,752) (1,398,598) Expenses from other liabilities from financial intermediation - (31) Other interest expense (427,673,450) (33,024,575) Gross financial margin 46,816,894,118 4,284,132,884 Income from financial assets recovered (Note 5) 33,956,971 37,554,019 Expenses from uncollectible accounts and write-down of financial assets (Notes 2 and 5) (2,937,586,011) (984,590,957) Uncollectible loans and other accounts receivable (2,937,586,011) (984,590,957) Net financial margin 43,913,265,078 3,337,095,946 Other operating income (Note 20) 100,035,810,078 3,051,785,365 Other operating expenses (Note 21) (12,281,452,732) (584,102,240) Financial intermediation margin 131,667,622,424 5,804,779,071 Operating expenses (107,004,959,477) (3,091,060,763) Salaries and employee benefits (31,857,898,389) (827,645,589) General and administrative expenses (Note 19) (72,952,327,193) (2,213,233,724) Fees paid to the Social Bank Deposit Protection Fund (Note 35) (612,166,590) (15,371,205) Fees paid to the Superintendency of Banking Sector Institutions (Note 35) (1,582,567,305) (34,810,245) Gross operating margin 24,662,662,947 2,713,718,308 Income from available-for-sale assets (Note 8) 200,000 - Sundry operating income 2,499,866,808 46,705,676 Expenses from available-for-sale assets (Note 8) - (63) Sundry operating expenses (3,205,273,445) (508,425,156) Net operating margin 23,957,456,310 2,251,998,765 Extraordinary expenses (Note 22) (1,323,627,822) (28,717,755) Gross income before tax 22,633,828,488 2,223,281,010 Income tax (Note 17) (345,559,670) (376,782,422) Net income 22,288,268,818 1,846,498,588

Appropriation of net income Retained earnings 22,288,268,818 1,846,498,588

Provision for the Antidrug Law (Notes 16 and 33) 241,884,365 22,735,018

The accompanying notes are an integral part of the financial statements

Mercantil, C.A. Banco Universal Statement of changes in equity Six-month periods ended June 30, 2019 and December 31, 2018

Retained earnings Equity adjustments Unappropriated surplus Capital reserves Adjustments Equity Employee Contributions Other from adjustments from Adjustments benefit plan Unrealized Capital pending Legal mandatory translation of exchange from asset Restricted Unappropriated remeasurement gain (loss) Total stock capitalization reserve reserves subsidiaries fluctuations, net revaluation surplus earnings (Note 2-k) on investments equity (In bolivars)

Balances at June 30, 2018 2,924 633,084 2,924 219 102,733 102,943,977 1,044,403 16,580,389 16,659,955 135,734 168,033 138,274,375 Net income ------1,846,498,588 - - 1,846,498,588 Reserve for the Social Contingency Fund - - - 15 - - - - (15) - - - Unrealized loss on investments (Note 4) ------(53,572,735) (53,572,735) Restricted surplus from equity in subsidiaries and affiliates (Note 7) ------248,760,696 (248,760,696) - - - Translation adjustment of net assets of subsidiaries abroad - - - - (1,304,206) ------(1,304,206) Adjustment from exchange differences, net - - - - - 37,053,915,522 - - - - - 37,053,915,522 Adjustment from employee benefit plan remeasurement, net of deferred income tax ------(135,991,923) - (135,991,923) Reclassification of 50% of net income to restricted surplus (Note 23) ------798,868,939 (798,868,939) - - - Balances at December 31, 2018 2,924 633,084 2,924 234 (1,201,473) 37,156,859,499 1,044,403 1,064,210,024 815,528,893 (135,856,189) (53,404,702) 38,847,819,621 Net income ------22,288,268,818 - - 22,288,268,818 Cash dividends declared on common shares (Note 23) ------(15,290,733) - - (15,290,733) Reserve for the Social Contingency Fund - - - 15 - - - - (15) - - - Unrealized gain on investments (Note 4) ------1,322,715,007 1,322,715,007 Restricted surplus from equity in subsidiaries and affiliates (Note 7) ------3,494,638,542 (3,494,638,542) - - - Adjustment from exchange differences, net - - - - - 340,409,292,904 - - - - - 340,409,292,904 Adjustment from employee benefit plan remeasurement, net of deferred income tax ------(5,175,711,569) - (5,175,711,569) Reclassification of 50% of net income to restricted surplus (Note 23) ------9,396,815,131 (9,396,815,131) - - - Balances at June 30, 2019 2,924 633,084 2,924 249 (1,201,473) 377,566,152,403 1,044,403 13,955,663,697 10,197,053,290 (5,311,567,758) 1,269,310,305 397,677,094,048

Income per share (Note 2)

Six-month periods ended June 30, December 31, 2019 2018

Outstanding common shares 292,415,038 292,415,038

Net income per share Bs 76.2214 Bs 6.3147

The accompanying notes are an integral part of the financial statements

Mercantil, C.A. Banco Universal Cash flow statement Six-month periods ended June 30, 2019 and December 31, 2018

June 30, December 31, 2019 2018 (In bolivars)

Cash flows from operating activities Net income 22,288,268,818 1,846,498,588 Adjustments to reconcile net income to net cash provided by operating activities Equity in subsidiaries and affiliates, net 3,494,638,542 248,760,695 Allowance for losses on loan portfolio 2,932,200,000 983,580,000 Provision for interest receivable 5,386,011 1,010,199 Write-offs of uncollectible accounts (16,986,777) (2,374,529) Income tax provision 149,576,990 351,686,890 Deferred income tax 195,982,680 25,095,532 Provision for other assets 5,257 3,338 Write-offs against the provision for other assets - (13) Release of provision for other assets (2,295) (66) Other provisions 6,259,258,075 202,359,966 Depreciation of property and equipment 15,347,743 157,192 Amortization of deferred expenses and goodwill 1,027,521,788 2,677,049 Amortization of available-for-sale assets - 63 Net change in trading securities - 1,148,696 Accrual for length-of-service benefits 4,333,228,944 210,712,658 Payment of length-of-service benefits (254,905,080) (14,958,941) Net change in Deposits with the Central Bank of Venezuela and overnight deposits 50,078,010 (49,958,027) Interest and commissions receivable (1,750,891,415) (135,371,674) Other assets (122,543,460,980) (2,188,798,899) Interest and commissions payable 621,858,153 (5,979,257) Accruals and other liabilities 155,862,237,524 7,474,743,152 Net cash provided by operating activities 72,669,341,988 8,950,992,612 Cash flows from financing activities Net change in Deposits 834,192,114,740 82,956,161,827 Deposits and liabilities with Banco Nacional de Vivienda y Hábitat 8,726 899 Borrowings 49,735,906,525 (1,143,761,174) Other liabilities from financial intermediation 1,316,515 330,168 Dividends paid (15,290,733) - Net cash provided by financing activities 883,914,055,773 81,812,731,720 Cash flows from investing activities Loans granted during the period (465,196,524,954) (55,020,920,788) Loans collected during the period 324,433,977,278 17,323,353,159 Net change in Available-for-sale investments (109,758,227,167) (1,030,408,595) Held-to-maturity investments 919 941 Restricted investments 27,931,319,073 (7,984,788,979) Investments in other securities 12,456 6,393,143,496 Investments in subsidiaries and affiliates (9,831,121,553) (1,334,800,877) Property and equipment (18,307,125) (1,739) Net cash used in investing activities (232,438,871,073) (41,654,423,382) Cash and due from banks Net change 724,144,526,688 49,109,300,950 Effect of exchange fluctuations 284,541,937,894 25,029,064,483 At the beginning of the period 74,958,012,463 819,647,030 At the end of the period 1,083,644,477,045 74,958,012,463

Supplementary information on non-cash activities Translation adjustment of net assets of subsidiaries abroad - (1,304,206)

Exchange fluctuation 340,409,292,904 37,053,915,522

Adjustment of available-for-sale investments to market value 1,322,715,007 (53,572,735)

Taxes paid 360,273,734 4,312,052

Interest paid 14,679,677,125 199,149,792

Reclassification of provisions Interest and commissions receivable to allowance for losses on loan portfolio 5,984,136 2,280

The accompanying notes are an integral part of the financial statements

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

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, 2019, the Bank and its branch in Curacao have 4,746 employees (4,710 employees at December 31, 2018).

The Bank’s financial statements at June 30, 2019 and December 31, 2018 were approved by the Board of Directors on July 8 and January 8, 2019, respectively, and approved for issue by the Audit Committee on August 20 and February 19, 2019, 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 3 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 was 0.75% until August, 1% as from September, and 2% as from November 2018 and is applicable to debits made from bank accounts and operations without the mediation of financial institutions.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

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.

During the six-month period ended June 30, 2019, contributions in this connection amount to Bs 189,835,000 (Bs 16,139,000 at December 31, 2018), included under sundry operating expenses.

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.

Law for the Advancement of Science, Technology and Innovation This Law establishes that the country’s major corporations will annually earmark 0.5% of gross income generated in Venezuela in the prior year. It aims at financing projects, plans, programs and activities for the priority areas defined by the national authority responsible for matters related to science, technology and innovation and their applications. During the six-month period ended June 30, 2019, contributions in this connection amount to Bs 18,186,000 (Bs 20,000 at December 31, 2018), included under sundry operating expenses.

Law on Equity Tax The Law on Equity Tax was published in July 2019. This tax is levied upon net equity, equal to or higher than 150,000,000 tax units, of taxpayers who have been qualified by the Tax Administration as special taxpayers. The applicable tax rate was set at between 0.25% and 1.50%; it is payable on the net equity value at September 30 each year. This tax will not be deductible for income tax purposes.

Branch The Bank’s branch abroad, which has not been incorporated separately from the Bank, is subject to specific requirements of regulatory agencies in the countries where it operates 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.

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, 2019, the annual interest rate for lending operations may not exceed 36% and for credit card transactions 40%. (24% y 29%, respectively, at December 31, 2018). Financial institutions may only charge an additional 3% per annum on amounts overdue from clients.

In January 2019, the BCV announced changes to the maximum interest rates for loan operations: 22% for manufacturing, 12.66% for mortgages, 15% for tourism, 36% for other sectors and 40% for credit cards. For savings and time deposits, the minimum interest rate was set at 21% and 24%, respectively.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

The maximum interest rates for directed loan portfolios are as follows:

June 30, 2019 December 31, 2018 Agriculture 17% 13% Microcredits 36% 24% Tourism 12% or 15% 3.77% or 6.77% Mortgages 12.66% 4.66% to 10.66% Manufacturing i) 22% as the maximum interest rate for credit i) 18% as the maximum interest rate for credit operations for this sector; and ii) an annual interest operations for this sector; and ii) an annual interest rate not greater than 19.80% of the previous rate for rate not greater than 16.20% of the previous rate for loans earmarked for small and medium industries, loans earmarked for small and medium industries, state-owned industries, community industries, as well state-owned industries, community industries, as as joint ventures for manufacturing. well as joint ventures for manufacturing.

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 41%.

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, 2019 would increase by Bs 84,508,000 (increase by Bs 57,279,000 at December 31, 2018). 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. Inflation rates are not available since April 2019; therefore, the Bank has not prepared the supplementary information.

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 the end of this period. The assets, liabilities and equity of the subsidiary abroad are translated at the prevailing official exchange rate. Income accounts are translated at the average exchange rate for the period. According to SUDEBAN regulations, fluctuations in foreign currency balances are recorded in equity, except for smaller amounts resulting from fluctuations in other currencies with respect to the U.S. dollar, which are included in profit or loss. Furthermore, exchange gains may be included in the income statement

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

when there are no deficit balances in provisions or expenses pending offsetting with prior authorization from SUDEBAN. Under VEN NIF exchange gains and losses are included in the income statement.

4) Investments in trading and available-for-sale securities According to SUDEBAN rules, investments in trading securities may remain in this category for only 90 days from the date they were classified as held for trading and investments in available-for-sale securities may not remain in this category for more than 1 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, at fair value through equity and amortized cost.

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.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

10) Overdue and in-litigation loans Loans classified as overdue must be written off within 24 months after inclusion in this category. In-litigation loans are those in the legal collection process. Loans in litigation must be fully provided for after 24 months in the in-litigation category. In addition, overdue monthly loan installments that have been repaid must be reclassified to the category to which they pertained before being classified as overdue. Likewise, when a debtor repays pending loan installments of a loan in litigation, thereby terminating the lawsuit, the Bank 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 A general 1% allowance, except microcredits (2% allowance), and a countercyclical allowance equivalent to 0.75% of the balance of the gross loan portfolio at month end are established according to SUDEBAN rules. VEN NIF require the allowance for losses on the loan portfolio to be determined based on credit losses expected for the following 12 months, for the remaining term of the loan or for impaired financial assets.

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 1 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) 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

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

16) Leases Lease disbursements are expensed during the month in which they are incurred. Under VEN NIF, lessees are required to recognize a financial asset and a financial liability for all high-value leases over 12 months; depreciation is recognized separately from interest expenses attributable to the lease obligation in the results for the period.

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 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.

19) Transactions with derivative instruments Contracted amounts in transactions with derivative instruments, mainly for futures trading, are shown under memorandum accounts instead of in the balance sheet as required by VEN NIF (Note 25).

20) Commissions collected Commissions collected on loans granted are shown as income when collected, whereas under VEN NIF, they are deferred and shown as income over the term of the loan.

21) Interest income Interest on loans, investments and accounts receivable is recorded as income when earned, except: a) interest receivable on loans more than 30 days overdue; b) interest on overdue or in- litigation loans, or other loans classified as real risk, high risk or unrecoverable; c) interest on current and rescheduled loans expected to be collected in 6 months or more and; d) overdue interest, which is recorded as income when collected. According to VEN NIF, interest is recorded as income when earned using the effective interest method.

In addition, interest accrued but not collected in respect of overdue loans is fully provided for. Interest on loan installments is fully provided for if repayment is more than 30 days past due. According to VEN NIF, interest is provided for based on collectibility.

22) Cash flows For purposes of the 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.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

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 trading securities These investments are recorded at fair value and comprise investments in debt and equity securities. Unrealized gains or losses resulting from fair value changes are included in the results for the period.

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, 2019 and December 31, 2018, 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.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

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).

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 4 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.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

Loans of a similar nature are assessed as a whole to determine any applicable allowances.

Other assets The Bank assesses the collectibility of items recorded under other assets using the same criteria, where applicable, as those applied to the loan portfolio. Furthermore, the Bank sets aside provisions for those items that require them due to their nature or aging or following SUDEBAN requirements.

Provision for legal and tax claims The Bank sets aside a provision for legal and tax contingencies considered probable and reasonably quantifiable based on the opinion of its legal advisors and facts known at the assessment date (Notes 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. As from the six-month period ended December 31, 2018, actuarial gains or losses are recorded in equity net of deferred income tax as remeasurements for employee benefit plans.

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).

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

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 increase, 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.

Post-retirement benefits The Supplementary Defined Benefit Plan and the Supplementary Savings Plan include certain additional post-retirement benefits for employees leaving the Bank that meet 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.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

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 by the Board of Directors and SUDEBAN.

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.

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, 2019 2018 (In bolivars)

Demand deposits (1) 190,571,874 2,211,679,425 Foreign currency purchased for trading purposes 25,153,385,953 - Legal reserve 775,634,489,808 41,137,911,329 800,978,447,635 43,349,590,754

(1) At December 31, 2018, includes balances awarded to clients through DICOM auctions at August 24, 2017.

At June 30, 2019, the legal reserve in Venezuela is 57% of the total amount of net liabilities and 100% for marginal increases (31% and 50%, respectively, at December 31, 2018). At December 31, 2018, the Bank maintained a special reserve, additional to the regular reserve, equivalent to 100% of its surplus reserves at August 31, 2018 and a fixed amount equal to 50% of the special reserve created at the December 28, 2018 closing.

In May 2019, the BCV announced that banks would receive a 2% annual remuneration on the average amount of the legal reserve maintained in the sole account at the BCV in the respective month. The legal reserve funds are not available for use.

The balance of pending cash items mainly relates to clearinghouse operations through the BCV.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

4. Investment securities

Investment securities comprise the following:

June 30, December 31, 2019 2018 (In bolivars)

Investments Deposits with the BCV and overnight deposits - 50,078,010 Available-for-sale securities 147,217,122,131 5,771,511,975 Held-to-maturity securities 314,936 315,855 Restricted investments 50,373,213,894 8,005,102,663 Other securities 12,225,250 12,237,706 197,602,876,211 13,839,246,209

a) Deposits with the Central Bank of Venezuela (BCV) and overnight deposits Deposits with the BCV and overnight deposits at December 31, 2018 comprise the following:

Book value (In bolivars)

Overnight deposits maturing in January 2019 50,000,000 (1) (a) Placements with the BCV maturing in March 2019 78,010 (1) (a) 50,078,010

(1) Shown at par value, which is considered as fair value.

Custodian of investments (a) Central Bank of Venezuela

Deposits with the BCV and overnight deposits at December 31, 2018 earn the following annual interest:

Minimum Maximum rate rate % %

Overnight deposits 0.10 0.10 Deposits with the BCV 8.50 8.50

b) Investments in available-for-sale securities Investments in available-for-sale securities comprise the following:

June 30, 2019 December 31, 2018 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 January 2020 and August 2037, with a par value Bs 1,244,084,754 (maturing between February 2019 and August 2037, with a par value of Bs 2,003,974,.586 at December 31, 2018) 1,275,290,128 206,348,213 (2,179) 1,481,636,162 (1) (a) 2,005,548,869 123,420 (1,541,988) 2,004,130,301 (1) (a) Fixed Interest Bonds (TIF) issued by the Bolivarian Republic of Venezuela, maturing between February 2021 and March 2032, with a par value of Bs 5,897 (maturing between March 2019 and March 2032, with a par value of Bs 6,621 at December 31, 2018) 7,590 406 (639) 7,357 (1) (a) 8,478 462 (445) 8,495 (1) (a) Treasury Notes issued by the Bolivarian Republic of Venezuela, with a par value of Bs 597,045,000, maturing between January and June 2019 at December 31, 2018 - - - - 587,546,413 785,461 (251,800) 588,080,074 (1) (a) 1,275,297,718 206,348,619 (2,818) 1,481,643,519 2,593,103,760 909,343 (1,794,233) 2,592,218,870 Equity in non-financial private-sector companies Sociedad de Garantías Recíprocas para la Pequeña y Mediana Empresa del Sector Turismo, S.A. (SOGATUR) 2,070 - - 2,070 (1) (b) 2,070 - - 2,070 (1) (b)

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

(In bolivars)

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 November and December 2019, with a par value of US$8,650,000 (maturing in January 2019, with a par value of US$5,000,000 at December 31, 2018) 57,527,033,535 53,321,939 - 57,580,355,474 (2) (c) 3,176,500,318 2,790,717 - 3,179,291,035 (2) (c) Debt securities issued by foreign public and private-sector agencies, maturing between October 2021 and 2024, with a par value of US$4,500,000 30,725,600,053 1,011,296,671 - 31,736,896,724 (2) (c) - - - - 88,252,633,588 1,064,618,610 - 89,317,252,198 3,176,500,318 2,790,717 - 3,179,291,035 Time deposits and placements Certificates of deposit issued by Mercantil Banco, S.A., maturing between July and December 2019, with a par value of US$8,400,000 56,418,224,344 - - 56,418,224,344 (3) (d) - - - - 145,946,157,720 1,270,967,229 (2,818) 147,217,122,131 5,769,606,148 3,700,060 (1,794,233) 5,771,511,975

(1) Based on the present value of estimated future cash flows.

(2) Market value based on prices listed on the stock exchange.

(3) Shown at cost, which is considered as fair value.

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) Bank of New York, Inc. (d) Mercantil Banco, S.A.

At June 30, 2019, the market value of securities issued and guaranteed by the Venezuelan government and owned by the Bank is lower than cost by Bs 2,818 (Bs 1,794,233 at December 31, 2018). 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 to recover unrealized losses.

Investments in available-for-sale securities earn the following annual yield:

June 30, 2019 December 31, 2018 Minimum Maximum Minimum Maximum rate rate rate rate % % % %

National Public Debt Bonds in local currency 9.55 21.08 8.08 21.07 Fixed Interest Bonds (TIF) 14.50 16.50 14.50 16.50 Debt securities issued by foreign public and private-sector agencies 4.38 5.75 - - Time deposits and placements 2.40 3.50 - -

Below is the classification of the weighted average maturity of investments in available-for-sale securities:

June 30, December 31, 2019 2018 (Months)

National Public Debt Bonds in local currency 39 43 Fixed Interest Bonds (TIF) 111 105 Treasury Notes - 3 Debt securities issued and guaranteed by government agencies of the United States of America 5 1 Debt securities issued by foreign public and private-sector agencies 50 - Time deposits and placements 2 -

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

Below is the classification of investments in available-for-sale securities according to maturity:

June 30, 2019 December 31, 2018 Book value Book value (equivalent (equivalent to market to market Cost value) Cost value) (In bolivars)

Up to 6 months 113,945,257,879 113,998,579,818 3,764,057,921 3,767,380,976 6 months to 1 year 20,380 18,843 - - 1 to 5 years 17,264,419,188 17,742,899,173 200,107,222 200,149,995 5 to 10 years 14,735,570,782 15,474,424,464 1,803,550,235 1,802,085,389 Over 10 years 889,491 1,199,833 1,890,770 1,895,615 145,946,157,720 147,217,122,131 5,769,606,148 5,771,511,975

The equity account unrealized gain on investments comprises the following:

June 30, December 31, 2019 2018 (In bolivars)

Investments in available-for-sale securities 1,270,964,411 1,905,827 Investments in available-for-sale securities, reclassified from investments in held-to-maturity securities (364) (382) Investments in subsidiaries and affiliates (1,653,742) (55,310,147) 1,269,310,305 (53,404,702)

During the six-month period ended June 30, 2019, the Bank recorded gains and losses on sale of investments in available-for-sale securities of Bs 564,647,000 and Bs 3,261,000, respectively (Bs 274,000 y Bs 262, respectively, during the six-month period ended December 31, 2018) (Notes 20 and 21), which are shown under other operating income and other operating expenses, respectively. The Bank received cash payments of Bs 3,091.265,000 and US$22,184,000 for the aforementioned sales (Bs 522,210,000 during the six-month period ended December 31, 2018).

c) Investments in held-to-maturity securities Investments in held-to-maturity securities comprise the following:

June 30, 2019 December 31, 2018 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 212,413 212,413 212,413 212,413 (1) (a) 212,413 212,413 212,413 (1) (a) Fixed Interest Bonds (TIF) issued by the Bolivarian Republic of Venezuela, maturing between November 2020 and January 2037, with a par value of Bs 49,432 54,348 52,441 63,539 (2) (a) 54,348 52,737 64,866 (2) (a) National Public Debt Bonds, maturing between April 2024 and June 2032 with a par value of Bs 42,942 52,874 50,082 59,445 (2) (a) 52,874 50,705 50,018 (2) (a) 319,635 314,936 335,397 319,635 315,855 327,297

(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.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

Investments in held-to-maturity securities earn the following annual yield:

June 30, 2019 December 31, 2018 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 Fixed Interest Bonds (TIF) issued by the Bolivarian Republic of Venezuela 13.25 17.00 13.25 17.00 National Public Debt Bonds 14.08 20.34 14.04 15.23

Below is the classification of the weighted average maturity of investments in held-to-maturity securities:

June 30, December 31, 2019 2018 (Months)

Dematerialized Certificate of Participation issued by Fondo Simón Bolívar para la Reconstrucción, S.A. 60 66 Fixed Interest Bonds (TIF) issued by the Bolivarian Republic of Venezuela 135 141 National Public Debt Bonds 102 108

Below is the classification of investments in held-to-maturity securities according to maturity:

June 30, 2019 December 31, 2018 Amortized Fair Amortized Fair cost value cost value (In bolivars)

1 to 5 years 66,758 70,815 43,452 44,205 5 to 10 years 209,385 213,945 227,362 226,342 Over 10 years 38,793 50,637 45,041 56,750 314,936 335,397 315,855 327,297

d) Restricted investments Restricted investments comprise the following:

June 30, 2019 December 31, 2018 Book value Book value (equivalent (equivalent to market to market Cost value) Cost value) (In bolivars)

As guarantee Certificates of deposit issued by Amerant Bank, N.A. and PNC Bank, maturing between December 2019 and April 2020, with a par value of US$7,499,970 (issued by Amerant Bank, N.A., Deutsche Bank and Standard Chartered Bank, New York, maturing between January and December 2019, with a par value of US$12,575,081 at December 31, 2018) 50,373,213,099 50,373,213,099 (1) (b, e) 8,005,102,279 8,005,102,279 (1) (a, b, d) Trust fund for the Social Contingency Fund 795 795 (2) (c) 384 384 (2) (c) 50,373,213,894 50,373,213,894 8,005,102,663 8,005,102,663

(1) Shown at par value, which is considered as fair value. (2) Trust funds maintained with Banco Provincial, S.A. Banco Universal.

Custodians of investments (a) Deutsche Bank. (b) Amerant Bank, N.A. (c) Banco Provincial, S.A. Banco Universal. (d) Standard Chartered Bank New York. (e) PNC Bank, N.A.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

Restricted investments earn the following annual yield:

June 30, 2019 December 31, 2018 Minimum Maximum Minimum Maximum rate rate rate rate % % % %

Investment trust 13.00 13.00 4.00 4.00 Certificates of deposit 0.03 1.90 0.03 1.70

Below is the classification of the weighted average maturity of restricted investments:

June 30, December 31, 2019 2018 (Months)

Certificates of deposit 8 5

Below is the classification of restricted investments according to maturity:

June 30, 2019 December 31, 2018 Fair Fair Cost value Cost value (In bolivars)

Up to 6 months 1,343,291,851 1,343,291,851 7,877,785,753 7,877,785,753 6 months to 1 year 49,029,922,043 49,029,922,043 127,316,910 127,316,910 50,373,213,894 50,373,213,894 8,005,102,663 8,005,102,663

e) Investments in other securities Investments in other securities comprise the following:

June 30, 2019 December 31, 2018 Weighted Weighted Book average Book average Yield value maturity value maturity Issuer Guarantee Maturity % (in bolivars) (months) (in bolivars) (months)

Investments in other securities Banco de Desarrollo Económico y Social de Venezuela (BANDES) BANDES 2022-2024 10 11,868,571 50 11,868,571 56

Fondo Simón Bolívar para la Bolivarian Republic Reconstrucción, S.A. of Venezuela 2020-2028 4.66-6.48 356,679 54 369,135 60 Total investments in other securities 12,225,250 12,237,706

The Bank’s control environment includes policies and procedures to determine investment risks by type of issuer and economic sector. At June 30, 2019, the Bank has investment securities issued by the Venezuelan government and public entities, securities issued by the government of the United States of America and government agencies, and securities issued by the Venezuelan and international public and private sector, among others, representing 0.76%, 29.14% and 70.10%, respectively, of its investment securities portfolio (investment securities issued by the Venezuelan government and public entities, placements 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 public and private sector, among others, representing 18.82%, 0.36%, 22.97% and 57.85%, respectively, at December 31, 2018).

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

5. Loan portfolio

The loan portfolio is classified as follows:

June 30, 2019 December 31, 2018 Current % Rescheduled % Overdue % Total % Total % (In bolivars) x Economic activity Commercial 205,549,988,732 75 - - 1,566,835,567 99 207,116,824,299 75 31,906,886,959 67 Credit cards 15,149,680,280 6 - - 2,258,485 - 15,151,938,765 6 4,926,433,642 10 Agriculture 26,324,373,572 10 9 - - - 26,324,373,581 10 8,009,833,073 17 Industrial 5,776,083,116 2 - - 10,650,000 1 5,786,733,116 2 175,241,567 - Services 10,807,694,743 4 995 - - - 10,807,695,738 4 2,328,430,612 5 Home purchases and improvements 179,165,246 - - - 791 - 179,166,037 - 1,360,810 - Construction 95,914,097 - - - 1,565 - 95,915,662 - 111,458,220 - Car loans 24,996,010 - - - - - 24,996,010 - 7,626,439 - Foreign trade - - - - 661 - 661 - 197,595,844 - Other 9,279,707,036 3 90,251 100 2 - 9,279,797,289 3 592,605,611 1 273,187,602,832 100 91,255 100 1,579,747,071 100 274,767,441,158 100 48,257,472,777 100 Guarantee Unsecured 143,156,358,427 52 90,514 99 1,565,272,484 99 144,721,721,425 53 22,797,252,190 47 Mortgage 283,500,212 - 739 1 2,364 - 283,503,315 - 96,888,824 - Debenture 7,948,420,817 3 2 - 13,109,723 1 7,961,530,542 3 11,011,222,342 23 Pledge 121,799,323,376 45 - - 1,362,500 - 121,800,685,876 44 14,352,109,421 30 273,187,602,832 100 91,255 100 1,579,747,071 100 274,767,441,158 100 48,257,472,777 100

Maturity Up to 3 months 167,677,112,570 61 76 - 1,575,141,362 100 169,252,254,008 62 16,322,118,970 34 3 to 6 months 53,289,472,357 20 - - 789,673 - 53,290,262,030 19 23,123,768,373 48 6 months to 1 year 935,834,037 - 9 - 1,557,410 - 937,391,456 - 4,172,571,924 9 1 to 2 years 44,367,028,657 16 90,470 99 2,258,622 - 44,369,377,749 16 3,215,516,852 7 2 to 3 years 4,709,856,538 2 599 1 2 - 4,709,857,139 2 1,387,548,947 2 3 to 4 years 2,011,747,009 1 - - - - 2,011,747,009 1 33,751,268 - 4 to 5 years 16,688,791 - - - - - 16,688,791 - 40,801 - Over 5 years 179,862,873 - 101 - 2 - 179,862,976 - 2,155,642 - 273,187,602,832 100 91,255 100 1,579,747,071 100 274,767,441,158 100 48,257,472,777 100

Loan Promissory note 249,999,300,888 91 9 - 14,292,500 1 250,013,593,397 91 43,040,796,254 90 Credit cards, mortgage and vehicles 20,966,173,147 8 90,470 99 2,258,486 - 20,968,522,103 8 4,966,664,570 10 Installment 268,934,733 - 776 1 2,355 - 268,937,864 - 10,281,929 - Financial leases 30 - - - - - 30 - 62 - Checking accounts 1,952,614,274 1 - - 1,563,193,067 99 3,515,807,341 1 41,489,045 - Letters of credit ------197,595,849 - Other 579,760 - - - 663 - 580,423 - 645,068 - 273,187,602,832 100 91,255 100 1,579,747,071 100 274,767,441,158 100 48,257,472,777 100

Geographic location Venezuela 195,276,721,352 72 91,255 100 1,579,747,071 100 196,856,559,678 72 40,618,458,177 84 Bahamas 33,582,276,500 12 - - - - 33,582,276,500 12 3,182,922,750 7 Luxemburg 33,582,276,500 12 - - - - 33,582,276,500 12 3,182,922,750 7 Other countries 10,746,328,480 4 - - - - 10,746,328,480 4 1,273,169,100 2 273,187,602,832 100 91,255 100 1,579,747,071 100 274,767,441,158 100 48,257,472,777 100

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, 2019 December 31, 2018 Total % Total % (In bolivars) Risk Normal 274,631,503,403 100 48,239,607,224 100 Potential 9,345,466 - 8,198,374 - Real 96,367,440 - 9,244,117 - High 15,000,275 - 322,456 - Unrecoverable 15,224,574 - 100,606 - 274,767,441,158 100 48,257,472,777 100

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

Regulatory portfolios comprise the following:

June 30, 2019 Maximum Balance Number of annual maintained Earmarked Required Number of loans interest rate Activity in bolivars % % debtors granted % Calculation basis

Agriculture 26,324,373,581 25.79 20.00 328 461 17 Gross loan portfolio at March 31, 2019

Small businesses 3,520,766,998 8.67 3.00 1,995 1,998 36 Gross loan portfolio at December 31, 2018

Mortgages (a) 101,815,385 0.25 - 6,245 6.245 12.66 Gross loan portfolio at December 31, 2018

Tourism (b) 1,295,704,096 3.19 - 29 48 15 or 12 in Gross loan portfolio at some cases December 31, 2018

22 or 19.80 in Gross loan portfolio at Manufacturing (c) 5,786,733,116 14.25 - 15 15 some cases December 31, 2018

December 31, 2018 Maximum Balance Number of annual maintained Earmarked Required Number of loans interest rate Activity in bolivars % % debtors granted % Calculation basis

Agriculture 8,009,833,073 102.50 25.00 1,327 2.926 13 Gross loan portfolio at September 30, 2018

Small businesses 1,266,283,755 87.53 3.00 6,542 11.047 24 Gross loan portfolio at June 30, 2018

Between 4.66 Gross loan portfolio at Mortgages (a) 9,712,863 27.32 20.00 18,120 18.120 and 10.66 December 31, 2017

Tourism (b) 5,232,407 14.72 5.25 38 70 6.77 or 3.77 Gross loan portfolio at in some cases December 31, 2017

Manufacturing (c) 175,241,567 492.87 30.00 164 208 18 Gross loan portfolio at or 16.20 in December 31, 2017 some cases

(a) Measurement and compliance with this portfolio is required annually. (b) At June 30, 2019, compliance percentages for 2019 have not been issued. At December 31, 2018, the Bank complies with the minimum percentage of the tourism loan portfolio (includes SOGATUR shares for Bs 2,070. The tourism portfolio plus these investments amount to Bs 1,295,706,166 at June 30, 2019 (Bs 5,234,477 at December 31, 2018). (c) In July 2018, the People’s Power Ministry for Industries and for Finance ratified the strategic development sectors to which at least 80% 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, mixed companies or indirect social property companies.

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, 2019 2018 (In bolivars) x Balance at the beginning of the period 1,149,610,353 35,104,276 Provided in the period, including branch 2,932,200,000 983,580,000 Effect of translating allowances in foreign currency 1,423,312,798 170,255,628 Write-offs of uncollectible accounts (16,986,777) (2,374,529) Decrease of allowance in the branch (193,555,132) (36,957,302) Reclassification to the provision for interest receivable 5,984,136 2,280 Balance at the end of the period 5,300,565,378 1,149,610,353

During the six-month period ended June 30, 2019, the Bank wrote off unrecoverable loans of Bs 16,987,000 (Bs 2,375,000 during the six-month period ended December 31, 2018), against the allowance for losses on loan portfolio. The Bank also collected loans written off as uncollectible in previous periods for Bs 1,698,000 (Bs 596,000 during the six-month period ended December 31, 2018), included in the income statement under income from financial assets recovered.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

Below is a breakdown of certain balances and transactions of the overdue and in-litigation loan portfolio:

Six-month periods ended June 30, December 31, 2019 2018 (In bolivars) x Interest free (1) 1,579,747,071 211,671,908 Interest accrued but not recorded as income 3,528,796 267,807 Interest collected on uncollectible loans written off in previous periods 1,697,783 596,717

(1) At December 31, 2018, Bs 197,596,000 corresponds to overdue letters of credit.

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, 2019 and December 31, 2018, 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, 2019 2018 (In bolivars) . Interest receivable on investment securities Deposits with the Central Bank of Venezuela (BCV) and overnight deposits - 5,916 Available for sale 518,149,435 51,332,014 Held to maturity 5,629 5,684 Interest receivable on investment securities 350,632 354,110 Restricted investments 176,062,272 36,363,613 694,567,968 88,061,337 Interest receivable on loan portfolio Current 1,815,532,320 152,824,146 Rescheduled 878 1,326 Overdue 603,782 1,198,846 1,816,136,980 154,024,318 Commissions receivable 1,057,995,027 95,153,683 Provision for interest receivable and other (604,673) (1,203,810) 3,568,095,302 336,035,528

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

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, 2019 2018 (In bolivars)

Inversiones y Valores Mercantil V, C.A., 31,724,500 fully paid common shares with a par value of Bs 0.00001 each, equivalent to 100% of its capital stock 5,108,735,277 107,669,857 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 1,444,285,789 136,889,174 Proyecto Conexus, C.A., 500,000 fully paid common shares with a par value of Bs 0.00001 each, equivalent to 33.33% of its capital stock 1,416,766,200 86,503,900 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 410,255,505 39,106,223 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 16,656,272 1,578,679 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 7,709,282 730,684 Inversiones Platco, C.A., 681,209 fully paid common shares with a par value of Bs 0.001 each, equivalent to 50% of its capital stock 5,456,626 301,335 8,409,864,951 372,779,852

During the six-month period ended June 30, 2019, the Bank recorded net income of Bs 3,494,639,000 in respect of its equity in the results of subsidiaries and affiliates (net income of Bs 248,761,000 during the six-month period ended December 31, 2018), shown under other operating income (Note 20).

During the six-month period ended June 30, 2019, the Bank granted a contribution for future capital increases of Bs 2,930,000,000 to its subsidiary Inversiones y Valores Mercantil V, C.A. to cover operational requirements.

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, 2019 Inversiones y Valores Proyectos Inversiones Mercantil V, Conexus, Platco, C.A. C.A. (1) C.A. (1) (In bolivars)

Assets Cash and due from banks 4,029,260,271 2,556,208,441 1,570,505,408 Investment securities 871,485,597 610,079,093 - Interest and commissions receivable 1 - - Investments in subsidiaries and affiliates 985 - - Property and equipment - 490,734,738 307,417 Other assets 295,338,835 944,690,162 4,782,489,682 Total assets 5,196,085,689 4,601,712,434 6,353,302,507

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

Balance sheet June 30, 2019 Inversiones y Valores Proyectos Inversiones Mercantil V, Conexus, Platco, C.A. C.A. (1) C.A. (1) (In bolivars)

Liabilities and Equity Liabilities Other liabilities 87,350,412 351,422,334 6,342,389,255 Total liabilities 87,350,412 351,422,334 6,342,389,255 Equity 5,108,735,277 4,250,290,100 10,913,252 Total liabilities and equity 5,196,085,689 4,601,712,434 6,353,302,507

Income statement Six-month period ended June 30, 2019 Inversiones y Valores Proyectos Inversiones Mercantil V, Conexus, Platco, C.A. C.A. (1) C.A. (1) (In bolivars)

Gross financial margin 504,584 20,240 - Operating income, net 2,103,230,114 4,368,375,202 5,840,495,522 Total expenses (31,015,551) (118,111,631) (5,830,184,939) Net income 2,072,719,147 4,250,283,811 10,310,583

Equity method (Note 20) 2,072,719,147 1,416,764,103 5,155,292

(1) Based on unaudited financial statements.

Balance sheet December 31, 2018 Inversiones y Valores Proyectos Inversiones Mercantil V, Conexus, Platco, C.A. C.A. (1) C.A. (1) (In bolivars)

Assets Cash and due from banks 165,363,008 138,764,548 24,064,259 Investment securities 136 62,194,180 - Investments in subsidiaries and affiliates 985 - - Property and equipment - 446,181 356,596 Other assets 217,888 69,192,305 203,338,403 Total assets 165,582,017 270,597,214 227,759,258

Liabilities and Equity Liabilities Other liabilities 57,912,160 11,086,028 227,156,588 Total liabilities 57,912,160 11,086,028 227,156,588 Equity 107,669,857 259,511,186 602,670 Total liabilities and equity 165,582,017 270,597,214 227,759,258

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

Income statement Six-month period ended December 31, 2018 Inversiones y Valores Proyectos Inversiones Mercantil V, Conexus, Platco, C.A. C.A. (1) C.A. (1) (In bolivars)

Gross financial margin (144,525) 760,592 - Operating income, net 172,089,316 429,453,223 192,873,819 Total expenses (64,917,918) (5,795,270) (192,352,439) Net income 107,026,873 424,418,545 521,380

Equity method (Note 20) 107,026,873 141,473,132 260,690

(1) Based on unaudited financial statements.

b) Branch abroad

Balance sheet June 30, 2019 December 31, 2018 Thousands of Equivalent Thousands of Equivalent U.S. dollars in bolivars U.S. dollars in bolivars

Assets Cash and due from banks 6,071 40,773,407,882 22,094 14,064,890,462 Investment securities 28,998 194,765,398,585 10,069 6,410,009,190 Loan portfolio 11,397 76,547,440,815 13,755 8,756,220,485 Interest and commissions receivable 304 2,042,974,829 115 72,958,898 Other assets 21 137,942,559 6 3,869,327 Total assets 46,791 314,267,164,670 46,039 29,307,948,362

Liabilities and Equity Accruals and other liabilities 200 1,343,846,104 132 84,305,241 Total liabilities 200 1,343,846,104 132 84,305,241 Equity 46,591 312,923,318,566 45,907 29,223,643,121 Total liabilities and equity 46,791 314,267,164,670 46,039 29,307,948,362

Income statement June 30, 2019 December 31, 2018 Thousands of Equivalent Thousands of Equivalent U.S. dollars in bolivars U.S. dollars in bolivars

Gross financial margin 529 2,438,774,200 413 67,202,496 Other operating income, net (1) 124 1,689,831,591 489 439,223,751 Total expenses (124) (572,311,833) (143) (23,330,406) Net income 529 3,556,293,958 759 483,095,841

(1) At June 30, 2019, includes Bs 1,116,164,000 for the effect of translating U.S. dollars into bolivars, which are eliminated in the results in consolidation and are transferred to equity (Bs 359,511,000 at December 31, 2018).

8. Available-for-sale assets

During the six-month period ended June 30, 2019, the Bank sold available-for-sale assets at a gain of Bs 200,000, in respect of property received as payment recorded under memorandum accounts. Fully- amortized available-for-sale assets are shown under memorandum accounts (Note 25).

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

9. Property and equipment

Property and equipment comprise the following:

December 31, June 30, 2018 Additions Disposals 2019 (In bolivars) .

Costs Building and facilities - main office 1,044,453 - - 1,044,453 Buildings and facilities 449,336 7,383,681 - 7,833,017 Furniture and equipment 411,252 10,927,186 (3,743) 11,334,695 Equipment for Chip Project 125 - - 125 Vehicles 427 - - 427 Land 19 - - 19 Total 1,905,612 18,310,867 (3,743) 20,212,736 Accumulated depreciation Building and facilities - main office (38,362) (13,056) - (51,418) Buildings and facilities (68,625) (4,740,261) - (4,808,886) Furniture and equipment (249,420) (10,594,372) 1 (10,843,791) Equipment for Chip Project (125) - - (125) Vehicles (116) (54) - (170) Total (356,648) (15,347,743) 1 (15,704,390) Net 1,548,964 2,963,124 (3,742) 4,508,346

During the six-month period ended June 30, 2019, the Bank recorded depreciation expense of Bs 15,348,000 (Bs 157,000 during the six-month period ended December 31, 2018), shown in the income statement under general and administrative expenses (Note 19).

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 629,138, increasing the value of property and equipment and revaluation adjustment of property and equipment, shown in equity for the same amount. In October 2017, the Bank recorded a second revaluation of its main office for Bs 415,265. During the six-month period ended June 30, 2019 and December 31, 2018, the Bank recorded Bs 13,056 in the income statement in connection with the depreciation expense of revaluation.

Below are the original useful lives and average remaining useful lives by type of asset at June 30, 2019:

Average Useful remaining life useful life (Years)

Building and facilities - main office 40 24 Buildings and facilities 40 15 Furniture and equipment 4-10 3

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

10. Other assets

Other assets comprise the following:

June 30, December 31, 2019 2018 (In bolivars)

Accounts receivable from other credit card companies for consumer transactions by cardholders 56,952,163,828 945,555,515 Insurance and prepaid expenses 30,354,785,534 731,876,244 Special program for employee financing 13,626,248,213 206,155,865 Deferred expenses for office setup, leasehold improvements and remodeling, net of accumulated amortization of Bs 870,872,000 (Bs 2,712,000 at December 31, 2018) (Note 2) 11,360,782,865 187,996,997 Advances to technology vendors, work in progress and other 6,809,724,712 5,129,534,796 Pending items and main office, branches and agencies 5,572,906,540 270,878,134 Yield on overdue investment securities 2,967,179,158 281,228,763 Stationery and office supplies 2,005,914,585 32,764,102 Software, net of accumulated amortization of Bs 145,288,000 (Bs 28,000 at December 31, 2018) 1,520,966,064 25,547 Prepaid taxes 1,185,103,697 108,839,165 Advances to Inversiones Platco, C.A. 533,212,510 81,127,479 Advances and guarantee deposits 300,567 180,589 Prepaid advertising 91,156 91,156 Other 3,785,854 5,304 Provision for other assets (2,967,198,841) (281,233,136) 129,925,966,442 7,695,026,520

The original value of other deferred expenses mainly comprises office setup expenses, leasehold improvements and projects pending capitalization, which include technological upgrade, hardware and software.

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).

In addition, at June 30, 2019, pending items and main office, branches and agencies include recording and control of pending cards for Bs 446,482,000 (Bs 33,000 at December 31, 2018).

Prepaid taxes include mainly payment of income tax, withholding tax and municipal taxes.

Amortization of deferred expenses and goodwill during the six-month period ended June 30, 2019 amounted to Bs 1,027,522,000 (Bs 2,677,000 during the six-month period ended December 31, 2018) and is shown under general and administrative expenses (Note 19).

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

The movement in the provision for other assets is shown below:

June 30, December 31, 2019 2018 (In bolivars) x Balance at the beginning of the period 281,233,136 1,137 Provided in the period 5,257 3,338 Release of provision (2,295) (66) Write-offs of unrecoverable accounts - (13) Reclassification of items 12,361 - Effect of exchange differences 2,685,950,382 281,228,740 Balance at the end of the period 2,967,198,841 281,233,136

11. Deposits

Deposits comprise the following:

June 30, December 31, 2019 2018

(In bolivars) x Demand deposits 830,758,646,397 76,935,489,578 Other demand deposits Cashier’s checks 12,204,103,644 1,343,250,907 Trust liabilities (Note 25) 2,849,696,390 161,658,090 Other demand deposits 17,372,805,745 124,675,607 Certified checks - 600 Advance collections from credit card holders (Note 25) 10,139,666 623,786 Judicial deposits 52,798 10,594 Housing savings fund liabilities 342,593,504 6,952,820 32,779,391,747 1,637,172,404 Savings deposits 115,533,951,976 12,517,081,116 Time deposits 748 783 Restricted deposits Dormant savings accounts 14,994,620 1,498,046 Dormant checking accounts 3,817,052 508,487 18,811,672 2,006,533 979,090,802,540 91,091,750,414

Deposits bear interest at the rates shown below:

June 30, 2019 December 31, 2018 Minimum Maximum Minimum Maximum rate rate rate rate % % % %

Type of deposit Interest-bearing checking accounts 0.01 0.01 0.01 0.01 Demand deposits and certificates 3.25 66.00 0.25 1.50 Savings deposits 21.00 21.00 12.50 16.00 Time deposits 14.50 24.00 14.50 14.50 Restricted deposits 0.01 16.00 0.01 16.00

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

Below is the classification of time deposits by maturity:

June 30, 2019 December 31, 2018 In bolivars % In bolivars %

Maturity Up to 30 days 173 23 508 65 31 to 60 days 67 9 106 14 61 to 90 days 38 5 63 8 91 to 180 days 63 9 106 13 181 to 360 days 407 54 - - 748 100 783 100

At June 30, 2019, deposits include Bs 28,437,870,000 from the Venezuelan government and other government agencies, equivalent to 2.90% of total deposits (Bs 2,485,707,000, equivalent to 2.73% at December 31, 2018).

12. Deposits and liabilities with Banco Nacional de Vivienda y Hábitat (BANAVIH)

Deposits and liabilities with BANAVIH comprise the following:

June 30, December 31, 2019 2018 (In bolivars)

Interest-free demand deposits with BANAVIH 9,748 1,022

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

Below is a breakdown of borrowings:

June 30, December 31, 2019 2018

(In bolivars) Overnight borrowings with other financial institutions Overnight deposits in foreign currency, with annual interest at between 119% and 126% 68,200,000,000 -

Borrowings with Venezuelan financial institutions Demand deposits 35,527,371 1,367,981 Borrowings with foreign financial institutions Demand deposits 12,558 8,872

68,235,539,929 1,376,853

Maturities of borrowings, up to one year, are as follows:

June 30, December 31, 2019 2018 (In bolivars)

Up to 6 months 68.235.539.929 1.376.853

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

14. Other liabilities from financial intermediation

Other liabilities from financial intermediation comprise the following:

June 30, December 31, 2019 2018 (In bolivars) x Liabilities with credit card merchants 1,650,928 334,413 Other 1 1 1,650,929 334,414

15. Interest and commissions payable

Interest and commissions payable comprise the following:

June 30, December 31, 2019 2018

(In bolivars) x Expenses payable on deposits Interest-bearing checking accounts 11,247,533 - Time deposits 2,210 22,932 11,249,743 22,932 Expenses payable on borrowings 681,475,000 - 692,724,743 22,932

16. Accruals and other liabilities

Accruals and other liabilities comprise the following:

June 30, December 31, 2019 2018 (In bolivars) x Suppliers and accounts payable for financial intermediation 137,627,920,328 10,273,124,404 Pending items and main office, branches and agencies 34,846,102,255 13,688,123 Provision for contingencies and accrued expenses 22,996,565,457 1,783,914,151 Overnight deposits 20,308,654,219 10,834,935 Employee profit sharing, vacation and bonuses 11,977,998,093 432,060,359 Collected and withheld taxes 11,010,240,880 667,994,259 Tax on large financial transactions and other taxes 3,071,315,800 233,675,472 Interest collected in advance on the loan portfolio and commissions 2,681,006,779 308,498,935 Accounts payable to clients 961,256,527 39,629,521 Income tax 779,220,567 419,478,510 Provision for the Antidrug Law (Note 33) 241,884,365 23,215,446 Labor contributions 181,127,392 6,068,310 Deferred income tax (Note 17) 141,852,417 5,791,217 Commissions payable 84,412,972 151,104,210 Provision for the Law for the Advancement of Science, Technology and Innovation 15,155,370 - Accounts payable to Inversiones Platco, C.A. (Note 27) 126,269 126,269 Deferred income from loan portfolio 2,374 2,507 Deferred gain on rights and sale of property 76 76 246,924,842,140 14,369,206,704

Suppliers and accounts payable for financial intermediation include mainly Maestro point-of-sale transactions by Bank customers pending offsetting and expenses incurred in Bank’s regional offices.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

At June 30, 2019 and December 31, 2018, the provision for contingencies and accrued expenses includes 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, 2019 2018 (In bolivars)

Taxes Current In Venezuela 138,672,831 350,454,932 Abroad 10,904,159 1,231,958 Deferred In Venezuela 195,982,680 25,095,532 345,559,670 376,782,422

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, 2019, 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, 2019, the Bank estimated an income tax expense of Bs 138,673,000.

At June 30, 2019, the Bank has extraterritorial tax losses of up to 25% of annual income amounting to Bs 122,900,521,000, of which Bs 62 and Bs 122,901,000 may carried forward until December 31, 2019 and December 31, 2021, respectively.

Below is a reconciliation between book expense and tax expense for the year ended December 31, 2018:

Statutory tax rate (%) 40

(Thousands of bolivars)

Book income before tax 2,270,089

Notional tax expense based on book income in Venezuela computed at the effective tax rate 908,035 Differences between notional tax expense and actual tax expense Net effect of shareholdings (99,387) Net effect of exemption of securities issued or guaranteed by the Venezuelan government (13,439) Other assets (304,480) Nondeductible provisions Loan portfolio, net 117,236 Other provisions 192,451 Other effects, net (439,500) 360,916

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

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 return for information purposes within the established deadlines.

b) Deferred tax liability Below is a summary of the deferred income tax liability:

June 30, December 31, 2019 2018 (In bolivars)

Other assets 178,966,693 120,382,907 Labor-related accruals 6,390,034 23,783,742 Provisions (43,342,060) (138,365,113) Loan portfolio (162,072) (5,668) Property and equipment, office setup expenses and other (178) (4,651) Deferred tax liability (Note 16) 141,852,417 5,791,217

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 The actual premises used to determine length-of-service benefit obligations are as follows:

June 30, December 31, 2019 2018 Financial Discount rate (%) 7.00 7.00 Salary increase rate (%) 21,652 450,000 Nominal obligations discount rate (%) 23,175 481,507

Demographic Mortality table for active employees GAM (1971) GAM (1971) Disability table PDT (1985) PDT (1985)

The movement in the additional length-of-service benefit obligation is as follows:

June 30, December 31, 2019 2018 (In thousands of bolivars)

Balance at the beginning of the period 295,719 1,393 Service cost 82,843 4,028 Interest cost 2,994,068 133,566 Benefits paid (82,596) (4,895) Remeasurements for employee benefit plans 5,207,633 161,627 Balance at the end of the period 8,497,667 295,719

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

The estimated net cost of the retrospective length-of-service benefit for the second semester of 2019 is Bs 715,079,000, calculated based on actuarial studies conducted in June 2019.

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, 2019, expenses in connection with this plan amount to Bs 197,142 (Bs 4,806 for the six-month period ended December 31, 2018), calculated based on actuarial studies conducted in December 2018.

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 3 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, 2019, expenses in connection with the Supplementary Defined Benefit Plan and post-retirement benefits amounted to Bs 701,062 (Bs 2,022 at December 31, 2018), calculated based on actuarial studies conducted in December 2018.

At December 31, 2018, 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 108 102 Service cost - 6 Interest cost 152,194 144,842 Remeasurement 135,954 134,700 Benefits paid (2,074) (12) Projected benefit obligation 286,182 279,638

Annual variation in restricted plan assets (1) Opening fair value of assets 3 - Yield 246,959 69,533 Remeasurement of assets 3,220,441 518,937 Bank contributions - 3,243 Transfer between plans (1,414,103) 1,414,103 Benefits paid (2,074) (12) Closing fair value of assets 2,051,226 2,005,804

Components of net benefit cost for the year Service cost - 6 Interest cost 152,194 144,842 Yield from plan assets (246,959) (69,533) Net benefit cost (94,765) 75,315

(1) The breakdown of plan assets is shown according to the accounting bases described in Note 2.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

Financial position balances at December 31 are shown below:

Supplementary Defined Benefit Plan 2018 2017 2016 2015 2014 (Thousands of bolivars)

Financial position at year end Present value of obligations (DBO) (286,182) (108) (9) (4) (1) Assets of external fund supporting the plan 2,051,226 3 1 1 1 (Projected obligation)/excess of assets 1,765,044 (105) (8) (3) -

Post-retirement benefits 2018 2017 2016 2015 2014 (Thousands of bolivars)

Financial position at year end Present value of obligations (DBO) (279,638) (102) (18) (5) (1) Assets of external fund supporting the plan 2,005,804 1 - 1 1 (Projected obligation)/excess of assets 1,726,166 (101) (18) (4) -

At December 31, 2018, 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.

At December 31, 2018, 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 16,748 18,706 15,491 18,919 Increase in medical expenses - - 17,900 14,965

Below is a breakdown of the assets supporting the plans of MERCANTIL and its subsidiaries, shown in conformity with the accounting bases described in Note 2:

June 30, December 31, 2019 2018 (Thousands of bolivars)

Cash and due from banks 782,400 151,403 Investments in available-for-sale securities (1) 44,277,545 3,893,664 Interest receivable 175,086 11,963 Total assets 45,235,031 4,057,030

(1) Securities quoted in an active market.

These assets may be granted for both plans and may only be distributed among their beneficiaries.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

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 7 years.

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 35,572 128,567 127,165 291,304 Post-retirement benefits 45,917 66,020 157,308 269,245 Total 81,489 194,587 284,473 560,549

d) Long-term stock option plan 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.

Until June 2019, MERCANTIL and certain subsidiaries had a long-term stock option plan to eligible officers approved by the Board of Directors’ Compensation Committee. Fundación BMA managed the plan and contributed the shares, which were deposited in a trust fund at Mercantil Seguros, C.A.

In view of the above, the Board of Directors’ Compensation Committee, when deemed pertinent, will define the use of the shares that will make up the long-term incentive plan. At June 30, 2019 and December 31, 2018, Fundación BMA has the following shares:

Number of shares Class “A” Class “B” Total

Trust fund 1,408,000 1,055,249 2,463,249

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

19. General and administrative expenses

General and administrative expenses comprise the following:

Six-month periods ended June 30, December 31, 2019 2018 (In bolivars) x Software licenses and maintenance 18,551,574,152 539,099,644 Maintenance of property and equipment 18,548,473,565 350,049,074 Outsourcing, fees and other 7,606,652,690 375,395,081 Transportation and communications 7,568,139,097 76,975,315 Taxes, fines and contributions 6,091,968,782 184,773,217 Sundry general expenses 4,299,855,824 175,510,221 Transportation and surveillance 3,259,373,493 156,360,594 Services and supplies 3,066,967,571 281,950,741 Leases 1,248,504,595 10,962,602 Amortization of deferred expenses (Note 10) 1,027,521,755 2,677,049 Advertising 1,001,941,676 55,024,642 Insurance for property and equipment 553,732,301 816,945 Legal 27,333,453 348,765 Depreciation of property and equipment (Note 9) 15,347,743 157,192 Amortization of goodwill (Note 10) 33 33 Other 84,940,463 3,132,609 72,952,327,193 2,213,233,724

20. Other operating income

Other operating income comprises the following:

Six-month periods ended June 30, December 31, 2019 2018 (In bolivars) x Commissions on banking services provided 61,945,560,638 1,268,506,473 Commissions on credit card transactions 11,559,449,039 519,190,880 Commissions on electronic transfers 9,484,620,604 140,225,741 Commissions on Conexus, Maestro and Abra 24 services 6,260,501,558 314,506,399 Commissions on credit card transactions 3,715,403,502 423,939,725 Income from equity in subsidiaries and affiliates (Note 7) 3,494,638,542 248,760,695 Commissions on third party transactions 1,705,093,548 83,235,279 Trust fund commissions 767,993,270 8,507,728 Income from investment securities 572,950,217 1,650,658 Commissions on ATM transactions 529,594,616 38,635,492 Exchange gain (Note 24) 4,544 4,626,295 100,035,810,078 3,051,785,365

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

21. Other operating expenses

Other operating expenses comprise the following:

Six-month periods ended June 30, December 31, 2019 2018 (In bolivars) x Commissions on Conexus and Maestro services 7,076,608,578 272,179,516 Commissions on banking services received 2,903,524,424 165,894,215 Commissions on credit card transactions 2,203,674,017 139,333,879 Commissions on third party transactions 94,369,282 5,314,499 Loss on investment securities 3,262,049 139,604 Exchange loss (Note 24) 13,449 1,239,577 Amortization of premium on investment securities (Note 4) 933 950 12,281,452,732 584,102,240

22. Extraordinary expenses

Extraordinary expenses comprise the following:

Six-month periods ended June 30, December 31, 2019 2018

(In bolivars) Loss from claims 1,148,817,115 23,710,485 Donations (Note 28) 168,000,000 4,844,994 Extraordinary expenses 6,273,115 137,045 Loss from theft and fraud 537,592 25,231 1,323,627,822 28,717,755

23. Equity

a) Capital stock At June 30, 2019 and December 31, 2018, the Bank’s paid-in capital amounts to Bs 2,924 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 0.00001. At June 30, 2019 and December 31, 2018, 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.

The capital stock of Bs 2,924 is the result of the first phase of the capital stock increase agreed at the Special Shareholders’ Meeting held on 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 0.00001 each. This increase included the payment of a premium amounting to Bs 0.00118 per share, to be recorded under premium on capital contributions for a total amount of Bs 28,658. Consequently, the Bank’s equity was increased by Bs 28,902. 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 held on 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 0.00001. This increase included the payment of a premium amounting to Bs 0.00163 per share, to be recorded under premium on capital contributions for a total amount of Bs 59,518. Consequently, the Bank’s equity was increased by Bs 59,884. To date, approval from SUDEBAN is pending.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

At a Special Shareholders’ Meeting held in March 2017 it was approved to increase subscribed and paid-in capital by up to Bs 800, 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 0.00001 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 Bank’s Board of Directors approved three phases to increase subscribed and paid-in capital; contributions made by shareholders are recorded under contributions pending capitalization, awaiting approval from SUDEBAN. Below is a summary of the increases:

Amount Contributions pending capitalization approved Share Class Par Capital Share Date Bs Class “A” Class “B” Total value Premium increase premium Total

(In bolivars)

Phase I March 2017 183 9,962,242 8,304,977 18,267,219 Bs 0.00001 Bs 0.00219 183 40,087 40,270 Phase II April 2017 209 11,385,421 9,491,404 20,876,825 Bs 0.00001 Bs 0.00232 209 48,378 48,587 Phase III September 2017 97 5,341,877 4,369,886 9,711,763 Bs 0.00001 Bs 0.00514 97 49,910 50,007 489 138,375 138,864

At a Special Shareholders’ Meeting held in June 2017, it was approved to increase capital through the capitalization of a share premium, taking the par value of shares from Bs 0.00001 to Bs 0.00011 each; this capitalization is awaiting approval from SUDEBAN.

At a Special Shareholders’ Meeting held in September 2017 it was approved to increase subscribed and paid-in capital by up to Bs 2,600, with a par value of Bs 0.00001 each. SUDEBAN deadline to execute the increase was March 22, 2018. 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

Amount Contributions pending capitalization approved Share Class Par Capital Share Date Bs Class “A” Class “B” Total value Premium increase premium Total

(In bolivars)

Phase I October 2017 235 12,949,541 10,593,602 23,543,143 Bs 0.00001 Bs 0.00594 235 139,780 140,015 Phase II November 2017 162 8,855,324 7,382,202 16,237,526 Bs 0.00001 Bs 0.00934 162 151,675 151,837 Phase III December 2017 104 5,692,705 4,745,699 10,438,404 Bs 0.00001 Bs 0.01089 104 113,721 113,825 501 405,176 405,677

At June 30, 2019 and December 31, 2018, the Bank complies with minimum paid-in capital requirements for universal banks of Bs 1,700.

b) Retained earnings and dividends on shares 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, 2019, the Bank reclassified to restricted surplus Bs 9,396,815,000 (Bs 798,869,000 during the six-month period ended December 31, 2018), equivalent to 50% of the Bank’s net individual income at that date.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

At June 30, 2019, restricted surplus of Bs 13,955,664,000 (Bs 1,064,210,000 at December 31, 2018) includes Bs 3,743,109,000 in respect of income from subsidiaries and affiliates (Bs 248,470,000 in respect of income from subsidiaries and affiliates at December 31, 2018). During the six-month period ended June 30, 2019, the Bank recorded income from equity in subsidiaries and affiliates of Bs 3,494,639,000 (Bs 248,761,000 during the six-month period ended December 31, 2018).

c) Cash dividends declared Below is a summary of dividends declared and paid for common shares:

Date of approval by the Amount for shares Type of dividend Board of Directors in bolivars Payment date

Ordinary January 2018 0.002291 May 2019 Ordinary September 2018 0.050000 May 2019

d) 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. At June 30, 2019 and December 31, 2018, the Bank’s reserve complies with the required amount.

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. At June 30, 2019, the investment for Bs 795 includes capitalization of investment interest (Bs 384 at December 31, 2018) (Notes 4 and 35).

e) 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, 2019 2018 Required Maintained Maintained % % %

Equity to risk-weighted assets and contingent operations 11.00 75.10 69.57 Equity to total assets 7.00 43.98 40.37

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.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

In January 2018, SUDEBAN published a series of temporary guidelines, effective until January 2019, to determine the equity to assets and contingent operations ratio, including the reduction of risk- weighting of risk assets considering the purpose and quality of the loan portfolio, changes to weighting of certain items in cash and due from banks, and inclusion of realized and unrealized gains from exchange differences and share premium as part of the primary equity (Level I), among others.

In October 2018, the Venezuelan Banking Association submitted a proposal to SUDEBAN to modify the risk weighting of items for capital adequacy ratio calculation, waiver of compliance with the capital adequacy ratio and extension until January 2020.

In December 2018, SUDEBAN replied to the aforementioned proposal stating that granting regulatory measures or waivers, other than those included in current regulations, was not possible, and that the request for extension of the effective period of Resolution No. 004.18 had been submitted to the Higher Authority of the National Financial System (OSFIN) for consideration.

In February 2019, SUDEBAN granted a supplementary regulatory exception, whereby it further extended the effective period of Resolution No. 004.18 of January 25, 2018, containing the temporary measures to determine equity to total assets and contingent operations ratio, for an additional six- month period for the application of the aforementioned measures, from the February 2019 month end until the July 2019 month end, both inclusive.

24. Financial assets and liabilities in foreign currency

a) Exchange control regime Since February 2003, the Venezuelan government established an exchange control. The protected exchange rate (DIPRO - Protected Exchange Rate) for the food, health, sports, culture and academic sectors, among others, and a supplementary floating exchange rate (DICOM - Supplementary Exchange Rate) for other areas of the economy, were established in March 2016. 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.

The free convertibility of the currency throughout the country was established in September 2018, and universal banks were authorized to act as exchange brokers on the foreign exchange market. In May 2019, the BCV authorized banks acting as exchange brokers to negotiate foreign currency purchase and sale transactions through foreign exchange desks. Additionally, financial institutions are required to report transactions daily. The BCV will publish, on a daily basis, the weighted average exchange rate.

b) Applicable exchange rates At June 30, 2019, the reference exchange rate applicable to foreign currency transactions is Bs 6,716.46/US$1 (Bs 636.58/US$1 at December 31, 2018).

c) Exchange differences During the six-month period ended June 30, 2019, as a result of applying the exchange rate, the Bank recorded net income of Bs 340,409,293,000 (Bs 37,057,014,000 at December 31, 2018), which was recorded under equity adjustments following SUDEBAN instructions.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

d) 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 indicated in b) above:

June 30, 2019 December 31, 2018 Branch Transaction Equivalent Branch Transaction Equivalent and agency in in thousands and agency in in thousands abroad Venezuela Total of bolivars abroad Venezuela Total of bolivars

(Thousands of U.S. dollars)

Assets Cash and due from banks 6,071 36,567 42,638 286,376,220 22,094 24,014 46,108 29,351,640 Investment securities, net 28,998 200 29,198 196,107,061 10,069 7,500 17,569 11,184,154 Loan portfolio 11,397 - 11,397 76,547,441 13,755 310 14,065 8,953,562 Interest and commissions receivable 304 133 437 2,935,091 115 204 319 203,070 Investments in subsidiaries and affiliates - 280 280 1,880,607 - 280 280 178,244 Other assets 21 138 159 1,067,916 6 127 133 84,666

Total assets 46,791 37,318 84,109 564,914,336 46,039 32,435 78,474 49,955,336 Liabilities Deposits - (8,425) (8,425) (56,586,136) - 9,334 9,334 5,941,880 Borrowings - - - - - 2,000 2,000 1,273,169 Interest and commissions - - - - - 14 14 8,912 payable Accruals and other liabilities (200) (9,369) (9,569) (64,269,761) 132 8,694 8,826 5,618,495 Total liabilities (200) (17,794) (17,994) (120,855,897) 132 20,042 20,174 12,842,456

Below is a reconciliation of the Bank’s net monetary position in foreign currency:

December 31, 2018 (Thousands of U.S. dollars)

Assets less liabilities, transaction in Venezuela 12,393 Foreign currency trade commitments (32) Position determined, computable as per the BCV rules 12,361 Maximum limit established by the BCV (60% of equity) 36,615 Margin in relation to authorized amount 24,254

The BCV excludes from the maximum limit that may be maintained by banks in foreign currency a portion of capital and income of the branch for US$46,591,000.

The estimated effect of every Bs 1,000/US$1 increase in the exchange rate of Bs 6,716.46 would be an increase in assets and equity of Bs 83,357,000 and Bs 101,019,000, respectively.

At August 22, 2019, the reference exchange rate applicable to foreign currency transactions was Bs 15,843.99/US$1.

During the six-month period ended June 30, 2019, the net exchange gain from revaluation of the foreign currency position decreased by Bs 9,000 (net exchange gain of Bs 288,000 during the six-month period ended December 31, 2018) (Notes 20 and 21).

In September 2018, SUDEBAN authorized the application of the balance of Bs 3,099,000, held in account 352 exchange gains or losses at January 31, 2018, to create the allowances required for the loan portfolio.

In January 2019, the BCV announced that, when deemed pertinent, it may conduct foreign currency sale transactions with banking institutions with a charge to the sole account with the BCV.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

In April 2019, the BCV established that net global asset or long position in foreign currency will not temporarily be subject to a maximum limit. Furthermore, the BCV informed that the maximum limit will be considered exceeded in the event of a net global liability or short position in foreign currency; the amount in excess will be subject to the corresponding rate.

25. Memorandum accounts

Memorandum accounts comprise the following:

June 30, December 31, 2019 2018 (In bolivars)

Contingent debtor accounts Guarantees granted (Notes 26 and 30) 265,802,062,411 29,979,329,527 Automatic lines of credit (Note 26) 1,460,265,698 996,041,522 Other contingencies (Notes 26 and 30) 31,428,546 240,900 Tourism loan commitments (Note 30) 371 371 Letters of credit (Note 26) - 7,877,784,751 267,293,757,026 38,853,397,071

Assets received in trust 201,351,726,989 17,631,390,152

Other debtor memorandum accounts Guarantees received 434,337,919,667 97,128,845,637 Unused lines of credit (Notes 26 and 30) 12,973,600,968 4,164,574,062 Valuables received in custody (1) 855,080,446,003 77,493,367,109 Collections 37 2,199,303,589 Consignments received 18,999,819 18,999,819 Other control accounts Guarantees received for lines of credit 1,705,942,451,205 156,179,124,820 Guarantees pending release 594,978,007,067 60,356,486,577 Bonds received 586,218,660,849 55,359,741,138 Returned checks 73,801,030,498 10,016,840,129 Foreign currency purchase commitments 753,276,325 71,395,415 Unconfirmed letters of credit (Note 5) 335,822,764 31,829,225 Interest receivable 3,528,796 26,773,416 Uncollectible accounts written off 18,713,979 1,965,265 Credit card loans granted (CENCOEX) 423 423 Real and personal property written off (Note 9) 313 308 Foreign currency sale commitments (30,664,888,277) (10,483,181) Other 48,399,261,675 1,240,119,117 2,979,785,865,617 283,273,792,652 4,282,196,832,111 464,278,882,868

Other debtor control accounts 37 37

(1) Valuables received in custody of the following institutions: BCV, Caja Venezolana de Valores, Clearstream Banking, S.A. and UBS International Bank.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

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, 2019 2018 (In bolivars)

Assets Cash and due from banks 6,452,652,641 1,978,102,399 Investment securities 177,359,764,729 15,280,314,420 Loan portfolio 15,256,346,153 279,715,463 Interest and commissions receivable 1,850,893,106 67,947,010 Assets received for administration 72 72 Other assets 432,070,288 25,310,788 Total assets 201,351,726,989 17,631,390,152

Liabilities and Equity Liabilities Fees and other accounts payable 975,179,234 93,799,134 Other liabilities 9,382,378 74,363 Total liabilities 984,561,612 93,873,497 Equity 200,367,165,377 17,537,516,655 Total liabilities and equity 201,351,726,989 17,631,390,152

Trust fund equity is classified as follows:

June 30, December 31, 2019 2018 (In bolivars)

Trust fund Investment 97,288,224,228 9,477,553,555 Administration 41,439,405,631 3,942,919,380 Guarantee and custody 35,961,138,693 3,363,377,024 Length-of-service benefits 24,143,467,560 701,208,636 Savings fund 21,024,251 52,458,060 Other 1,513,905,014 - 200,367,165,377 17,537,516,655

Trust fund Private sector 187,869,052,507 16,469,966,184 Public sector 12,498,112,870 1,067,550,471 200,367,165,377 17,537,516,655

At June 30, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, trust funds contributed by the private sector represent 94%, and those by the government entities 6%.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

Investment securities included in trust fund accounts comprise the following:

June 30, 2019 December 31, 2018 Book Fair Book Fair value value value value (In bolivars)

1) Securities issued or guaranteed by the Venezuelan government Treasury Bonds in foreign currency, with 7.65% annual interest, maturing in April 2025, and a par value of US$9,000 60,448,098 16,765,280 (1) (a) 5,729,261 1,300,829 (1) (a) National Public Debt Bonds, with annual yield at between 8.25% and 20.34%, maturing between January 2020 and August 2037, and a par value of Bs 622,777 (annual yield at between 8.25% and 17%, maturing between February 2019 and August 2037, and a par value of Bs 626,628 at December 31, 2018) 632,525 764,860 (1) (b) 636,982 659,757 (1) (b) Treasury Notes issued by the Bolivarian Republic of Venezuela, maturing between February and April 2019, with a par value of Bs 40,000,000 - - 39,531,615 39,521,170 (1) (b) 61,080,623 17,530,140 45,897,858 41,481,756 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 2019, and a par value of US$5,770,000 (maturing between January and March 2019 and a par value of US$5,680,000 at December 31, 2018) 38,569,061,222 38,580,594,173 (2) (c) 3,611,283,895 3,610,243,533 (2) (c) Bonds issued by foreign private-sector agencies, with annual interest at between 2.46% and 5.50%, and a par value of US$930,000 (annual interest at between 5.,50% and 8%, maturing between May 2019 and January 2021, and a par value of US$515,000 at December 31, 2018) 6,294,799,151 6,263,052,233 (2) (c) 338,034,304 330,164,418 (2) (q) Bonds issued by foreign public-sector agencies of the governments of Colombia and Panama, with annual interest at between 5.20% and 11.75%, maturing between January and February 2020, and a par value of US$572,000 3,908,759,884 3,918,817,253 (2) (c) 375,747,517 373,414,755 (2) (q) 48,772,620,257 48,762,463,659 4,325,065,716 4,313,822,706 3) Debt securities issued by Venezuelan private-sector companies Debenture bonds

Automercados Plaza’s, C.A., with annual yield at between 23.04% and 36%, maturing between March and October 2020, and a par value of Bs 18,001,200 (16.81% annual yield, maturing in March 2020 and a par value of Bs 1,200 at December 31, 2018) 18,001,200 20,249,390 (1) (d) 1,200 1,132 (1) (d) Preparados Alimenticios Internacionales, C.A. (PAICA), with 26% annual yield, maturing in June 2021 and a par value of Bs 40,000 40,000 40,994 (1) (d) 40,000 42,708 (1) (d) Domínguez y Cía., S.A., with annual yield at between 26% and 29.20%, maturing between March and August 2021, and a par value of Bs 39,000 (annual yield at between 24% and 26% at December 31, 2018) 39,000 40,195 (1) (d) 39,000 40,984 (1) (d) Inversiones Selva, C.A., with 28.14% annual yield, maturing in March 2021 and a par value of Bs 22,000 (24% annual yield at December 31, 2018) 22,000 23,165 (1) (d) 22,000 20,651 (1) (d) Envases Venezolanos, S.A., with 24% annual yield, maturing in July 2021 and a par value of Bs 13,000 (annual yield at between 16.52% and 24%, maturing between February 2019 and July 2021, and a par value of Bs 18,800 at December 31, 2018) 13,000 12,928 (1) (d) 18,800 19,349 (1) (d) Mercantil Servicios Financieros, C.A., with 25.61% annual yield, maturing between May 2020 and March 2021, and a par value of Bs 11,050 (annual yield at between 19.12% and 24% at December 31, 2018) 11,050 11,154 (1) (d) 11,050 11,264 (1) (d) Commercial paper

Automercados Plaza’s, C.A., maturing in August 2019 and a par value of Bs 44,000,000 (maturing in March 2019 and a par value of Bs 4,000 at December 31, 2018) 42,897,498 42,392,592 (1) (d) 3,874 3,819 (1) (d) NETUNO, C.A., with 20% annual yield, maturing in October 2019 and a par value of Bs 600,000 600,000 571,511 (1) (d) 600,000 583,304 (1) (d) 61,623,748 63,341,929 735,924 723,211 4) Investments issued by Venezuelan non-financial public-sector companies Envases Venezolanos, S.A., 261,430 common shares, with a par value of Bs 861 each (84,553 common shares, with a par value of Bs 56 each at December 31, 2018) 225,040,398 810,433,000 (3) (d) 4,702,341 10,146,360 (3) (d) Domínguez y Cía., S.A., 109,959 common shares, with a par value of Bs 1,869 each (23,741 common shares, with a par value of Bs 101 each at December 31, 2018) 205,464,698 538,799,100 (3) (d) 2,397,368 6,410,070 (3) (d) 430,505,096 1,349,232,100 7,099,709 16,556,430 5) Investments issued by Venezuelan non-financial private-sector companies Certificates of deposit Banco Provincial, S.A. Banco Universal, with annual yield at between 25% y 50%, maturing in July 2019 and a par value of Bs 1,323,874,242 (annual yield at between 3.5% and 9%, maturing in January 2019 and a par value of Bs 15,294,923 at December 31, 2018) 1,323,874,242 1,323,874,242 (3) (e) 15,294,923 15,294,923 (3) (e) Banesco Banco Universal, S.A., with annual yield at between 35% and 45%, maturing in July 2019 and a par value of Bs 787,084,500 (4% annual yield, maturing in January 2019 and a par value of Bs 10,053,015 at December 31, 2018) 787,084,500 787,084,500 (3) (f) 10,053,015 10,053,015 (3) (f) Banco Plaza, C.A., with annual yield at between 32% and 43%, maturing in July 2019 and a par value of Bs 614,333,675 (annual yield at between 6% and 9,5%, maturing in January 2019 and a par value of Bs 10,137,843 at December 31, 2018) 614,333,675 614,333,675 (3) (g) 10,137,843 10,137,843 (3) (g) Banco Venezolano de Crédito, C.A., Banco Universal, with annual yield at between 34% and 45%, maturing in July 2019 and a par value of Bs 546,387,360 (annual yield at between 3.25% and 9.5%, maturing in January 2019 and a par value of Bs 10,149,818 at December 31, 2018) 546,387,360 546,387,360 (3) (h) 10,149,818 10,149,818 (3) (h) Banco Exterior, C.A. Banco Universal, with annual yield at between 36% and 41%, maturing in July 2019 and a par value of Bs 409,039,418 (annual yield at between 3.5% and 9%, maturing in January 2019 and a par value of Bs 6,067,137 at December 31, 2018) 409,039,418 409,039,418 (3) (i) 6,067,137 6,067,137 (3) (i) Banco del Caribe, C.A., Banco Universal, with annual yield at between 32% and 42%, maturing in July 2019 and a par value of Bs 339,806,273 (9% annual yield, maturing in January 2019 and a par value of Bs 10,070,000 at December 31, 2018) 339,806,273 339,806,273 (3) (j) 10,070,000 10,070,000 (3) (j) Banco Caroní, C.A. Banco Universal, with 55% annual yield, maturing in July 2019 and a par value of Bs 270,000,000 270,000,000 270,000,000 (3) (k) - - Bancamiga Banco Universal, with 42% annual yield, maturing in July 2019 and a par value of Bs 184,860,000 184,860,000 184,860,000 (3) (l) - - Bancrecer, S.A. Banco Microfinanciero, with annual yield at between 39% and 40%, maturing in July 2019 and a par value of Bs 154,056,112 (annual yield at between 5.5% and 12%, maturing in January 2019 and a par value of Bs 4,053,332 at December 31, 2018) 154,056,112 154,056,112 (3) (m) 4,053,332 4,053,332 (3) (m) 100% Banco, Banco Comercial, C.A., with annual yield at between 4% and 9%, maturing in January 2019 and a par value of Bs 5,062,811 at December 31, 2018 - - 5,062,811 5,062,811 (3) (p) Banco Activo, C.A. Banco Universal, with annual yield at between 25% and 52%, maturing in July 2019 and a par value of Bs 149,121,821 (12% annual yield, maturing in January 2019 and a par value of Bs 5,041,667 at December 31, 2018) 149,121,821 149,121,821 (3) (l) 5,041,667 5,041,667 (3) (l) Del Sur Banco Universal, C.A., with annual yield at between 4.5% and 9%, maturing in January 2019 and a par value of Bs 2,040,188 at December 31, 2018 - - 2,040,188 2,040,188 (3) (l) Carried forward 4,778,563,401 4,778,563,401 77,970,734 77,970,734

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

June 30, 2019 December 31, 2018 Book Fair Book Fair value value value value (In bolivars)

Brought forward 4,778,563,401 4,778,563,401 77,970,734 77,970,734 Shares in Venezuelan banks Banco Provincial, S.A. Banco Universal, 25,299 common shares, with a par value of Bs 10,421 each (8,868 common shares, with a par value of Bs 790 each at December 31, 2018) 263,650,331 708,372,000 (3) (e) 7,009,873 20,396,400 (3) (e) Banco de Venezuela, S.A. Banco Universal, 378 common shares, with a par value Bs 0.01 each - 119,070 (4) (d) - 7,061 (4) (d) 5,042,213,732 5,487,054,471 84,980,607 98,374,195 6) Investments in foreign banks and other financial institutions Certificates of deposit Mercantil Banco, S.A., with annual yield at between 1% and 3%, maturing between July 2019 and September 2020, and a par value of US$11,748,389 (annual yield at between 1% and 3%,

maturing between January 2019 and September 2020, and a par value of US$12,550,136 at December 31, 2018) 78,907,532,540 78,907,532,540 (3) (n) 7,989,222,519 7,989,222,519 (3) (n) Black Rock Merrill Lynch Investment Managers, maturing in July 2019 and a par value of US$4,503,609 (maturing in January 2019 and a par value of US$4,441,377 at December 31, 2018) 30,248,290,859 30,248,290,859 (3) (o) 2,827,312,087 2,827,312,087 (3) (q) UBS International Bank, with annual yield at between 1.79% and 2.09%, maturing in September 2019 and a par value of US$2,060,000 13,835,897,874 13,835,897,874 (3) (c) - - 122,991,721,273 122,991,721,273 10,816,534,606 10,816,534,606 177,359,764,729 178,671,343,572 15,280,314,420 15,287,492,904

(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.

Custodians of investment securities (a) Clearstream Banking (b) Central Bank of Venezuela (c) UBS International Bank (d) Caja Venezolana de Valores, S.A. (e) Banco Provincial, S.A. Banco Universal (f) Banesco, C.A. Banco Universal (g) Banco Plaza, C.A. Banco Universal (h) Banco Venezolano de Crédito, C.A. Banco Universal (i) Banco Exterior, C.A. Banco Universal (j) Banco del Caribe, C.A. Banco Universal (k) Banco Caroní, C.A. Banco Universal (l) Other custodians (m) Bancrecer, S.A. Banco Microfinanciero (n) Mercantil Banco, S.A. (o) Black Rock Merrill Lynch Investment Managers (p) 100% Banco, Banco Comercial, C.A. (q) Merrill Lynch, Pierce, Fenner & Smith

At June 30, 2019, the market value of some securities issued by the Bolivarian Republic of Venezuela is lower than amortized cost by Bs 43,682,891 (Bs 4,439,411 at December 31, 2018). 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.

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.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

Below is the classification of investment securities according to maturity:

June 30, 2019 December 31, 2018 Book Fair Book Fair value value value value (In bolivars)

Up to six months 131,396,133,317 131,413,754,811 7,791,000,280 7,789,420,966 Six months to one year 7,990,815,203 7,999,758,900 3,565,473,480 3,565,456,784 One to five years 37,217,618,255 37,182,621,494 3,903,398,026 3,893,732,293 Over five years 61,042,528 17,485,196 6,333,052 1,922,968 Without maturity 694,155,426 2,057,723,171 14,109,582 36,959,893 177,359,764,729 178,671,343,572 15,280,314,420 15,287,492,904

Investment securities are classified as follows:

June 30, December 31, 2019 2018 (In bolivars)

Non directed 113,180,924,586 9,267,566,495 Directed 64,178,840,143 6,012,747,925 177,359,764,729 15,280,314,420

Trust fund resources comprise the following:

June 30, 2019 December 31, 2018 Directed Non-directed Total % Directed Non-directed Total % (In bolivars) (In bolivars)

Investments at banks and other foreign financial institutions 64,118,392,046 58,873,329,227 122,991,721,273 100 2,827,312,086 7,989,222,520 10,816,534,606 71 Debt securities issued by foreign public and private-sector agencies - 48,772,620,257 48,772,620,257 - 3,179,706,577 1,145,359,139 4,325,065,716 28 Investments at banks and other local financial institutions - 5,042,213,732 5,042,213,732 - - 84,980,607 84,980,607 1 Investments issued by Venezuelan non-financial public-sector companies - 430,505,096 430,505,096 - - 7,099,709 7,099,709 - Debt securities issued by Venezuelan private-sector companies - 61,623,748 61,623,748 - - 735,924 735,924 - Investments in Venezuelan private-sector companies and other investments 60,448,097 632,526 61,080,623 - 5,729,262 40,168,596 45,897,858 -

64,178,840,143 113,180,924,586 177,359,764,729 100 6,012,747,925 9,267,566,495 15,280,314,420 100

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.

The trust fund loan portfolio comprises the following:

June 30, December 31, 2019 2018 (In bolivars)

Loans to beneficiaries of Length-of-service benefit trust funds 15,256,345,515 279,714,009 Mortgage loans 628 1,444 Company loans 10 10 15,256,346,153 279,715,463

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.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

The trust fund acts as trustee for termination benefit contracts of employees of the Bank and Mercantil Seguros, C.A. amounting to Bs 9,355,622,412 and Bs 1,373,226,717, respectively (Bs 111,225,402 and Bs 15,748,805, respectively, at December 31, 2018). 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, 2019, loans to beneficiaries of length-of-service benefit trust funds include Bs 8,910,130,167 and Bs 1,314,585,987 in respect of loans granted to the Bank and Mercantil Seguros, C.A. employees, respectively (Bs 101,331,143 and Bs 15,175,902, respectively, at December 31, 2018).

At June 30, 2019, mortgage loans include Bs 628 in respect of guaranteed loans granted under the administration trust fund using resources from public entities (Bs 1,444 at December 31, 2018).

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 December 31, 2018 amounted to Bs 43 and Bs 31, respectively, 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 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, 2019, the Bank recorded income from financial transactions of Bs 79 shown under income from other accounts receivable (Bs 183 during the six- month period ended December 31, 2018).

d) Other control accounts Other control accounts are mainly in respect of returned checks and guarantees pending release. At June 30, 2019 and December 31, 2018, these accounts also include Bs 423, in respect of foreign currency pending authorization by exchange authorities for payments in foreign currency made by the Bank on behalf of the customers for credit card use abroad.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

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 1 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 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, 2019, stand-by letters of credit were pledged for Visa International transactions amounting to US$5,075,081 (for MasterCard International and Visa International transactions amounting to US$7,300,000 and US$5,075,081, respectively, at December 31, 2018), 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, 2019 and December 31, 2018 was 40% and 29% per annum, respectively (Note 1).

The Bank’s exposure to credit loss in the event of noncompliance by customers with terms for credit extension, letters of credit and guarantees is represented by the notional contractual amounts of these credit-related instruments. 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, 2019 and December 31, 2018, 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 40 (Note 16).

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

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, 2019 2018 (In bolivars)

Assets Cash and due from banks 25,092,657,711 6,516,779,134 Mercantil Banco, S.A. 24,960,751,318 6,504,246,204 Mercantil Bank (Schweiz) A.G. 131,906,393 12,532,930 Investments in subsidiaries and affiliates (Note 7) 6,530,958,103 194,475,092 Inversiones y Valores Mercantil V, C.A. 5,108,735,277 107,669,857 Proyectos Conexus, C.A. 1,416,766,200 86,503,900 Inversiones Platco, C.A. 5,456,626 301,335 Other assets 1,494,739,121 174,385,787 Fideicomiso Mercantil Banco Universal 960,776,611 93,214,207 Inversiones Platco, C.A. 533,212,510 81,127,479 Mercantil Financiadora de Primas 750,000 44,101 Total assets 33,118,354,935 6,885,640,013

Liabilities Deposits 6,239,748,163 435,057,425 Demand deposits 6,204,338,048 434,473,401 Non-interest-bearing checking accounts 3,124,641,658 249,815,311 Inversiones Platco, C.A. 956,058,363 12,548,522 Cestaticket Accor Services, C.A. 642,072,842 24,091,537 Fundación BMA 592,687,359 207,825 Servicio Panamericano de Protección, C.A. 289,259,163 163,700,258 Mercantil Servicios Financieros, C.A. 231,076,728 10,031,810 Mercantil Merinvest Casa de Bolsa, C.A. 117,410,660 2,078,682 Mercantil Seguros, C.A. 117,363,434 24,071,616 Mercantil Planes Administrados 47,624,019 9,135,829 Mercantil Servicios de Inversión, C.A. 43,020,814 958,027 Fundación Mercantil 35,410,096 459,057 Mercantil Inversiones y Valores, C.A. 21,723,066 112,932 Mercantil Financiadora de Primas, C.A. 21,699,423 1,342,597 Mercantil Sociedad Administradora de Entidades de Inversión Colectiva, C.A. 3,122,799 104,111 Inversiones y Valores Mercantil V, C.A. 2,842,586 632,737 Mercantil Arte y Cultura, C.A. 1,904,018 189,532 Mercantil Merinvest, C.A. 792,457 1,206 Inversiones y Valores Mercantil VI, C.A. 344,021 148,425 Servibien, C.A. 229,810 608 Interest-bearing checking accounts 2,849,696,390 161,658,090 Fideicomiso Mercantil, C.A. Banco Universal 2,849,696,390 161,658,090

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

June 30, December 31, 2019 2018 (In bolivars)

Demand deposits and certificates 230,000,000 23,000,000 Cestaticket Accor Services, C.A. 230,000,000 23,000,000 Savings accounts 35,410,115 584,024 Fundación Mercantil 35,410,096 379,943 Fundación BMA 19 204,061 Mercantil Merinvest Casa de Bolsa, C.A. - 20 Other liabilities 6,820,653 356,175 Mercantil Bank (Curacao), N.V. 6,694,291 - Inversiones Platco, C.A. 126,269 126,269 Inversiones y Valores Mercantil V, C.A. 82 82 Mercantil Merinvest Casa de Bolsa, C.A. 10 10 Mercantil Inversiones y Valores, C.A. 1 1 Fundación BMA - 116,768 Fundación Mercantil - 113,045 Total liabilities 6,246,568,816 435,413,600

b) Income statement

Six-month periods ended June 30, December 31, 2019 2018 (In bolivars)

Interest income 523,352,336 - Income from cash and due from banks 523,352,336 - Mercantil Banco, S.A. 523,352,336 - Interest expense 1,043,917 210,402 Inversiones y Valores Mercantil V, C.A. 503,933 27,193 Fundación Mercantil 488,970 182,209 Mercantil Merinvest Casa de Bolsa, C.A. 51,011 998 Fundación BMA 3 2 Operating income 5,254,394,480 282,967,142 Inversiones y Valores Mercantil V, C.A. 2,072,719,147 107,026,873 Proyectos Conexus, C.A. 1,416,764,104 141,473,132 Mercantil Financiadora de Primas, C.A. 985,670,209 25,634,657 Fideicomiso Mercantil, C.A. Banco Universal 767,993,269 8,507,728 Inversiones Platco, C.A. 5,155,292 260,690 Mercantil Merinvest, C.A. 1,820,467 15,870 Mercantil Inversiones y Valores, C.A. 1,485,807 23,748 Mercantil Servicios Financieros, C.A. 1,478,169 8,723 Mercantil Planes Administrados 794,794 12,526 Mercantil Arte y Cultura, C.A. 195,926 1,600 Fundación BMA 128,658 - Fundación Mercantil 121,260 - Servibien, C.A. 67,378 - Inversiones y Valores Mercantil VI, C.A. - 1,595 Operating expenses 1,920,081,745 117,493,786 Inversiones Platco, C.A. 1,920,081,745 109,768,975 Mercantil Bank (Curacao), N.V. - 7,723,971 Mercantil Inversiones y Valores, C.A. - 840 Extraordinary expenses 168,000,000 4,844,994 Fundación Mercantil (Nota 28) 168,000,000 4,844,994

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

c) Trust fund

June 30, December 31, 2019 2018

(In bolivars)

Assets Cash and due from banks 3,876,883,657 162,126,680 Mercantil, C.A. Banco Universal 2,849,696,390 161,658,090 Mercantil Banco, S.A. 1,027,187,267 468,590 Investment securities 78,907,543,590 7,989,233,569 Mercantil Banco, S.A. 78,907,532,540 7,989,222,519 Mercantil Servicios Financieros, C.A. 11,050 11,050 Interest receivable 1,550,607,177 53,119,662 Mercantil Banco, S.A. 1,550,607,177 53,119,662 Total assets 84,335,034,424 8,204,479,911

Liabilities Fees payable 960,776,611 93,214,207 Mercantil, C.A. Banco Universal 960,776,611 93,214,207 Total liabilities 960,776,611 93,214,207

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.

Mercantil Servicios de Inversión, C.A. (MSI), subsidiary of MERCANTIL, is authorized by SUNAVAL 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, 2019, the Bank paid MSI Bs 65,234,000 in this connection (Bs 1,072,000 during the six-month period ended December 31, 2018).

At June 30, 2019 and December 31, 2018, 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, 2019, the Bank recorded income of Bs 767,993,000 and has Bs 960,777,000 receivable in respect of these commissions (Bs 8,508,000 and Bs 93,214,000, respectively, during the six-month period ended December 31, 2018).

The other assets and liabilities with Inversiones Platco, C.A. are mainly in respect of services for the processing of electronic payment means.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

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, 2019, the Bank made contributions of Bs 168,000,000 (Bs 4,845,000 during the six-month period ended December 31, 2018), shown under extraordinary expenses (Note 22).

29. Maturity of financial assets and liabilities

The assets and liabilities are classified according to maturity as follows:

June 30, 2019 Beyond December 31, June 30, December 31, June 30, December 31, June 30, December 31, December 2019 2020 2020 2021 2021 2022 2022 2022 Total

(In bolivars ) Assets Cash and due from banks 1,083,644,477,045 ------1,083,644,477,045 Investment securities 115,341,871,669 49,029,940,886 8,568 40,939 6,923,345,188 61,959 2,124,400 26,305,482,602 197,602,876,211 Loan portfolio 222,542,516,038 937,391,456 33,596,273,736 10,773,104,013 81,030,978 4,628,826,161 2,011,741,785 196,556,991 274,767,441,158 Interest and commissions receivable 3,568,699,975 ------3,568,699,975 Total financial assets 1,425,097,564,727 49,967,332,342 33,596,282,304 10,773,144,952 7,004,376,166 4,628,888,120 2,013,866,185 26,502,039,593 1,559,583,494,389

Liabilities Customer deposits 979,090,802,133 407 ------979,090,802,540 Liabilities with BANAVIH 9,748 ------9,748 Borrowings 68,235,539,929 ------68,235,539,929 Other liabilities from financial intermediation 1,650,929 ------1,650,929 Interest and commissions payable 692,724,743 ------692,724,743 Total financial liabilities 1,048,020,727,482 407 ------1,048,020,727,889

December 31, 2018 June 30, December 31, June 30, December 31, June 30, December 31, June 30, Mayor a 2019 2019 2020 2020 2021 2021 2022 June 2022 Total (In bolivars)

Assets Cash and due from banks 74,958,012,463 ------74,958,012,463 Investment securities 11,695,244,739 127,316,910 24,671 14,384 58,604 21,477 105,248 2,016,460,176 13,839,246,209 Loan portfolio 39,445,887,343 4,172,571,904 14,208,855 3,201,307,950 1,278,171,451 109,377,497 33,633,244 2,314,533 48,257,472,777 Interest and commissions receivable 337,239,338 ------337,239,338 Total financial assets 126,436,383,883 4,299,888,814 14,233,526 3,201,322,334 1,278,230,055 109,398,974 33,738,492 2,018,774,709 137,391,970,787

Liabilities Customer deposits 91,091,750,414 ------91,091,750,414 Liabilities with BANAVIH 1,022 ------1,022 Borrowings 1,376,853 ------1,376,853 Other liabilities from financial intermediation 334,414 ------334,414 Interest and commissions payable 22,932 ------22,932 Total financial liabilities 91,093,485,635 ------91,093,485,635

30. Fair value of financial instruments

Below are the fair values of financial instruments maintained by the Bank:

June 30, 2019 December 31, 2018 Book Fair Book Fair value value value value (In bolivars)

Assets Cash and due from banks 1,083,644,477,045 1,083,644,477,045 74,958,012,463 74,958,012,463 Investment securities 197,602,876,211 197,602,896,672 13,839,246,209 13,839,257,651 Loan portfolio, net of provision 269,466,875,780 269,466,875,780 47,107,862,424 47,107,862,424 Interest and commissions receivable, net of provision 3,568,095,302 3,568,095,302 336,035,528 336,035,528 1,554,282,324,338 1,554,282,344,799 136,241,156,624 136,241,168,066

Liabilities Customer deposits 979,090,802,540 979,090,802,540 91,091,750,414 91,091,750,414 Deposits and liabilities with BANAVIH 9,748 9,748 1,022 1,022 Borrowings 68,235,539,929 68,235,539,929 1,376,853 1,376,853 Other liabilities from financial intermediation 1,650,929 1,650,929 334,414 334,414 Interest and commissions payable 692,724,743 692,724,743 22,932 22,932 1,048,020,727,889 1,048,020,727,889 91,093,485,635 91,093,485,635

Memorandum accounts Contingent debtor accounts 267,293,757,026 267,293,757,026 38,853,397,071 38,853,397,071

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

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, 2019 2018 (In bolivars)

Guarantees granted 265,802,062,411 29,979,329,527 Unused lines of credit 12,973,600,968 4,164,574,062 Other contingencies 31,428,546 240,900 Tourism loan commitments 371 371 Letters of credit issued but not negotiated (Stand-by) - 7,877,784,751 278,807,092,296 42,021,929,611

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 purchase exchange rate of Bs 6,716.46/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.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

31. Risk management

The Bank is mainly exposed to credit, market, liquidity, legal operational and reputation 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.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

The legal operational and reputation 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.

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, 2019 and December 31, 2018, 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.

Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2019 and December 31, 2018

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, 2019 and December 31, 2018, the biannual fee is 0.1% of the average of the Bank’s assets for the last two-month periods prior to the two-month period when the payment is due; it is payable monthly at ½ of the resulting amount. This fee is shown under operating expenses.

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, 2019, the Bank maintains an investment of Bs 795, which includes contributions and interest at that date (Bs 384 at December 31, 2018) (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, 2019, contributions in this connection amount to Bs 1,131,146,000 (Bs 111,102,000 at December 31, 2018).