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

Report of Independent Accountants and Financial Statements December 31, 2016 and 2015

Mercantil, C.A. Banco Universal Index to the financial statements December 31, 2016 and 2015

Pages

I - Report of independent accountants 1 - 2 II - Financial statements 1 - 5 III - Notes to the financial statements 1 - Operations and regulatory environment 6 - 8 2 - Basis of preparation 8 - 15 3 - Cash and due from banks 15 - 16 4 - Investment securities 16 - 22 5 - Loan portfolio 23 - 25 6 - Interest and commissions receivable 25 7 - Investments in subsidiaries and affiliates 26 - 29 8 - Available-for-sale assets 29 9 - Property and equipment 29 - 30 10 - Other assets 30 - 31 11 - Deposits 31 - 32 12 - Deposits and liabilities with Banco Nacional de Vivienda y Hábitat (BANAVIH) 32 13 - Borrowings 32 14 - Other liabilities from financial intermediation 33 15 - Interest and commissions payable 33 16 - Accruals and other liabilities 33 17 - Taxes 34 - 35 18 - Employee benefits 35 - 39 19 - General and administrative expenses 39 20 - Other operating income 39 21 - Other operating expenses 40 22 - Extraordinary expenses 40 23 - Equity 40 - 42 24 - Financial assets and liabilities in foreign currency 42 - 43 25 - Memorandum accounts 44 - 49 26 - Credit-related commitments 49 - 50 27 - Balances and transactions with related companies 51 - 54 28 - Fundación Mercantil 54 29 - Maturity of financial assets and liabilities 55 30 - Fair value of financial instruments 56 - 57 31 - Risk management 57 - 58 32 - Liabilities and contingencies 58 - 59 33 - Money laundering prevention and terrorism financing 59 34 - Investments and loans granted in excess of legal limits 60 35 - Legal contributions 60

Mercantil, C.A. Banco Universal (Subsidiary of Mercantil Servicios Financieros, C.A.) Balance sheet December 31, 2016 and 2015

2016 2015 (In bolivars)

Assets Cash and due from banks (Note 3) 568,394,325,205 154,144,272,775 Cash 24,762,307,200 8,491,607,452 Central Bank of Venezuela 523,286,245,760 137,641,396,706 Venezuelan banks and other financial institutions 152,000 339,950 Foreign and correspondent banks 474,871,065 506,838,971 Pending cash items 19,870,749,180 7,504,089,696 Investment securities (Note 4) 131,670,732,915 69,247,832,747 Deposits with the Central Bank of Venezuela and overnight deposits 15,917,071,000 2,100,000,000 Investments in available-for-sale securities 43,342,710,853 18,943,344,378 Investments in held-to-maturity securities 32,151,090,061 12,291,413,348 Restricted investments 783,529,945 659,097,254 Investments in other securities 39,476,331,056 35,253,977,767 Loan portfolio (Note 5) 595,301,689,832 307,411,935,388 Current 611,782,048,569 316,170,494,485 Rescheduled 1,034,017,279 510,652,762 Overdue 1,934,763,298 627,456,726 In litigation 103,251,530 50,639,821 (Allowance for losses on loan portfolio) (19,552,390,844) (9,947,308,406) Interest and commissions receivable (Note 6) 6,471,397,290 3,989,981,760 Interest receivable on cash and due from banks - 374 Interest receivable on investment securities 1,652,800,563 1,012,443,541 Interest receivable on loan portfolio 4,720,441,473 2,894,614,993 Commissions receivable 216,632,840 121,604,244 Interest and commissions receivable on other accounts receivable - 2,529 (Provision for interest receivable and other) (118,477,586) (38,683,921) Investments in subsidiaries and affiliates (Note 7) 4,329,863,212 1,393,205,898 Available-for-sale assets (Note 8) 38,712,975 597,465 Property and equipment (Note 9) 5,186,781,944 2,968,662,509 Other assets (Note 10) 23,247,898,819 11,946,459,365 Total assets 1,334,641,402,192 551,102,947,907

Memorandum accounts (Note 25) Contingent debtor accounts 3,105,533,108 2,573,471,845 Assets received in trust 46,105,061,092 28,110,445,227 Other special trust services 7,052,161 7,706,986 Other debtor memorandum accounts 1,390,803,091,112 759,338,795,264 Other debtor control accounts 3,680,014 7,704,280 1,440,024,417,487 790,038,123,602

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 December 31, 2016 and 2015

2016 2015 (In bolivars)

Liabilities and Equity Liabilities Deposits (Note 11) 1,226,342,084,953 497,141,012,617 Demand deposits 929,238,397,295 349,469,735,940 Non-interest-bearing checking accounts 753,419,258,080 181,423,432,339 Interest-bearing checking accounts 150,559,595,347 126,057,606,370 Checking accounts under Exchange Agreement No. 20 90,710,233 66,362,329 Demand deposits and certificates 25,168,833,635 41,922,334,902 Other demand deposits 12,493,876,115 4,215,561,594 Savings deposits 283,822,443,756 142,548,765,626 Time deposits 311,063,967 530,236,411 Restricted deposits 476,303,820 376,713,046 Deposits and liabilities with Banco Nacional de Vivienda y Hábitat (Note 12) 186,227 1,311,628 Borrowings (Note 13) 205,848,259 69,842,275 Venezuelan financial institutions, up to one year 73,750,368 43,800,051 Foreign financial institutions, up to one year 132,097,891 26,042,224 Other liabilities from financial intermediation (Note 14) 3,530,966 4,136,512 Interest and commissions payable (Note 15) 27,433,028 104,786,598 Expenses payable on deposits 27,433,028 104,742,958 Expenses payable on borrowings - 43,640 Accruals and other liabilities (Note 16) 46,713,017,158 16,442,827,650 Total liabilities 1,273,292,100,591 513,763,917,280 Equity (Note 23) Capital stock 292,415,038 268,060,233 Contributions pending capitalization 8,854,223,503 2,890,220,542 Capital reserves 309,959,940 281,463,245 Equity adjustments (703,263) (1,425,900) Retained earnings 51,591,474,335 33,017,542,783 Unrealized gain on investments (Note 4) 301,932,048 883,169,724 Total equity 61,349,301,601 37,339,030,627 Total liabilities and equity 1,334,641,402,192 551,102,947,907

The accompanying notes are an integral part of the financial statements

2

Mercantil, C.A. Banco Universal Income statement Years ended December 31, 2016 and 2015

2016 2015 (In bolivars)

Interest income 112,955,151,454 56,137,958,972 Income from cash and due from banks 363,805 600,813 Income from investment securities 6,489,184,547 4,140,369,059 Income from loan portfolio 106,193,831,846 51,872,533,280 Income from other accounts receivable 44,430,102 42,851,940 Other interest income 227,341,154 81,603,880 Interest expense (27,772,771,135) (16,625,561,488) Expenses from deposits (27,632,775,277) (16,482,817,165) Expenses from borrowings (420,269) (1,035,394) Expenses from other liabilities from financial intermediation (136,817,092) (136,334,667) Other interest expense (2,758,497) (5,374,262) Gross financial margin 85,182,380,319 39,512,397,484 Income from financial assets recovered (Note 5) 822,204,424 518,844,469 Expenses from uncollectible accounts and write-down of financial assets (Notes 2 and 5) (12,583,464,154) (4,836,208,610) Uncollectible loans and other accounts receivable (12,583,464,154) (4,836,208,610) Net financial margin 73,421,120,589 35,195,033,343 Other operating income (Note 20) 30,903,945,332 12,216,975,882 Other operating expenses (Note 21) (12,279,650,955) (5,149,452,979) Financial intermediation margin 92,045,414,966 42,262,556,246 Operating expenses (61,899,781,273) (22,035,587,635) Salaries and employee benefits (20,435,258,977) (7,184,406,886) General and administrative expenses (Note 19) (32,291,485,668) (10,047,218,817) Fees paid to the Social Bank Deposit Protection Fund (Note 35) (8,198,999,898) (4,331,535,386) Fees paid to the Superintendency of Banking Sector Institutions (Note 35) (974,036,730) (472,426,546) Gross operating margin 30,145,633,693 20,226,968,611 Income from available-for-sale assets (Note 8) 1,072,382,287 232,946,003 Sundry operating income 1,861,497,586 279,354,658 Expenses from available-for-sale assets (Note 8) (4,723,492) (260,841) Sundry operating expenses (4,781,050,977) (2,081,827,321) Net operating margin 28,293,739,097 18,657,181,110 Extraordinary expenses (Note 22) (366,486,618) (114,975,975) Gross income before tax 27,927,252,479 18,542,205,135 Income tax (Note 17) (9,324,824,232) (6,380,626,766) Net income 18,602,428,247 12,161,578,369

Appropriation of net income Retained earnings 18,602,428,247 12,161,578,369

Provision for the Antidrug Law (Notes 16 and 33) 285,794,968 188,443,510

The accompanying notes are an integral part of the financial statements

3

Mercantil, C.A. Banco Universal Statement of changes in equity Years ended December 31, 2016 and 2015

Retained earnings Capital reserves Unappropriated surplus Contributions Other Employee Unrealized Capital pending Legal mandatory Equity Restricted Unappropriated benefits gain (loss) on Total stock capitalization reserve reserves adjustments surplus earnings (Note 2-k) investments equity (In bolivars)

Balances at December 31, 2014 268,060,233 35,833 268,060,233 10,722,409 (1,035,863) 12,951,888,083 10,008,575,954 (91,367,271) 840,865,039 24,255,804,650 Net income ------12,161,578,369 - - 12,161,578,369 Cash dividends on common shares ------(2,010,451,749) - - (2,010,451,749) Reserve for the Social Contingency Fund - - - 2,680,603 - - (2,680,603) - - - Unrealized gain on investments (Note 4) ------42,304,685 42,304,685 Contributions pending capitalization - 2,890,184,709 ------2,890,184,709 Employee benefit plan remeasurement ------407,611,999 (407,611,999) - - Restricted surplus from equity in subsidiaries and affiliates (Note 7) - - - - - 70,961,241 (70,961,241) - - - Translation adjustment of net assets of subsidiaries abroad - - - - (47,279) - - - - (47,279) Reclassification of 50% of net income to restricted surplus (Note 23) - - - - (342,758) 6,043,968,262 (6,043,968,262) - - (342,758) Balances at December 31, 2015 268,060,233 2,890,220,542 268,060,233 13,403,012 (1,425,900) 19,066,817,586 14,449,704,467 (498,979,270) 883,169,724 37,339,030,627 Net income ------18,602,428,247 - - 18,602,428,247 Capital increase (Note 23) 24,354,805 (24,354,805) ------Reserve for the Social Contingency Fund - - - 4,141,890 - - (4,141,890) - - - Unrealized loss on investments (Note 4) ------(581,237,676) (581,237,676) Legal reserve - - 24,354,805 - - - (24,354,805) - - - Contributions pending capitalization - 5,988,357,766 ------5,988,357,766 Employee benefit plan remeasurement ------384,152,617 (384,152,617) - - Restricted surplus from equity in - subsidiaries and affiliates (Note 7) - - - - - (220,087,516) 220,087,516 - - - Translation adjustment of net assets of subsidiaries abroad - - - - 722,637 - - - - 722,637 Reclassification of 50% of net income to restricted surplus (Note 23) - - - - - 9,397,009,534 (9,397,009,534) - - - Balances at December 31, 2016 292,415,038 8,854,223,503 292,415,038 17,544,902 (703,263) 28,243,739,604 24,230,866,618 (883,131,887) 301,932,048 61,349,301,601

Income per share (Note 2)

Years ended December 31, 2016 2015

Outstanding common shares 292,415,038 268,060,233

Net income per share Bs 63.6165 Bs 45.3688

The accompanying notes are an integral part of the financial statements

4

Mercantil, C.A. Banco Universal Cash flow statement Years ended December 31, 2016 and 2015

2016 2015 (In bolivars)

Cash flows from operating activities Net income 18,602,428,247 12,161,578,369 Adjustments to reconcile net income to net cash provided by operating activities Equity in subsidiaries and affiliates, net 95,325,743 53,800,533 Release of exchange adjustment (811,167,606) - Allowance for losses on loan portfolio 12,473,414,288 4,803,365,793 Provision for interest receivable 109,736,231 32,608,633 Write-offs of uncollectible accounts and decrease in branch provision for doubtful accounts (2,885,951,705) (770,176,726) Income tax provision 209,088,674 6,934,604,836 Deferred income tax 1,018,163,900 (553,978,070) Provision for other assets 22,931,424 4,324,061 Write-offs against the provision for other assets (1,796,336) (3,326,443) Release of provision for other assets (716,716) (1,857,848) Other provisions 2,770,808,889 751,361,032 Depreciation of property and equipment 787,692,702 395,361,540 Amortization of deferred expenses and goodwill 1,467,787,357 385,190,676 Amortization of available-for-sale assets 4,723,492 260,841 Accrual for length-of-service benefits 3,564,135,157 1,621,521,839 Payment of length-of-service benefits (1,826,058,239) (1,182,283,707) Net change in Deposits with the Central Bank of Venezuela and overnight deposits (13,817,071,000) (911,225,000) Interest and commissions receivable (2,554,746,885) (1,836,074,313) Other assets (11,821,656,917) (9,219,105,666) Interest and commissions payable (77,383,314) 41,591,306 Accruals and other liabilities 23,596,472,291 3,100,396,294 Net cash provided by operating activities 30,926,159,677 15,807,937,980 Cash flows from financing activities Net change in Deposits 729,155,836,206 239,056,471,696 Deposits and liabilities with Banco Nacional de Vivienda y Hábitat (1,125,401) 936,370 Borrowings 120,608,299 (198,321,127) Other liabilities from financial intermediation (605,546) 75,474 Dividends paid - (2,010,451,749) Capital increase 24,354,805 - Contributions pending capitalization 5,964,002,961 2,890,184,709 Net cash provided by financing activities 735,263,071,324 239,738,895,373 Cash flows from investing activities Loans granted during the year (968,337,857,465) (410,674,926,700) Loans collected during the year 670,942,997,249 261,833,208,915 Net change in Available-for-sale investments (24,458,538,002) (2,055,149,526) Held-to-maturity investments (19,859,676,713) (6,536,056,632) Restricted investments (112,135,606) (369,539,633) Investments in other securities (4,222,353,289) (15,045,564,550) Investments in subsidiaries and affiliates (3,019,521,748) (997,921,760) Available-for-sale assets (42,839,002) 21,777,765 Property and equipment (3,005,812,137) (2,443,976,693) Net cash used in investing activities (352,115,736,713) (176,268,148,814) Cash and due from banks Net change 414,073,494,288 79,278,684,539 Effect of exchange fluctuations 176,558,142 - At the beginning of the year 154,144,272,775 74,865,588,236 At the end of the year 568,394,325,205 154,144,272,775

Supplementary information on non-cash activities Translation adjustment of net assets of subsidiaries abroad 722,637 295,479

Adjustment of available-for-sale investments to market value 581,237,676 42,304,685

Adjustment from net exchange gain (811,167,606) -

Taxes paid 6,933,176,360 2,842,435

Interest paid 27,850,124,706 16,583,970,182

Reclassification of provisions (Notes 5 and 6) Interest and commissions receivable to allowance for losses on loan portfolio 17,257,531 15,925,765

The accompanying notes are an integral part of the financial statements

5 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

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 December 31, 2016, the Bank and its branch in Curacao have 6,191 employees.

The Bank’s financial statements at December 31, 2016 and 2015 were approved by the Board of Directors on January 10, 2017 and January 12, 2016, respectively, and approved for issue by the Audit Committee on February 14, 2017 and February 16, 2016, respectively.

Regulatory environment Law of the National Financial System This Law aims to supervise and coordinate the National Financial System, which is formed by the group of public, private and communal financial institutions and any other form of organization operating in the banking sector, the insurance sector, the stock market and any other sector or group of financial institutions that the policy-making body deems should form part of the system in order to ensure that financial resources are used and invested for the public interest and for economic and social development.

This Law prohibits institutions belonging to the National Financial System from forming financial groups with each other or with companies from other sectors of the national economy or to associate with international financial groups for purposes other than those defined in the Law.

Law on Banking Sector Institutions This Law, among other things, considers banking as a public service; defines financial intermediation as fundraising for investment in loan portfolios and securities issued or guaranteed by the Venezuelan government or government agencies; limits the bank’s assets and transactions with a single debtor and defines “debtor” in relation to this limitation; regulates the formation and functions of the Board of Directors; establishes disqualification instances to act as directors; regulates the formation of financial groups; establishes a social contribution to finance projects developed by communal councils and establishes prohibitions.

Income Tax Law Venezuelan Income Tax Law requires, among other things, a 40% proportional income tax for institutions engaged in banking, financial, insurance and reinsurance activities; these institutions and special taxpayers are excluded from the inflation adjustment for tax purposes set forth in this Law. The Law establishes that net operating losses may be carried forward for three years and offset up to a maximum of 25% of annual income (Note 17).

Law on Tax on Large Financial Transactions In December 2015 the Venezuelan government enacted the Decree Law on Tax on Large Financial Transactions applicable to incorporated and unincorporated entities qualified by the Tax Administration as special taxpayers. The tax rate is equivalent to 0.75% applicable to debits made from bank accounts and operations without the mediation of financial institutions. This Decree became effective as from February 1, 2016.

6 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

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.

New Labor Law (LOTTT) The new Labor Law extends job security, establishes the retrospective accrual of length-of-service benefits, and improves the indemnity for termination of employment. Based on actuarial studies, the impact of these changes has been estimated and recorded (Note 18).

In addition, the LOTTT regulates certain legal benefits such as working hours, rest days, holidays, vacation, profit sharing, absences and leave. The Bank’s collective labor agreement also establishes the legal benefits that match or exceed benefits established in the Law.

Branch and agency The Bank’s branch and agency abroad, which have not been incorporated separately from the Bank, are subject to specific requirements of regulatory agencies in the countries where they operate regarding prior consultation for certain transactions, quality of assets, and capital and liquidity levels, as explained below:

Mercantil, C.A. Banco Universal - Curacao Branch This branch operates in Curacao. It is supervised and controlled by the Central Bank of Curacao and Saint Marteen and the Superintendency of Banking Sector Institutions (SUDEBAN) in Venezuela.

Mercantil, C.A. Banco Universal - Coral Gables, FL agency (United States of America) This agency is subject to banking regulations in the State of Florida. In addition, it is supervised and regulated by the Federal Reserve Bank and SUDEBAN in Venezuela.

The Board of Directors resolved to close the Bank’s agency in Coral Gables FL, which was approved by SUDEBAN and notified to the Federal Reserve Bank. The agency ceased operations in November 2016.

Central Bank of Venezuela (BCV) Deposit and lending rates are regulated by the BCV. The BCV sets maximum and minimum interest rates for deposits and credit operations based on reference rates. In this regard, at December 31, 2016 and 2015, the annual interest rate for lending operations may not exceed 24% and 29% for credit card transactions. Financial institutions may only charge an additional 3% per annum on amounts overdue from clients.

The maximum interest rates for directed loan portfolios at December 31 are as follows:

2016 2015 Agriculture 13% 13% Microcredits 24% 24% Tourism 8.62% or 11.62% 7.82% or 10.82% Mortgages 4.66% to 10.66% 4.66% to 10.66% Manufacturing i) 18% as the maximum interest rate for credit i) 18% as the maximum interest rate for credit operations for this sector; and ii) an annual operations for this sector; and ii) an annual interest rate not greater than 16.20% of the interest rate not greater than 16.20% of the previous rate for loans earmarked for small and previous rate for loans earmarked for small medium industries, state-owned industries, and medium industries, state-owned community industries, as well as joint ventures industries, community industries, as well as for manufacturing. joint ventures for manufacturing.

7 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

The annual interest rates on savings deposits may not fall below 16% calculated on daily balances up to Bs 20,000 and 12.50% on daily balances greater than Bs 20,000. Annual interest rates on time deposits may not fall below 14.50%.

The annual interest rate to be charged by the BCV on discount, rediscount and advance operations, except as regards those conducted under special regimes, was set at 29.50%.

The BCV has regulated service fees charged by banks to customers in respect of savings and current accounts, and leasing, international, and credit and debit card transactions.

2. Basis of preparation

The accompanying financial statements include the accounts of the Bank and its branch abroad and have been prepared based on the Accounting Manual for Banking Institutions (Accounting Manual) and the accounting rules and instructions of SUDEBAN, which differ in certain significant respects from accounting principles generally accepted in Venezuela (VEN NIF).

The Venezuelan Federation of Public Accountants (FCCPV) approved the adoption of VEN NIF as the accounting principles of mandatory application in Venezuela as from January 1, 2008. These standards are mainly based on International Financial Reporting Standards (IFRS) and their interpretations issued by the International Accounting Standards Board (IASB), except for certain criteria concerning adjustments for inflation, among others.

The main differences with VEN NIF applicable to the Bank are:

1) Consolidation The accompanying financial statements show investments in over 50%-owned subsidiaries under the equity method. In accordance with VEN NIF, these subsidiaries and special purpose entities controlled by the Bank or of which the Bank is considered the main beneficiary of their income must be consolidated. If the financial statements were presented on a consolidated basis, assets and liabilities at December 31, 2016 would decrease by Bs 62,226,000 (Bs 47,512,000 at December 31, 2015). A summary of the subsidiaries’ financial statements is shown in Note 7.

2) Inflation-adjusted financial statements VEN NIF require that the effects of inflation on the financial statements be recognized provided that inflation for the year exceeds one digit. SUDEBAN has stipulated that inflation-adjusted financial statements must be provided as supplementary information. At December 31, 2016, the inflation rates for 2016 are not available; therefore, the Bank has not prepared this supplementary information at December 31, 2016 and 2015.

3) Foreign currency Foreign currency transactions, mainly in U.S. dollars, are recorded at the official exchange rate in effect at the transaction date and adjusted to the official rate prevailing at year end. The assets, liabilities and equity of the branch and agency abroad are translated at the prevailing official exchange rate. Income accounts are translated at the average official exchange rate for the year. VEN NIF establish two options to measure transactions and balances in foreign currency: a) at the official exchange rates established in the exchange agreements issued by the BCV or b) on the basis of best estimates of future cash flows in bolivars expected to be obtained using the exchange or settlement mechanisms permitted under Venezuelan law. VEN NIF establish that exchange gains and losses on available-for-sale or held-to- maturity securities must be included in the income statement.

8 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

4) Investments in trading and available-for-sale securities According to SUDEBAN rules, investments in trading securities may remain in this category for only 90 days from the date they were classified as held for trading and investments in available-for-sale securities may not remain in this category for more than one year as from the date they were classified as available for sale, except for securities issued and guaranteed by the Venezuelan government and investments in shares of mutual guarantee companies. Under VEN NIF, they may remain in these categories indefinitely.

5) Discounts or premiums on held-to-maturity investments Discounts or premiums on held-to-maturity investments are amortized over the term of the security with a debit or credit to gain or loss on investment securities under other operating income or other operating expenses, respectively. Under VEN NIF, they are accounted for as part of the security’s yield and, therefore, must be recognized under interest income.

6) Permanent losses on investment securities When permanent losses arising from impairment in the fair value of investment securities are recorded, any subsequent recovery in fair value does not affect the new cost basis. Under VEN NIF, any recovery of previously expensed impairment losses on debt securities may be recognized as income.

7) Valuation of reclassified securities a) Reclassification of held-to-maturity securities to available-for-sale securities According to VEN NIF, when held-to-maturity securities for significant amounts are reclassified to available-for-sale securities and such transfer is due to a change in their original intended use not qualified as an isolated, external, nonrecurring or unusual event affecting the Bank, all investments remaining in this category must be reclassified to available-for-sale securities. According to SUDEBAN rules, reclassifications of held-to-maturity securities must be approved by SUDEBAN.

b) Reclassification of available-for-sale securities to held-to-maturity securities SUDEBAN rules establish that available-for-sale investments reclassified to the held-to-maturity category must be recorded at their fair value at the reclassification date. Unrealized gains or losses are maintained separately in equity and are amortized over the investment’s remaining life as an adjustment to yield. Under VEN NIF, the fair value of the investment at the reclassification date becomes the new amortized cost basis, and any gain or loss previously recognized in equity is accounted for as follows: a) gains or losses on fixed maturity investments, as well as any difference between the new amortized cost and value at maturity, are taken to profit and loss and amortized over the investment’s remaining life and; b) gains or losses on non-maturity investments will remain in equity until the asset is sold or otherwise disposed of, when they shall be recognized in profit or loss.

8) Investments in other securities Investments in other securities include investment trusts, as well as investments not classified under any of the other categories defined by the Accounting Manual. According to VEN NIF, investments in other securities are recorded under three categories: at fair value through profit or loss, available for sale and held to maturity.

9) Rescheduled loans The Accounting Manual establishes that loans whose original payment schedule, term or other conditions have been modified at the request of the debtor must be reclassified within rescheduled loans. VEN NIF provide no specific guidance. However, they do state that impairment losses on financial assets carried at amortized cost shall be charged to the results for the year in which they are incurred.

10) Overdue and in-litigation loans Loans classified as overdue must be written off within 24 months after inclusion in this category. In-litigation loans are those in the legal collection process. Loans in litigation must be fully provided for after 24 months in the in-litigation category. In addition, overdue monthly loan installments that have

9 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

been repaid must be reclassified to the category to which they pertained before being classified as overdue. Likewise, when a debtor repays pending loan installments of a loan in litigation, thereby terminating the lawsuit, the Bank must reclassify the loan to the category to which it pertained before being classified as in litigation. Under VEN NIF, they are recorded based on collectibility.

11) Allowance for losses on loan portfolio Allowances for losses on the loan portfolio are determined based on a collectibility assessment for individual loans, a global risk assessment for loans not assessed individually and a general allowance of 1% over loan balances at month end, except for microcredits, which are subject to a general 2% allowance. In addition to the minimum general and specific allowances required for the loan portfolio, SUDEBAN established a general countercyclical allowance equivalent to 0.75% of the gross loan portfolio balance. VEN NIF require the allowance for losses on the loan portfolio to be determined based on asset recoverability, considering the fair value of guarantees, and do not provide for a general allowance, which would have to be accounted for as a reduction of retained earnings in the statement of changes in equity.

12) Assets received as payment and idle assets Assets received as payment must be recorded at the lower of assigned value, book value, market value or appraisal value not older than one year, and are amortized using the straight-line method over 1 to 3 years. Assets idle for more than 24 months are written out of asset accounts. In accordance with VEN NIF, assets received as payment are recorded at the lower of cost and market value and are classified as property and equipment or non-current assets held for sale depending on their use.

13) Property and equipment The Accounting Manual establishes that these assets shall be initially recorded at acquisition or construction cost, as applicable. VEN NIF allow revaluation of property and equipment, and any increase in value is credited to equity under revaluation surplus.

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 year for the amount by which the asset’s carrying amount exceeds fair value. According to VEN NIF, the recoverable amount of an asset or group of assets to be held and used is the higher of fair value less costs to sell and value in use (value in use is the present value of estimated future cash flows to be obtained from an asset or Cash Generating Unit (CGU)).

The CGU represents the lowest level within the entity that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

14) Leasehold improvements Significant leasehold improvements are recorded as amortizable expenses and included under other assets. According to VEN NIF, leasehold improvements are recorded within property and equipment.

15) Goodwill Goodwill relates to the excess of cost over book value of shares and contributions pending capitalization at the date of acquisition and is being amortized using the straight-line method over 20 years (Note 10). As from 2008, goodwill must be amortized over no more than 5 years. According to VEN NIF, goodwill should not be amortized but tested for impairment annually or sooner whenever events or circumstances indicate that the value of the respective reporting unit may be impaired. Impairment is determined comparing the book value to the recoverable amount of the CGU, and if the carrying amount exceeds the recoverable amount, an impairment loss is recognized in the income statement.

10 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

16) Provisions The Accounting Manual establishes timeframes to record provisions for bank reconciling items, pending items and accounts receivable forming part of other assets, interest receivable and disposal of certain assets, among others.

According to VEN NIF, provisions are recorded based on the probability of collection or recovery. No timeframes are established for creating provisions for these items.

17) Deferred tax The Bank recognizes a deferred tax asset or liability in respect of temporary differences between the tax and the book balance sheets, except for provisions for losses on other than unrecoverable loans. A deferred tax asset is not recognized for any amount exceeding future taxable income. In accordance with VEN NIF, a deferred tax asset or liability is calculated in respect of all temporary differences between the tax balance sheet and the accounting balance sheet (Note 17).

18) Employee benefit plan remeasurement VEN NIF establish that the effect due to experience and changes in actuarial assumptions must be recognized in equity. In accordance with the rules and instructions of SUDEBAN, employee benefit plan remeasurement is recognized in the income statement.

19) Employee stock option plan The Bank has a long-term stock option plan allowing certain key officers to purchase shares of Mercantil Servicios Financieros, C.A. (MERCANTIL) (Note 18). The Bank makes contributions to Fundación BMA for share purchases and records them in the results for the year in which they are made. According to VEN NIF, the related expense is recorded at the fair value of options granted to employees and amortized over the vesting period. The effect of shares purchased for the stock option plan on the financial statements is also recognized.

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

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

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

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

23) Cash flows For purposes of the cash flow statement, the Bank considers cash and due from banks as cash equivalents. Under VEN NIF, investments and deposits maturing within 90 days are considered cash equivalents.

11 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

Below is a summary of SUDEBAN rules and instructions that do not differ from VEN NIF:

a) Investment securities Investment securities are classified upon acquisition, based on their nature and intended use, as deposits with the BCV and overnight deposits, investments in trading securities, investments in available-for-sale securities, investments in held-to-maturity securities, investments in other securities and restricted investments. They are accounted for as described below:

Deposits with the Central Bank of Venezuela (BCV) and overnight deposits Excess liquidity deposited at the BCV, overnight deposits and debt securities issued by Venezuelan financial institutions are included in this category. These investments are recorded at realizable value, representing cost or par value. In addition, this category includes securities acquired under repurchase agreements, which are recorded at the agreed value.

Investments in available-for-sale securities Investments in available-for-sale debt and equity securities are recorded at fair value. Unrealized gains or losses, net of tax, resulting from differences in fair values are included in equity under unrealized gain (loss) on investments until they are sold. Investments in available-for-sale debt securities not listed on stock exchanges are recorded at fair value based principally on the present value of future cash flows of the securities.

Investments in held-to-maturity securities Investments in debt securities that the Bank has the firm intention and ability to hold until maturity are recorded at cost, which should not differ significantly from fair value at purchase, and are subsequently adjusted for amortization of discounts or premiums. Discounts or premiums are amortized over the term of the securities as a credit or debit to income from investment securities.

The Bank assesses at each balance sheet date, or sooner if circumstances require it, whether there is objective evidence that financial assets are impaired. An impairment in the fair value of held-to-maturity and available-for-sale securities is charged to the results for the year 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 years ended December 31, 2016 and 2015, the Bank has identified no other-than-temporary impairments in the value of its investments.

Restricted investments Restricted investments originating from other investment categories are measured using the same criteria used to record those investments from which they are derived.

b) Investments in subsidiaries and affiliates Investments in shares of 20% to 50%-owned affiliates are shown using the equity method and are recorded in investments in subsidiaries and affiliates (Note 7).

Investments in companies less than 20% owned that the Bank has the intention of holding, and over whose administration it has significant influence, are recorded under the equity method or at cost.

c) Investment securities acquired under resale agreements Securities acquired under resale agreements are recorded as deposits with the BCV and overnight deposits for the amount of funds transacted. The difference with respect to the resale price is recorded within interest income on an accrual basis (Note 4).

12 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

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.

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.

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 year, and the disclosure of contingent assets and liabilities at the date of the financial statements.

The areas involving a higher degree of judgment or complexity, or areas where management’s assumptions or estimates are significant to the financial statements are the allowance for losses on the loan portfolio (Note 5), the income tax provision (Note 17), employee benefits (Note 18) and the determination of fair values (Note 30).

Below is a summary of the main bases used in the preparation of the financial statements:

Contingent loans The provision for contingent loans is determined based on a collectibility assessment aimed at quantifying the specific allowance for possible losses on each loan considering, among other things, economic conditions, client credit risk, credit history and the fair value of guarantees received. The Bank performs its review on a quarterly basis in accordance with SUDEBAN rules.

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

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

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).

13 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

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.

Indemnity Under the LOTTT, if an employee is terminated for reasons other than justified dismissal, the employee will be entitled to receive an additional indemnity equal to his or her accrued length-of-service benefits. This amount is recorded within salaries and employee benefits upon termination of employment.

Profit-sharing bonus and vacation leave As established in its collective labor agreement, the Bank grants profit-sharing bonuses and vacation leave to its employees that match or exceed the legal minimums, and accrues the related liabilities as incurred (Note 16).

Retirement pension plan The Bank has a long-term defined benefit plan covering all eligible employees which is managed by Fundación BMA. Related costs and liabilities are calculated using actuarial methods and are recorded in the results for the year. The net costs of the pension plan are based on actuarial assumptions that are revised annually, such as the discount rate of the obligation, the inflation rate and salary increases, and include service costs, interest expense and returns on plan assets. Important changes in assumptions may affect the amount of future contribution.

The Bank uses the projected unit credit method to calculate the present value of the Defined Benefit Obligation (DBO). The Bank makes annual contributions to the plan, except when the DBO is already covered by plan assets. Plan assets are recorded at fair value.

Post-retirement benefits The Supplementary Defined Benefit Plan and the Supplementary Savings Plan include certain additional post-retirement benefits for the Bank’s employees meeting certain conditions in respect of age and length of service, mainly medical insurance. The related costs and liabilities are determined based on actuarial methods.

The effect due to experience and changes in actuarial assumptions in retirement pension plans and post-retirement benefits are recorded in the income statement. Past service costs of the pension plan are recorded in the income statement in the year in which the change occurs.

14 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

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 year in which they are incurred. This Plan is a voluntary programmed savings scheme in the form of individual capitalization accounts that is managed by the Savings and Loan Fund of employees of Mercantil Servicios Financieros, C.A. Under this Plan, employees contribute between 1% and 5% of their basic monthly salary and the Bank doubles the employee’s contribution up to a maximum of 10% of said salary.

k) Stock option plan The Bank has a long-term stock option plan of MERCANTIL shares for certain key officers. Stock options are recorded as equity. The Bank determines the fair value of these options and amortizes the related expense over the vesting period. The fair value of each option is determined at the option grant date using the Black-Scholes-Merton valuation model and does not take into consideration cash dividends that will not be received by the participants.

l) Recognition of revenue, costs and expenses Income, costs and expenses are recorded as earned or incurred. Interest collected in advance is included within accruals and other liabilities as deferred income and recorded as income when earned (Note 16).

Interest on deposits, liabilities and borrowings is recorded as interest expense when incurred.

Income from financial leases and amortization costs of leased property are shown net in the income statement within income from the loan portfolio.

m) Assets received in trust The Bank acts as custodian, administrator and manager of third-party investments. Assets received in trust, shown under memorandum accounts, are measured using the same parameters used by the Bank to measure its own assets, except investments in debt securities that are recorded at cost, which should not differ significantly from fair value at purchase. Discounts or premiums are amortized over the term of the securities as a credit or debit to interest income, resulting in a lower or greater effective yield on investments. Debt securities in foreign currency are adjusted to the prevailing official exchange rate. Investments in equity securities in bolivars and foreign currency are recorded at cost. In accordance with certain trust agreements, investments in debt or equity securities included in these trusts are maintained at cost or market values.

n) Dividends Cash dividends are recorded as liabilities when approved at a Shareholders’ Meeting.

o) Net income per share Basic net income per share has been determined by dividing net income for the year by the weighted average of outstanding common shares during the year.

3. Cash and due from banks

The balances with the BCV included in cash and due from banks at December 31 comprise the following: 2016 2015 (In bolivars)

Legal reserve 238,770,063,878 113,169,363,912 Demand deposits (1) 284,516,181,882 24,472,032,794 523,286,245,760 137,641,396,706 (1) Includes balances of Exchange Agreement No. 20 at December 31, 2015.

15 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

At December 31, 2016 and 2015, the legal reserve is 18.50% of all deposits. The legal reserve for marginal increases in deposits is 28% as from March 2014. Legal reserve funds do not earn interest for the Bank and are not available for use (Note 4-e). Demand deposits with the BCV relate to internal liquidity risk limits, and earn no interest. At December 31, 2016, this balance includes the effect of recent high liquidity levels of the Venezuelan financial system.

Pending cash items relate mainly to clearinghouse operations conducted by the BCV and other banks.

4. Investment securities

Investment securities at December 31 comprise the following:

2016 2015 (In bolivars)

Investments Deposits with the BCV and overnight deposits 15,917,071,000 2,100,000,000 Available-for-sale securities 43,342,710,853 18,943,344,378 Held-to-maturity securities 32,151,090,061 12,291,413,348 Restricted investments 783,529,945 659,097,254 Other securities 39,476,331,056 35,253,977,767 131,670,732,915 69,247,832,747

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

Book value 2016 2015 (In bolivars)

Deposits with the BCV, maturing between January and September 2017 (maturing in January 2016 at December 31, 2015) 15,906,271,000 (1) (a) 2,100,000,000 (1) (a) Investment securities under repurchase agreement acquired under resale agreements with the BCV, maturing in January 2017 10,800,000 (1) (a) - 15,917,071,000 2,100,000,000

(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 earn the following annual interest:

2016 2015 Minimum Maximum Minimum Maximum rate rate rate rate % % % %

Deposits with the BCV 6.00 7.25 6.00 6.00 Investment securities under repurchase agreement 6.00 6.00 - -

16 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

b) Investments in available-for-sale securities Investments in available-for-sale securities at December 31 comprise the following:

2016 2015 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 March 2017 and July 2033, with a par value of Bs 6,950,508,812 (maturing between May 2016 and 2029, with a par value of Bs 10,917,584,859 at December 31, 2015) 8,278,800,248 322,480,910 (16,850,986) 8,584,430,172 (1) (a) 12,426,468,011 974,507,172 (18,335,321) 13,382,639,862 (1) (a) Fixed Interest Bonds (TIF) issued by the Bolivarian Republic of Venezuela, maturing between February 2017 and March 2032, with a par value of Bs 570,281,126 (maturing between December 2015 and March 2029, with a par value of Bs 2,078,768,256 at December 31, 2015) 690,341,166 10,010,805 (13,977,511) 686,374,460 (1) (a) 2,517,747,309 29,392,478 (89,598,883) 2,457,540,904 (1) (a) Principal and Interest Covered Bonds (TICC), maturing between April 2017 and March 2019, with a reference par value of US$107,859,528 payable in bolivars at the official exchange rate (maturing between April 2017 and March 2019, with a reference par value of US$842,132 at December 31, 2015) 1,050,512,251 2,769,448 (106,226) 1,053,175,473 (1) (a, f) 688,517,524 1,880,783 (628,524) 689,769,783 (1) (a) Debenture bonds issued by Petróleos de Venezuela, S.A. (PDVSA), maturing in July 2017, with a par value of Bs 186,530,000 (maturing between July 2016 and 2017, with a par value of Bs 373,060,000 at December 31, 2015) 191,368,731 - (2,224,886) 189,143,845 (1) (a) 382,190,085 - (3,960,220) 378,229,865 (1) (a) Sovereign Bonds issued by the Bolivarian Republic of Venezuela, with a par value of US$26,711,300, maturing between April 2020 and October 2024 125,165,320 3,366 (1,263,306) 123,905,380 (1) (d, g) - - - - Treasury Notes issued by the Bolivarian Republic of Venezuela, with a par value of Bs 1,480,000,000, maturing between January and November 2017 (maturing between January and December 2016, with a par value of Bs 1,809,333,000 at December 31,2015) 1,452,367,576 20,188,129 (29,025) 1,472,526,680 (1) (a, f) 1,795,310,541 9,958,505 (2,820,649) 1,802,448,397 (1) (a) 11,788,555,292 355,452,658 (34,451,940) 12,109,556,010 17,810,233,470 1,015,738,938 (115,343,597) 18,710,628,811 Equity in non-financial private-sector companies Sociedad de Garantías Recíprocas para la Pequeña y Mediana Empresa del Sector Turismo, S.A. (SOGATUR) 207,025,200 - - 207,025,200 (1) (b) 207,025,200 - - 207,025,200 (1) (b) Sociedad Nacional de Garantías Recíprocas para la Pequeña y Mediana Industria, S.A. (SOGAMPI) 1,000 - - 1,000 (1) (c) 1,000 - - 1,000 (1) (c) 207,026,200 - - 207,026,200 207,026,200 - - 207,026,200 Bonds and debt securities from decentralized administration entities 2017 Agriculture BANDES Certificates of Participation, with a par value of Bs 31,019,390,403, maturing in September 2017 31,019,390,403 - - 31,019,390,403 (1) (a) - - - - 31,019,390,403 - - 31,019,390,403 - - - - 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 in November 2044, with a par value of US$651,879 (maturing between November 2022 and October 2042, with a par value of US$4,071,058 at December 31,2015) 6,654,896 - (154,255) 6,500,641 (2) (d) 26,774,735 - (1,085,368) 25,689,367 (2) (d) Debt securities issued by foreign financial institutions, maturing in February 2017, with a par value of COL$71,518,026 237,599 - - 237,599 (1) (e) - - - - 6,892,495 - (154,255) 6,738,240 26,774,735 - (1,085,368) 25,689,367 43,021,864,390 355,452,658 (34,606,195) 43,342,710,853 18,044,034,405 1,015,738,938 (116,428,965) 18,943,344,378

(1) Based on the present value of estimated future cash flows. (2) Market value based on prices listed on the stock exchange.

Custodians of investments (a) Central Bank of Venezuela. (b) Sociedad de Garantías Recíprocas para la Pequeña y Mediana Empresa del Sector Turismo, S.A. (SOGATUR). (c) Sociedad Nacional de Garantías Recíprocas para la Pequeña y Mediana Industria, S.A. (SOGAMPI). (d) Bank of New York, Inc. (e) Representation Office in Colombia. (f) Mercantil Bank (Panamá), S.A. (g) Clearstream Banking, S.A.

At December 31, 2016, the market value of securities issued and guaranteed by the Venezuelan government and owned by the Bank is lower than cost by Bs 34,452,000 (Bs 115,344,000 at December 31, 2015). This loss is included in equity as an unrealized gain (loss) on investments. The Bank believes that these losses arise from normal stock market fluctuations and, consequently, are temporary. Management does not expect to realize these securities at a price below their book value. The Bank has the ability to hold these securities for a sufficient period of time to recover unrealized losses.

17 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

Investments in available-for-sale securities at December 31 earn the following annual yield:

2016 2015 Minimum Maximum Minimum Maximum rate rate rate rate % % % %

National Public Debt Bonds in local currency 9.40 15.40 10.28 16.65 National Public Debt Bonds in local currency (Agriculture Bonds) 9.10 9.10 9.10 9.10 Fixed Interest Bonds (TIF) 9.88 18.00 9.88 18.00 Sovereign Bonds 8.25 8.25 - - Principal and Interest Covered Bonds (TICC) 5.25 6.25 5.25 6.25 Debt securities issued and guaranteed by government agencies of the United States of America 3.00 3.00 1.00 2.53 Debt securities issued by foreign private-sector companies - - 0.12 0.27 Debt securities issued by foreign financial institutions 1.50 1.50 - - Debt securities from decentralized administration entities 4.00 4.00 - -

Below is the classification of the weighted average maturity of investments in available-for-sale securities at December 31:

2016 2015 (Months)

National Public Debt Bonds in local currency 64 62 National Public Debt Bonds in local currency (Agriculture Bonds) 7 12 Fixed Interest Bonds (TIF) 82 48 Principal and Interest Covered Bonds (TICC) 27 39 Treasury Notes 3 4 Debt securities issued and guaranteed by government agencies of the United States of America 339 205 Debt securities issued by foreign private-sector companies - 19 Sovereign Bonds 67 - Debt securities issued by foreign financial institutions 2 - Debt securities from decentralized administration entities 9 -

Below is the classification of investments in available-for-sale securities according to maturity at December 31:

2016 2015 Book value Book value (equivalent (equivalent to market to market Cost value) Cost value) (In bolivars)

Up to 6 months 2,131,516,492 2,146,327,634 3,124,508,288 3,176,285,633 6 months to 1 year 31,639,755,239 31,643,979,103 1,183,836,050 1,199,228,067 1 to five years 2,574,615,012 2,654,883,672 2,663,970,794 2,666,188,203 5 to 10 years 4,019,430,552 4,091,236,182 10,001,540,173 10,738,499,617 Over 10 years 2,656,547,095 2,806,284,262 1,070,179,100 1,163,142,858 43,021,864,390 43,342,710,853 18,044,034,405 18,943,344,378

The equity account unrealized gain (loss) on investments at December 31 comprises the following:

2016 2015 (In bolivars)

Investments in available-for-sale securities 320,846,463 899,309,973 Investments in held-to-maturity securities, reclassified from investments in available-for-sale securities (12,097,072) (7,993,072) Restricted investments - (515,901) Investments in subsidiaries and affiliates (6,817,343) (7,631,276) 301,932,048 883,169,724

18 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

During the year ended December 31, 2016, the Bank recorded gains and losses on sale of investments in available-for-sale securities of Bs 2,023,869,000 and Bs 953,748,000, respectively (Bs 1,482,990,000 and Bs 759,937,000, respectively, during the year ended December 31, 2015), which are shown under other operating income and other operating expenses, respectively. The Bank received cash payments of Bs 345,934,994,000 for the aforementioned sales (Bs 273,273,624,000 during the year ended December 31, 2015).

The Bank transferred investment securities at fair value from the available-for-sale investment portfolio to the held-to-maturity investment portfolio. The unrealized loss associated with these investments is amortized until the maturity date and recognized under other operating expenses (Note 21). Below is a breakdown of transfers made:

Market Unrealized value loss (In bolivars)

December 31, 2007 749,155,000 9,573,000 December 31, 2012 1,135,003,000 52,420,000 December 31, 2016 7,878,982,000 11,879,000

c) Investments in held-to-maturity securities Investments in held-to-maturity securities at December 31 comprise the following:

2016 2015 Amortized Fair Amortized Fair Cost cost value Cost cost value (In bolivars)

Dematerialized Certificate of Participation issued by Fondo Simón Bolívar para la Reconstrucción, S.A., maturing between June 2023 and November 2024, with a par value of Bs 21,241,566,713 (maturing between May 2016 and July 2024, with a par value of Bs 10,524,702,714 at December 31, 2015) 21,241,566,713 21,241,566,713 21,241,566,713 (2) (a) 10,524,702,714 10,524,702,714 10,524,702,714 (2) (a) Fixed Interest Bonds (TIF) issued by the Bolivarian Republic of Venezuela, maturing between April 2018 and March 2033, with a par value of Bs 4,593,333,324 (maturing between February 2021 and 2030, with a par value of Bs 801,061,724 at December 31, 2015) 5,264,806,477 5,150,903,209 5,472,312,016 (1) (a) 896,122,497 887,565,342 1,027,557,575 (1) (a) National Public Debt Bonds, maturing between April 2024 and June 2032, with a par value of Bs 4,294,367,092 5,384,998,615 5,321,712,983 5,420,291,776 (1) (a) - - - Debt securities issued by Fondo de Desarrollo Nacional FONDEN, S.A., maturing in April 2017, with a par value of Bs 435,300,000 (maturing between April 2016 and 2017, with a par value of Bs 870,600,000 at December 31, 2015) 460,025,475 436,907,156 460,025,475 (2) (a) 909,779,177 879,145,292 909,779,177 (2) (a) 32,351,397,280 32,151,090,061 32,594,195,980 12,330,604,388 12,291,413,348 12,462,039,466

(1) Fair value is determined from trading operations on the secondary market. (2) Shown at par value, which is considered as fair value.

Custodian of investments (a) Central Bank of Venezuela.

The Bank transferred investment securities at fair value from the held-to-maturity investment portfolio to the available-for-sale investment portfolio. Below is a breakdown of transfers made:

Market Unrealized value loss (In bolivars)

December 31, 2015 478,251,000 6,182,000

19 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

Investments in held-to-maturity securities at December 31 earn the following annual yield:

2016 2015 Minimum Maximum Minimum Maximum rate rate rate rate % % % %

National Public Debt Bonds 14.68 15.79 - - Fixed Interest Bonds (TIF) issued by the Bolivarian Republic of Venezuela 14.50 18.00 15.25 16.50 Dematerialized Certificate of Participation issued by Fondo Simón Bolívar para la Reconstrucción, S.A. 4.66 6.05 3.75 6.05 Debt securities issued by Fondo de Desarrollo Nacional FONDEN, S.A. 9.10 9.10 9.10 9.10

Below is the classification of the weighted average maturity of investments in held-to-maturity securities at December 31:

2016 2015 (Months)

National Public Debt Bonds 118 - Fixed Interest Bonds (TIF) issued by the Bolivarian Republic of Venezuela 149 158 Dematerialized Certificate of Participation issued by Fondo Simón Bolívar para la Reconstrucción, S.A. 91 66 Debt securities issued by Fondo de Desarrollo Nacional FONDEN, S.A. 4 10

Below is the classification of investments in held-to-maturity securities according to maturity at December 31: 2016 2015 Amortized Fair Amortized Fair cost value cost value (In bolivars)

Up to 6 months 436,907,156 460,025,475 3,632,314,073 3,645,485,591 1 to 5 years 1,990,988,020 2,083,116,703 442,563,108 460,025,475 5 to 10 years 26,063,865,914 26,066,280,821 7,543,846,001 7,547,706,764 Over 10 years 3,659,328,971 3,984,772,981 672,690,166 808,821,636 32,151,090,061 32,594,195,980 12,291,413,348 12,462,039,466

d) Restricted investments Restricted investments at December 31 comprise the following:

2016 2015 Book value Book value (equivalent (equivalent to market to market Cost value) Cost value) (In bolivars)

As guarantee Trust fund for MasterCard transactions 633,575,748 633,575,748 (3) (c) 587,562,615 587,562,615 (3) (c) Trust fund for the Social Contingency Fund 24,099,672 24,099,672 (3) (c) 18,121,541 18,121,541 (3) (c) Debt securities issued and guaranteed by government agencies of the United States of America, maturing in April 2021, with a par value of US$3,000,000 - - 20,779,336 20,263,434 (1) (a) Certificates of deposit issued by Mercantil Bank, N.A., Deutsche Bank and Standard Chartered Bank, maturing between February and August 2017, with a par value of US$12,616,995 (maturing between March and June 2016, with a par value of US$5,275,081 at December 31, 2015) 125,854,525 125,854,525 (2) (a, b,d) 33,149,664 33,149,664 (2) (a,b,d) 783,529,945 783,529,945 659,613,156 659,097,254

(1) Based on the present value of estimated future cash flows. (2) Shown at par value, which is considered as fair value. (3) Trust funds maintained with Banco Provincial, S.A. Banco Universal.

20 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

Custodians of investments (a) Deutsche Bank AG, London. (b) Mercantil Bank, N.A. (c) Mercantil, C.A. Banco Universal. (d) Standard Chartered Bank, New York.

Restricted investments at December 31 earn the following annual yield:

2016 2015 Minimum Maximum Minimum Maximum rate rate rate rate % % % %

Debt securities issued and guaranteed by government agencies of the United States of America - - 4.59 4.59 Investment trust 10.00 10.00 2.00 10.00 Certificates of deposit 0.10 1.25 0.10 0.40

Below is the classification of the weighted average maturity of restricted investments at December 31:

2016 2015 (Months)

Debt securities issued and guaranteed by government agencies of the United States of America - 216 Certificates of deposit 4 4

Below is the classification of restricted investments according to maturity at December 31:

2016 2015 Fair Fair Cost value Cost value (In bolivars)

Up to 6 months 781,534,945 781,534,945 638,833,820 638,833,820 6 months to 1 year 1,995,000 1,995,000 - - 5 to 10 years - - 20,779,336 20,263,434 Over 10 years - - - - 783,529,945 783,529,945 659,613,156 659,097,254

21 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

e) Investments in other securities As required by the Venezuelan government, at December 31, 2016 and 2015, the Bank has investment securities issued by the Bolivarian Republic of Venezuela, public companies and decentralized entities to finance social projects for agricultural development and housing construction, as follows:

2016 2015 Weighted Weighted Book average Book average Yield value maturity value maturity Issuer Guarantee Maturity % (In bolivars) (months) (In bolivars) (months) Characteristics H Investments in other securities Imputable to Fondo Simón Bolivarian mortgage portfolio Bolívar para la Republic compliance Reconstrucción, S.A. of Venezuela 2020-2028 4.66-6.48 37,580,812,056 85 33,242,488,767 78 (1, 2, 5) (a) (Note 5) Reduces the legal 2017 4.66 1,315,669,000 6 1,315,669,000 18 (5) (a) reserve (Note 3) Imputable to Banco Nacional de BANAVIHI’s mortgage portfolio Vivienda y Hábitat current loan compliance (BANAVIH) portfolio 2021 2.00 579,850,000 59 695,820,000 73 (2) (a) (Note 5)

Total investments in other securities 39,476,331,056 35,253,977,767 Available-for-sale Debenture bonds Imputable to investments Bolivarian agricultural loan Petróleos de Venezuela, S.A. Republic of portfolio compliance (PDVSA) Venezuela 2017 9.10 189,143,845 7 378,229,865 15 (2, 3) (a) (Notes 4-b and 5)

Sociedad de Garantías Recíprocas para People’s Power Imputable to la Pequeña y Mediana Empresa del Ministry for tourism loan Sector Turismo, S.A. (SOGATUR) Tourism - - 207,025,200 - 207,025,200 - (4) (b) portfolio compliance Banco de Desarrollo Económico y Social de Reduces the legal Venezuela (BANDES) BANDES 2017 4 31,019,390,403 9 - - (6) (a) reserve (Note 3) Total available-for-sale investments 31,415,559,448 585,255,065

Held-to-maturity investments Fondo Simón Bolivarian Bolívar para la Republic Reduces the legal Reconstrucción, S.A. of Venezuela 2023-2024 4.66 - 6.05 21,241,566,713 91 10,524,702,714 11 (2,5) (a) reserve (Note 3) Imputable to agricultural loan Fondo de Desarrollo portfolio compliance Nacional FONDEN, S.A. Debenture bonds 2017 9.10 436,907,156 4 879,145,292 10 (2) (a) (Notes 4-b and 5) Total held-to-maturity investments 21,678,473,869 11,403,848,006

Total investments required 92,570,364,373 47,243,080,838

(1) At December 31, 2016, the Bank maintains Bs 37,580,812,056 in Bolivarian Housing Securities issued by Fondo Simón Bolívar para la Reconstrucción, S.A., of which the entire amount is imputable to the mortgage portfolio from previous years, to finance Venezuela’s Great Housing Mission (Bs 33,242,488,767 at December 31, 2015, of which Bs 15,161,534.576 was imputable to the mortgage portfolio for 2015).

(2) These securities may be traded with the BCV at 100% of their par value for purposes of liquidity injection and credit assistance. The Bank has the intention to hold them until maturity. These securities are recorded at cost. These securities are not currently traded on the Caracas Stock Exchange.

(3) These securities may be traded on the Bicentennial Public Stock Exchange at market value. They are available for sale and are recorded at the price quoted on the Bicentennial Public Stock Exchange.

(4) At December 31, 2016 and 2015, the Bank maintains Bs 207,025,200 in Class “B” shares of Sociedad de Garantías Recíprocas para la Pequeña y Mediana Empresa del Sector Turismo, S.A. (SOGATUR) imputable to tourism loan portfolio compliance.

(5) At December 31, 2016, reduces the legal reserve by 3% and Bs 21,241,566,713 (3% and Bs 10,524,702,714 at December 31, 2015).

(6) During the year ended December 31, 2016, the Bank purchased certificates of participation for Bs 31,019,390,000 issued by Banco de Desarrollo Económico y Social de Venezuela (BANDES) to grant national agricultural loans. This amount reduces the legal reserve up to the business day previous to these certificates’ maturity date.

Custodians of investments (a) Central Bank of Venezuela. (b) Sociedad de Garantías Recíprocas para la Pequeña y Mediana Empresa del Sector Turismo, S.A. (SOGATUR).

The Bank’s control environment includes policies and procedures to determine investment risks by type of issuer and economic sector. At December 31, 2016, the Bank has investment securities issued by the Venezuelan government and public entities, deposits with the BCV, securities issued by the government of the United States of America and government agencies and securities issued by the Venezuelan and international private sector, among others, representing 87.15%, 12.09%, 0.005% and 0.755%, respectively, of its investment securities portfolio (94.69%, 3.03%, 0.04% and 2.24%, respectively, at December 31, 2015).

22 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

5. Loan portfolio

The loan portfolio at December 31 is classified as follows:

2016 2015 Current % Rescheduled % Overdue % In litigation % Total % Total % (In bolivars)

Economic activity Commercial 246,039,824,776 40 673,533,842 65 603,735,596 31 99,487,004 96 247,416,581,218 40 128,905,488,891 41 Credit cards 143,663,770,301 23 - - 44,537,374 2 - - 143,708,307,675 23 71,464,699,723 23 Agriculture 101,389,165,388 17 56,531,758 6 37,028,166 1 - - 101,482,725,312 17 48,962,440,677 15 Industrial 32,124,752,932 5 13,987,235 1 69,829,615 4 3,318,337 4 32,211,888,119 5 19,206,396,204 6 Services 35,681,485,118 6 3,774,523 - 52,959,131 3 437,500 - 35,738,656,272 6 15,025,808,761 5 Home purchases and improvements 11,817,285,242 2 147,420 - 75,923,846 4 5,268 - 11,893,361,776 2 8,849,274,821 3 Construction 4,660,695,055 1 - - 67,297,572 3 - - 4,727,992,627 1 3,625,296,091 1 Car loans 13,922,922,806 2 - - 135,735,147 7 - - 14,058,657,953 2 3,222,277,190 1 Foreign trade 62,998 - - - 8,502,553 - - - 8,565,551 - 9,501,333 - Other 22,482,083,953 4 286,042,501 28 839,214,298 45 3,421 - 23,607,344,173 4 18,088,060,103 5 611,782,048,569 100 1,034,017,279 100 1,934,763,298 100 103,251,530 100 614,854,080,676 100 317,359,243,794 100

Guarantee Unsecured 219,199,149,451 36 156,254,413 15 546,836,466 28 - - 219,902,240,330 36 105,267,528,294 33 Mortgage 82,826,175,936 14 192,246,697 19 132,700,869 7 8,687 - 83,151,132,189 14 41,731,436,039 13 Debenture 265,014,740,987 43 685,485,894 66 1,249,819,650 65 103,242,843 100 267,053,289,374 43 161,595,340,420 51 Pledge 44,741,982,195 7 30,275 - 5,406,313 - - - 44,747,418,783 7 8,764,939,041 3 611,782,048,569 100 1,034,017,279 100 1,934,763,298 100 103,251,530 100 614,854,080,676 100 317,359,243,794 100

Maturity Up to 3 months 161,513,560,104 26 228,034,619 22 973,541,378 50 70,336,499 68 162,785,472,600 26 73,713,531,259 23 3 to 6 months 87,156,773,053 14 11,760,997 1 654,652,852 34 27,027,698 26 87,850,214,600 14 25,866,391,580 8 6 months to 1 year 161,890,916,440 27 215,930,139 21 238,311,896 12 - - 162,345,158,475 27 96,049,655,121 30 1 to 2 years 51,589,953,805 8 270,404,427 26 37,233,071 2 5,878,645 6 51,903,469,948 8 30,421,939,033 10 2 to 3 years 45,989,300,674 8 112,892,414 11 12,213,098 1 - - 46,114,406,186 8 37,080,092,442 12 3 to 4 years 26,969,099,494 4 16,268,071 2 14,625,521 1 - - 26,999,993,086 4 9,515,086,673 3 4 to 5 years 11,130,903,000 2 4,944,600 - 3,418,309 - - - 11,139,265,909 2 9,953,938,510 3 Over 5 years 65,541,541,999 11 173,782,012 17 767,173 - 8,688 - 65,716,099,872 11 34,758,609,176 11 611,782,048,569 100 1,034,017,279 100 1,934,763,298 100 103,251,530 100 614,854,080,676 100 317,359,243,794 100

Loan Promissory note 414,244,283,399 68 747,827,359 72 713,212,306 37 103,242,843 100 415,808,565,907 68 211,650,726,707 67 Credit cards, mortgage and vehicles 163,143,825,874 27 152,222,033 15 491,110,489 25 - - 163,787,158,396 27 84,203,208,464 27 Installment 17,041,125,267 3 133,967,887 13 119,969,440 6 8,687 - 17,295,071,281 3 13,235,309,762 4 Financial leases 166,644,748 ------166,644,748 - 501,555,117 - Factoring and discounts 470,750,626 ------470,750,626 - 288,003,182 - Checking accounts 495,966,974 - - - 50,340,203 3 - - 546,307,177 - 154,116,110 - Letters of credit 62,998 - - - 8,502,553 - - - 8,565,551 - 9,501,341 - Other 16,219,388,683 2 - - 551,628,307 29 - - 16,771,016,990 2 7,316,823,111 2 611,782,048,569 100 1,034,017,279 100 1,934,763,298 100 103,251,530 100 614,854,080,676 100 317,359,243,794 100

Geographic location Venezuela 611,781,984,865 100 1,034,017,279 100 1,934,763,298 100 103,251,530 100 614,854,016,972 100 317,323,405,327 100 United States of America ------35,838,467 - Other Latin American countries 63,704 ------63,704 - - - 611,782,048,569 100 1,034,017,279 100 1,934,763,298 100 103,251,530 100 614,854,080,676 100 317,359,243,794 100

Below is the classification of the loan portfolio by type of risk of the Bank and branch and agency abroad in accordance with parameters set by SUDEBAN at December 31:

2016 2015 In bolivars % In bolivars %

Risk Normal 608,591,246,187 100 314,295,661,746 100 Potential 2,332,257,430 - 1,089,177,478 - Real 2,472,157,860 - 801,478,028 - High 1,346,618,981 - 1,068,133,569 - Unrecoverable 111,800,218 - 104,792,973 - 614,854,080,676 100 317,359,243,794 100

23 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

At December 31, 2016, regulations require universal banks to earmark a minimum nominal percentage of 64.25% of their gross loan portfolio to finance loans for agriculture, small businesses, tourism, mortgages and manufacturing (62.25% for agriculture, small businesses and tourism at December 31, 2015), as follows:

December 31, 2016 Maximum Balance Number of annual maintained Earmarked Required Number of loans interest rate Activity in bolivars % % debtors granted % Calculation basis x Average gross loan portfolio balance at December 31, Agriculture (a) 101,482,725,312 42.04 26.00 2.088 4.159 13.00 2015 and 2014 Small businesses 15,618,458,159 3.88 3.00 10.775 10.999 24.00 Gross loan portfolio at June 30, 2016 Between 4.66 Mortgages (b, c) 11,215,922,175 3.53 20.00 22.464 22.464 and 10.66 Gross loan portfolio at December 31, 2015 11.62 but 8.62 may be applied in some Average gross loan portfolio balance at December 31, Tourism (d) 12,964,211,303 5.42 5.25 69 214 cases 2015 and 2014 18 but 16.20 may be applied in some Manufacturing ( e) 32,211,888,119 10.15 10.00 1.434 2.288 cases Gross loan portfolio at December 31, 2015

December 31, 2015 Maximum Balance Number of annual maintained Earmarked Required Number of loans interest rate Activity in bolivars % % debtors granted % Calculation basis x Average gross loan portfolio balance at December 31, Agriculture (a) 48,962,440,677 38.42 25.00 2.492 4.910 13.00 2014 and 2013 Small businesses 10,857,878,595 4.89 3.00 14.705 15.542 24.00 Gross loan portfolio at June 30, 2015 Between 4.66 Mortgages (b, c) 9,366,727,303 17.14 20.00 24.187 24.188 and 10.66 Gross loan portfolio at December 31, 2014 10.82 but 7.82 may be applied in some Average gross loan portfolio balance at December 31, Tourism (d) 6,979,686,206 5.50 4.25 71 204 cases 2014 and 2013 18 but 16.20 may be applied in some Manufacturing (e) 19,206,396,202 11.40 10.00 2.057 3.891 cases Gross loan portfolio at December 31, 2014

(a) In May and July 2012, Fondo de Desarrollo Nacional FONDEN, S.A. and Petróleos de Venezuela, S.A. (PDVSA), respectively, issued non-convertible bearer bonds to strengthen and finance Venezuela’s Great Agro Mission of the Ezequiel Zamora Fund. In April 2009, the Venezuelan government approved the issue of National Public Debt Bonds to finance the Integral Agricultural Development Plan for 2009-2010. These bonds may be imputed to the mandatory agricultural loan portfolio for an amount of up to 30% of the total loan portfolio, as authorized by the People’s Power Ministry for Agriculture and Land in July 2012. The loan portfolio plus these investments amount to Bs 102,108,776,313 at December 31, 2016 (Note 4-e).

At December 31, 2016, the Bank earmarked 91.56% for strategic items, 3.55% for non-strategic items and 4.72% earmarked for agroindustrial investment and 0.17% for marketing. In addition, at December 31, 2016, medium and long-term loans represent 45.46% of the total agricultural portfolio (42.37% at December 31, 2015).

(b) At December 31, 2016, the mortgage portfolio reached 3.53% compliance, including new loans repaid and the balance maintained at that date of loans earmarked for acquisition, self-construction, improvements and expansion. When only new loans repaid are considered during 2016 the percentage of this portfolio reaches 1.13%.

(c) At December 31 and June 30, 2016, the Bank maintains Bs 37,580,812,056 in Bolivarian Housing Securities issued by Fondo Simón Bolívar para la Reconstrucción, S.A., to finance Venezuela’s Great Housing Mission. New Bolivarian Housing Securities were not issued for 2016 compliance (Note 4-e).

(d) At December 31, 2016 and 2015, the Bank complied with the minimum required percentage of the tourism loan portfolio (includes SOGATUR shares for Bs 207,025,200). The tourism portfolio plus these investments amount to Bs 13,171,236,503 (Bs 7,186,711,406 at December 31, 2015) (Note 4-e).

(e) In November 2016, the People’s Power Ministries for Industries and for Finance established the strategic development sectors to which at least 60% of the manufacturing loan portfolio resources should be allocated, as well as a minimum percentage of 40% to finance small and medium-sized companies, joint ventures and state companies, whose main activity is part of the Classification of Venezuelan Economic Activities (CAEV). At December 31, 2016, the Bank has allocated 76.30% to the strategic development sectors and 21.43% to finance small and medium-sized companies, joint ventures and communal and state companies whose main activity is part of CAEV.

24 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

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 at December 31:

2016 2015 (In bolivars)

Balance at the beginning of the year 9,947,308,406 5,898,193,570 Provided in the year, including the branch 12,473,414,288 4,803,365,793 Effect of translating allowances in foreign currency 362,323 - Write-offs of uncollectible accounts (2,884,962,207) (769,823,361) Decrease in branch allowance (989,497) (353,361) Reclassification to the provision for interest receivable 17,257,531 15,925,765 Balance at the end of the year 19,552,390,844 9,947,308,406

During the year ended December 31, 2016, the Bank wrote off unrecoverable loans of Bs 2,884,962,000 (Bs 769,824,000 during the year ended December 31, 2015), against the allowance for losses on loan portfolio. The Bank also collected loans written off as uncollectible in previous year for Bs 822,204,000 (Bs 518,845,000 during the year ended December 31, 2015), included in the income statement under income from financial assets recovered.

Below is a breakdown of certain balances and transactions of the overdue and in-litigation loan portfolio at December 31:

2016 2015 (In bolivars)

No earning interest (1) 3,245,012,140 1,134,233,273 Interest accrued but not recorded as income 2,841,053,091 1,223,461,395 Interest collected on uncollectible loans written off in previous years 2,537,356,807 1,103,246,385

(1) At December 31, 2016, Bs 8,502,553 corresponds to overdue letters of credit (Bs 6,567,000 at December 31, 2015).

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 December 31, 2016 and 2015, 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 at December 31 comprise the following:

2016 2015 (In bolivars)

Interest receivable on cash and due from banks - 374 Interest receivable on investment securities Deposits with the Central Bank of Venezuela (BCV) and overnight deposits 76,056,635 6,450,000 Available for sale 520,554,086 343,093,200 Held to maturity 580,120,303 235,520,742 Other securities 474,943,844 425,273,582 Restricted investments 1,125,695 2,106,017 1,652,800,563 1,012,443,541 Interest receivable on loan portfolio Current 4,565,007,952 2,728,140,016 Rescheduled 46,714,121 44,632,853 Overdue 108,719,400 121,842,124 4,720,441,473 2,894,614,993 Commissions receivable 216,632,840 121,604,244 Interest and commissions receivable on other accounts receivable - 2,529 Provision for interest receivable and other (118,477,586) (38,683,921) 6,471,397,290 3,989,981,760

25 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

7. Investments in subsidiaries and affiliates

Investments in subsidiaries and affiliates at December 31 recorded at cost by the equity method comprise the following:

2016 2015 (In bolivars)

Inversiones Platco, C.A., 573,985 fully paid common shares with a par value of Bs 100 each, equivalent to 50% of its capital stock 4,129,544,548 1,193,571,336 Inversiones y Valores Mercantil V, C.A., 31,724,500 fully paid common shares with a par value of Bs 1 each, equivalent to 100% of its capital stock 197,228,890 195,394,762 Proyecto Conexus, C.A., 500,000 fully paid common shares with a par value of Bs 1 each, equivalent to 33.33% of its capital stock 1,181,888 2,915,143 Corporación Andina de Fomento, 24 fully paid common shares with a par value of US$5,000 each, equivalent to 0.003% of its capital stock 1,011,833 637,450 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 564,016 368,560 Inmobiliaria Asociación Bancaria, C.A., 28,862 fully paid common shares with a par value of Bs 1 each, equivalent to 7.4% of its capital stock 167,370 167,370 Caja Venezolana de Valores, S.A., 2,596,824 fully paid common shares with a par value of Bs 3 each, equivalent to 18.01% of its capital stock (1,298,412 common shares at December 31, 2015) 128,480 128,480 Banco Interamericano de Ahorro y Préstamo (BIAPE), 1,214 fully paid common shares with a par value of US$1 each, equivalent to 0.15% of its capital stock 24,737 15,584 Súper Octanos, C.A., 84,800 fully paid common shares with a par value of Bs 1 each, equivalent to 2% of its capital stock 16,960 16,960 Banco Latinoamericano de Comercio Exterior, S.A. (BLADEX), 32,376 fully paid common shares with a par value of US$1 each, equivalent to 0.19% of its capital stock 11,450 7,213 Mantex, S.A., 830 fully paid common shares with a par value of Bs 1 each, equivalent to 0.00051% of its capital stock (415 common shares at December 31, 2015) 162 162 Provision for investments in subsidiaries and affiliates (17,122) (17,122) 4,329,863,212 1,393,205,898

During the year ended December 31, 2016, the Bank recorded net losses in respect of its equity in the results of subsidiaries and affiliates of Bs 95,326,000 (net losses of Bs 70,961,000 during the year ended December 31, 2015), shown under other operating income and other operating expenses, respectively (Notes 20 and 21).

During the year ended December 31, 2016, the Bank made cash contributions for future capital increases of Bs 3,018,426,000 to its affiliate Inversiones Platco, C.A. During the year ended December 31, 2015, the Bank made a contribution for future capital increases of Bs 216,135,000 to its affiliate Inversiones Platco, C.A. by assigning points of sale (POS) at their book value of Bs 497,634,000, which generated goodwill of Bs 281,499,000, shown under other assets (Note 10). In addition, the Bank made a cash contribution of Bs 945,164,000.

During the year ended December 31, 2015, Inversiones y Valores Mercantil V, C.A. reduced contributions for future capital increases for Bs 132,000,000 and declared dividends for Bs 30,000,000.

26 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

Below is the summary of the financial statements of the main subsidiaries and affiliates at December 31 shown under the equity method, as well as the branch and agency abroad:

a) Subsidiaries and affiliates

Balance sheet December 31, 2016 Inversiones y Valores Mercantil V, Proyectos Inversiones C.A. and Conexus, Platco, subsidiaries C.A. (1) C.A. (1) (In bolivars)

Assets Cash and due from banks 2,113,273 23,708,742 1,414,095,793 Investment securities 99,063,721 2,772,536 - Interest and commissions receivable 749,960 - - Investments in subsidiaries and affiliates abroad 98,708,088 - - Property and equipment - 285,891 4,864,802,100 Other assets 9,057,259 74,877,927 4,153,218,186 Total assets 209,692,301 101,645,096 10,432,116,079

Liabilities and Equity Liabilities Other liabilities 12,463,412 98,099,439 2,173,026,985 Total liabilities 12,463,412 98,099,439 2,173,026,985 Equity 197,228,889 3,545,657 8,259,089,094 Total liabilities and equity 209,692,301 101,645,096 10,432,116,079

Income statement Year ended December 31, 2016 Inversiones y Valores Mercantil V, Proyectos Inversiones C.A. and Conexus, Platco, subsidiaries (2) C.A. (1) C.A. (1) (In bolivars)

Gross financial margin 11,274,908 13,544,520 784,074 Operating income, net (4,107,448) 98,566,632 7,055,901,687 Total expenses (7,018,465) (112,911,362) (7,221,590,344) Net income (loss) 148,995 (800,210) (164,904,583)

Equity method (12,606,715) (266,736) (82,452,292)

(1) Based on unaudited financial statements.

(2) Equity does not include Bs 12,756,000 in respect of the realization of the exchange difference authorized by SUDEBAN (Note 24).

27 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

Balance sheet December 31, 2015 Inversiones y Valores Mercantil V, Proyectos Inversiones C.A. and Conexus, Platco, subsidiaries C.A. (1) C.A. (1) (In bolivars)

Assets Cash and due from banks 1,338,327 19,704,720 1,376,394,686 Investment securities 87,110,063 3,067,520 - Interest and commissions receivable 1,245,695 - - Investments in subsidiaries and affiliates abroad 99,798,510 - - Property and equipment - 1,575,044 565,278,237 Other assets 8,758,657 22,434,399 908,128,309 Total assets 198,251,252 46,781,683 2,849,801,232

Liabilities and Equity Liabilities Other liabilities 2,856,491 38,036,271 462,658,561 Total liabilities 2,856,491 38,036,271 462,658,561 Equity 195,394,761 8,745,412 2,387,142,671 Total liabilities and equity 198,251,252 46,781,683 2,849,801,232

Income statement Year ended December 31, 2015 Inversiones y Valores Mercantil V, Proyectos Inversiones C.A. and Conexus, Platco, subsidiaries (1) C.A. (1) C.A. (1) (In bolivars)

Gross financial margin 15,936,841 5,459,524 4,347,022 Operating income, net (5,319,263) 17,392,795 262,425,777 Total expenses (2,136,794) (32,315,084) (387,369,639) Net income (loss) 8,480,784 (9,462,765) (120,596,840)

Equity method 8,480,784 (1,982,896) (60,298,420)

(1) Based on unaudited financial statements.

b) Branch and agency abroad (combined)

Balance sheet December 31, 2016 December 31, 2015 Thousands of Equivalent Thousands of Equivalent U.S. dollars in bolivars U.S. dollars in bolivars

Assets Cash and due from banks 15,307 152,689,126 8,778 55,159,987 Investment securities 115,511 1,154,837,042 116,373 731,317,472 Loan portfolio - - 5,603 35,211,284 Interest and commissions receivable 4,876 48,640,664 1,838 11,547,380 Other assets 21 208,204 13 79,356 Total assets 135,715 1,356,375,036 132,605 833,315,479

Liabilities and Equity Deposits (270) (2,693,090) 2,404 15,103,974 Borrowings - - 4,172 26,217,117 Interest and commissions payable - (2,264) 7 48,168 Accruals and other liabilities (133) (1,327,194) 183 1,151,485 Total liabilities (403) (4,022,548) 6,766 42,520,744 Equity (135,312) (1,352,352,488) 125,839 790,794,735 Total liabilities and equity (135,715) (1,356,375,036) 132,605 833,315,479

28 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

Income statement Years ended 2016 2015 Thousands of Equivalent Thousands of Equivalent U.S. dollars in bolivars U.S. dollars in bolivars

Gross financial margin 7,109 35,761,070 13,184 82,850,847 Other operating income, net 26,768 203,879,761 5,353 33,638,234 Total expenses (24,761) (207,389,141) (11,064) (69,527,980) Net income 9,116 32,251,690 7,473 46,961,101

8. Available-for-sale assets

Available-for-sale assets at December 31 comprise the following:

2015 Additions Disposals 2016

(In bolivars)

Idle assets 738,783 43,136,540 (738,784) 43,136,539 Amortization (141,318) (4,723,492) 441,246 (4,423,564) Net 597,465 38,413,048 (297,538) 38,712,975

During the year ended December 31, 2016, the Bank sold fully amortized assets received as payment that had been recorded under memorandum accounts at a gain of Bs 1,072,382,000 (Bs 232,946,000 during the year ended December 31, 2015), shown in the income statement under income from available- for-sale assets.

During the year ended December 31, 2016, the Bank recorded amortization expense in respect of available-for-sale assets of Bs 4,724,000 (Bs 260,000 during the year ended December 31, 2015), included in the income statement under expenses from available-for-sale assets.

Fully amortized available-for-sale assets are recorded under memorandum accounts (Note 25).

9. Property and equipment

Property and equipment at December 31 comprises the following:

Translation 2015 Additions Disposals adjustment 2016 (In bolivars)

Cost Buildings 757,291,895 - (12,519,760) - 744,772,135 Furniture and equipment 3,164,783,986 3,049,881,860 (60,173,934) 36,381 6,154,528,293 Equipment for Chip Project 14,157,100 - (1,624,120) - 12,532,980 Vehicles 1,372,027 - (434,720) - 937,307 Land 2,550,166 - - - 2,550,166 Work in progress 42,476,511 5,819,774 - - 48,296,285 Total 3,982,631,685 3,055,701,634 (74,752,534) 36,381 6,963,617,166

Accumulated depreciation Buildings (39,610,377) (18,978,638) 3,205,801 - (55,383,214) Furniture and equipment (959,003,558) (768,648,854) 19,707,072 (36,381) (1,707,981,721) Equipment for Chip Project (14,157,100) - 1,624,120 - (12,532,980) Vehicles (1,198,141) (65,210) 326,044 - (937,307) Total (1,013,969,176) (787,692,702) 24,863,037 (36,381) (1,776,835,222) Net 2,968,662,509 2,268,008,932 (49,889,497) - 5,186,781,944

During the year ended December 31, 2016, the Bank recorded depreciation expense of Bs 787,693,000 (Bs 395,362,000 during the year ended December 31, 2015), included in the income statement under general and administrative expenses (Note 19).

29 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

Work in progress is mainly in respect of the construction or remodeling of Bank offices.

Below are the original useful lives and average remaining useful lives by type of asset at December 31, 2016:

Average Useful remaining life useful life (Years)

Buildings 40 26 Furniture and equipment 4-10 3

10. Other assets

Other assets at December 31 comprise the following:

2016 2015 (In bolivars)

Deferred expenses of office facilities, leasehold improvements and other, net of accumulated amortization of Bs 1,350,202,190 (Bs 396,821,073 at December 31, 2015) 7,785,432,973 3,023,783,376 Prepaid taxes 3,329,974,852 189,113,415 Accounts receivable from other credit card companies 2,821,763,261 681,799,484 Stationery and office supplies 2,573,718,888 1,074,794,870 Advances to technology vendors, construction contractors and other 2,557,940,747 4,609,571,950 Software, net of accumulated amortization of Bs 615,863,270 (Bs 219,311,000 at December 31, 2015) 1,569,784,343 348,809,242 Insurance and other prepaid expenses 970,957,012 780,435,684 Other accounts receivable 827,874,699 45,555,538 Pending items and main office, branches and agencies 397,933,271 205,409,713 Goodwill on acquisition of shareholding, net of accumulated amortization of Bs 180,044,363 (Bs 117,183,000 at December 31, 2015) 232,677,200 295,538,161 Advances and guarantee deposits 131,514,970 86,309,044 Prepaid advertising 43,652,630 33,255,062 Deferred income tax (Note 17) - 553,978,070 Provision for other assets (40,549,327) (20,130,955) Other 45,223,300 38,236,711 23,247,898,819 11,946,459,365

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 December 31, 2016, pending items and main office, branches and agencies also comprise spot transactions not yet cleared for Bs 44,519,000 (Bs 1,443,000 at December 31, 2015) and recording and control of pending cards for Bs 176,237,000 (Bs 141,289,000 at December 31, 2015).

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

Amortization of deferred expenses and goodwill during the year ended December 31, 2016 amounted to Bs 1,467,788,000 (Bs 385,190,000 during the year ended December 31, 2015) and is shown under general and administrative expenses (Note 19).

30 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

During the year ended December 31, 2016, the Bank recorded expenses from the provision for other assets of Bs 22,931,000 (Bs 4,324,000 during the year ended December 31, 2015), shown in the income statement under sundry operating expenses.

The movement in the provision for other assets at December 31 is shown below:

2016 2015 (In bolivars)

Balance at the beginning of the year 20,130,955 20,991,185 Provided in the year 22,931,424 4,324,062 Release of provision (716,716) (1,857,848) Write-offs of unrecoverable accounts (1,796,336) (3,326,444) Balance at the end of the year 40,549,327 20,130,955

11. Deposits

Deposits at December 31 comprise the following:

2016 2015 (In bolivars)

Demand deposits 929,238,397,295 349,469,735,940 Other demand deposits Cashier’s checks 4,853,120,334 3,003,289,406 Trust liabilities (Note 25) 6,744,397,273 1,023,172,251 Other demand deposits 256,065,607 139,215,977 Certified checks 7,274,259 12,464,766 Advance collections from credit card holders (Note 25) 39,879,005 20,792,989 Judicial deposits 553,356,746 3,400,975 Housing savings fund liabilities 39,781,950 13,219,387 Reimbursable collections 941 5,843 12,493,876,115 4,215,561,594 Savings deposits 283,822,443,756 142,548,765,626 Time deposits 311,063,967 530,236,411 Restricted deposits Dormant savings accounts 342,709,926 204,583,659 Dormant checking accounts 132,403,568 168,721,408 Guarantee time deposits 1,161,646 3,357,269 Other restricted deposits 28,680 31,169 Attached funds of checking account deposits - 19,541 476,303,820 376,713,046 1,226,342,084,953 497,141,012,617

Deposits at December 31 bear interest at the rates shown below:

2016 2015 Deposits Deposits Deposits Deposits in bolivars in U.S. dollars in bolivars in U.S. dollars Minimum Maximum Minimum Maximum Minimum Maximum Minimum Maximum rate rate rate rate rate rate rate rate % % % % % % % %

Type of deposit Interest-bearing checking accounts 0.01 1.00 0.02 0.02 0.05 2.00 0.01 0.02 Savings deposits 12.50 16.00 - - 12.5 16.00 0.01 0.03 Time deposits 14.50 14.50 0.10 0.15 14.5 14.50 0.10 0.15 Restricted deposits 0.01 16.00 0.10 1.47 0.05 16.00 0.10 0.73

31 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

Below is the classification of time deposits by maturity at December 31:

2016 2015 In bolivars % In bolivars %

Up to 30 days 109,874,274 35 103,077,120 19 31 to 60 days 61,528,042 20 58,941,572 11 61 to 90 days 58,126,003 19 71,309,659 13 91 to 180 days 80,394,480 26 131,135,630 25 181 to 360 days 1,083,976 - 164,068,498 32 Over 360 days 57,192 - 1,703,932 - 311,063,967 100 530,236,411 100

At December 31, 2016, deposits include Bs 23,747,475,000 from the Venezuelan government and other government agencies, equivalent to 1.94% of total deposits (Bs 6,437,814,000, equivalent to 1.29% at December 31, 2015).

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

Deposits and liabilities with BANAVIH at December 31 comprise the following:

2016 2015 (In bolivars)

Interest-free demand deposits with BANAVIH 186,112 1,311,596 Other liabilities with BANAVIH 115 32 186,227 1,311,628

Funds received from BANAVIH are used to finance loans. Other liabilities with BANAVIH are in respect of funds received to subsidize the initial installment of loans granted. Demand deposits are in respect of funds received to be assigned by BANAVIH (Note 25).

13. Borrowings

Borrowings at December 31 comprise the following:

2016 2015

(In bolivars) x Borrowings with Venezuelan financial institutions Demand deposits 73,750,368 43,800,051 Borrowings with foreign financial institutions Borrowings Mercantil Bank (Curacao), N.V., maturing in February 2016, with a par value of US$4,000,000 and 1.25% annual yield at December 31, 2015 - 25,136,800 Demand deposits 132,097,891 905,424

132,097,891 26,042,224

205,848,259 69,842,275

Maturities of borrowings, up to one year, at December 31 are as follows:

2016 2015 (In bolivars)

Up to 6 months 205,848,259 69,842,275

32 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

14. Other liabilities from financial intermediation

Other liabilities from financial intermediation at December 31 comprise the following:

2016 2015 (In bolivars)

Liabilities with credit card merchants 3,483,527 4,089,073 Other 47,439 47,439 3,530,966 4,136,512

15. Interest and commissions payable

Interest and commissions payable at December 31 comprise the following:

2016 2015

(In bolivars)

Expenses payable on deposits Time deposits 24,753,064 32,355,870 Interest-bearing checking accounts 2,679,944 72,383,288 Other (Note 2) 20 3,800 27,433,028 104,742,958

Expenses payable on borrowings Expenses payable on borrowings - 43,640 27,433,028 104,786,598

16. Accruals and other liabilities

Accruals and other liabilities at December 31 comprise the following:

2016 2015 (In bolivars)

Suppliers and other accounts payable 20,819,898,953 3,080,336,256 Taxes (Note 17) 8,571,631,751 6,934,277,829 Provision for contingencies and other (Note 32) 7,807,039,497 2,368,628,998 Employee profit sharing, vacation and bonuses 3,744,595,845 1,562,472,916 Interest collected in advance on the loan portfolio and commissions 2,520,507,451 1,156,732,624 Collected and withheld taxes 2,057,410,386 829,802,214 Deferred income tax (Note 17) 464,185,830 - Provision for the Antidrug Law (Note 33) 285,794,968 188,443,510 Labor contributions 137,840,147 102,417,040 Commissions payable 83,967,746 6,019,200 Deferred income from loan portfolio 80,272,165 88,076,715 Deferred gain on rights, sale of property and other 49,245,091 49,292,550 Pending items and main office, branches and agencies 48,401,954 52,710,942 Accounts payable to Inversiones Platco, C.A. 37,694,753 22,992,512 Sales option 3,156,119 - Other accounts payable to clients 1,374,502 624,344 46,713,017,158 16,442,827,650

At December 31, 2016 and 2015, the provision for contingencies and other mainly includes accrued expenses from unbilled services received, other accruals for human resources and the provision for cashier’s checks written off due to aging.

33 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

17. Taxes

a) Tax expense The tax expense comprises the following:

Years ended December 31, 2016 2015 (In bolivars)

Taxes Current In Venezuela 8,306,623,053 6,933,331,245 Abroad 37,279 1,273,591 8,306,660,332 6,934,604,836 Deferred In Venezuela 1,018,163,900 (553,978,070) 9,324,824,232 6,380,626,766

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 year ended December 31, 2016, the main differences between income/loss recognized for accounting and tax purposes arise from shareholdings, provisions, accruals and prepaid expenses 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 year ended December 31, 2016, the Bank estimated an income tax expense of Bs 8,306,623,000.

At December 31, 2016, the Bank has extraterritorial tax losses of up to 25% of annual income amounting to Bs 157,109,129, of which Bs 75,982,000 may be carried forward until December 31, 2017, Bs 75,982,000 until December 31, 2017 and Bs 81,126,812 until December 31, 2018.

The following is a reconciliation between book expense and tax expense for the year ended December 31, 2016:

Statutory tax rate 40% x (Thousands of bolivars)

Book income before tax 27,927,252

Notional tax expense based on book income in Venezuela computed at the effective tax rate 11,170,901 Differences between notional tax expense and actual tax expense Net effect of shareholdings (157,584) Net effect of exemption of securities issued or guaranteed by the Venezuelan government (2,519,792) Other assets (1,364,143) Effect of exchange differences 26,846 Nondeductible provisions Loan portfolio, net 1,733,559 Other provisions (721,744) Other effects, net 138,580 8,306,623

34 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

Transfer pricing Venezuelan Income Tax Law establishes transfer-pricing regulations. According to these regulations, taxpayers that conduct transactions with related parties abroad are required to calculate income, costs and deductions applying the methodologies set out in the Law, report results obtained through a special return, and keep supporting documentation and information related to transfer-pricing calculation for these transactions. Accordingly, the Bank filed transfer-pricing returns for information purposes.

b) Deferred tax asset (liability) Below is a summary of deferred income tax.

The deferred tax liability at December 31, 2016 comprises the following:

(In bolivars)

Property and equipment, office setup expenses and other (193,250) Other assets 1,048,753,150 Other provisions (1,205,309,474) Loan portfolio (553,497,132) Income collected in advance (15,097,395) Labor-related provisions 1,189,529,931 Deferred tax liability (Note 16) 464,185,830

The deferred tax asset at December 31, 2015 comprises the following:

(In bolivars)

Other provisions 490,021,992 Loan portfolio 45,540,575 Income collected in advance 18,355,953 Labor-related provisions 59,550 Deferred tax asset (Note 10) 553,978,070

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 year to the next.

18. Employee benefits

a) Length-of-service benefits In accordance with the Labor Law (LOTTT), the Bank calculates length-of-service benefits based on the last salary earned by the employee upon employment termination using actuarial methods (Note 2).

At December 31 the actual assumptions used to determine the length-of-service benefit obligations are as follows:

2016 2015

Financial Discount rate (%) 7 7 Salary increase rate (%) - -

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

35 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

Below is the movement in the additional obligation from length-of-service benefits at December 31:

2016 2015 (In bolivars)

Opening balance 204,479 235,793 Service cost 13,866 16,729 Interest cost 268,380 71,550 Remeasurement (365,614) (85,690) Benefits paid 1,334,043 (33,903) Closing balance 1,455,154 204,479

The estimated net cost of the retrospective length-of-service benefits for 2017 is Bs 3,753,605,000.

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 year ended December 31, 2016, expenses in connection with this plan amount to Bs 289,345,000 (Bs 197,647,000 for the year ended December 31, 2015).

c) Supplementary Defined Benefit Plan and post-retirement benefits The Supplementary Defined Benefit Plan and post-retirement benefits for eligible employees are based on a minimum 10-year length-of-service period and a minimum retirement age. The retirement pension is based on the employee’s average annual salary over the last three years of employment preceding retirement and is payable at a maximum of 60% of this average salary.

For the year ended December 31, 2016, expenses in connection with the Supplementary Defined Benefit Plan and post-retirement benefits amounted to Bs 90,300,000 (Bs 45,600,000 at December 31, 2015).

At December 31 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 2016 2015 2016 2015 (Thousands of bolivars)

Annual variation in projected benefit obligation Benefit obligation 440,576 90,222 535,121 131,653 Service cost 899 65 32,775 8,574 Interest cost 640,363 27,087 823,574 42,069 Remeasurement (92,386) 355,209 544,396 374,160 Benefits paid (113,462) (32,007) (103,473) (21,335) Projected benefit obligation 875,990 440,576 1,832,393 535,121

Annual variation in restricted plan assets Opening fair value of assets 86,920 132,906 98,453 69,095 Remeasurement and yield on assets (153,349) (120,492) 226,262 156,374 Bank contribution - 832 132,906 - Transfer between plans 326,268 105,680 (326,268) (105,680) Benefits paid (113,462) (32,006) (103,472) (21,335) Closing fair value of assets 146,377 86,920 27,881 98,454 Components of net benefit cost for the year

36 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

Supplementary Post- Defined retirement Benefit Plan benefits 2016 2015 2016 2015 (Thousands of bolivars)

Service cost 899 65 32,775 8,574 Interest cost 640,363 27,087 823,574 42,069 Yield from plan assets (159,638) (11,010) (142,787) (156,374) Net benefit cost 481,624 16,142 713,562 (105,731)

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

Financial position balances at December 31 are shown below:

Supplementary Defined Benefit Plan 2016 2015 2014 2013 2012 (Thousands of bolivars)

Financial position at year end Present value of obligations (DBO) (875,990) (440,576) (90,222) (67,248) (137,616) Assets of external fund supporting the plan 146,377 86,920 132,906 141,805 137,616 (Projected obligation)/excess of assets (729,613) (353,656) 42,684 74,557 -

Post-retirement benefits 2016 2015 2014 2013 2012 (Thousands of bolivars)

Financial position at year end Present value of obligations (DBO) (1,832,393) (535,121) (131,653) (119,540) (75,717) Assets of external fund supporting the plan 27,881 98,454 69,095 71,604 40,900 (Projected obligation)/excess of assets (1,804,512) (436,667) (62,558) (47,936) (34,817)

At December 31 the actual assumptions used to determine benefit obligations are as follows:

Supplementary Supplementary Post- Defined Defined retirement Benefit Plan Benefit Plan benefits 2016 2015 2016 2015

Discount rate (%) 7 7 7 7 Increase in medical expenses (1) (%) - - 10 10

(1) This assumption only applies to the post-retirement benefit plan.

At December 31, 2016, a hypothetical increase or decrease of 1% in the main actuarial assumptions would impact the value of the projected obligations of the plans as follows:

Supplementary Post- Defined Benefit Plan retirement benefits Increase Decrease Increase Decrease (Thousands of bolivars)

Discount rate 62,929 77,772 409,694 570,715 Increase in medical expenses - - 527,561 392,151

37 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

Below is a breakdown of the assets supporting the plans of MERCANTIL and its subsidiaries at December 31, shown in conformity with the accounting bases described in Note 2:

2016 2015 (Thousands of bolivars)

Cash and due from banks 2,741 43,778 Investments in available-for-sale securities (1) 168,921 138,765 Interest receivable 1,665 2,379 Other assets 931 452 Total assets 174,258 185,374

(1) Securities quoted in an active market.

At December 31, 2016, the fair value of these assets, in conformity with accounting standards applicable to Fundación BMA (VEN NIF), is Bs 4,595,267,000 (Bs 1,408,751,000 at December 31, 2015); these assets may be used for both plans and may only be distributed among their beneficiaries.

The Bank through its employee benefit plans is exposed to a variety of risks (market, credit and operational risks), which are minimized by applying risk management policies and procedures (Note 30).

The Bank’s policy to determine investment assets includes regular consultation with its internal advisors. The expected long-term rate of return on plan assets is updated periodically, taking into consideration asset allocations, historic returns and current economic conditions. The fair value of plan assets is affected by general market conditions. If actual returns on plan assets differ from expected returns, actual results may differ from initial estimates.

The average length of the Supplementary Defined Benefit Plan and post-retirement benefits is 6 and 34 years, respectively.

The projection of future undiscounted payments of the post-retirement benefit plans are as follows:

1 2 to 5 Over 5 year years years Total (Thousands of bolivars)

Supplementary Defined Benefit Plan 93,139 359,499 1,023,131 1,475,769 Post-retirement benefits 1,112,660 6,789,429 819,076,522 826,978,611 Total 1,205,799 7,148,928 820,099,653 828,454,380

d) Long-term stock option plan MERCANTIL and certain subsidiaries in Venezuela and abroad offer a stock option plan to eligible officers approved by the Board of Directors’ Compensation Committee. These shares are allotted over three-year periods and awarded annually. Fundación BMA manages the plan and sets up trust funds with the shares on behalf of members once these shares have been assigned and subsequently awarded to eligible officers based on individual allotments approved in accordance with plan regulations. During each administrative phase and until the shares are actually acquired by officers, cash dividends declared in respect of these shares are received by Fundación BMA and stock dividends by the participants.

According to the long-term nature of the plan, officers must be active employees of the Bank in order for shares to be awarded to them. At December 31, 2016 and 2015, the plan has no current phases. Plan restructuring is currently being analyzed for continuity purposes.

The Special Plan of Extraordinary Stock Recognition of MERCANTIL Employees was designed in 2015 and allocated 318,677 Class “A” common shares and 237,013 Class “B” common shares, which are partially restricted for sale for four years and employees may annually dispose of 25%.

38 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

At December 31, 2016, all program shares are available and deposited in the trust fund with Mercantil Seguros, C.A. that Fundación BMA set up for such purpose. A breakdown of these shares is shown below:

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

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

19. General and administrative expenses

General and administrative expenses for the years ended December 31 comprise the following:

2016 2015 (In bolivars)

Maintenance of property and equipment 7,515,435,761 2,557,536,289 Transportation and surveillance 4,634,344,040 1,085,991,503 Taxes, fines and contributions 3,633,664,133 1,134,685,719 Software licenses and maintenance 3,466,313,602 1,179,110,164 Sundry general expenses 3,140,027,991 719,671,312 Services and supplies 2,774,244,998 873,715,009 Outsourcing, fees and other 2,224,885,693 779,156,121 Amortization of deferred expenses 1,404,926,396 359,862,942 Transportation and communications 1,278,786,930 410,896,189 Leases 825,070,984 208,475,324 Depreciation of property and equipment 787,692,702 395,361,540 Advertising 376,736,874 259,244,997 Insurance for property and equipment 108,565,182 40,658,205 Amortization of goodwill 62,860,961 25,327,734 Other 42,575,758 10,042,743 Legal 15,353,663 7,483,026 32,291,485,668 10,047,218,817

20. Other operating income

Other operating income for the years ended December 31 comprise the following:

2016 2015 (In bolivars)

Service commissions 27,406,618,954 10,472,530,543 Gain on sale of investment securities 2,260,254,570 1,482,990,082 Trust fund commissions 343,981,614 218,198,429 Exchange gain (Note 24) 893,090,194 27,521,177 Income from equity in subsidiaries and affiliates (Note 7) - 14,130,629 Discount amortization obtained from investment securities - 1,605,022 30,903,945,332 12,216,975,882

39 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

21. Other operating expenses

Other operating expenses for the years ended December 31 comprise the following:

2016 2015 (In bolivars)

Service commissions 10,757,167,146 4,245,926,414 Loss on sale of investment securities 1,163,925,107 759,936,680 Amortization of premium on investment securities (Note 4) 180,866,912 30,914,960 Loss from equity in subsidiaries and affiliates (Note 7) 95,325,742 67,931,161 Exchange loss (Note 24) 82,366,048 44,743,764 12,279,650,955 5,149,452,979

22. Extraordinary expenses

Extraordinary expenses for the years ended December 31 comprise the following:

2016 2015 (In bolivars)

Donations made by the Bank (Note 28) 167,532,202 80,000,000 Loss from claims 149,644,190 17,076,700 Loss from theft and fraud 41,402,162 11,713,918 Other 7,908,064 6,185,357 366,486,618 114,975,975

23. Equity

a) Capital stock At December 31, 2016, the Bank’s paid-in capital amounts to Bs 292,415,038 and is represented by 159,480,029 Class “A” common shares and 132,935,009 Class “B” common shares with limited voting rights, all with a par value of Bs 1 (paid-in capital of Bs 268,060,233, represented by 146,198,516 Class “A” common shares, and 121,861,717 Class “B” common shares with limited voting rights all with a par value of Bs 1 at December 31, 2015). Mercantil Servicios Financieros, C.A. has 159,374,233 Class “A” common shares and 132,875,865 Class “B” common shares at December 31, 2016 (146,093,038 Class “A” common shares and 121,802,877 Class “B” common shares at December 2015), representing 99.94% of the Bank’s capital stock.

The capital stock of Bs 292,415,038 is the result of the first phase of the capital stock increase agreed at the Special Shareholders’ Meeting of October 20, 2015, in respect of which 24,354,805 new shares were issued (13,281,513 Class “A” shares and 11,073,292 Class “B” shares), with a par value of Bs 1 each. This increase included the payment of a premium amounting to Bs 117.67 per share, to be recorded under premium on capital contributions for a total amount of Bs 2,865,829,904. Consequently, the Bank’s equity was increased by Bs 2,890,184,709. This increase was authorized by SUDEBAN in July 2016.

The second phase of the capital stock increase, agreed at the aforementioned Shareholders’ Meeting of October 20, 2015, was approved in September 2016, in respect of which 36,534,426 new shares were issued (19,924,487 Class “A” shares and 16,609,939 Class “B” shares), with a par value of Bs 1 each. This increase included the payment of a premium amounting to Bs 162.91 per share, to be recorded under premium on capital contributions for a total amount of Bs 5,951,823,340. Consequently, the Bank’s equity was increased by Bs 5,988,357,766. To date, SUDEBAN’s authorization is still pending.

At December 31, 2016 and 2015, the Bank complies with minimum paid-in capital requirements for universal banks of Bs 170,000,000.

40 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

b) Retained earnings and dividends on shares Below is a summary of cash dividends on shares declared or paid for the years reported:

Amount Date of approval at per share Type of dividend Shareholders’ Meeting in bolivars Payment date

Ordinary January 2015 7.50 February 2015

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 year ended December 31, 2016, the Bank reclassified to restricted surplus Bs 9,397,010,000 (Bs 6,043,969,000 during the year ended December 31, 2015), equivalent to 50% of net income at that date.

At December 31, 2016, restricted surplus of Bs 28,243,740,000 (Bs 19,066,818,000 at December 31, 2015) includes Bs 14,188,000, in respect of income from subsidiaries and affiliates (Bs 406,169,000 at December 31, 2015), which will only be available when these subsidiaries and affiliates declare and distribute the related dividends or the investment is sold. During the year ended December 31, 2016, the Bank recorded losses of Bs 220,088,000 in this connection (income of Bs 70,961,000 at December 31, 2015).

c) Capital reserve Appropriation to legal reserve In accordance with its bylaws and the Law on Banking Sector Institutions, the Bank records annually an appropriation to the legal reserve equivalent to 20% of net income for the year until the reserve reaches 50% of its capital stock. When the legal reserve has reached this amount, the Bank’s appropriation to the legal reserve will be 10% of net income for each six-month period until the reserve reaches 100% of its capital stock.

Appropriation to other mandatory reserves SUDEBAN establishes a requirement for banks to set aside 0.5% of their capital stock biannually to the Social Contingency Fund, with a charge to unappropriated surplus, until the reserve reaches 10% of such capital (Notes 4 and 35).

d) Risk-based capital ratio Ratios required and maintained by the Bank, calculated based on its published financial statements in accordance with SUDEBAN rules at December 31, are shown below:

2016 2015 Required Maintained Maintained % % %

Equity to risk-weighted assets and contingent operations 12.00 13.08 12.69 Equity to total assets 9.00 11.15 9.96

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

41 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

securities issued by the BCV and Petróleos de Venezuela, S.A. and including in equity the amounts for general allowance and countercyclical allowance for loan portfolio and microcredits. Likewise, SUDEBAN allowed to include these allowances in primary equity (Level I) for calculation of the capital to risk-weighted asset and contingent operation ratio.

In December 2016, SUDEBAN granted an exception to the banking system in the calculation of the capital adequacy ratio, by temporarily allowing deduction of pending cash items from total assets, as well as the variation of the sub-account bills and coins as compared to November 2016. To calculate total capital ratio, pending cash items will be computed as 0% risk-weighted items (formerly 50%).

24. Financial assets and liabilities in foreign currency

a) Exchange control regime Since February 2003, the Venezuelan government established an exchange control regime managed by the Commission for the Administration of Foreign Currency (CADIVI), currently National Foreign Trade Center (CENCOEX).

In March 2013, the Venezuelan government established the Supplementary Foreign Currency Administration System (SICAD), a foreign currency auction system through which individuals and companies may offer and purchase foreign currency when convened by the BCV, taking into consideration the nation’s objectives and economic needs.

In March 2014, the Venezuelan government created the Alternative Currency Exchange System (SICAD II), a system that allowed the trade of foreign currency both in cash and securities.

SICAD II was eliminated in February 2015. A new exchange system, called the Marginal Foreign Exchange System (SIMADI), was established in which universal banks and exchange offices may trade foreign currency in cash. Purchase and sale exchange rates of foreign currency on this market will be freely agreed upon by the parties, prior authorization of the exchange rate and the client.

A new protected exchange rate (DIPRO) for the food, health, sports, culture and academic sectors, among others, and a supplementary floating exchange rate (DICOM) for other areas of the economy, were established in March 2016. Furthermore, it was resolved that SIMADI would continue to operate until it is substituted by a new system to process transactions at the DICOM exchange rate. The BCV shall establish the operating conditions for DICOM.

b) Applicable exchange rates The prevailing exchange rate from February 2013 through March 2016 was Bs 6.2842/US$1 (purchase) and Bs 6.30/US$1 (sale). In April 2016, the BCV established that as from the March 2016 period end, the financial statements and the recording of foreign currency assets and liabilities of entities belonging to the banking, insurance and securities sectors will be measured at the DIPRO exchange rate of Bs 9.9750/US$1 (purchase) and Bs 10/US$1 (sale).

At December 31, 2016 and 2015, the exchange rate resulting from the last SICAD auction was Bs 13.50/US$1.

At December 31, 2016, the daily variable average exchange rate based on supply and demand in SIMADI was Bs 672.0772/US$1 (Bs 198.2018/US$1 at December 31, 2015).

c) Exchange differences During the year ended December 31, 2016, as a result of applying the exchange rates of Bs 6.2842/US$1, Bs 9.9750/US$1 and Bs 10.000/US$1 to Interest Covered Bonds, the Bank recorded income of Bs 811,167,606, which was recorded under equity adjustments as per SUDEBAN instructions. In August 2016, SUDEBAN authorized recording of said income in the results for the period.

42 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

d) Net global position in foreign currency At December 31, the Bank’s balance sheet includes the following balances of financial assets and liabilities in foreign currency, denominated mainly in U.S. dollars, stated at the exchange rates described in Note 2:

2016 2015 Branch Transaction Equivalent and Transaction Equivalent Branch in in thousands 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 15,307 34,553 49,860 497,354 8,606 74,520 83,126 588,742 Investment securities 10,924 25,062 35,986 358,960 7,312 5,275 12,587 79,099 Loan portfolio - 20,859 20,859 208,069 5,603 1,512 7,115 44,712 Interest and commissions receivable 2 885 887 8,848 58 98 156 980 Investments in subsidiaries and affiliates - 162 162 1,616 - 164 164 1,031 Other assets 21 15,709 15,730 156,907 13 15,121 15,134 95,105 Total assets 26,254 97,230 123,484 1,231,754 21,592 96,690 118,282 809,669

Liabilities Customer deposits 270 9,094 9,364 93,406 2,403 - 2,403 81,462 Borrowings - - - - 4,000 - 4,000 25,137 Interest and commissions payable - - - - 8 - 8 50 Accruals and other liabilities 133 6,674 6,807 67,900 183 6,473 6,656 41,828 Total liabilities 403 15,768 16,171 161,306 6,594 6,473 13,067 148,477

The estimated effect of every Bs 1/US$1 increase in the exchange rate of Bs 9.975/US$1 at December 31, 2016 would be an increase in assets and equity of Bs 123,484,000 and Bs 107,313,000, respectively (an increase in assets and equity of Bs 118,282,000 and Bs 105,215,000, respectively, at December 31, 2015).

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

2016 2015 (Thousands of U.S. dollars)

Assets less liabilities, transaction in Venezuela 81,462 90,217 Foreign currency trade commitments (387) (21) To exclude Sovereign Bonds as per BCV rules (12,891) - Position determined, computable as per BCV rules 73,028 63,554 Maximum limit established by the BCV (30% of the previous month equity) 141,212 153,750 Margin in relation to authorized amount 1,747,612 1,704,461

1,606,400 1,550,711

The BCV excludes from the maximum limit that may be maintained by banks in foreign currency (30% of equity of the previous month) a portion of capital and income of the agency and branch abroad for US$62,284,000 and securities issued by the Bolivarian Republic of Venezuela for US$12,891,000 (Sovereign Bonds), with a reference value in foreign currency and payable in bolivars (TICC) of Bs 7,435,000 (Bs 4,641,000 at December 31, 2015).

During the year ended December 31, 2016, the net exchange gain from revaluation of the foreign currency position amounted to Bs 808,613,000 (Bs 15,373,000 during the year ended December 31, 2015) (Notes 20 and 21).

43 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

25. Memorandum accounts

Memorandum accounts at December 31 comprise the following:

2016 2015 (In bolivars)

Contingent debtor accounts Guarantees granted (Notes 26 and 30) 851,267,604 584,120,381 Tourism loan commitments (Note 30) 887,911,331 764,822,539 Letters of credit (Notes 26 and 30) 126,177,934 146,012,890 Investment securities under repurchase agreement (Notes 4 and 30) 10,800,000 - Other contingencies (Notes 26 and 30) 1,229,376,239 1,078,516,035 3,105,533,108 2,573,471,845

Assets received in trust 46,105,061,092 28,110,445,227

Other special trust services 7,052,161 7,706,986

Other debtor memorandum accounts Guarantees received 732,526,160,725 367,590,960,680 Unused lines of credit (Notes 26 and 30) 87,473,305,343 47,462,490,766 Valuables received in custody (1) 22,640,916,002 17,589,550,844 Collections 204,888,773 270,449,529 Other control accounts Guarantees pending release 186,327,333,657 166,010,394,913 Returned checks 329,371,469,564 141,436,880,923 Rights for spot purchases of securities 14,165,706,169 6,111,191,094 Other 11,786,607,646 9,394,157,412 Uncollectible accounts written off 4,196,020,914 1,945,838,175 Unconfirmed letters of credit (Note 5) 1,516,041,693 1,004,865,617 Interest receivable 765,916,246 451,115,102 Credit card loans granted (CENCOEX) 42,223,081 42,117,997 Real property written off (Note 9) 27,477,235 27,779,726 Foreign currency purchase commitments 1,816,281 3,735,998 Foreign currency sale commitments (242,792,217) (2,733,512) 547,957,820,269 326,425,343,445 1,390,803,091,112 759,338,795,264

Other debtor control accounts 3,680,014 7,704,280

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

44 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

a) Assets received in trust Trust fund accounts at December 31 include the following balances according to the combined financial statements of the trust:

2016 2015 (In bolivars)

Assets Cash and due from banks 6,906,101,465 1,129,043,663 Investments securities 16,472,290,054 13,056,208,709 Loan portfolio 22,444,166,588 13,679,767,315 Interest and commissions receivable 198,442,896 156,608,749 Assets received for administration 7,234,457 7,234,457 Other assets 76,825,632 81,582,334 Total assets 46,105,061,092 28,110,445,227

Liabilities and Equity Liabilities Fees and other accounts payable 216,893,122 121,769,668 Other liabilities 182,533 453,750 Total liabilities 217,075,655 122,223,418 Equity 45,887,985,437 27,988,221,809 Total liabilities and equity 46,105,061,092 28,110,445,227

Trust fund equity at December 31 is classified as follows:

2016 2015 (In bolivars)

Trust fund Length-of-service benefits 39,385,509,106 23,127,068,867 Administration 2,244,358,586 1,597,318,511 Savings fund 2,735,360,964 975,414,806 Guarantee and custody 1,042,985,725 951,193,335 Investment 479,771,056 1,337,226,290 45,887,985,437 27,988,221,809

Trust fund Private sector 31,488,738,570 21,261,846,573 Public sector 14,399,246,867 6,726,375,236 45,887,985,437 27,988,221,809

Investments in debt securities in bolivars and foreign currency are recorded at cost, which should be consistent with market value at the time of purchase. Discounts or premiums are amortized over the term of the securities as a credit or debit to interest income, resulting in a lower or greater effective yield on investments. Debt securities in foreign currency are adjusted to the prevailing official exchange rate. Investments in equity securities, in bolivars and foreign currency, are recorded at cost. In accordance with certain trust agreements, investments in debt or equity securities included in these trusts are maintained at amortized cost and adjusted at the prevailing official exchange rate.

At December 31, 2016, trust funds contributed by government entities represent 31%, and those by the private sector 69% (24% and 76% at December 31, 2015).

45 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

Investment securities included in trust fund accounts at December 31 comprise the following:

2016 2015 Book Fair Book Fair value value value value (In bolivars)

1) Securities issued or guaranteed by the Venezuelan government National Public Debt Bonds, with annual yield at between 9.40% and 18.00%, maturing between March 2017 and July 2033, and a par value of Bs 9,894,815,346 (yield at between 9.88% and 18%, maturing between June 2016 and February 2030, and a par value of Bs 7,842,407,591 at December 31, 2015) 10,900,228,181 12,141,416,050 (1) (a) 8,699,198,341 9,909,047,005 (1) (a) Principal and Interest Covered Bonds (TICC), with annual interest at between 5.25% and 6.25%, maturing between April 2017 and March 2019, and a par value of US$113,696,138, payable in bolivars at the official exchange rate 1,134,485,638 1,135,260,279 (1) (a) 706,144,483 713,420,265 (1) (a) Treasury Notes in foreign currency, with annual interest at between 7% and 7.65%, maturing between December 2018 and April 2025, and a par value of US$27,000 269,325 156,437 (1) (d) 169,673 73,738 (1) (d) 12,034,983,144 13,276,832,766 9,405,512,497 10,622,541,008 2) Debt securities issued by foreign public-sector agencies Debt securities issued and guaranteed by government agencies of the United States of America, maturing in March 2017, and a par value of US$5,020,500 (par value of US$4,870,000, maturing between March and October 2016 at December 31, 2015) 50,036,561 50,022,347 (2) (d) 30,514,834 30,496,263 (2) (d) Bonds issued by foreign public-sector agencies (governments of Mexico, Colombia, Panama and Peru), with annual interest at between 5.13% and 11.75%, maturing between January 2017 and February 2020, and a par value of US$1,524,000 (Mexico, Colombia, Panama and Peru, maturing between May 2016 and February 2020, and a par value of US$3,215,000 at December 31, 2015) 15,656,958 15,723,982 (2) (d) 20,639,793 20,579,118 (2) (d) Bonds issued by Petróleos Mexicanos (PEMEX), with 5.75% annual interest, maturing in March 2018 and a par value of US$1,050,000 10,852,808 10,857,508 (2) (d) - - (2) (d) 76,546,327 76,603,837 51,154,627 51,075,381 3) Debt securities issued by Venezuelan private-sector companies Toyota Services de Venezuela, C.A., with annual yield at between 14.27% and 18.50%, maturing between February 2018 and October 2021, and a par value of Bs 135,600,000 (annual yield at between 13.74% and 14.50%, maturing between August 2016 and July 2020), and a par value of Bs 61,050,000 at December 31, 2015) 135,600,000 133,914,854 (1) (e) 61,050,000 60,680,920 (1) (e) Envases Venezolanos, S.A., with annual yield at between 16.32% and 17,94%, maturing between December 2017 and February 2019, and a par value of Bs 100,000,000 (15.76% annual yield, and a par value of Bs 20,000,000 at December 31, 2015) 100,000,000 99,350,640 (1) (e, f) 20,000,000 20,199,940 (1) (e, f) 235,600,000 233,265,494 81,050,000 80,880,860 4) Investments issued by Venezuelan non-financial public-sector companies Inversiones La Previsora, C.A., 22,150 common shares, with a par value of Bs 0.40 each 8,922 8,882 (3) (I) 8,922 8,882 (3) (I) Siderúrgica Venezolana, S.A. (SIVENSA), 1,658 common shares, with a par value of Bs 2 each 3,316 2,321,200 (4) (l) 3,316 414,500 (4) (I) Compañía Anónima Nacional Teléfonos de Venezuela (CANTV), 7 common shares, with a par value of between Bs 7.78 and Bs 8.34 - - (2) (d) 57 1,050 (2) (d) 12,238 2,330,082 12,295 424,432 5) Investments issued by Venezuelan non-financial private-sector companies H.L. Boulton & Co., S.A., 637 common shares, with a par value of Bs 10 each 6,370 56,693 (4) (l) 6,370 56,693 (4) (i) 6) Investments in Venezuelan banks and other financial institutions Certificates of deposit Banesco, C.A. Banco Universal, with annual interest at between 0,75% and 1%, maturing in January 2017, and a par value of Bs 2,424,796,602 (annual interest at between 12.50% and 13%, maturing in January 2016 and a par value of Bs 1,255,562,034 at December 31, 2015) 2,424,796,602 2,424,796,602 (3) (c) 1,255,562,034 1,255,562,034 (3) (c) BBVA Banco Provincial, S.A. Banco Universal, with annual interest at between 0.25% and 0.50%, maturing in January 2017, and a par value of Bs 1,033,035,621 (12.50% annual interest, maturing in January 2016, and a par value of Bs 1,402,033,131 at December 31, 2015) 1,033,035,621 1,033,035,621 (3) (f) 1,402,033,131 1,402,033,131 (3) (f) Banco del Caribe, C.A. Banco Universal, with 1% annual interest, maturing in January 2017, and a par value of Bs 458,990,341 (13% annual interest, maturing in January 2016, and a par value of Bs 471,903,048 at December 31, 2015) 458,990,341 458,990,341 (3) (g) 471,903,048 471,903,048 (3) (g) 100% Banco, Banco Comercial, C.A., with 4% annual interest, maturing in January 2017, and a par value of Bs 55,099,739 55,099,739 55,099,739 3) (h) - - Banco Plaza, C.A. Banco Universal, with 8.50% annual interest, maturing in 2017, and a par value of Bs 54,613,200 54,613,200 54,613,200 (3) (i) - - Banco Exterior, C.A. Banco Universal, with 0.50% annual interest, maturing in January 2017, and a par value of Bs 32,596,178 (annual interest at between 9% and 10%, maturing in January 2016, and a par value of Bs 281,599,922 at December 31, 2015) 32,596,178 32,596,178 (3) (j) 281,599,922 281,599,922 (3) (j) Bancrecer, S.A. Banco Microfinanciero, with 8,50% annual interest, maturing in January 2017, and a par value of Bs 22,175,451 22,175,451 22,175,451 (3) (k) - - Shares in Venezuelan banks Banco Venezolano de Crédito, C.A. Banco Universal, 48 common shares, with a par value of between Bs 100 and Bs 2,365 (96 common shares at December 31, 2015) 27,450 77,156 (5) (l) 54,900 154,312 (4) (i) Banco de Venezuela, S.A., Banco Universal, 378 common shares, with a par value of Bs 0.1 each 38 94,500 (4) (e) 38 37,800 (4) (e) 4,081,334,620 4,081,478,788 3,411,153,073 3,411,290,247 7) Investments in foreign banks and other financial institutions Certificates of deposit Black Rock Merrill Lynch Investment Managers, maturing in January 2017, with a par value of US$4,391,715 (maturing in January 2016, with a par value of US$4,444,928 at December 31, 2015) 43,807,355 43,807,355 (3) (b) 28,020,123 28,020,123 (3) (b) 43,807,355 43,807,355 28,020,123 28,020,123 8) Other investments Commercial paper issued by Venezuelan non-financial private-sector companies Provencesa, S.A., maturing between January and March 2016, with a par value of Bs 80,000,000 at December 31, 2015 - - 79,299,724 78,863,100 (3) (e, f) 16,472,290,054 17,714,375,015 13,056,208,709 14,273,151,844

46 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

(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) Banco Central de Venezuela. (b) Merrill Lynch, Pierce, Fenner & Smith. (c) Banesco, C.A. Banco Universal. (d) Clearstream Banking, S.A. (e) Caja Venezolana de Valores, S.A. (f) BBVA, Banco Provincial Banco Universal. (g) Banco del Caribe, C.A, Banco Universal. (h) 100% Banco; Banco Universal, C.A. (i) Banco Plaza, C.A. Banco Universal. (j) Banco Exterior, C.A. Banco Universal. (k) Bancrecer, S.A, Banco Microfinanciero. (l) Other custodians.

At December 31, 2016, the market value of some securities issued by the Bolivarian Republic of Venezuela is lower than amortized cost by Bs 31,069,000 (Bs 32,309,000 at December 31, 2015). The trust fund considers that these losses are temporary since they relate to normal fluctuations of investments in the stock markets. Management expects that these securities will not be realized at a price lower than the book value. In addition, the trust fund has the ability to hold these securities for a sufficient period of time to recover unrealized losses.

Below is the classification of investment securities at December 31 according to maturity:

2016 2015 Book Fair Book Fair value value value value (In bolivars)

Up to six months 5,286,059,756 5,291,835,674 3,560,467,356 3,561,770,576 Six months to one year 696,447,130 767,259,012 75,189,033 79,594,991 One to five years 2,564,238,058 2,984,230,993 3,031,686,781 3,500,173,957 Over five years 7,925,499,015 8,668,490,904 6,388,791,936 7,130,939,082 Without maturity 46,095 2,558,432 73,603 673,238 16,472,290,054 17,714,375,015 13,056,208,709 14,273,151,844

Investment securities at December 31 are classified as follows:

2016 2015 (In bolivars)

Non directed 16,274,008,333 12,922,206,154 Directed 198,281,721 134,002,555 16,472,290,054 13,056,208,709

47 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

Trust fund resources at December 31 comprise the following:

2016 2015 Directed Non-directed Directed Non-directed (In bolivars)

Securities issued or guaranteed by the Venezuelan government 105,836,831 11,929,146,313 76,772,815 9,328,739,682 Debt securities issued by foreign public or private- sector companies 48,591,439 27,954,887 29,136,014 22,018,613 Debt securities issued by Venezuelan public-sector companies 12,238 - 12,333 - Investments in Venezuelan private-sector companies and other investments 6,370 235,600,000 6,370 160,349,724 Deposits with other Venezuelan financial institutions 27,488 4,081,307,133 54,900 3,411,098,135 Deposits with other banks 43,807,355 - 28,020,123 - 198,281,721 16,274,008,333 134,002,555 12,922,206,154

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.

At December 31, 2016, investment securities issued or guaranteed by the Venezuelan government account for 73% of the trust’s investment securities portfolio (72% at December 31, 2015).

The trust fund loan portfolio at December 31 comprises the following:

2016 2015 (In bolivars)

Loans to beneficiaries of Length-of-service benefit trust funds 21,913,296,262 13,185,536,243 Mortgage loans 529,868,557 493,215,473 Company loans 970,000 970,000 Loans to government agencies 31,769 45,599 22,444,166,588 13,679,767,315

Loans to beneficiaries of length-of-service benefit trust funds consist of loans granted to employees that are guaranteed by their length-of-service benefits, which are deposited in trust funds. These interest- free loans relate to trust fund plans of public and private-sector companies and have no fixed maturity.

The trust fund acts as trustee for termination benefit contracts of employees of the Bank and Mercantil Seguros, C.A. amounting to Bs 5,334,440,000 and Bs 809,629,000, respectively (Bs 2,770,512,000 and Bs 407,009,000, respectively, at December 31, 2015). 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 December 31, 2016, loans to beneficiaries of length-of-service benefit trust funds include Bs 4,786,516,000 and Bs 731,403,000 in respect of loans granted to the Bank and Mercantil Seguros, C.A. employees, respectively (Bs 2,770,512,000 and Bs 407,009,000, respectively, at December 31, 2015).

At December 31, 2016, mortgage loans include Bs 529,284,000 in respect of guaranteed loans granted under the administration trust fund using resources from public entities (Bs 492,146,000 at December 31, 2015). This account also includes Bs 584,000 in respect of mortgage loans granted to beneficiaries of the length-of-service trust fund (Bs 1,069,000 at December 31, 2015).

48 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

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 year ended December 31, 2016 amounted to Bs 216,437,000 and Bs 136,817,000, respectively (Bs 74,755,000 and Bs 136,335,000, respectively, during the year ended December 31, 2015), 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 year ended December 31, 2016, the Bank recorded income from financial transactions of Bs 26,684,000. Shown under income from other accounts receivable (Bs 25,606,000 during the year ended December 31, 2015).

d) Other control accounts Other control accounts are mainly in respect of returned checks and guarantees pending release. At December 31, 2016, these accounts also include US$5,408,000 equivalent to Bs 42,223,000 (US$5,401,000, equivalent to Bs 42,118,000, at December 31, 2015) in respect of the balance receivable from CADIVI for payments in foreign currency made by the Bank on behalf of the customers for credit card use abroad.

26. Credit-related commitments

The Bank has significant outstanding commitments related to letters of credit, guarantees granted, lines of credit and credit card limits to meet the needs of its customers and to manage its own risk resulting from interest rate variations. Since many of its credit limits may expire without being used, aggregate liabilities do not necessarily represent future cash requirements. Commitments to extend credit, letters of credit and guarantees granted by the Bank are recorded under memorandum accounts.

Guarantees granted After conducting a credit risk analysis, the Bank provides guarantees to certain customers within their line of credit. These guarantees are issued to a beneficiary and may be executed if the customer fails to comply with the terms of the agreement. These guarantees mature after more than one year and earn annual commissions between 0.50% and 5% of their value. Commissions are recorded monthly while the guarantees are in force.

49 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

Letters of credit Letters of credit usually mature within 90 days and are renewable. They are generally issued to finance a trade agreement for the shipment of goods from a seller to a buyer. The Bank charges a fee of 0.50% of the amount of the letter of credit and records the latter under assets once it is used by the customer. Unused letters of credit and other similar liabilities are included under memorandum accounts.

The Bank has trademark license agreements for the use of Visa, MasterCard and Diners Club International credit cards. Visa and MasterCard agreements require the Bank to deposit collateral in foreign financial institutions. In addition, at December 31, 2016, stand-by letters of credit were pledged for MasterCard International and Visa International transactions amounting to US$7,300,000 and US$5,116,000, respectively (US$7,300,000 and US$5,075,000 at December, 31, 2015) 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 three 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 year ended December 31, 2016 and 2015 was 29% per annum, respectively.

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 December 31, 2016 and 2015, in accordance with the Accounting Manual, the Bank has set aside general and specific provisions for contingent debtor accounts amounting to Bs 10,747,000.

50 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

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 at December 31:

a) Balance sheet

2016 2015 (In bolivars)

Assets Cash and due from banks 228,213,050 373,477,798 Mercantil Bank, N.A. 227,447,335 373,105,304 Mercantil Bank (Panamá), S.A. 576,100 251,200 Mercantil Bank (Schweiz), A.G. 189,615 121,294 Investment securities 1,995,000 33,149,664 Short-term deposits (Note 4) Mercantil Bank, N.A. 1,995,000 33,149,664

Investments in subsidiaries and affiliates (Note 7) 4,327,955,326 1,391,881,241 Inversiones Platco, C.A. 4,129,544,548 1,193,571,336 Inversiones y Valores Mercantil V, C.A. 197,228,890 195,394,762 Proyecto Conexus, C.A. 1,181,888 2,915,143 Other assets 220,140,897 130,526,294 Fideicomiso Mercantil, C.A. Banco Universal 216,407,318 121,323,822 Mercantil Financiadora de Primas 3,557,500 9,080,597 Mercantil Bank (Curacao), N,V. 176,079 121,875 Total assets 4,778,304,273 1,929,034,997

51 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

2016 2015 (In bolivars)

Liabilities Deposits 12,546,991,814 4,466,490,562 Checking accounts 12,381,613,495 4,431,423,745 Non-interest-bearing checking accounts 5,562,916,222 2,528,118,202 Cestaticket Accor Services, C.A. 1,879,177,561 590,079,668 Mercantil Seguros, C.A. 1,145,786,882 316,273,063 Mercantil Servicios Financieros, C.A. 805,929,121 446,831,256 Servicio Panamericano de Protección, C.A. 541,201,507 325,448,246 Inversiones Platco, C.A. 474,039,875 544,201,133 Mercantil Planes Administrados, C.A. 338,236,193 - Mercantil Financiadora de Primas, C.A. 198,357,274 101,187,018 Mercantil Inversiones y Valores, C.A. 95,602,735 21,612,029 Fundación Mercantil 23,973,041 7,761 Inversiones y Valores Mercantil VI, C.A. 12,597,030 84,174,337 Fundación BMA 10,678,142 61,989,943 Mercantil Sociedad Administradora de Entidades de Inversión Colectiva, C.A. 10,616,652 422,735 Mercantil Merinvest Casa de Bolsa, C.A. 8,074,246 15,648,813 Mercantil Servicios de Inversión, C.A. 8,029,173 7,488,544 Mercantil Arte y Cultura, C.A. 5,687,242 4,275,487 Mercantil Merinvest, C.A. 3,158,366 6,474,183 Servibien, C.A. 937,046 353,859 Inversiones y Valores Mercantil V, C.A. 473,892 1,223,494 Innovex, C.A. 360,244 426,633 Interest-bearing checking accounts 6,744,397,273 1,023,172,251 Fideicomiso Mercantil, C.A. Banco Universal 6,744,397,273 1,023,172,251 Demand deposits and certificates 74,300,000 880,133,292 Inversiones y Valores Mercantil V, C.A. 74,300,000 48,050,000 Cestaticket Accor Services, C.A. - 620,000,000 Mercantil Seguros, C.A. - 109,083,292 Mercantil Merinvest, C.A. - 55,000,000 Mercantil Planes Administrados, C.A. - 28,000,000 Fundación Mercantil - 20,000,000 Savings accounts 165,378,319 35,066,817 Mercantil Merinvest Casa de Bolsa, C.A. 142,045,418 20,957,425 Fundación Mercantil 22,052,459 12,973,918 Fundación BMA 1,280,442 1,135,474 Borrowings - 25,136,800 Mercantil Bank (Curacao), N.V. - 25,136,800 Other liabilities 39,076,729 2,062,249 Inversiones Platco, C.A. (Note 16) 37,694,753 - Fundación BMA 706,887 51,245 Fundación Mercantil 592,835 1,095,889 Mercantil Inversiones y Valores, C.A. 60,027 - Inversiones y Valores Mercantil V, C.A. 22,227 333,281 Mercantil Merinvest Casa de Bolsa, C.A. - 538,194 Mercantil Bank Curacao, N.V. - 43,640 Total liabilities 12,586,068,543 4,493,689,611

52 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

b) Income statement

Years ended December 31, 2016 2015 (In bolivars)

Interest income 5,093,610 4,371,454 Income from cash and due from banks 247,942 600,934 Mercantil Bank, N.A. 247,942 600,934 Other interest income 4,845,668 3,770,520 Mercantil Bank, N.A. 4,845,668 3,770,520 Interest expense 295,062,818 41,033,383 Mercantil Servicios Financieros, C.A. 260,353,650 21,919,997 Inversiones y Valores Mercantil V, C.A. 9,192,572 2,883,739 Mercantil Merinvest Casa de Bolsa, C.A. 8,596,949 4,378,191 Mercantil Planes Administrados, C.A. 7,995,805 761,854 Fundación Mercantil 4,985,497 7,462,795 Inversiones y Valores Mercantil VI, C.A. 1,903,523 2,678,171 Mercantil Inversiones y Valores, C.A. 1,388,818 122,504 Fundación BMA 511,338 216,272 Mercantil Arte y Cultura, C.A. 132,576 506,083 Servibien, C.A. 2,090 - Mercantil Bank (Curacao), N.V. - 103,777 Operating income 583,196,924 322,579,850 Fideicomiso Mercantil, C.A. Banco Universal 343,981,614 218,198,429 Mercantil Financiadora de Primas, C.A. 226,417,606 89,736,816 Mercantil Servicios Financieros, C.A. 12,655,669 8,418 Inversiones y Valores Mercantil V, C.A. 83,616 8,549,528 Mercantil Inversiones y Valores, C.A. 27,276 50,907 Inversiones Platco, C.A. 11,316 5,294,766 Mercantil Arte y Cultura, C.A. 8,072 426 Mercantil Merinvest Casa de Bolsa, C.A. 4,972 8,661 Servibien, C.A. 2,997 - Fundación Mercantil 2,950 - Mercantil Planes Administrados, C.A. 736 - Fundación BMA 100 2,744 Proyecto Conexus, C.A. - 355,079 Mercantil Bank (Panamá), S.A. - 241,942 Mercantil Seguros, C.A. - 132,134 Operating expenses 2,794,608,786 1,025,508,583 Inversiones Platco, C.A. 2,703,145,591 1,000,510,210 Mercantil Inversiones y Valores, C.A. 75,774,922 1,816,157 Inversiones y Valores Mercantil V, C.A. 12,606,715 - Mercantil Bank, N.A. 1,272,668 3,950,186 Mercantil Bank Curacao, N.V. 1,542,153 2,759,923 Proyecto Conexus, C.A. 266,737 2,337,975 Mercantil Merinvest, C.A. - 14,134,132 Extraordinary expenses 162,352,000 80,000,000 Fundación Mercantil (Note 28) 162,352,000 80,000,000

53 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

c) Trust fund at December 31

2016 2015 (In bolivars)

Assets Cash and due from banks Mercantil, C.A. Banco Universal (Note 11) 6,744,397,273 1,023,172,251 Mercantil Bank, N.A. 59,553 34,338 Total assets 6,744,456,826 1,023,206,589

Liabilities Fees payable Mercantil, C.A. Banco Universal 216,407,318 121,323,822

d) Transactions The Bank’s significant transactions with related companies are described below:

Cash and due from banks, deposits and other liabilities from financial intermediation are mainly in respect of debit or credit balances of checking accounts at the Bank’s agencies or related banks abroad.

Other assets include interest receivable and other accounts receivable.

Expenses payable to Mercantil Bank, N.A. are mainly in respect of data processing, personnel administration and consulting services, and were incurred by the Bank’s offices abroad.

Mercantil Servicios de Inversión, C.A. (MSI), subsidiary of MERCANTIL, is authorized by the Venezuelan Securities Superintendency (SNV) to provide investment services and manage investment portfolios. The Bank has engaged MSI as a specialist to optimize yields on investments of trustors. For the provision of this service, the trust fund (principal), grants MSI (agent) special powers for portfolio management and disposal. Trustee responsibility is not delegated as part of the service for which MSI charges an annual commission on the portfolio collections. During the year ended December 31, 2016, the Bank paid MSI Bs 28,012,000 in this connection (Bs 16,687,000 during the year ended December 31, 2015).

At December 31, 2016 and 2015, 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 year ended December 31, 2016, the Bank recorded income of Bs 343,982,000 and has Bs 216,407,000 receivable in respect of these commissions (Bs 218,199,000 and Bs 116,521,000, respectively, at December 31, 2015).

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 year ended December 31, 2016, the Bank made contributions of Bs 162,352,000 (Bs 80,000,000 during the year ended December 31, 2015), shown under extraordinary expenses (Note 22).

54 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

29. Maturity of financial assets and liabilities

At December 31, financial assets and liabilities are classified according to maturity as follows:

2016 December 31, December 31, December 31, Beyond 2017 2018 2019 December 2020 Total (In bolivars)

Assets Cash and due from banks 568,394,325,205 - - - 568,394,325,205 Investment securities 52,243,483,838 1,408,696,832 1,391,220,267 76,627,331,978 131,670,732,915 Loan portfolio 412,980,845,680 51,903,469,946 46,114,406,189 103,855,358,861 614,854,080,676 Interest and commissions receivable 6,589,874,876 - - - 6,589,874,876 Total financial assets 1,040,208,529,599 53,312,166,778 47,505,626,456 180,482,690,839 1,321,509,013,672

Liabilities Customer deposits 1,226,342,027,761 57,162 - - 1,226,342,084,953 Liabilities with BANAVIH 186,227 - - - 186,227 Borrowings 205,848,259 - - - 205,848,259 Other liabilities from financial intermediation 3,530,966 - - - 3,530,966 Interest and commissions payable 27,433,028 - - - 27,433,028 Total financial liabilities 1,226,579,026,241 57,162 - - 1,226,579,083,433

2015 December 31, December 31, December 31, Beyond 2016 2017 2018 December 2019 Total (In bolivars)

Assets Cash and due from banks 154,144,272,775 - - - 154,144,272,775 Investment securities 10,746,661,593 2,953,087,697 474,263,193 55,073,820,263 69,247,832,746 Loan portfolio 195,629,577,960 30,421,939,033 37,080,092,442 54,227,634,359 317,359,243,794 Interest and commissions receivable 4,028,665,681 - - - 4,028,665,681 Total financial assets 364,549,178,009 33,375,026,730 37,554,355,635 109,301,454,622 544,780,014,996

Liabilities Customer deposits 497,139,308,685 1,703,932 - - 497,141,012,617 Liabilities with BANAVIH 1,311,628 - - - 1,311,628 Borrowings 69,842,275 - - - 69,842,275 Other liabilities from financial intermediation 4,136,512 - - - 4,136,512 Interest and commissions payable 104,786,598 - - - 104,786,598 Total financial liabilities 497,319,385,698 1,703,932 - - 497,321,089,630

55 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

30. Fair value of financial instruments

Below are the fair values of financial instruments maintained by the Bank at December 31:

2016 2015 Book Fair Book Fair value value value value (In bolivars)

Assets Cash and due from banks 568,394,325,205 568,394,325,205 154,144,272,775 154,144,272,774 Investment securities 131,670,732,915 132,113,838,834 69,247,832,747 69,418,458,865 Loan portfolio, net of provision 595,301,689,832 595,301,689,832 307,411,935,388 307,411,935,388 Interest and commissions receivable, net of provision 6,471,397,290 6,471,397,290 3,989,981,760 3,989,981,760 1,301,838,145,242 1,302,281,251,161 534,794,022,670 534,964,648,787

Liabilities Customer deposits 1,226,342,084,953 1,226,342,084,953 497,141,012,617 497,141,012,617 Deposits and liabilities with BANAVIH 186,227 186,227 1,311,628 1,311,628 Borrowings 205,848,259 205,848,259 69,842,275 69,842,275 Other liabilities from financial intermediation 3,530,966 3,530,966 4,136,512 4,136,512 Interest and commissions payable 27,433,028 27,433,028 104,786,598 104,786,598 1,226,579,083,433 1,226,579,083,433 497,321,089,630 497,321,089,630

Memorandum accounts Contingent debtor accounts 3,105,533,108 3,105,533,108 2,573,471,845 2,573,471,845

In the ordinary course of business, the Bank maintains financial instruments with off-balance sheet risks to meet the financial needs of its customers. At December 31, the Bank’s main exposure is represented by the following commitments:

2016 2015 (In bolivars)

Unused lines of credit 87,473,305,342 47,462,490,766 Other contingencies 1,229,376,239 1,078,516,035 Tourism loan commitments 887,911,331 764,822,539 Guarantees granted 851,267,605 584,120,381 Letters of credit issued but not negotiated (Stand-by) 125,352,494 146,012,890 Letters of credit confirmed but not negotiated 825,440 - Investment securities acquired under repurchase agreements 10,800,000 - 90,578,838,451 50,035,962,611

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.

56 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

Below is a summary of the most significant methods and assumptions used in estimating the fair values of financial instruments:

Short-term financial instruments Financial instruments, including derivatives, are recorded in the balance sheet under assets or liabilities at their respective market value. Short-term financial instruments, both assets and liabilities, are shown in the balance sheet at book value, which does not significantly differ from fair value due to their short- term maturity. These instruments include cash and due from banks, deposits with no fixed maturity and short-term maturity, other liabilities from financial intermediation with short-term maturity, and commissions and interest receivable and payable.

Investment securities The fair value of investment securities was determined using the present value of future cash flows of investment securities, quoted market prices, reference prices determined from trading operations on the secondary market and quoted market prices of financial instruments with similar characteristics. The equivalent in bolivars of the fair value of securities denominated in foreign currency was determined using the official exchange rate of Bs 9.975/US$1.

Loan portfolio Most of the Bank’s loan portfolio earns interest at variable rates that are revised frequently, generally between 30 and 90 days for most of the short-term portfolio. Allowances are made for loans with some risk of recovery. Therefore, in management’s opinion, the net book value of this loan portfolio approximates its fair value.

Deposits and long-term liabilities Deposits and long-term liabilities earn interest at variable rates. Therefore, Bank management considers fair value to be equivalent to book value.

31. Risk management

The Bank is mainly exposed to credit, market and operational risks. Below is the risk policy used by the Bank for each type of risk:

Credit risk Credit risk is the risk that a counterparty will default on its debts at maturity. The Bank monitors credit risk exposure by regularly analyzing the payment capabilities of its borrowers. The Bank structures the level of credit risk by establishing limits for individual or group borrowers. The Bank classifies risk exposure by risk category into direct, contingent and issuer risks.

Market risk Financial institutions encounter market risks when market conditions show adverse changes that affect the liquidity and value of financial instruments included in investment portfolios or contingent positions, including transactions with derivative instruments, and result in a loss for these financial institutions. Market risks mainly comprise two types of risk: price risk (including interest rate, foreign exchange and share price risks) and liquidity risk.

a) Price risk Price risk includes interest rate, foreign exchange and share price risks.

Interest rate risk is represented by changes in market interest rates with a potential impact on the Bank’s financial margin or equity.

To measure interest rate risk, the Bank monitors the variables affecting interest rate movements and financial assets and liabilities. The Bank regularly controls and mitigates existing exposure to risks.

57 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

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.

The operational risk management structure established by the Bank enables it to conduct internal processes for identification, assessment, quantification, monitoring and mitigation of operational risks across the organization. This structure also provides management with the information required to set priorities and aid the decision-making process.

Operational risk management at the Bank is a dynamic process conducted from a qualitative standpoint -by identifying risks and analyzing trigger factors- and from a quantitative standpoint-by identifying events, measuring their impact, monitoring the behavior of key risk indicators and analyzing scenarios. The information gathered from these processes serves as the basis to define and implement actions aimed at controlling and mitigating risks within the Bank.

32. Liabilities and contingencies

In the ordinary course of business, the Bank is defendant in various legal proceedings. The Bank is not aware of any other pending legal proceedings which could have a significant effect on its financial position or the results of its operations.

In tax matters, the Bank and its merged financial institutions have received additional income tax assessments from the Tax Authorities amounting to Bs 21,957,000, mainly due to disallowance of certain income considered nontaxable, expenses related to tax-exempt income, expenses for unpaid or late payment of withholdings, nondeductible expenses for uncollectible accounts, rejection of tax loss carryforwards and the calculation of inflation adjustment for tax purposes. The Bank also received additional tax assessments of Bs 3,341,000 in respect of withheld and late payments of value added tax (VAT). The Bank appealed alleging most of these assessments are not well grounded in law. The tax courts have not ruled on some of these assessments; those that went in favor of the Bank were appealed by the National Treasury and rulings are pending.

58 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

The Bank also received additional bank debit tax assessments amounting to Bs 23,508,000, which were appealed. In the opinion of Bank management and its legal advisors, these assessments are not well grounded in law.

In April 2008, the Bank was subject to a tax assessment of Bs 62,679,000 in respect of the proportional tax on dividends. In June 2008, the Bank filed a discharge claim with the Tax Authorities stating its legal arguments against this assessment. In December 2008, the National Integrated Customs and Tax Administration Service (SENIAT) confirmed this tax assessment and in January 2009 the Bank filed an appeal against the payment forms issued. In June 2011, SENIAT confirmed the tax assessment, which was appealed by the Bank in July 2011. In the opinion of Bank management and its legal advisors, there are legal grounds to uphold the inadmissibility of the assessment.

Bank management identified a maximum risk of Bs 50,503,000 in connection with the aforementioned assessments based on inadmissibility of monetary restatement and interest charges; hence a provision has been set aside to cover this amount.

In June 2008, the Bank was notified by BANAVIH, ascribed to the People’s Power Ministry for Housing, of an assessment of Bs 25,364,000 in respect of alleged differences in the contributions made under the Housing Loan Law. The Bank appealed this assessment in July 2008. In August 2008, BANAVIH ruled partially in favor of the Bank and reduced the assessment to Bs 11,647,000. However, in September 2008, the Bank appealed this decision. Simultaneously, since BANAVIH arrived at the ruling following procedures established in the Law on Administrative Proceedings instead of applying the procedures set out in the Master Tax Code, as required by the Instance Courts and the Supreme Tribunal of Justice, the Bank filed for and was awarded constitutional protection in December 2008 and February 2009, respectively. BANAVIH was ordered to follow the Master Tax Code to rule on the appeal filed by the Bank in September 2008, according to which the effects of the tax assessment would be suspended. In the opinion of Bank management and its legal advisors, there are legal grounds to uphold the inadmissibility of the assessment.

In December 2012, the Bank was notified of two proceedings as joint guarantor filed in October 2011. In March 2013, the Supreme Tribunal of Justice annulled one of the proceedings for Bs 13,919,000. The Bank has sufficient collateral over the second proceeding for Bs 3,338,000. In the opinion of Bank management and its legal advisors, the ruling on the latter proceeding should be favorable to the Bank.

Bank management and its legal advisors believe that there are favorable expectations about the future resolution of these contingencies, which they believe will not significantly change next year.

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.

59 Mercantil, C.A. Banco Universal Notes to the financial statements December 31, 2016 and 2015

34. Investments and loans granted in excess of legal limits

At December 31, 2016 and 2015, the Bank has no 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 year closing.

These contributions will be paid through monthly premiums equivalent to one-sixth of this percentage. Contributions in this connection are shown under operating expenses.

Fee paid to the Superintendency of Banking Sector Institutions The Law on Banking Sector Institutions requires Venezuelan banks and financial institutions regulated by this Law to pay a special fee to support SUDEBAN operations.

At December 31, 2016 and 2015, the biannual fee is 0.08% of the average of the Bank’s assets for the six-month period; it is payable monthly at one-sixth of the resulting amount for the six-month period. This fee is shown under operating expenses.

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 December 31, 2016, the Bank maintains an investment of Bs 24,100,000, which includes contributions and interest at that date (Bs 18,121,000 at December 31, 2015) (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 year ended December 31, 2016, contributions in this connection amount to Bs 1,396,361,000 (Bs 927,047,000 at December 31, 2015).

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