Mercantil, C.A. Banco Universal (Subsidiary of Mercantil Servicios Financieros, C.A.)
Independent Auditor’s Report and Financial Statements June 30, 2018
Mercantil, C.A. Banco Universal Index to the financial statements June 30, 2018 and December 31, 2017
Pages
I - Independent auditor’s report 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 - 16 3 - Cash and due from banks 16 4 - Investment securities 16 - 23 5 - Loan portfolio 23 - 25 6 - Interest and commissions receivable 25 7 - Investments in subsidiaries and affiliates 26 - 28 8 - Available-for-sale assets 29 9 - Property and equipment 29 - 30 10 - Other assets 30 - 31 11 - Deposits 32 12 - Deposits and liabilities with Banco Nacional de Vivienda y Hábitat (BANAVIH) 33 13 - Borrowings 33 14 - Other liabilities from financial intermediation 33 15 - Interest and commissions payable 34 16 - Accruals and other liabilities 34 17 - Taxes 35 - 36 18 - Employee benefits and employee benefit plan 36 - 39 19 - General and administrative expenses 40 20 - Other operating income 40 21 - Other operating expenses 41 22 - Extraordinary expenses 41 23 - Equity 41 - 43 24 - Financial assets and liabilities in foreign currency 44 - 45 25 - Memorandum accounts 45 - 51 26 - Credit-related commitments 51 - 52 27 - Balances and transactions with related companies 52 - 55 28 - Fundación Mercantil 56 29 - Maturity of financial assets and liabilities 56 30 - Fair value of financial instruments 57 - 58 31 - Risk management 58 - 59 32 - Liabilities and contingencies 59 - 60 33 - Money laundering prevention and terrorism financing 60 34 - Investments and loans granted in excess of legal limits 60 35 - Legal contributions 61
Mercantil, C.A. Banco Universal (Subsidiary of Mercantil Servicios Financieros, C.A.) Balance sheet June 30, 2018 and December 31, 2017
June 30, December 31, 2018 2017 (In bolivars)
Assets Cash and due from banks (Note 3) 81,964,703,027,958 8,194,442,652,787 Cash 450,176,764,233 43,968,440,214 Central Bank of Venezuela 73,374,720,546,491 7,937,322,571,560 Venezuelan banks and other financial institutions 1,279,777 150,000 Foreign and correspondent banks 4,881,953,778,517 497,944,310 Pending cash items 3,257,850,658,940 212,653,546,703 Investment securities (Note 4) 5,397,732,811,436 370,078,518,915 Deposits with the Central Bank of Venezuela and overnight deposits 11,998,347,000 21,876,608,000 Investments in trading securities 114,869,656,125 - Investments in available-for-sale securities 2,515,532,285,116 48,503,994,952 Investments in held-to-maturity securities 31,679,598,117 33,006,990,269 Restricted investments 2,031,368,375,078 154,668,638 Investments in other securities 692,284,550,000 266,536,257,056 Loan portfolio (Note 5) 143,348,374,813,407 3,456,163,745,189 Current 146,800,797,467,570 3,552,770,248,421 Rescheduled 1,888,917,131 497,128,392 Overdue 55,662,600,791 1,709,337,101 In litigation 453,462,075 757,220,482 (Allowance for losses on loan portfolio) (3,510,427,634,160) (99,570,189,207) Interest and commissions receivable (Note 6) 798,610,138,252 26,174,823,792 Interest receivable on investment securities 32,566,252,405 8,140,133,339 Interest receivable on loan portfolio 754,488,503,903 17,483,117,566 Commissions receivable 12,059,261,712 627,043,778 (Provision for interest receivable and other) (503,879,768) (75,470,891) Investments in subsidiaries and affiliates (Note 7) 76,835,931,365 4,588,321,622 Available-for-sale assets (Note 8) 6,301,533 16,966,654 Property and equipment (Note 9) 170,441,694,048 110,235,891,389 Other assets (Note 10) 9,613,378,907,408 267,365,218,650 Total assets 241,370,083,625,407 12,429,066,138,998
Memorandum accounts (Note 25) Contingent debtor accounts 10,407,795,574,544 188,939,949,558 Assets received in trust 4,317,527,431,812 168,695,157,224 Other special trust services 6,070,623 6,311,768 Other debtor memorandum accounts 304,835,076,274,409 8,040,777,517,194 Other debtor control accounts 3,678,722 3,678,722 319,560,409,030,110 8,398,422,614,466
The accompanying notes are an integral part of the financial statements
1
Mercantil, C.A. Banco Universal (Subsidiary of Mercantil Servicios Financieros, C.A.) Balance sheet June 30, 2018 and December 31, 2017
June 30, December 31, 2018 2017 (In bolivars)
Liabilities and Equity Liabilities Deposits (Note 11) 211,846,435,166,000 11,455,242,792,607 Demand deposits 185,567,281,793,937 9,221,871,493,143 Non-interest-bearing checking accounts 138,387,438,339,587 7,894,260,702,984 Interest-bearing checking accounts 34,335,422,211,754 1,301,812,327,561 Checking accounts under Exchange Agreement No. 20 1,140,801,016,882 96,502,972 Demand deposits and certificates 11,703,620,225,714 25,701,959,626 Other demand deposits 1,281,826,895,774 178,906,936,937 Savings deposits 24,994,197,667,182 2,053,217,769,466 Time deposits 89,125,188 122,658,859 Restricted deposits 3,039,683,919 1,123,934,202 Deposits and liabilities with Banco Nacional de Vivienda y Hábitat (Note 12) 12,267,589 7,976,680 Borrowings (Note 13) 3,797,810,310 412,830,423 Venezuelan financial institutions, up to one year 3,641,015,226 256,617,450 Foreign financial institutions, up to one year 156,795,084 156,212,973 Other liabilities from financial intermediation (Note 14) 424,562,193 40,556,995 Interest and commissions payable (Note 15) 11,394,451,979 7,829,448 Expenses payable on deposits 11,394,451,979 7,829,448 Accruals and other liabilities (Note 16) 15,680,581,837,857 605,618,742,338 Total liabilities 227,542,646,095,928 12,061,330,728,491 Equity (Note 23) Capital stock 292,415,038 292,415,038 Contributions pending capitalization 63,308,425,509 63,307,441,923 Capital reserves 314,346,166 312,884,091 Equity adjustments 10,409,111,289,334 104,439,480,454 Retained earnings 3,337,607,753,484 199,401,047,861 Unrealized gain (loss) on investment securities (Note 4) 16,803,299,948 (17,858,860) Total equity 13,827,437,529,479 367,735,410,507 Total liabilities and equity 241,370,083,625,407 12,429,066,138,998
The accompanying notes are an integral part of the financial statements
2
Mercantil, C.A. Banco Universal Income statement Six-month periods ended June 30, 2018 and December 31, 2017
June 30, December 31, 2018 2017 (In bolivars)
Interest income 11,489,345,022,925 451,336,393,985 Income from cash and due from banks 2,549,106,667 834,817 Income from investment securities 45,024,616,652 10,536,965,661 Income from loan portfolio 7,428,077,353,033 345,075,109,677 Income from other accounts receivable 4,013,598,089,786 94,855,933,690 Other interest income 95,856,787 867,550,140 Interest expense (487,929,215,252) (60,105,071,904) Expenses from deposits (484,655,270,720) (59,111,545,244) Expenses from other liabilities from financial intermediation (90,107,291) (459,428,684) Other interest expense (3,183,837,241) (534,097,976) Gross financial margin 11,001,415,807,673 391,231,322,081 Income from financial assets recovered (Note 5) 1,803,426,431 1,438,811,421 Expenses from uncollectible accounts and write-down of financial assets (Notes 2 and 5) (3,376,010,394,748) (64,592,408,309) Uncollectible loans and other accounts receivable (3,376,010,394,748) (64,592,408,309) Net financial margin 7,627,208,839,356 328,077,725,193 Other operating income (Note 20) 3,544,917,755,894 175,528,269,908 Other operating expenses (Note 21) (1,191,069,952,250) (69,771,873,861) Financial intermediation margin 9,981,056,643,000 433,834,121,240 Operating expenses (4,927,054,547,521) (193,294,148,189) Salaries and employee benefits (871,131,142,190) (68,820,169,117) General and administrative expenses (Note 19) (3,964,641,590,558) (106,032,468,250) Fees paid to the Social Bank Deposit Protection Fund (Note 35) (82,762,063,827) (16,575,324,924) Fees paid to the Superintendency of Banking Sector Institutions (Note 35) (8,519,750,946) (1,866,185,898) Gross operating margin 5,054,002,095,479 240,539,973,051 Income from available-for-sale assets (Note 8) 49,299,985,207 10,953,257,787 Sundry operating income 40,574,994,305 6,918,823,771 Expenses from available-for-sale assets (Note 8) (10,483,286) (10,747,315) Sundry operating expenses (387,428,353,577) (37,017,261,739) Net operating margin 4,756,438,238,128 221,384,045,555 Extraordinary income - 31,280,614 Extraordinary expenses (Note 22) (16,478,437,400) (439,643,192) Gross income before tax 4,739,959,800,728 220,975,682,977 Income tax (Note 17) (1,601,751,633,030) (90,700,525,388) Net income 3,138,208,167,698 130,275,157,589
Appropriation of net income Retained earnings 3,138,208,167,698 130,275,157,589
Provision for the Antidrug Law (Notes 16 and 33) 48,042,815,004 2,236,202,480
The accompanying notes are an integral part of the financial statements
3
Mercantil, C.A. Banco Universal Statement of changes in equity Six-month periods ended June 30, 2018 and December 31, 2017
Retained earnings Equity adjustments Unappropriated surplus Capital reserves Adjustments Equity Employee Contributions Other from adjustments from Adjustments benefit plan Unrealized Capital pending Legal mandatory translation exchange from asset Restricted Unappropriated remeasurement gain (loss) Total stock capitalization reserve reserves of subsidiaries fluctuations, net revaluation surplus earnings (Note 2-k) on investments equity (In bolivars)
Balances at June 30, 2017 292,415,038 17,739,895,414 292,415,038 19,006,978 (785,703) - 62,913,837,533 38,316,116,067 31,694,368,167 (883,131,887) 182,971,521 150,567,108,166 Net income ------130,275,157,589 - - 130,275,157,589 Reserve for the Social Contingency Fund - - - 1,462,075 - - - - (1,462,075) - - - Contributions pending capitalization (Note 23) - 45,567,546,509 ------45,567,546,509 Unrealized loss on investments (Note 4) ------(200,830,381) (200,830,381) Restricted surplus from equity in susbsidiaries and affiliates (Note 7) ------240,244,739 (240,244,739) - - - Translation adjustment of net assets of subsidiaries abroad - - - - (41,821) ------(41,821) Adjustment from employee benefit plan remeasurement ------6,465,508,094 (6,465,508,094) - - Adjustment from revaluation of property and equipment (Note 9) - - - - - 41,526,470,445 - - - - 41,526,470,445 Reclassification of 50% of net income to restricted surplus (Note 23) ------65,016,725,387 (65,016,725,387) - - - Balances at December 31, 2017 292,415,038 63,307,441,923 292,415,038 20,469,053 (827,524) - 104,440,307,978 103,573,086,193 103,176,601,649 (7,348,639,981) (17,858,860) 367,735,410,507 Net income ------3,138,208,167,698 - - 3,138,208,167,698 Reserve for the Social Contingency Fund - - - 1,462,075 - - - - (1,462,075) - - - Contributions pending capitalization (Note 23) - 983,586 ------983,586 Unrealized gain on investments (Note 4) ------16,821,158,808 16,821,158,808 Restricted surplus from equity in subsidiaries and affiliates (Note 7) ------(29,275,208,674) 29,275,208,674 - - - Translation adjustment of net assets of subsidiaries abroad - - - - 10,274,076,762 ------10,274,076,762 Adjustment from exchange fluctuations, net - - - - - 10,294,397,732,118 10,294,397,732,118 Adjustment from employee benefit plan remeasurement ------(20,921,950,174) 20,921,950,174 - - Reclassification of 50% of net income to restricted surplus (Note 23) ------1,583,740,957,149 (1,583,740,957,149) - - - Balances at June 30, 2018 292,415,038 63,308,425,509 292,415,038 21,931,128 10,273,249,238 10,294,397,732,118 104,440,307,978 1,658,038,834,668 1,665,995,608,623 13,573,310,193 16,803,299,948 13,827,437,529,479
Income per share (Note 2)
Six-month periods ended June 30, December 31, 2018 2017
Outstanding common shares 292,415,038 292,415,038
Net income per share Bs 10,732.0341 Bs 445.5146
The accompanying notes are an integral part of the financial statements
4
Mercantil, C.A. Banco Universal Cash flow statement Six-month periods ended June 30, 2018 and December 31, 2017
June 30, December 31, 2018 2017 (In bolivars)
Cash flows from operating activities Net income 3,138,208,167,698 130,275,157,589 Adjustments to reconcile net income to net cash provided by operating activities Equity in subsidiaries and affiliates, net 29,275,208,674 (240,244,738) Allowance for losses on loan portfolio 3,375,553,796,424 64,573,820,129 Provision for interest receivable 370,709,413 18,456,156 Write-offs of uncollectible accounts (1,110,504,567) (1,440,448,807) Income tax provision 982,079,653,263 77,168,418,598 Deferred income tax 619,671,979,767 13,532,106,790 Provision for other assets 43,842,985 21,351,372 Write-offs against the provision for other assets (15,040,374) (5,635,202) Release of provision for other assets (72,412) (71,923) Other provisions 202,273,051,274 8,025,375,954 Depreciation of property and equipment 14,857,416,797 1,732,064,297 Amortization of deferred expenses and goodwill 2,482,425,807 1,673,008,795 Amortization of available-for-sale assets 10,483,286 10,747,315 Net change in trading securities (114,869,656,125) - Accrual for length-of-service benefits 240,454,113,059 16,719,056,224 Payment of length-of-service benefits (9,291,780,901) (1,850,559,952) Net change in Deposits with the Central Bank of Venezuela and overnight deposits 9,878,261,000 566,126,000 Interest and commissions receivable (731,701,164,452) (16,064,862,686) Other assets (9,202,678,438,827) (223,293,341,567) Interest and commissions payable 11,386,565,974 1,096,091 Accruals and other liabilities 12,005,513,676,335 399,833,980,561 Net cash provided by operating activities 10,572,392,694,098 471,255,600,996 Cash flows from financing activities Net change in Deposits 199,524,249,658,419 9,138,060,131,396 Deposits and liabilities with Banco Nacional de Vivienda y Hábitat 4,290,909 (1,707,347) Borrowings 3,384,979,887 165,254,830 Other liabilities from financial intermediation 384,005,198 (30,645,811) Contributions pending capitalization 983,586 45,567,546,509 Net cash provided by financing activities 199,528,023,917,999 9,183,760,579,577 Cash flows from investing activities Loans granted during the period (184,761,811,070,925) (5,209,710,296,948) Loans collected during the period 43,474,029,517,866 2,933,522,102,672 Net change in Available-for-sale investments 1,759,858,605,830 (8,443,941,644) Held-to-maturity investments 1,327,392,152 (1,450,191,701) Restricted investments (2,031,213,706,440) 662,370,985 Investments in other securities (425,748,292,944) (228,955,445,000) Investments in subsidiaries and affiliates 4,945,798,344 (37,558,075) Available-for-sale assets 181,835 919,247 Property and equipment (75,063,219,456) (1,751,086,066) Net cash used in investing activities (142,053,674,793,738) (2,516,163,126,530) Cash and due from banks Net change 68,046,741,818,359 7,138,853,054,043 Effect of exchange fluctuations 5,723,518,556,812 - At the beginning of the period 8,194,442,652,787 1,055,589,598,744 At the end of the period 81,964,703,027,958 8,194,442,652,787
Supplementary information on non-cash activities Translation adjustment of net assets of subsidiaries abroad 10,274,076,762 (41,821)
Exchange fluctuation 10,294,397,732,118
Adjustment of available-for-sale investments to market value 16,821,158,808 (200,830,381)
Adjustment from revaluation of property and equipment - 41,526,470,445
Taxes paid 86,911,110,769 -
Interest paid 476,542,592,721 60,103,975,813
Reclassification of provisions Interest and commissions receivable to allowance for losses on loan portfolio 22,916,700 50,173,617
The accompanying notes are an integral part of the financial statements
5 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
1. Operations and regulatory environment
Reporting entity Mercantil, C.A. Banco Universal (the Bank), founded in 1925 in the Bolivarian Republic of Venezuela, and its subsidiaries operate in the financial services sector in Venezuela and abroad. The Bank’s primary activities consist in providing financial intermediation services to individuals and corporations through its main office in Caracas, agencies throughout the country and its branch in Curacao.
Most of the Bank’s assets are located in Venezuela. At June 30, 2018, the Bank and its branch in Curacao have 4,754 employees.
The Bank’s financial statements at June 30, 2018 and December 31, 2017 were approved by the Board of Directors on July 11 and January 11, 2018, respectively, and approved for issue by the Audit Committee on August 21 and February 20, 2018, respectively.
Regulatory environment Law of the National Financial System This Law aims to supervise and coordinate the National Financial System, which is formed by the group of public, private and communal financial institutions and any other form of organization operating in the banking sector, the insurance sector, the stock market and any other sector or group of financial institutions that the policy-making body deems should form part of the system in order to ensure that financial resources are used and invested for the public interest and for economic and social development.
This Law prohibits institutions belonging to the National Financial System from forming financial groups with each other or with companies from other sectors of the national economy or to associate with international financial groups for purposes other than those defined in the Law.
Law on Banking Sector Institutions This Law, among other things, considers banking as a public service; defines financial intermediation as fundraising for investment in loan portfolios and securities issued or guaranteed by the Venezuelan government or government agencies; limits the bank’s assets and transactions with a single debtor and defines “debtor” in relation to this limitation; regulates the formation and functions of the Board of Directors; establishes disqualification instances to act as directors; regulates the formation of financial groups; establishes a social contribution to finance projects developed by communal councils and establishes prohibitions.
Income Tax Law Venezuelan Income Tax Law requires, among other things, a 40% proportional income tax for institutions engaged in banking, financial, insurance and reinsurance activities; these institutions and special taxpayers are excluded from the inflation adjustment for tax purposes set forth in this Law. The Law establishes that net operating losses may be carried forward for 3 years and offset up to a maximum of 25% of annual income (Note 17).
Law on Tax on Large Financial Transactions The Law on Tax on Large Financial Transactions applies to incorporated and unincorporated entities qualified by the Tax Administration as special taxpayers. The tax rate is equivalent to 0.75% applicable to debits made from bank accounts and operations without the mediation of financial institutions.
Sports and Physical Education Law Companies subject to this Law must contribute 1% of their net or accounting profit to the activities contemplated therein. This Law seeks to regulate physical education and the sponsorship, organization and management of sporting activities as public services.
6 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
During the six-month period ended June 30, 2018, contributions in this connection amount to Bs 31,994,782,000 (Bs 1,313,484,000 at December 31, 2017), included under sundry operating expenses.
Labor Law (LOTTT) The new Labor Law extends job security, establishes the retrospective accrual of length-of-service benefits, and improves the indemnity for termination of employment. Based on actuarial studies, the impact of these changes has been estimated and recorded (Note 18).
In addition, the LOTTT regulates certain legal benefits such as working hours, rest days, holidays, vacation, profit sharing, absences and leave. The Bank’s Collective Labor Agreement also establishes the legal benefits that match or exceed benefits established in the Law.
Law for the Advancement of Science, Technology and Innovation This Law establishes that the country’s major corporations will annually earmark 0.5% of gross income generated in Venezuela in the prior year. It aims at financing projects, plans, programs and activities for the priority areas defined by the national authority responsible for matters related to science, technology and innovation and their applications. During the six-month period ended June 30, 2018, the contribution in this connection amounts to Bs 2,024,938,000 (Bs 365,881,000 at December 31, 2017), included under sundry operating expenses.
Branch The Bank’s branch abroad, which has not been incorporated separately from the Bank, is subject to specific requirements of regulatory agencies in the countries where it operates regarding prior consultation for certain transactions, quality of assets, and capital and liquidity levels, as explained below:
Mercantil, C.A. Banco Universal - Curacao Branch This branch operates in Curacao. It is supervised and controlled by the Central Bank of Curacao and Saint Marteen and the Superintendency of Banking Sector Institutions (SUDEBAN) in Venezuela.
Central Bank of Venezuela (BCV) Deposit and lending rates are regulated by the BCV. The BCV sets maximum and minimum interest rates for deposits and credit operations based on reference rates. In this regard, at June 30, 2018 and December 31, 2017, 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 and June 30, 2017 are as follows:
June 30, 2018 December 31, 2017 Agriculture 13% 13% Microcredits 24% 24% Tourism 2.95% or 5.95% 5.84% or 8.84% Mortgages 4.66% to 10.66% 4.66% to 10.66% Manufacturing i) 18% as the maximum interest rate for credit i) 18% as the maximum interest rate for credit operations for this sector; and ii) an annual operations for this sector; and ii) an annual interest rate not greater than 16.20% of the interest rate not greater than 16.20% of the previous rate for loans earmarked for small and previous rate for loans earmarked for small medium industries, state-owned industries, and medium industries, state-owned community industries, as well as joint ventures industries, community industries, as well as for manufacturing. joint ventures for manufacturing.
7 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
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.
Subsequent events Monetary redenomination The Venezuelan government established that as from August 2018 the unit of the Venezuelan monetary system will be redenominated at a conversion rate of Bs 100,000 to Bs.S 1. As from that date, financial statements should be presented in the new monetary unit. The Bank has adapted its operating and information systems to the new monetary system.
Measures announced by the Venezuelan government In August 2018, the Venezuelan government announced a series of tax, labor and exchange measures, which will be effective as from their publication in the Official Gazette. Management considers that these new measures, as established in the accounting standards (IAS 10 “Events after the reporting period”) are events that do not require adjustments in the financial statements at June 30, 2018. To date, management is assessing the future impact of these measures on the financial statements.
2. Basis of preparation
The accompanying financial statements include the accounts of the Bank and its branch abroad and have been prepared based on the Accounting Manual for Banking Institutions (Accounting Manual) and the accounting rules and instructions of SUDEBAN, which differ in certain significant respects from accounting principles generally accepted in Venezuela (VEN NIF).
The Venezuelan Federation of Public Accountants (FCCPV) approved the adoption of VEN NIF as the accounting principles of mandatory application in Venezuela as from January 1, 2008. These standards are mainly based on International Financial Reporting Standards (IFRS) and their interpretations issued by the International Accounting Standards Board (IASB), except for certain criteria concerning adjustments for inflation, among others.
The main differences with VEN NIF applicable to the Bank are:
1) Consolidation The accompanying financial statements show investments in over 50%-owned subsidiaries under the equity method. In accordance with VEN NIF, these subsidiaries and special purpose entities controlled by the Bank or of which the Bank is considered the main beneficiary of their income must be consolidated. If the financial statements were presented on a consolidated basis, assets and liabilities at June 30, 2018 would increase by Bs 532,758,000 (increase by Bs 142,423,000 at December 31, 2017). 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. Since January 2016 the inflation rates are not available; therefore, the Bank has not presented this supplementary information at June 30, 2018 and December 31, 2017.
8 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
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 resulting exchange gains or losses are recorded in equity and may only be used, subject to previous authorization from SUDEBAN, to offset losses, create contingency provisions for assets and subsequently taken to profit and loss. The assets, liabilities and equity of the branch abroad are translated at the prevailing official exchange rate. Income accounts are translated at the average official exchange rate for the period. VEN NIF establish two options to measure transactions and balances in foreign currency: a) at the official exchange rates established in the exchange agreements issued by the BCV or b) on the basis of best estimates of future cash flows in bolivars expected to be obtained using the exchange or settlement mechanisms permitted under Venezuelan law. According to VEN NIF exchange gains and losses should be included in the income statement of the corresponding period.
4) Investments in trading and available-for-sale securities According to SUDEBAN rules, investments in trading securities may remain in this category for only 90 days from the date they were classified as held for trading and investments in available-for-sale securities may not remain in this category for more than 1 year as from the date they were classified as available for sale, except for securities issued and guaranteed by the Venezuelan government and investments in shares of mutual guarantee companies. Under VEN NIF, they may remain in these categories indefinitely.
5) Discounts or premiums on held-to-maturity investments Discounts or premiums on held-to-maturity investments are amortized over the term of the security with a debit or credit to gain or loss on investment securities under other operating income or other operating expenses, respectively. Under VEN NIF, they are accounted for as part of the security’s yield and, therefore, must be recognized under interest income.
6) Permanent losses on investment securities When permanent losses arising from impairment in the fair value of investment securities are recorded, any subsequent recovery in fair value does not affect the new cost basis. Under VEN NIF, any recovery of previously expensed impairment losses on debt securities may be recognized as income.
7) Valuation of reclassified securities a) Reclassification of held-to-maturity securities to available-for-sale securities According to VEN NIF, when held-to-maturity securities for significant amounts are reclassified to available-for-sale securities and such transfer is due to a change in their original intended use not qualified as an isolated, external, nonrecurring or unusual event affecting the Bank, all investments remaining in this category must be reclassified to available-for-sale securities. According to SUDEBAN rules, reclassifications of held-to-maturity securities must be approved by SUDEBAN.
b) Reclassification of available-for-sale securities to held-to-maturity securities SUDEBAN rules establish that available-for-sale investments reclassified to the held-to-maturity category must be recorded at their fair value at the reclassification date. Unrealized gains or losses are maintained separately in equity and are amortized over the investment’s remaining life as an adjustment to yield. Under VEN NIF, the fair value of the investment at the reclassification date becomes the new amortized cost basis, and any gain or loss previously recognized in equity is accounted for as follows: a) gains or losses on fixed maturity investments, as well as any difference between the new amortized cost and value at maturity, are taken to profit and loss and amortized over the investment’s remaining life and; b) gains or losses on non-maturity investments will remain in equity until the asset is sold or otherwise disposed of, when they shall be recognized in profit or loss.
9 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
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 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 1 year, and are amortized using the straight-line method over 1 to 3 years. Assets idle for more than 24 months are written out of asset accounts. In accordance with VEN NIF, assets received as payment are recorded at the lower of cost and market value and are classified as property and equipment or non-current assets held for sale depending on their use.
13) Property and equipment Under VEN NIF, depreciation is recorded in the results based on the remaining useful life of the revalued asset. Depreciation expense may subsequently be reclassified to unappropriated earnings. When an item of property and equipment is revalued, all items belonging to the same class of assets, net of deferred income tax, should also be revalued.
The Bank assesses possible impairment in the value of its long-lived assets when events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized in the results for the period for the amount by which the asset’s carrying amount exceeds fair value. According to VEN NIF, the recoverable amount of an asset or group of assets to be held and used is the higher of fair value less costs to sell and value in use (value in use is the present value of estimated future cash flows to be obtained from an asset or Cash Generating Unit (CGU)).
The CGU represents the lowest level within the entity that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
10 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
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.
16) Provisions The Accounting Manual establishes timeframes to record provisions for bank reconciling items, pending items and accounts receivable forming part of other assets, interest receivable and disposal of certain assets, among others.
According to VEN NIF, provisions are recorded based on the probability of collection or recovery. No timeframes are established for creating provisions for these items.
17) Deferred tax The Bank recognizes a deferred tax asset or liability in respect of temporary differences between the tax and the book balance sheets, except for: a) provisions for losses on other than unrecoverable loans, and b) revaluation of property and equipment. A deferred tax asset is not recognized for any amount exceeding future taxable income. In accordance with VEN NIF, a deferred tax asset or liability is calculated in respect of all temporary differences between the tax balance sheet and the accounting balance sheet (Note 17).
18) Employee stock option plan The Bank has a long-term stock option plan allowing certain key officers to purchase shares of Mercantil Servicios Financieros, C.A. (MERCANTIL) (Note 18). The Bank makes contributions to Fundación BMA for share purchases and records them in the results for the year in which they are made. According to VEN NIF, the related expense is recorded at the fair value of options granted to employees and amortized over the vesting period. The effect of shares purchased for the stock option plan on the financial statements is also recognized.
19) 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.
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.
11 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
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.
Below is a summary of SUDEBAN rules and instructions that do not differ from VEN NIF:
a) Investment securities Investment securities are classified upon acquisition, based on their nature and intended use, as deposits with the BCV and overnight deposits, investments in trading securities, investments in available-for-sale securities, investments in held-to-maturity securities, investments in other securities and restricted investments. They are accounted for as described below:
Deposits with the Central Bank of Venezuela (BCV) and overnight deposits Excess liquidity deposited at the BCV, overnight deposits and debt securities issued by Venezuelan financial institutions are included in this category. These investments are recorded at realizable value, representing cost or par value. In addition, this category includes securities acquired under repurchase agreements, which are recorded at the agreed value.
Investments in trading securities These investments are recorded at fair value and comprise investments in debt and equity securities. Unrealized gains or losses resulting from fair value changes are included in the results for the period.
Investments in available-for-sale securities Investments in available-for-sale debt and equity securities are recorded at fair value. Unrealized gains or losses, net of tax, resulting from differences in fair values are included in equity under unrealized gain (loss) on investments until they are sold. Investments in available-for-sale debt securities not listed on stock exchanges are recorded at fair value based principally on the present value of future cash flows of the securities.
Investments in held-to-maturity securities Investments in debt securities that the Bank has the firm intention and ability to hold until maturity are recorded at cost, which should not differ significantly from fair value at purchase, and are subsequently adjusted for amortization of discounts or premiums. Discounts or premiums are amortized over the term of the securities as a credit or debit to income from investment securities.
The Bank assesses at each balance sheet date, or sooner if circumstances require it, whether there is objective evidence that financial assets are impaired. An impairment in the fair value of held-to-maturity and available-for-sale securities is charged to the results for the period when management considers that it is other than temporary. Certain factors identified as indicators of impairment are, among others: 1) a prolonged period where fair value remains substantially below cost; 2) the financial difficulty and liquidity of the issuer; 3) a fall in the issuer’s credit rating; 4) the disappearance of an active market
12 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
for the security; and 5) the Bank’s inability to hold the investment long enough to allow for recovery of fair value. For the six-month periods ended June 30, 2018 and December 31, 2017, 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).
d) Loan portfolio As required by SUDEBAN, commercial loans and term, mortgage and credit card loan installments are classified as overdue if repayment is more than 30 days past due. Advances on negotiated letters of credit are classified as overdue if not repaid within 270 days after their due date. Furthermore, the entire principal balance of term, mortgage or credit card loans is classified as overdue if repayment of any installment is more than 90 days late. In addition, the entire balance of loans granted to small businesses is considered past due if repayment of at least one monthly installment is 60 days overdue or one weekly installment is 14 days overdue. In securities loans, the Bank acts as lender and the client as borrower.
e) Available-for-sale assets Available-for-sale assets other than personal and real property received as payment are recorded at the lower of cost and market value. Gains or losses from the sale of available-for-sale assets are included in income accounts.
f) Property and equipment Property and equipment is shown net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Gains or losses on the sale of personal and real property are shown in income accounts.
SUDEBAN Accounting Manual establishes that these assets shall be initially recorded at acquisition or construction cost, as applicable. Revaluation of these assets is allowed under the conditions previously authorized by SUDEBAN. Revaluation adjustment is recorded in equity. Revaluation is depreciated with a charge to results over the period established in the Accounting Manual.
g) Deferred expenses Deferred expenses are mainly in respect of office setup, office improvement and software expenses. These expenses are recorded at cost, net of accumulated amortization. Amortization is calculated using the straight-line method over 4 years.
h) Use of estimates in the preparation of financial statements The preparation of financial statements and their notes requires management to make reasonable estimates that affect the reported amounts of assets and liabilities, the amounts of gains and losses recorded during the period, and the disclosure of contingent assets and liabilities at the date of the financial statements.
13 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
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).
i) Income tax The tax provision is based on management’s projection of tax results. The Bank records a deferred tax asset (liability) when, in the opinion of management, there is reasonable expectation that future tax results will allow its realization. Deferred tax asset (liability) must always be recognized (Note 17).
j) Employee benefits Accrual for length-of-service benefits Based on the provisions of the LOTTT and the Bank’s Collective Labor Agreement, length-of-service benefits are a vested right of employees. Under the LOTTT, the Bank transfers guaranteed length-of- service benefits quarterly and annually to a trust fund on behalf of each employee. In addition, the LOTTT establishes that length-of-service benefits will be calculated retrospectively upon termination of employment considering the last salary earned by the employee and length of service. The LOTTT requires the payment to employees at employment termination of the higher of retrospective length-of- service benefits and total amounts accrued in the employee’s trust fund.
Due to the uncertainty involved in estimating an employee’s last salary, termination date and total amounts to be accrued in the employee’s trust fund at year end, the Bank uses actuarial methods to measure and record its obligation for length-of-service benefits based on assumptions that include discount rates, salary increase rates and employee turnover rates. These assumptions are reviewed annually and changes may affect the amount of the obligation.
In accordance with the LOTTT, the Bank calculates additional length-of-service benefits based on the last salary earned by the employee upon employment termination, using actuarial methods.
Indemnity Under the LOTTT, if an employee is terminated for reasons other than justified dismissal, the employee will be entitled to receive an additional indemnity equal to his or her accrued length-of-service benefits. This amount is recorded within salaries and employee benefits upon termination of employment.
14 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
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 employees leaving the Bank that meet certain conditions in respect of age and length of service, mainly medical insurance. The related costs and liabilities are determined based on actuarial methods.
The effect due to experience and changes in actuarial assumptions in retirement pension plans and post-retirement benefits are recorded in the income statement. Past service costs of the pension plan are recorded in the income statement in the period in which the change occurs.
Defined contribution scheme The Bank maintains a defined contribution scheme called MERCANTIL Supplementary Savings Plan (Plan de Ahorro Previsional Complementario MERCANTIL) to replace the Supplementary Defined Benefit Plan (Plan Complementario de Pensiones de Jubilación). Contributions to the plan are recorded in the results for the period in which they are incurred. This Plan is a voluntary programmed savings scheme in the form of individual capitalization accounts that is managed by the Savings and Loan Fund of employees of Mercantil Servicios Financieros, C.A. Under this Plan, employees contribute between 1% and 5% of their basic monthly salary and the Bank doubles the employee’s contribution up to a maximum of 10% of said salary.
k) Stock option plan The Bank has a long-term stock option plan of MERCANTIL shares for certain key officers. Stock options are recorded as equity. The Bank determines the fair value of these options and amortizes the related expense over the vesting period. The fair value of each option is determined at the option grant date using the Black-Scholes-Merton valuation model and does not take into consideration cash dividends that will not be received by the participants.
l) Recognition of revenue, costs and expenses Income, costs and expenses are recorded as earned or incurred. Interest collected in advance is included within accruals and other liabilities as deferred income and recorded as income when earned (Note 16).
Interest on deposits, liabilities and borrowings is recorded as interest expense when incurred.
Income from financial leases and amortization costs of leased property are shown net in the income statement within income from the loan portfolio.
15 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
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 Regular Shareholders’ Meeting.
o) Net income per share Basic net income per share has been determined by dividing net income for the period by the weighted average of outstanding common shares during the period.
3. Cash and due from banks
The balances with the BCV included in cash and due from banks comprise the following:
June 30, December 31, 2018 2017 (In bolivars)
Demand deposits (1) 20,957,663,500,598 4,955,350,613,009 Legal reserve 52,417,057,045,893 2,981,971,958,551 73,374,720,546,491 7,937,322,571,560
(1) Includes balances awarded to clients through DICOM auctions at August 24, 2017.
At June 30, 2018 and December 31, 2017, the legal reserve in Venezuela is 21.5% of all deposits and 31% for marginal increases in deposits.
Legal reserve funds do not earn interest for the Bank and are not available for use. Demand deposits with the BCV relate to internal liquidity risk limits, and earn no interest. At June 30, 2018 and December 31, 2017, this balance includes the effect of recent high liquidity levels of the Venezuelan financial system.
The balance of pending cash items mainly relates to clearinghouse operations through the BCV.
4. Investment securities
Investment securities comprise the following:
June 30, December 31, 2018 2017 (In bolivars) Investments Deposits with the BCV and overnight deposits 11,998,347,000 21,876,608,000 Trading securities 114,869,656,125 - Available-for-sale securities 2,515,532,285,116 48,503,994,952 Held-to-maturity securities 31,679,598,117 33,006,990,269 Restricted investments 2,031,368,375,078 154,668,638 Other securities 692,284,550,000 266,536,257,056 5,397,732,811,436 370,078,518,915
16 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
a) Deposits with the Central Bank of Venezuela (BCV) and overnight deposits Deposits with the BCV and overnight deposits comprise the following:
Book value June 30, December 31, 2018 2017 (In bolivars)
Deposits with the BCV maturing between July 2018 and March 2019 (maturing between January and September 2018 at December 31, 2017) 11,998,347,000 (1) (a) 21,851,208,000 (1) (a) Investment securities under repurchase agreement acquired under resale agreements with the BCV, maturing in January 2018 (Note 25) - 25,400,000 (1) (a) 11,998,347,000 21,876,608,000
(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 earn the following annual interest:
June 30, 2018 December 31, 2017 Minimum Maximum Minimum Maximum rate rate rate rate % % % %
Deposits with the BCV 6.00 8.50 6.00 8.50 Investment securities under repurchase agreement - - 6.00 6.00
b) Investments in trading securities Investments in trading securities at June 30, 2018 comprise the following:
Book value (equivalent to market Cost value) (In bolivars)
Debt securities issued by foreign financial institutions, maturing in June 2024 and a par value of US$1,000,000 115,006,737,563 114,869,656,125 (1) (a)
(1) Based on the present value of estimated future cash flows.
Custodian of investments (a) Bank of New York, Inc.,
At June 30, 2018, investments in trading securities bear annual interest at the rates shown below:
Minimum Maximum rate rate % %
Debt securities issued or guaranteed by the government of the United States of America 3.35 3.35
Below is the classification of the weighted average maturity of investments in trading securities at June 30, 2018:
(Months)
Debt securities issued or guaranteed by government agencies of the United States of America 71
17 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
Below is the classification of investments in trading securities according to maturity at June 30, 2018:
Book value (equivalent to Cost market value)
(In bolivars)
5 to 10 years 115,006,737,563 114,869,656,125
During the six-month period ended June 30, 2018, the Branch recorded losses on valuation of trading securities for US$1,195. These losses are recorded under other operating expenses and sundry operating expenses.
c) Investments in available-for-sale securities Investments in available-for-sale securities comprise the following:
June 30, 2018 December 31, 2017 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 Principal and Interest Covered Bonds (TICC), maturing in March 2019, with a reference par value of US$20,182,232, payable in bolivars at the official exchange rate (maturing in March 2019, with a reference par value of US$20,173,232 at December 31, 2017) 2,292,533,061,305 22,794,906,310 - 2,315,327,967,615 (1) (a) 199,760,327 1,971,993 - 201,732,320 (1) (a) Treasury Notes issued by the Bolivarian Republic of Venezuela, with a par value of Bs154,751,761,000 maturing between September and June 2019 (maturing between January and November 2018, with a par value of Bs 1,065,142,000 at December 31, 2017) 152,499,917,561 157,051,814 - 152,656,969,375 (1) (a) 1,041,352,105 8,125,242 (804,889) 1,048,672,458 (1) (a) National Public Debt Bonds, maturing between February 2019 and August 2037, with a par value of Bs 12,467,841,000 (maturing between April 2018 and August 2037 with a par value of Bs 12,246,685,565 at December 31, 2017) 15,250,222,176 454,469,139 (322,163,260) 15,382,528,055 (1) (a) 15,063,650,703 85,101,308 (126,687,405) 15,022,064,606 (1) (a)
Fixed Interest Bonds (TIF) issued by the Bolivarian Republic of Venezuela, maturing between August 2018 and March 2032, with a par value of Bs 725,918,000 (maturing between August 2018 and March 2032, with a par value of Bs 725,919,163at December 31, 2017) 923,136,401 52,078,691 (36,811,221) 938,403,871 (1) (a) 923,137,919 44,114,157 (19,148,260) 948,103,816 (1) (a) Sovereign Bonds issued by the Bolivarian Republic of Venezuela, with a par value of US$15,000 at December 31, 2017 - - - - - 3,741 - 3,741 (1) (d) 2,461,206,337,443 23,458,505,954 (358,974,481) 2,484,305,868,916 17,227,901,054 139,316,441 (146,640,554) 17,220,576,941 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 2018 Agriculture BANDES Certificates of Participation, with a par value of Bs 31,019,390,000 maturing in october 2018 31,019,390,403 - - 31,019,390,403 (1) (a) 31,019,390,403 - - 31,019,390,403 (1) (a) 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 September 2022, with a par value of US$5,694,479 at December 31, 2017 - - - - 57,119,699 - (118,291) 57,001,408 (2) (d) 2,492,432,753,643 23,458,505,954 (358,974,481) 2,515,532,285,116 48,511,437,356 139,316,441 (146,758,845) 48,503,994,952
(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.
18 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
At June 30, 2017, the market value of securities issued and guaranteed by the Venezuelan government and owned by the Bank is lower than cost by Bs 358,974,000 (Bs 146,641,000 at December 31, 2017). This loss is included in equity as an unrealized gain (loss) on investments. The Bank believes that these losses arise from normal stock market fluctuations and, consequently, are temporary. Management does not expect to realize these securities at a price below their book value. The Bank has the ability to hold these securities for a sufficient period to recover unrealized losses
Investments in available-for-sale securities earn the following annual yield:
June 30, 2018 December 31, 2017 Minimum Maximum Minimum Maximum rate rate rate rate % % % %
National Public Debt Bonds in local currency 10.87 15.07 10.07 14.92 Fixed Interest Bonds (TIF) 9.88 16.50 9.88 16.50 Principal and Interest Covered Bonds (TICC) 5.25 5.25 5.25 5.25 Debt securities from decentralized administration entities 4.00 4.00 4.00 4.00 Debt securities issued and guaranteed by government agencies of the United States of America - - 1.93 1.93
Below is the classification of the weighted average maturity of investments in available-for-sale securities:
June 30, December 31, 2018 2017 (Months)
National Public Debt Bonds in local currency 46 51 Fixed Interest Bonds (TIF) 105 111 Principal and Interest Covered Bonds (TICC) 9 15 Treasury Notes 5 4 Debt securities from decentralized administration entities 3 9 Debt securities issued and guaranteed by government agencies of the United States of America - 58 Sovereign Bonds - 28
Below is the classification of investments in available-for-sale securities according to maturity:
June 30, 2018 December 31, 2017 Book value Book value (equivalent (equivalent to market to market Cost value) Cost value) (In bolivars)
Up to 6 months 179,295,132,746 179,417,964,724 806,359,596 811,509,970 6 months to 1 year 2,297,959,916,623 2,320,688,001,741 31,333,383,149 31,329,618,698 1 to 5 years 10,730,266,500 10,485,373,771 8,841,992,539 8,746,963,768 5 to 10 years 392,286,876 416,851,075 3,426,722,651 3,441,921,079 Over 10 years 4,055,150,898 4,524,093,805 4,102,979,421 4,173,981,437 2,492,432,753,643 2,515,532,285,116 48,511,437,356 48,503,994,952
19 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
The equity account unrealized gain on investments comprises the following:
June 30, December 31, 2018 2017 (In bolivars)
Investments in available-for-sale securities 23,099,531,473 (7,442,404) Investments in available-for-sale securities, reclassified from investments in held-to-maturity securities (40,240,921) (8,967,518) Investments in subsidiaries and affiliates (6,255,990,604) (1,448,938) 16,803,299,948 (17,858,860)
During the six-month period ended June 30, 2018, the Bank recorded gains and losses on sale of investments in available-for-sale securities of Bs 1,784,421,000 and Bs 150,950,000, respectively (Bs 671,644,000 and Bs 443,026,000, respectively, during the six-month period ended December 31, 2017) (Notes 20 and 21), which are shown under other operating income and other operating expenses, respectively. The Bank received cash payments of Bs 16,494,963,000 and US$5,760,000 for the aforementioned sales (Bs 168,301,924,000 and US$177,265,000 during the six-month period ended December 31, 2017).
d) Investments in held-to-maturity securities Investments in held-to-maturity securities comprise the following:
June 30, 2018 December 31, 2017 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 21,241,563,000 21,241,563,000 21,241,563,000 21,241,563,000 (1) (a) 21,241,566,713 21,241,566,713 21,241,566,713 (1) (a) Fixed Interest Bonds (TIF) issued by the Bolivarian Republic of Venezuela, maturing between November 2020 and January 2037, with a par value of Bs 4,943,501,000 5,435,133,680 5,304,117,845 6,469,182,255 (2) (a) 6,875,979,411 6,569,250,006 7,512,807,337 (2) (a) National Public Debt Bonds, maturing between April 2024 and June 2032, with a par value of Bs 4,294,365,000 5,287,505,243 5,133,917,272 5,660,016,438 (2) (a) 5,384,998,615 5,196,173,550 5,760,771,558 (2) (a) 31,964,201,923 31,679,598,117 33,370,761,693 33,502,544,739 33,006,990,269 34,515,145,608
(1) Shown at par value, which is considered as fair value. (2) Fair value is determined from trading operations on the secondary market.
Custodian of investments (a) Central Bank of Venezuela.
Investments in held-to-maturity securities earn the following annual yield:
June 30, 2018 December 31, 2017 Minimum Maximum Minimum Maximum rate rate rate rate % % % %
Dematerialized Certificate of Participation issued by Fondo Simón Bolívar para la Reconstrucción, S.A. 4.66 6.05 4.66 6.05 National Public Debt Bonds 13.97 15.12 14.17 15.32 Fixed Interest Bonds (TIF) issued by the Bolivarian Republic of Venezuela 13.25 17.00 13.25 18.00
20 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
Below is the classification of the weighted average maturity of investments in held-to-maturity securities:
June 30, December 31, 2018 2017 (Months)
Dematerialized Certificate of Participation issued by Fondo Simón Bolívar para la Reconstrucción, S.A. 73 79 Fixed Interest Bonds (TIF) issued by the Bolivarian Republic of Venezuela 147 144 National Public Debt Bonds 114 106
Below is the classification of investments in held-to-maturity securities according to maturity:
June 30, 2018 December 31, 2017 Amortized Fair Amortized Fair cost value cost value (In bolivars)
Up to 6 months - - 1,235,539,942 1,254,844,203 1 to 5 years 4,358,328,443 4,450,504,492 596,462,064 673,575,969 5 to 10 years 22,808,782,645 23,319,238,676 26,065,904,180 26,586,681,335 Over 10 years 4,512,487,029 5,601,018,525 5,109,084,083 6,000,044,101 31,679,598,117 33,370,761,693 33,006,990,269 34,515,145,608
e) Restricted investments Restricted investments comprise the following:
June 30, 2018 December 31, 2017 Book value Book value (equivalent (equivalent to market to market Cost value) Cost value) (In bolivars)
As guarantee Trust fund for the Social Contingency Fund 31,781,784 31,781,784 (1) (c) 28,654,606 28,654,606 (1) (c) Certificates of deposit issued by Mercantil Bank, N.A., Deutsche Bank and Standard Chartered Bank, N.Y., maturing between July and October 2018, with a par value of US$17,708,067 (maturing between February and October 2018, with a par value of US$12,632,986 at December 31, 2017) 2,031,336,593,294 2,031,336,593,294 (2) (a, b, d) 126,014,032 126,014,032 (2) (a, b, d) 2,031,368,375,078 2,031,368,375,078 154,668,638 154,668,638
(1) Trust funds maintained with Banco Provincial, S.A. Banco Universal. (2) Shown at par value, which is considered as fair value.
Custodians of investments (a) Deutsche Bank AG, London. (b) Mercantil Bank, N.A. (c) Mercantil, C.A. Banco Universal. (d) Standard Chartered Bank, New York.
Restricted investments earn the following annual yield:
June 30, 2018 December 31, 2017 Minimum Maximum Minimum Maximum rate rate rate rate % % % %
Investment trust 4.00 4.00 10.00 10.00 Certificates of deposit 0.03 1.65 0.03 1.45
21 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
Below is the classification of the weighted average maturity of restricted investments:
June 30, December 31, 2018 2017 (Months)
Investment trust 6 6 Certificates of deposit 1 5
Below is the classification of restricted investments according to maturity:
June 30, 2018 December 31, 2017 Fair Fair Cost value Cost value (In bolivars)
Up to 6 months 2,031,336,593,294 2,031,336,593,294 152,673,638 152,673,638 6 months to 1 year 31,781,784 31,781,784 1,995,000 1,995,000 2,031,368,375,078 2,031,368,375,078 154,668,638 154,668,638
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.
f) Investments in other securities As required by the Venezuelan government, at June 30, 2018 and December 31, 2017, the Bank has investment securities issued by the Bolivarian Republic of Venezuela, public companies and decentralized entities to finance social projects for agricultural development and housing construction, as follows:
June 30, 2018 December 31, 2017 Weighted Weighted Book average Book average Yield value maturity value maturity Issuer Guarantee Maturity % (In bolivars) (months) (In bolivars) (months) Characteristics Investments in other securities Banco de Desarrollo Económico y Social de Venezuela (BANDES) BANDES 2022-2024 10 654,894,174,000 58 228.955.445.000 58 (4) (a)
Imputable to Fondo Simón Bolivarian mortgage portfolio Bolívar para la Republic compliance Reconstrucción, S.A. of Venezuela 2020-2028 4.66-6.48 37,390,376,000 66 37.580.812.056 72 (1, 2) (a) (Note 5)
Total investments in other securities 692,284,550,000 266.536.257.056
Reduces the legal reserve (Note 3) Imputable to Available-for-sale Investments agricultural loan Banco de Desarrollo Económico y Social de portfolio compliance Venezuela (BANDES) BANDES 2018 4 31,019,390,000 3 31.019.390.403 9 (5) (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 portfolio Sector Turismo, S.A. (SOGATUR) Tourism - - 207,025,200 - 207.025.200 - (3) (b) compliance Total available-for-sale investments 31,226,415,200 31,226,415,603 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 21,241,563,000 73 21.241.566.713 79 (2, 6) (a) reserve (Note 3) Total held-to-maturity investments 21,241,563,000 21.241.566.713 Total investments required 744,752,528,200 319.004.239.372
(1) At June 30, 2018 and December 31, 2017, the Bank maintains Bs Bs 37,390,376,000 and Bs 37,580,812,000 in Bolivarian Housing Securities issued by Fondo Simón Bolívar para la Reconstrucción, S.A., of which the entire amount is imputable to the mortgage portfolio from previous years, to finance Venezuela’s Great Housing Mission.
(2) These securities may be traded with the BCV at 100% of their par value for purposes of liquidity injection and credit assistance. The Bank has the intention to hold them until maturity. These securities are recorded at cost; they are not currently traded on the Caracas Stock Exchange.
(3) At June 30, 2018 and December 31, 2017, 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.
(4) At June 30, 2018 and December 31, 2017, the Bank maintains Bs 654,894,174,000 and Bs 228,955,455,000, respectively, in BANDES Securities, issued by Banco de Desarrollo Económico y Social de Venezuela (BANDES) to finance strategic projects.
(5) At June 30, 2018 and December 31, 2017, 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 is imputable to the agricultural loan portfolio compliance and reduced the legal reserve until September 30, 2017.
(6) At June 30, 2018 and December 31, 2017, reduces the legal reserve by Bs 21,241,563,000 and Bs 21,241,566,713 respectively.
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).
22 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
The Bank’s control environment includes policies and procedures to determine investment risks by type of issuer and economic sector. At June 30, 2018, the Bank has investment securities issued by the Venezuelan government and public entities, deposits with the BCV and securities issued by the Venezuelan and international private sector, among others, representing 60.01%, 0.22% and 39.77%, respectively, of its investment securities portfolio (93.98%, 5.91%, 0.01% and 0.11%, respectively, at December 31, 2017).
5. Loan portfolio
The loan portfolio is classified as follows:
December 31, June 30, 2018 2017 Current % Rescheduled % Overdue % In litigation % Total % Total % (In bolivars)
Economic activity Commercial 67,340,306,331,845 45 85,863,229 5 4,432,531,027 8 453,300,408 100 67,345,278,026,509 45 2,000,430,673,434 59 Credit cards 35,509,211,776,492 25 - - 222,615,348 - - - 35,509,434,391,840 25 515,054,987,944 14 Agriculture 27,245,800,888,210 19 20,097,686 1 - - - - 27,245,820,985,896 19 484,829,469,139 14 Industrial 8,961,679,072,272 6 ------8,961,679,072,272 6 64,047,816,858 2 Services 4,570,839,505,259 3 611,830,443 32 44,712,183 - 152,979 - 4,571,496,200,864 3 297,329,202,636 8 Home purchases and improvements 52,535,960,404 - 105,709 - 34,575,847 - 5,268 - 52,570,647,228 - 23,565,171,608 1 Construction 1,430,531,677,975 1 1,624,416 - 32,089 - - - 1,430,533,334,480 1 44,365,519,338 - Car loans 30,725,815,368 - - - 12,445,780 - - - 30,738,261,148 - 19,774,999,821 1 Foreign trade - - - 50,742,873,858 91 - - 50,742,873,858 - 4,500,889 - Other 1,659,166,439,745 1 1,169,395,648 62 172,814,659 1 3,420 - 1,660,508,653,472 1 106,331,592,729 1 146,800,797,467,570 100 1,888,917,131 100 55,662,600,791 100 453,462,075 100 146,858,802,447,567 100 3,555,733,934,396 100
Guarantee Unsecured 99,887,485,445,414 68 1,688,294,290 89 55,408,969,829 100 - - 99,944,582,709,533 68 992,993,275,267 28 Mortgage 447,600,335,726 - 126,181,771 7 41,647,323 - 8,687 - 447,768,173,507 - 215,172,478,836 6 Debenture 36,770,399,109,656 25 74,441,070 4 211,983,639 - 453,453,388 100 36,771,138,987,753 25 1,882,274,416,489 53 Pledge 9,695,312,576,774 7 ------9,695,312,576,774 7 465,293,763,804 13 146,800,797,467,570 100 1,888,917,131 100 55,662,600,791 100 453,462,075 100 146,858,802,447,567 100 3,555,733,934,396 100
Maturity Up to 3 months 40,778,088,838,374 28 32,247,403 2 4,485,037,354 8 - - 40,782,606,123,131 28 1,036,476,370,218 29 3 to 6 months 88,868,633,804,619 61 2,465,665 - 57,506,485 - 384,525,247 85 88,869,078,302,016 61 1,207,936,846,475 34 6 months to 1 year 13,548,829,049,305 9 34,705,477 2 310,565,066 1 68,936,828 15 13,549,243,256,676 9 993,598,121,338 28 1 to 2 years 2,230,948,311,148 2 454,765,034 24 60,342,504 - - - 2,231,463,418,686 2 51,031,502,339 1 2 to 3 years 1,140,564,963,682 - 1,250,025,287 66 47,049,743,235 85 - - 1,188,864,732,204 - 119,497,916,982 4 3 to 4 years 107,047,496,693 - 4,549,600 - 3,697,110,026 6 - - 110,749,156,319 - 35,102,417,685 1 4 to 5 years 28,701,322,280 - 81,020,247 4 1,783,667 - - - 28,784,126,194 - 35,132,222,625 1 Over 5 years 97,983,681,469 - 29,138,418 2 512,454 - - - 98,013,332,341 - 76,958,536,734 2 146,800,797,467,570 100 1,888,917,131 100 55,662,600,791 100 453,462,075 100 146,858,802,447,567 100 3,555,733,934,396 100
Loan Promissory note 111,035,505,873,406 76 107,594,011 6 94,485,405 - 453,453,388 100 111,036,161,406,210 76 2,949,342,007,810 83 Credit cards, mortgage and vehicles 35,627,099,678,233 24 1,688,294,290 89 290,821,335 1 - - 35,629,078,793,858 24 554,071,608,508 16 Installment 100,475,456,968 - 93,028,830 5 34,607,935 - 8,687 - 100,603,102,420 - 30,069,597,196 1 Financial leases 10,086,874 ------10,086,874 - 36,905,133 - Factoring and discounts 20,982,979,267 ------20,982,979,267 - 6,856,136,804 - Checking accounts 2,601,759,155 - - - 4,382,757,804 8 - - 6,984,516,959 - 2,030,657,044 - Letters of credit - - - - 50,742,873,858 91 - - 50,742,873,858 - 4,501,889 - Other 14,121,633,667 - - - 117,054,454 - - - 14,238,688,121 - 13,322,520,012 - 146,800,797,467,570 100 1,888,917,131 100 55,662,600,791 100 453,462,075 100 146,858,802,447,567 100 3,555,733,934,396 100
Geographic location Venezuela 144,604,051,201,428 99 1,888,917,131 100 55,662,567,053 100 453,462,075 100 144,662,056,147,687 99 3,555,367,800,925 100 Colombia 820,194,375,000 ------820,194,375,000 - 71,321,250 - Other countries 1,376,551,891,142 1 - - 33,738 - - - 1,376,551,924,880 1 294,812,221 -
146,800,797,467,570 100 1,888,917,131 100 55,662,600,791 100 453,462,075 100 146,858,802,447,567 100 3,555,733,934,396 100
Below is the classification of the loan portfolio by type of risk of the Bank and branch abroad in accordance with parameters set by SUDEBAN:
June 30, 2018 December 31, 2017 In bolivars % In bolivars %
Risk Normal 146,812,053,299,015 100 3,550,370,250,261 100 Potential 1,056,934,127 - 693,414,633 - Real 44,944,997,300 - 2,104,993,243 - High 249,764,775 - 2,220,290,848 - Unrecoverable 497,452,350 - 344,985,411 - 146,858,802,447,567 100 3,555,733,934,396 100
23 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
At June 30, 2018, regulations require universal banks to earmark a minimum nominal percentage of 33.5% of their gross loan portfolio to finance loans for agriculture, small businesses and tourism (58.25% for agriculture, small businesses, tourism, mortgages and manufacturing at December 31, 2017), as follows:
June 30, 2018 Maximum Balance Number of annual maintained Earmarked Required Number of loans interest rate Activity in bolivars % % debtors granted % Calculation basis x Agriculture (a) 27,245,820,985,896 167.22 28.00 1,652 3,893 13.00 Gross loan portfolio at March 31, 2018
Small businesses 6,777,832,702,085 190.63 3.00 12,273 23,370 24.00 Gross loan portfolio at December 31, 2017
Mortgages (b) 66,960,441,219 - - 18,106 18,106 Between 4.66 and 10.66
5.95 or 2.95 in some Tourism (c) 500,138,529,031 14.07 2.50 54 142 cases Gross loan portfolio at December 31, 2017
18 of 16.20 in Manufacturing (b) 8,961,679,072,272 - - 630 1,097 some cases
December 31, 2017 Maximum Balance Number of annual maintained Earmarked Required Number of loans interest rate Activity in bolivars % % debtors granted % Calculation basis x Agriculture (a) 484,829,469,139 40.31 20.00 1,750 3,854 13.00 Gross loan portfolio at June 30, 2017 Small businesses 98,141,572,057 7.67 3.00 14,978 23,042 24.00 Gross loan portfolio at June 30, 2017 Between 4.66 Mortgages (b, e) 21,932,564,926 3.57 20.00 21,316 21,353 and 10.66 Gross loan portfolio at December 31, 2016 8.84 but 5.84 may be applied in some Average gross loan portfolio balance at Tourism (c) 26,612,379,178 5.75 5.25 60 182 cases December 31, 2016 and 2015 18 but 16.20 may be applied in some Manufacturing (b, d) 64,047,816,857 10.42 10.00 503 664 cases Gross loan portfolio at December 31, 2016
a) In September 2017, the Bank purchased a BANDES 2018 certificate of participation, which may be imputable to the mandatory agricultural loan portfolio, as established in Circular No. SIB-II-GGR-GNP-21551 of October 13, 2017; the agricultural loan portfolio plus this investment amount to Bs 27,276,840,375,895 at June 30, 2018 (515,848,859,542 at December 31, 2017).
b) Measurement and compliance with this portfolio is required annually. This semester, the Bank has granted 6.24% of its portfolio at June 30, 2018 to the mortgage and manufacturing sectors.
c) At June 30, 2018 and December 31, 2017, the Bank complies with the minimum percentage of the tourism loan portfolio (includes SOGATUR shares for Bs 207,025,200). The total tourism loan portfolio plus these investments amount to Bs 500,345,554,231 at June 30, 2018 (Bs 26.819.404.378 at December 31, 2017).
d) In November 2016, the People’s Power Ministries for Industries and for Finance ratified the strategic development sectors to which at least 60% of the manufacturing loan portfolio resources shall be allocated, as well as the minimum percentage of 40% to finance small and medium-sized companies, joint ventures, and state companies whose main activities are included in the Venezuelan Economic Activities Classification (CAEV).
e) At December 31, 2017, the mortgage portfolio reached 3.57% of compliance, including new loans and the balance of loans at that date for the acquisition, self-construction, expansion and remodeling.
The Bank has allowances for losses on the loan portfolio exceeding the minimum requirements set by SUDEBAN. Below is the movement in the allowance for losses on the loan portfolio:
Six-month periods ended June 30, December 31, 2018 2017 (In bolivars)
Balance at the beginning of the period 99,570,189,207 36,386,644,268 Provided in the period 3,375,553,796,424 64,573,820,129 Exchange differences 36,391,236,396 - Write-offs of uncollectible accounts (1,110,504,567) (1,440,448,807) Reclassification to the provision for interest receivable 22,916,700 50,173,617 Balance at the end of the period 3,510,427,634,160 99,570,189,207
24 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
During the six-month period ended June 30, 2018, the Bank wrote off unrecoverable loans of Bs 1,110,505,000 (Bs 1,440,449,000 during the six-month period ended December 31, 2017), against the allowance for losses on loan portfolio. The Bank also collected loans written off as uncollectible in previous periods for Bs 1,803,425,000 (Bs 1,438,811,000 during the six-month period ended December 31, 2017), included in the income statement under income from financial assets recovered.
Below is a breakdown of certain balances and transactions of the overdue and in-litigation loan:
Six-month periods ended June 30, December 31, 2018 2017 (In bolivars)
No earning interest (1) 56,116,062,866 2,466,557,583 Interest accrued but not recorded as income 1,806,859,506 988,961,726 Interest collected on uncollectible loans written off in previous periods 1,803,424,822 1,438,811,421
(1) At June 30, 2018, Bs 50,742,873,858 corresponds to overdue letters of credit (Bs 4,501,889 at December 31, 2017).
The Bank’s control environment includes policies and procedures to determine credit risks by client and economic sector. Concentration of risk is limited since loans are granted to a variety of economic sectors and a large number of clients. At June 30, 2018 and December 31, 2017, the Bank’s loan portfolio does not have significant risk concentrations in terms of individual clients and groups of related companies.
6. Interest and commissions receivable
Interest and commissions receivable comprise the following:
June 30, December 31, 2018 2017 (In bolivars)
Interest receivable on investment securities Deposits with the Central Bank of Venezuela (BCV) and overnight deposits 290,379,541 581,355,184 Available for sale 14,669,438,924 592,384,689 Held to maturity 554,152,776 610,401,028 Interest receivable on investment securities 14,635,167,014 6,355,031,161 Restricted investments 2,417,114,150 961,277 32,566,252,405 8,140,133,339 Interest receivable on loan portfolio Current 754,040,414,000 17,379,140,450 Rescheduled 32,625,331 36,211,681 Overdue 415,464,572 67,765,435 754,488,503,903 17,483,117,566 Commissions receivable 12,059,261,712 627,043,778 Provision for interest receivable and other (503,879,768) (75,470,891) 798,610,138,252 26,174,823,792
25 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
7. Investments in subsidiaries and affiliates
Investments in subsidiaries and affiliates recorded at cost by the equity method comprise the following:
June 30, December 31, 2018 2017 (In bolivars) 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 36,741,403,957 44,154,395 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 16,783,976,978 533,027,771 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 11,636,081,538 1,011,833 Society for Worldwide Interbank Financial Telecommunication (SWIFT), 27 fully paid common shares with a par value of €125 each, equivalent to 0.01% of its capital stock 7,193,596,344 639,837 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 4,064,429,573 4,009,155,749 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 284,477,823 24,737 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 131,669,302 11,450 Inmobiliaria Asociación Bancaria, C.A., 28,862 fully paid common shares with a par value of Bs 1 each, equivalent to 7.4% of its capital stock 167,370 167,370 Caja Venezolana de Valores, S.A., 2,596,824 fully paid common shares with a par value of Bs 3 each, equivalent to 18.01% of its capital stock 128,480 128,480 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 Mantex, S.A., 830 fully paid common shares with a par value of Bs 1 each, equivalent to 0.00051% of its capital stock 162 162 Provision for investments in subsidiaries and affiliates (17,122) (17,122) 76,835,931,365 4,588,321,622
During the six-month period ended June 30, 2018, the Bank recorded net losses of Bs 29,275,209,000 in respect of its equity in the results of subsidiaries and affiliates (net income of Bs 240,245,000 during the six-month period ended December 31, 2017), shown under other operating income and other operating expenses (Notes 20 and 21).
During the six-month period ended June 30, 2018, the Bank granted a contribution for future capital increases of Bs 1,570,000,000 to its subsidiary Inversiones y Valores Mercantil V, C.A. to cover operational requirements.
Below is a summary of the financial statements of the main subsidiaries and affiliates shown under the equity method, as well as the branch abroad:
a) Subsidiaries and affiliates
Balance sheet June 30, 2018 Inversiones y Valores Proyectos Inversiones Mercantil V, C.A. Conexus, Platco, and subsidiaries C.A. (1) C.A. (1) (In bolivars) Assets Cash and due from banks 37,853,214,528 27,648,856,866 12,384,366,302 Investment securities 14,141,772 15,902,944,801 - Interest and commissions receivable 47,900 - - Investments in subsidiaries and affiliates abroad 98,456,000 - - Property and equipment 427,604,609 4,272,437,998 - Other assets 110,921,499 15,003,963,562 211,072,465,823 Total assets 38,504,386,308 62,828,203,227 223,456,832,125
26 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
Balance sheet June 30, 2018 Inversiones y Valores Proyectos Inversiones Mercantil V, C.A. Conexus, Platco, and subsidiaries C.A. (1) C.A. (1) (In bolivars) Liabilities and Equity Liabilities Other liabilities 1,762,982,351 12,476,372,997 215,327,972,980 Total liabilities 1,762,982,351 12,476,372,997 215,327,972,980 Equity 36,741,403,957 50,351,830,230 8,128,859,145 Total liabilities and equity 38,504,386,308 62,828,203,227 223,456,832,125
Income statement Six-month period ended June 30, 2018 Inversiones y Valores Proyectos Inversiones Mercantil V, C.A. Conexus, Platco, and subsidiaries C.A. (1) C.A. (1) (In bolivars)
Gross financial margin (27,107,699) 537,302,523 - Operating income, net (21,448,587,351) 24,854,273,290 288,338,349,368 Total expenses (30,684,288,030) 43,096,788,955 (288,227,801,721) Net income (loss) (52,159,983,080) (2) 68,488,364,768 110,547,647
Equity method (Notes 20 and 21) (52,159,983,080) 22,829,500,582 55,273,824
(1) Based on unaudited financial statements. (2) The company reports losses in its results due to recognition of tax charges
Balance sheet December 31, 2017 Inversiones y Valores Mercantil V, Proyectos Inversiones C.A. and Conexus, Platco, subsidiaries C.A. (1) C.A. (1) (In bolivars)
Assets Cash and due from banks 9,403,103 172,000,096 2,070,383,549 Investment securities 71,468,249 1,894,405 - Interest and commissions receivable 53,044 - - Investments in subsidiaries and affiliates abroad 98,456,000 - - Property and equipment 71,271 963,584,046 3,482,680,046 Other assets 11,492,369 1,473,900,065 21,503,897,034 Total assets 190,944,036 2,611,378,612 27,056,960,629
Liabilities and Equity Liabilities Other liabilities 146,789,642 1,012,298,498 19,038,649,131 Total liabilities 146,789,642 1,012,298,498 19,038,649,131 Equity 44,154,394 1,599,080,114 8,018,311,498 Total liabilities and equity 190,944,036 2,611,378,612 27,056,960,629
27 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
Income statement Six-month period ended December 31, 2017 Inversiones y Valores Mercantil V, Proyectos Inversiones C.A. and Conexus, Platco, subsidiaries C.A. C.A. (In bolivars)
Gross financial margin 1,624,020 25,046,625 476 Operating income, net 3,972,880 1,500,410,026 31,437,880,841 Total expenses (125,503,675) (260,622,785) (31,560,802,553) Net income (loss) (119,906,775) 1,264,833,866 (122,921,236)
Equity method (Notes 20 and 21) (119,906,775) 421,612,132 (61,460,619)
(1) Based on unaudited financial statements.
b) Branch abroad (combined)
Balance sheet June 30, 2018 December 31, 2017 Thousands of Equivalent Thousands of Equivalent U.S. dollars in bolivars U.S. dollars in bolivars
Assets Cash and due from banks 20,156 2,312,160,175,043 8,622 86,003,304 Investment securities 6,076 697,044,885,338 5,715 57,005,149 Loan portfolio 18,815 2,158,301,348,438 16,850 168,077,503 Interest and commissions receivable 282 32,390,718,205 97 965,787 Other assets - 4,367,105 - 1,873 Total assets 45,329 5,199,901,494,129 31,284 312,053,616
Liabilities and Equity Deposits - - 178 1,777,197 Interest and commissions payable - - - 166 Accruals and other liabilities 185 21,359,382,613 147 1,463,256 Total liabilities 185 21,359,382,613 325 3,240,619 Equity 45,144 5,178,542,111,516 (1) 30,959 308,812,997 (1) Total liabilities and equity 45,329 5,199,901,494,129 31,284 312,053,616
Income statement Six-month period ended Six-month period ended June 30, 2018 December 31, 2017 Thousands of Equivalent Thousands of Equivalent U.S. dollars in bolivars U.S. dollars in bolivars
Gross financial margin 285,914 16,736,545,377 504,631 5,033,691 Other operating income, net 94,208 15,259,994,553 (2) 2,821,844 28,147,892 Total expenses (206,642) (12,096,224,607) (21,309,889) (213,015,475) Net income (loss) 173,480 19,900,315,323 (17,983,414) (179,833,892)
(1) At June 30, 2018, the Bank made an equity contribution of US$14,000,000 (US$600,000 and the Curacao Branch reduced capital at December 31, 2017),
(2) At June 30, 2018, includes Bs 9,745,314,000 for the effect of translating U.S. dollars to bolivars, which are eliminated in the results in consolidation and are transferred to equity.
28 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
8. Available-for-sale assets
Available-for-sale assets comprise the following:
December 31, June 30, 2017 Additions Disposals 2018
(In bolivars)
Idle assets 42,041,173 - (305,102) 41,736,071 Amortization (25,074,519) (10,483,286) 123,267 (35,434,538) Net 16,966,654 (10,483,286) (181,835) 6,301,533
During the six-month period ended June 30, 2018, the Bank sold available-for-sale assets at a gain of Bs 49,299,985,000 (Bs 10,953,258,000 during the six-month period ended December 31, 2017), of which Bs 49,299,818,000 is in respect of fully amortized idle assets that were recorded under memorandum accounts (Bs 10,360,140,000 at December 31, 2017),
During the six-month period ended June 30, 2018, the Bank recorded amortization expense in respect of idle assets of Bs 10,483,000 (Bs 10,747,000 during the six-month period ended December 31, 2017), included in the income statement under expenses from available-for-sale assets.
Fully amortized available-for-sale assets are recorded under memorandum accounts (Note 25).
9. Property and equipment
Property and equipment comprises the following:
December 31, June 30, 2017 Additions Disposals Other (1) 2018 (In bolivars)
Costs Building and facilities - main office 104,445,225,649 - - - 104,445,225,649 Buildings and facilities 1,748,626,795 43,185,019,729 - - 44,933,646,524 Furniture and equipment 8,386,735,329 31,836,479,729 (255,641) 732,930,319 40,955,889,736 Equipment for Chip Project 12,532,980 - - - 12,532,980 Vehicles 937,307 41,720,000 - - 42,657,307 Land 1,949,033 - - - 1,949,033 Total 114,596,007,093 75,063,219,458 (255,641) 732,930,319 190,391,901,229 Accumulated depreciation Building and facilities - main office Buildings and facilities (1,225,038,369) (1,305,581,173) - - (2,530,619,542) Furniture and equipment (149,884,319) (3,156,645,568) - - (3,306,529,887) Equipment for Chip Project (2,971,722,729) (10,389,864,100) 255,641 (732,930,319) (14,094,261,507) Vehicles (12,532,980) - - - (12,532,980) Total (937,307) (5,325,958) - - (6,263,265) Net (4,360,115,704) (14,857,416,799) 255,641 (732,930,319) (19,950,207,181) 110,235,891,389 60,205,802,659 - - 170,441,694,048
(1) Includes fully depreciated assets incorporated during the period.
Once SUDEBAN approval was received in April 2017, the Bank recorded the revaluation of its main office for the total amount of the primary equity (Tier I) at December 31, 2016 for Bs 62,913,837,000, increasing the value of property and equipment and revaluation adjustment of property and equipment, shown in equity for the same amount. In October 2017, the Bank recorded a second revaluation of its main office for Bs 41,526,470,000. During the six-month period ended June 30, 2018, the Bank recorded Bs 1,305,504,000 in the income statement in connection with the depreciation expense of revaluation (Bs 959,450,000 at December 31, 2017).
29 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
During the six-month period ended June 30, 2018, the Bank recorded depreciation expense of Bs 14,857,417,000 (Bs 1,732,064,000 during the six-month period ended December 31, 2017), shown in the income statement under general and administrative expenses (Note 19).
During the six-month period ended December 31, 2017, the property in Mexico City was sold to CERV LIN, C.A., a variable capital company, for US$3,200,000, giving rise to extraordinary income of Bs 31,281,000.
Below are the original useful lives and average remaining useful lives by type of asset:
Average Useful remaining life useful life (Years)
Building and facilities - main office 40 25 Buildings and facilities 40 37 Furniture and equipment 4-10 2
10. Other assets
Other assets comprise the following:
June 30, December 31, 2018 2017 (In bolivars)
Advances to technology vendors and work in progress 3,428,072,367,133 37,306,376,671 Insurance and prepaid expenses 2,772,265,208,115 59,050,250,738 Accounts receivable from other credit card companies for consumer transactions by cardholders 1,416,768,830,101 66,576,519,936 Deferred expenses for office setup, leasehold improvements and remodeling, net of accumulated amortization of Bs 4,731,504,492 (Bs 3,013,703,563 at December 31, 2017) (Note 2) 1,138,509,133,188 60,329,845,886 Accounts receivable 427,334,750,131 5,396,185,873 Stationery and office supplies 289,941,171,525 19,636,932,562 Pending items and main office, branches and agencies 111,958,883,955 7,810,277,128 Prepaid advertising 13,966,648,077 8,962,826 Prepaid taxes 11,024,749,499 4,834,783,588 Software, net of accumulated amortization of Bs 2,197,308,093 (Bs 1,448,313,334 at December 31, 2017) 3,179,182,133 3,825,457,765 Advances and guarantee deposits 61,541,244 185,184,946 Goodwill on acquisition of shareholding, net of accumulated amortization of Bs 114,819,588 (Bs 111,539,027 at December 31, 2017) 16,402,776 19,683,337 Items to be adjusted from transactions with derivative instruments - 8,416,759 Advances to Inversiones Platco, C.A. - 2,400,000,000 Other 393,702,785 61,273,690 Provision for other assets (113,663,254) (84,933,055) 9,613,378,907,408 267,365,218,650
The original value of other deferred expenses mainly comprises office setup expenses, leasehold improvements and projects pending capitalization, which include technological upgrade, hardware and software.
30 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
The balance of pending items and main office, branches and agencies mainly comprises operations that, due to their nature, cannot be immediately imputed to a definitive account, as well as lending operations between Bank offices that are being identified and have not yet been definitively recorded at monthly cutoff. Most of these operations clear during the first few days of the following month. Debit transactions with these same characteristics are included under accruals and other liabilities (Note 16).
In addition, at June 30, 2018, pending items and main office, branches and agencies include mainly recording and control of pending cards for Bs 656,870,000 (Bs 2,215,393,000 at December 31, 2017).
Prepaid taxes mainly include payment of income tax, withholding tax and municipal taxes.
Amortization of deferred expenses and goodwill during the six-month period ended June 30, 2018 amounted to Bs 2,482,426,000 (Bs 1,673,009,000 during the six-month period ended December 31, 2017) and is shown under general and administrative expenses (Note 19).
During the six-month period ended June 30, 2018, the Bank recorded expenses from the provision for other assets of Bs 43,843,000 (Bs 21,351,000 during the six-month period ended December 31, 2017), shown in the income statement under sundry operating expenses.
The movement in the provision for other assets is shown below:
June 30, December 31, 2018 2017 (In bolivars) Balance at the beginning of the six-month period 84,933,055 69,288,808 Provided in the six-month period 43,842,985 21,351,372 Release of provision (72,412) (71,923) Write-offs of unrecoverable accounts (15,040,374) (5,635,202) Balance at the end of the six-month period 113,663,254 84,933,055
31 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
11. Deposits
Deposits comprise the following:
June 30, December 31, 2018 2017 (In bolivars)
Demand deposits 185,567,281,793,937 9,221,871,493,143 Other demand deposits Cashier’s checks 851,858,933,274 90,260,814,438 Trust liabilities (Note 25) 391,684,623,412 85,730,202,118 Other demand deposits 35,598,644,733 1,960,478,443 Certified checks 11,408,526 4,420,235 Advance collections from credit card holders (Note 25) 1,546,040,154 130,046,235 Judicial deposits 616,884,542 629,976,969 Housing savings fund liabilities 510,353,693 190,997,959 Reimbursable collections 7,440 540 1,281,826,895,774 178,906,936,937 Savings deposits 24,994,197,667,182 2,053,217,769,466 Time deposits 89,125,188 122,658,859 Restricted deposits Dormant savings accounts 1,271,216,554 723,300,353 Dormant checking accounts 1,768,430,417 400,601,095 Other restricted deposits 36,948 32,754 3,039,683,919 1,123,934,202 211,846,435,166,000 11,455,242,792,607
Deposits bear interest at the rates shown below:
June 30, 2018 December 31, 2017 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 - - 0.01 1.00 0.02 0.02 Demand deposits and certificates 0.25 1.50 - - 0.25 1.50 - - Savings deposits 12.50 16.00 - - 12.50 16.00 - - Time deposits 14.50 14.50 - - 14.50 14.50 0.10 0.15 Restricted deposits 0.01 16.00 - - 0.01 16.00 - -
Below is the classification of time deposits by maturity:
June 30, 2018 December 31, 2017 In bolivars % In bolivars %
Up to 30 days 25,010,425 28 59,319,037 48 31 to 60 days 13,351,720 15 21,065,150 17 61 to 90 days 7,147,731 8 13,041,691 11 91 to 180 days 12,425,801 14 29,115,681 24 181 to 360 days 31,189,511 35 117,300 - 89,125,188 100 122,658,859 100
At June 30, 2018, deposits include Bs 3,161,823,030,000 from the Venezuelan government and other government agencies, equivalent to 1.49% of total deposits (Bs 208,301,952,000, equivalent to 1.82% at December 31, 2017).
32 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
12. Deposits and liabilities with Banco Nacional de Vivienda y Hábitat (BANAVIH)
Deposits and liabilities with BANAVIH comprise the following:
June 30, December 31, 2018 2017 (In bolivars)
Interest-free demand deposits with BANAVIH 12,267,407 7,976,664 Other liabilities with BANAVIH 182 16 12,267,589 7,976,680
Funds received from BANAVIH are used to finance loans. Other liabilities with BANAVIH are in respect of funds received to subsidize the initial installment of loans granted. Demand deposits are in respect of funds received to be assigned by BANAVIH (Note 25).
13. Borrowings
Borrowings comprise the following:
x June 30, December 31, 2018 2017
(In bolivars) x Borrowings with Venezuelan financial institutions Demand deposits 3,641,015,226 256,617,450 Borrowings with foreign financial institutions Demand deposits 156,795,084 156,212,973
3,797,810,310 412,830,423
Maturities of borrowings, up to one year, are as follows:
June 30, December 31, 2018 2017 (In bolivars)
Up to 6 months 3,797,810,310 412,830,423
14. Other liabilities from financial intermediation
Other liabilities from financial intermediation comprise the following:
June 30, December 31, 2018 2017 (In bolivars)
Liabilities with credit card merchants 412,210,165 3,440,521 Items to be adjusted from transactions with derivative instruments 12,304,589 37,069,035 Other 47,439 47,439 424,562,193 40,556,995
33 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
15. Interest and commissions payable
Interest and commissions payable comprise the following:
June 30, December 31, 2018 2017
(In bolivars)
Expenses payable on deposits Interest-bearing checking accounts 11,390,823,155 954,172 Time deposits 3,628,824 6,875,276 11,394,451,979 7,829,448
16. Accruals and other liabilities
Accruals and other liabilities comprise the following:
June 30, December 31, 2018 2017 (In bolivars)
Suppliers and accounts payable for financial intermediation 9,187,462,347,389 369,688,162,046 Provision for contingencies and accrued expenses 2,808,085,618,283 54,880,604,528 Income tax 992,458,030,340 86,897,180,998 Interest collected in advance on the loan portfolio and commissions 788,000,751,585 18,481,914,589 Deferred income tax (Note 17) 633,098,549,587 13,426,569,820 Collected and withheld taxes 596,711,451,709 19,621,685,615 Employee profit sharing, vacation and bonuses 373,135,357,643 26,368,401,769 Tax on large financial transactions and other taxes 180,381,296,597 5,797,592,299 Provision for the Antidrug Law (Note 33) 48,042,815,004 2,536,152,571 Accounts payable to Inversiones Platco, C.A. (Note 27) 42,677,610,822 2,679,519,050 Pending items and main office, branches and agencies 10,272,732,756 774,324,521 Accounts payable to clients 6,409,072,262 554,916 Labor contributions 4,753,292,883 571,583,492 Commissions payable 4,150,795,918 1,234,607,350 Accruals and other liabilities 3,963,941,771 358,576 Direct financial liabilities 832,429,604 2,495,042,225 Deferred income from loan portfolio 138,071,134 156,648,361 Deferred gain on rights and sale of property 7,672,570 7,839,612 15,680,581,837,857 605,618,742,338
Suppliers and accounts payable for financial intermediation include mainly Maestro point-of-sale transactions by Bank customers pending offsetting and expenses incurred in Bank’s regional offices.
At June 30, 2018 and December 31, 2017, the provision for contingencies and accrued expenses includes unbilled services received, other accruals for human resources and the provision for cashier’s checks written off due to aging.
34 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
17. Taxes
a) Tax expense The tax expense comprises the following:
Six-month periods ended June 30, December 31, 2018 2017 (In bolivars)
Taxes Current In Venezuela 981,880,100,492 77,168,418,598 Abroad 199,552,771 - Deferred In Venezuela 619,671,979,767 13,532,106,790 1,601,751,633,030 90,700,525,388
Venezuelan Income Tax Law This Law establishes, among other things, regulations concerning a proportional tax on dividends, worldwide income taxation, international fiscal transparency regulations and transfer pricing.
The Bank’s tax year ends on December 31. For the six-month period ended June 30, 2018, the main differences between income/loss recognized for accounting and tax purposes arise from shareholdings, provisions, prepaid expenses and accruals that are normally tax deductible in subsequent periods, nontaxable income and tax exempt income from National Public Debt Bonds and other securities issued by the Bolivarian Republic of Venezuela.
For the six-month period ended June 30, 2018, the Bank estimated an income tax expense of Bs 982,079,653,263.
At June 30, 2018, the Bank has extraterritorial tax losses of up to 25% of annual income amounting to Bs 87,291,365, of which Bs 81,126,812 may be carried forward until December 31, 2018 and Bs 6,164,553 until December 31, 2019.
The following is a reconciliation between book expense and tax expense for the year ended December 31, 2017:
Statutory tax rate (%) 40 x (Thousands of bolivars)
Book income before tax 250,303,798 a Notional tax expense based on book income in Venezuela computed at the effective tax rate 100,121,519 Differences between notional tax expense and actual tax expense Net effect of shareholdings (86,954) Net effect of exemption of securities issued or guaranteed by the Venezuelan government (5,937,525) Other assets (26,447,809) Nondeductible provisions Loan portfolio, net 11,073,668 Other provisions 13,144,130 Other effects, net (4,955,918) 86,911,111
35 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
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 liability Below is a summary of the deferred income tax liability:
June 30, December 31, 2018 2017 (In bolivars) Cash and due from banks - 36,342,875 Loan portfolio (361,773,685) (683,880,268) Property and equipment, office setup expenses and other (611,167,188) (1,114,340,624) Other assets 656,084,331,028 23,468,967,112 Labor-related provisions 66,958,370,602 7,014,965,076 Provisions (88,971,211,170) (15,295,484,351) Deferred tax liability (Note 16) 633,098,549,587 13.426.569.820
The Bank has a model which considers the historic financial performance, taxable income projections and the future realization of existing temporary differences, among others. This model is used to assess the recoverability of deferred tax assets or probable settlement of deferred tax liabilities. This assessment is based on approved business plans, among others, and includes management judgment on the assumptions used, which may vary from one six-month period to the next.
18. Employee benefits and employee benefit plan
a) Length-of-service benefits At June 30, 2018, date of the last actuarial study, the actual premises used to determine length-of-service benefit obligations are as follows:
Financial Discount rate (%) 7.00 Salary increase rate 2017 (%) 535.58 Nominal obligations discount rate 2017 (%) 494.00 Salary inflation rate 2018 (%) 5,349.00 Nominal obligations discount rate 2018 (%) 5,536.50
Demographic Mortality table for active employees GAM (1971) Disability table PDT (1985)
At June 30, 2018, date of the last actuarial study, the additional length-of-service benefit obligation is as follows:
(Thousands of bolivars)
Balance at December 31, 2017 12,881,535 Service cost 146,888 Interest cost 156,497,844 Benefits paid (9,291,781) Remeasurement (20,921,950) Balance at June 30, 2018 139,312,536
36 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
The estimated net cost of the retrospective length-of-service benefit for the second semester of 2018 is Bs 6,478,231,365,000, calculated based on actuarial studies conducted in June 30, 2018.
b) Supplementary Savings Plan Since 2006, the Bank maintains a plan for its employees and those of its Venezuelan subsidiaries entitled “Plan de Ahorro Previsional Complementario Mercantil” (Supplementary Savings Plan), which replaced the defined benefit plan entitled “Plan Complementario de Pensiones de Jubilación” (Supplementary Defined Benefit Plan). Only active employees have the option of subscribing to the new plan or remaining in the Supplementary Defined Benefit Plan.
For the six-month period ended June 30, 2018, expenses in connection with this plan amount to Bs 4,285,989,000 (Bs 836,210,000 for the six-month period ended December 31, 2017), calculated based on actuarial studies conducted in December 2017.
c) Supplementary Defined Benefit Plan and post-retirement benefits The Supplementary Defined Benefit Plan and post-retirement benefits for eligible employees are based on a minimum 10-year length-of-service period and a minimum retirement age. The retirement pension is based on the employee’s average annual salary over the last 3 years of employment preceding retirement and is payable at a maximum of 60% of this average salary.
For the six-month period ended June 30, 2018, expenses in connection with the Supplementary Defined Benefit Plan and post-retirement benefits amounted to Bs 1,850,000,000 (Bs 850,000,000 at December 31, 2017), calculated based on actuarial studies conducted in December 2017.
At December 31, 2017, date of the last actuarial study, assets, obligations and results of the Supplementary Defined Benefit Plan and post-retirement benefits for both plans are as follows:
Supplementary Post- Defined retirement Benefit Plan benefits (Thousands of bolivars)
Annual variation in projected benefit obligation Benefit obligation 875,990 1,832,393 Service cost 1,650 109,571 Interest cost 4,701,373 10,400,461 Remeasurement 5,760,596 (1,764,138) Benefits paid (572,750) (336,389) Projected benefit obligation 10,766,859 10,241,898
Annual variation in restricted plan assets (1) Opening fair value of assets 146,377 27,881 Remeasurement and yield (2,836,426) 2,869,066 Bank contribution - 1,081,693 Transfer between plans 3,558,725 (3,558,725) Benefits paid (572,750) (336,389) Closing fair value of assets 295,926 83,526
Components of net benefit cost for the year Service cost 1,650 109,571 Interest cost 4,701,373 10,400,461 Yield from plan assets (1,501,762) (3,849,082) Net benefit cost 3,201,261 6,660,950
(1) The breakdown of plan assets is shown according to the accounting bases described in Note 2.
37 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
Financial position balances at December 31 are shown below:
Supplementary Defined Benefit Plan 2017 2016 2015 2014 2013 (Thousands of bolivars)
Financial position at year end Present value of obligations (DBO) (10,766,859) (875,990) (440,576) (90,222) (67,248) Assets of external fund supporting the plan 295,926 146,377 86,920 132,906 141,805 (Projected obligation)/excess of assets (10,470,933) (729,613) (353,656) 42,684 74,557
Post-retirement benefits 2017 2016 2015 2014 2013 (Thousands of bolivars)
Financial position at year end Present value of obligations (DBO) (10,241,898) (1,832,393) (535,121) (131,653) (119,540) Assets of external fund supporting the plan 83,466 27,881 98,454 69,095 71,604 Projected obligation (10,158,432) (1,804,512) (436,667) (62,558) (47,936)
At December 31, 2017, date of the last actuarial study, the actual assumptions used to determine benefit obligations are as follows:
Supplementary Post- Defined retirement Benefit Plan benefits
Discount rate (%) 7 7 Increase in medical expenses (%) (1) - 10
(1) This assumption only applies to the post-retirement benefit plan.
At December 31, 2017, date of the last actuarial study, a hypothetical increase or decrease of 1% in the main actuarial assumptions would impact the value of the projected obligations of the plans as follows:
Supplementary Post- Defined Benefit Plan retirement benefits Increase Decrease Increase Decrease (Thousands of bolivars)
Discount rate 648,561 732,387 2,236,123 3,083,324 Increase in medical expenses - - 945,441 830,956
Below is a breakdown of the assets supporting the plans of MERCANTIL and its subsidiaries, shown in conformity with the accounting bases described in Note 2:
June 30, December 31, 2018 2017 (Thousands of bolivars)
Cash and due from banks 9,025,181 238,244 Investments in available-for-sale securities (1) 768,917,063 107,643 Interest receivable 6,103,228 981 Other assets 393,574 32,524 Total assets 784,439,046 379,392
(1) Securities quoted in an active market.
38 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
At June 30, 2018, the fair value of these assets, in conformity with accounting standards applicable to Fundación BMA (VEN NIF), is Bs 784,439,046,000 (Bs 23,114,990,000 at December 31, 2017); 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 4.5 and 32.9 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 1,348,001 4,922,300 4,986,206 11,256,507 Post-retirement benefits 1,661,124 2,360,861 6,711,807 10,733,792 Total 3,009,125 7,283,161 11,698,013 21,990,299
d) Long-term stock option plan MERCANTIL and certain subsidiaries in Venezuela and abroad offer a stock option plan to eligible officers approved by the Board of Directors’ Compensation Committee. These shares are allotted over three-year periods and awarded annually. Fundación BMA manages the plan and sets up trust funds with the shares on behalf of members once these shares have been assigned and subsequently awarded to eligible officers based on individual allotments approved in accordance with plan regulations. During each administrative phase and until the shares are actually acquired by officers, cash dividends declared in respect of these shares are received by Fundación BMA and stock dividends by the participants.
According to the long-term nature of the plan, officers must be active employees of the Bank in order for shares to be awarded to them. At June 30, 2018 and December 31, 2017, 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 4 years and employees may annually dispose of 25%.
At June 30, 2018, 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
39 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
19. General and administrative expenses
General and administrative expenses comprise the following:
Six-month periods ended June 30, December 31, 2018 2017 (In bolivars)
Software licenses and maintenance 1,722,037,975,773 21,402,764,575 Services and supplies 580,766,848,030 5,915,085,977 Maintenance of property and equipment 422,419,154,142 23,727,097,010 Sundry general expenses 299,311,336,219 9,679,108,742 Outsourcing, fees and other 272,736,537,037 8,078,152,817 Taxes, fines and contributions 290,044,468,653 15,494,979,306 Transportation and communications 216,487,080,664 4,887,748,773 Transportation and surveillance 77,036,828,428 10,665,525,456 Insurance for property and equipment 34,820,866,003 18,435,268 Depreciation of property and equipment (Note 9) 14,857,416,799 1,732,064,297 Advertising 14,273,228,029 1,357,255,067 Leases 12,984,226,717 1,320,742,665 Amortization of deferred expenses (Note 10) 2,479,145,247 1,669,728,235 Legal 277,095,247 15,608,584 Amortization of goodwill (Note 10) 3,280,560 3,280,560 Other 4,106,103,010 64,890,918 3,964,641,590,558 106,032,468,250
20. Other operating income
Other operating income comprises the following:
Six-month periods ended June 30, December 31, 2018 2017 (In bolivars)
Commissions on credit card transactions 1,840,822,008,192 64,283,146,755 Commissions on ATM transactions 1,041,326,023,655 68,144,734,094 Commissions on Conexus, Maestro and Abra 24 services 490,617,106,852 30,620,961,075 Commissions on banking services provided 57,170,924,979 3,990,903,195 Commissions on electronic transfers 55,650,108,265 1,533,339,036 Commissions on third party transactions 27,014,861,435 5,218,400,859 Income from equity in subsidiaries and affiliates (Note 7) 22,884,774,406 421,612,132 Trust fund commissions 7,168,131,411 626,710,031 Gain on sale of investment securities 1,827,568,348 687,389,553 Exchange gain (Note 24) 436,248,351 1,073,178 3,544,917,755,894 175,528,269,908
40 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
21. Other operating expenses
Other operating expenses comprise the following:
Six-month periods ended June 30, December 31, 2018 2017 (In bolivars)
Commissions on Conexus and Maestro services 471,221,957,929 32,332,492,052 Commissions on credit cards transactions 451,120,099,813 21,216,647,227 Commissions on banking services received 211,825,013,105 15,287,112,259 Loss from equity in subsidiaries and affiliates (Note 7) 52,159,983,080 181,367,394 Commissions on third party transactions 4,131,351,152 131,962,918 Exchange loss (Note 24) 234,689,453 1,147,433 Loss on sale of investment securities 220,946,700 459,180,332 Amortization of premium on investment securities (Note 4) 155,911,018 161.964.246 1,191,069,952,250 69,771,873,861
22. Extraordinary expenses
Extraordinary expenses comprise the following:
Six-month periods ended June 30, December 31, 2018 2017 (In bolivars)
Loss from claims 9,164,476,258 288,020,679 Donations made by the Bank (Note 28) 7,262,142,081 133,949,375 Extraordinary expenses 36,308,582 4,585,033 Loss from theft and fraud 15,510,479 13,088,105 16,478,437,400 439,643,192
23. Equity
a) Capital stock At June 30, 2018 and December 31, 2017, the Bank’s paid-in capital amounts to Bs 292,415,038 and is represented by 159,480,029 Class “A” common shares and 132,935,009 Class “B” common shares with limited voting rights, all with a par value of Bs 1. At June 30, 2018 and at December 31, 2017, Mercantil Servicios Financieros, C.A. has 159,374,223 Class “A” common shares and 132,875,865 Class “B” common shares, representing 99.94% of the Bank’s capital stock.
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 held on October 20, 2015, in respect of which 24,354,805 new shares were issued (13,281,513 Class “A” shares and 11,073,292 Class “B” shares), with a par value of Bs 1 each. This increase included the payment of a premium amounting to Bs 117.67 per share, to be recorded under premium on capital contributions for a total amount of Bs 2,865,829,904. Consequently, the Bank’s equity was increased by Bs 2,890,184,709. This increase was authorized by SUDEBAN in July 2016.
In September 2016, the second phase of the capital stock increase agreed at the Special Shareholders’ Meeting held on October 20, 2015 was approved, in respect of which 36,534,426 new shares were issued (19,924,487 Class “A” and 16,609,939 Class “B” shares), with a par value of Bs 1. This increase included the payment of a premium amounting to Bs 162.91 per share, to be recorded under premium on capital contributions for a total amount of Bs 5,951,823,340. Consequently, the Bank’s equity was increased by Bs 5,988,357,766. To date, approval from SUDEBAN is pending.
41 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
At a Special Shareholders’ Meeting held in March 2017 it was approved to increase subscribed and paid- in capital by up to Bs 80,000,000, divided into up to 44,000,000 Class “A” common shares and up to 36,000,000 Class “B” common shares, with a par value of Bs 1 each. SUDEBAN deadline to execute the increase was August 31, 2017. At the same Shareholders’ Meeting, the Bank’s Board of Directors was authorized to define, approve and decide on the other terms, conditions, characteristics and issues in connection with the issue.
The Bank’s Board of Directors approved three phases to increase subscribed and paid-in capital; contributions made by shareholders are recorded under contributions pending capitalization, awaiting approval from SUDEBAN. Below is a summary of the increases:
Contributions pending capitalization Amount Par Capital Shares approved Share Class value Premium increase issued Total Date Bs Class “A” Class “B” Total Bs Bs Bs Bs Bs
Phase I March 2017 18,267,219 9,962,242 8,304,977 18,267,219 1 219,45 18,267,219 4,008,741,210 4,027,008,429 Phase II April 2017 20,876,825 11,385,421 9,491,404 20,876,825 1 231,73 20,876,825 4,837,786,657 4,858,663,482 Phase III September 2017 9,711,763 5,341,877 4,369,886 9,711,763 1 513,91 9,711,763 4,990,972,123 5,000,683,886 48,855,807 13,837,499,990 13,886,355,797
At a Special Shareholders’ Meeting held in June 2017, it was approved to increase capital through the capitalization of a share premium, taking the par value of shares from Bs 1 to Bs 10.80 each; this capitalization is awaiting approval from SUDEBAN.
At a Special Shareholders’ Meeting held in September 2017 it was approved to increase subscribed and paid-in capital by up to Bs 260,000,000, divided into up to 260,000,000 Class “A” common shares with a par value of Bs 1 each. SUDEBAN deadline to execute the increase is March 22, 2018. At the same Shareholders’ Meeting, the Bank’s Board of Directors was authorized to define, approve and decide on the other terms, conditions, characteristics and issues in connection with the issue
The Bank’s Board of Directors approved three phases to increase subscribed and paid-in capital; contributions made by shareholders are recorded under contributions pending capitalization, awaiting approval from SUDEBAN. Below is a summary of the increases:
Contributions pending capitalization Amount Par Capital Shares approved Share Class value Premium increase issued Total Date Bs Class “A” Class “B” Total Bs Bs Bs Bs Bs
Phase I October 2017 23,543,143 12,949,541 10,593,602 23,543,143 1 593.72 23,543,143 13,978,034,862 14,001,578,005 Phase II November 2017 16,237,526 8,855,324 7,382,202 16,237,526 1 934.10 16,237,526 15,167,473,037 15,183,710,563 Phase III December 2017 10,437,502 5,692,705 4,745,699 10,438,404 1 1,089.45 10,438,404 11,372,119,238 11,382,557,642 50,219,073 40,517,627,137 40,567,846,210
At June 30, 2018 and December 31, 2017, the Bank complies with minimum paid-in capital requirements for universal banks of Bs 170,000,000.
b) Retained earnings and dividends on shares SUDEBAN establishes a requirement to set aside an equity reserve of 50% of income for each period to restricted surplus, exclusively for capital increase purposes. In February 2015, the concepts for which SUDEBAN could authorize the use of this reserve were expanded to include covering deficit or equity losses, creating provisions, offsetting deferred expenses, as well as costs and goodwill generated by mergers. During the six-month period ended June 30, 2018, the Bank reclassified to restricted surplus Bs 1,583,740,957,000 (Bs 65,016,725,387 during the six-month period ended December 31, 2017), equivalent to 50% of the Bank’s net individual income at that date.
42 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
At June 30, 2018, restricted surplus of Bs 1,658,038,835,000 (Bs 103,573,086,000 at December 31, 2017) includes Bs 29,043,637,000 in respect of losses from subsidiaries and affiliates (Bs 231,572,000 in respect of income from subsidiaries and affiliates at December 31, 2017). During the six-month period ended June 30, 2018, the Bank recorded losses from equity in subsidiaries and affiliates of Bs 29,275,209,000 (income of Bs 240,245,000 at December 31, 2017).
c) Capital reserve Appropriation to legal reserve In accordance with its bylaws and the Law on Banking Sector Institutions, the Bank records biannually an appropriation to the legal reserve equivalent to 20% of net income for the six-month period until the reserve reaches 50% of its capital stock. When the legal reserve has reached this amount, the Bank’s appropriation to the legal reserve will be 10% of net income for each six-month period until the reserve reaches 100% of its capital stock.
Appropriation to other mandatory reserves SUDEBAN establishes a requirement for banks to set aside 0.5% of their capital stock biannually to the Social Contingency Fund, with a charge to unappropriated surplus, until the reserve reaches 10% of such capital (Notes 4 and 35).
d) Risk-based capital ratio Ratios required and maintained by the Bank, calculated based on its published financial statements in accordance with SUDEBAN rules, are shown below:
June 30, 2018 December 31, 2017 Required Maintained Required Maintained % % % %
Equity to risk-weighted assets and contingent operations 11.00 14.17 12.00 12.29 Equity to total assets 7.00 10.21 9.00 11.12
In September 2013, SUDEBAN established that banking institutions should adapt the capital to risk asset ratio of 10% at December 31, 2014. In October 2014, SUDEBAN deferred compliance with this percentage, keeping it at 9%. During the year ended December 31, 2015, SUDEBAN granted an exception in the calculation of this ratio, allowing the exclusion from assets of the entire balance maintained at each month closing as legal reserve with the BCV. In April 2016, SUDEBAN granted a new exception in the calculation of the aforementioned ratio, which consists in excluding from total assets deposits and cash and due from banks of the Bank maintained with the BCV, as well as bonds and debt securities issued by the BCV and Petróleos de Venezuela, S.A. and including in equity the amounts for general allowance and countercyclical allowance for loan portfolio and microcredits. Likewise, SUDEBAN allowed to include these allowances in primary equity (Level I) for calculation of the capital to risk-weighted asset and contingent operation ratio.
In December 2016, SUDEBAN granted an exception to the banking system in the calculation of the capital adequacy ratio, by temporarily allowing deduction of pending cash items from total assets, as well as the variation of the sub-account bills and coins as compared to November 2016. To calculate risk- weighted ratio, pending cash items will be computed at 0% (formerly 50%). This exception has been extended by the regulatory entity on a monthly basis; the last one was made in August 2017.
In January 2018, SUDEBAN published a series of temporary guidelines, effective until January 2019, to determine the equity to assets and contingent operations ratio, including the reduction of risk-weighting of certain assets considering the purpose and quality of the loan portfolio, changes to weighting of certain items in cash and due from banks, and the possibility to include realized and unrealized gains from exchange differences as part of the primary equity (Level I), among others.
43 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
24. Financial assets and liabilities in foreign currency
a) Exchange control regime Since February 2003, the Venezuelan government established an exchange control. The protected exchange rate (DIPRO - Protected Exchange Rate) for the food, health, sports, culture and academic sectors, among others, and a supplementary floating exchange rate (DICOM - Supplementary Exchange Rate) for other areas of the economy, were established in March 2016 The DICOM exchange rate system was established in May 2017. This is a foreign currency auction system through which the BCV, individuals and private-sector companies may offer and purchase foreign currency.
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 and until January 2018, the BCV established that 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).
At June 30, 2018, the DICOM exchange rate was Bs 114,712.50/US$1 (Bs 3,336.6375/US$1 at December 31, 2017), which is the lowest bid price proposal by foreign currency buyers awarded in the last auction. Exchange rates in each auction are set based on a system of monitored currency bands.
c) Exchange differences During the six-month period ended June 30, 2018, as a result of applying the DICOM exchange rate, the Bank recorded a net exchange gain of Bs 10,294,397,732,118, which was recorded under equity adjustments as per SUDEBAN instructions.
d) Net global position in foreign currency The Bank’s balance sheet includes the following balances of financial assets and liabilities in foreign currency, denominated mainly in U.S. dollars, stated at the exchange rates described in Note 2:
June 30, 2018 December 31, 2017 Transaction Equivalent Transaction Equivalent Branch in in thousands Branch in in thousands abroad Venezuela Total of bolivars abroad Venezuela Total of bolivars (Thousands of U.S. dollars) Assets Cash and due from banks 20,156 26,333 46,489 5,332,869,413 8,622 45,939 54,561 544,236 Investment securities 6,076 12,633 18,709 2,146,156,163 5,715 12,633 18,348 183,021 Loan portfolio 18,815 442 19,257 2,209,018,613 16,850 451 17,301 172,577 Interest and commissions 282 100 382 43,820,175 97 148 245 2,444 receivable Investments in subsidiaries and affiliates - 168 168 19,271,700 - 169 169 1,686 Other assets - 598 598 68,598,075 - 14,472 14,472 144,358 Total assets 45,329 40,274 85,603 9,819,734,139 31,284 73,812 105,096 1,048,322
Liabilities Deposits - 9,945 9,945 1,140,815,813 178 9,674 9,852 98,274 Accruals and other liabilities 186 8,206 8,392 962,667,300 147 9,486 9,633 96,089 Total liabilities 186 18,151 18,337 2,103,483,113 325 19,160 19,485 194,363
44 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
Below is a reconciliation of the Bank’s net monetary position in foreign currency:
June 30, December 31, 2018 2017 (Thousands of U.S. dollars)
Assets less liabilities, transaction in Venezuela 22,123 54,652 Foreign currency trade commitments (75) (326) Position determined, computable as per the BCV rules 22,048 54,326 Maximum limit established by the BCV (60% of the previous month equity) 72,324 9,589,889 Margin in relation to authorized amount 50,276 9,535,563
The BCV excludes from the maximum limit that may be maintained by banks in foreign currency a portion of capital and income of the branch for US$45,144,000 and Capital and Interest Covered Bonds (TICC), with a reference value in foreign currency and payable in bolivars of Bs 2,328,369,107,000 (Bs 204,733,000 at December 31, 2017). These TICC were redeemed in August 2018. This limit corresponds to 60% of the Bank’s equity of the month (30% of equity of the month prior to December 31, 2017).
During the six-month period ended June 30, 2018, the net exchange gain from revaluation of the foreign currency position increased to Bs 201,559,000 (net exchange loss of Bs 74,000 during the six-month period ended December 31, 2017) (Notes 20 and 21).
25. Memorandum accounts
Memorandum accounts comprise the following:
June 30, December 31, 2018 2017 (In bolivars)
Contingent debtor accounts Guarantees granted (Notes 26 and 30) 5,422,394,006,455 868,430,418 Automatic lines of credit (Note 26) 3,558,945,291,542 183,839,322,858 Letters of credit (Notes 26 and 30) 1,419,576,679,213 123,641,433 Investment securities under repurchase agreement (Notes 4 and 30) - 25,400,000 Transactions with derivative instruments 825,256,353 2,715,140,383 Tourism loan commitments (Note 30) 37,106,913 1,088,056,972 Other contingencies (Notes 26 and 30) 6,017,234,068 279,957,494 10,407,795,574,544 188,939,949,558
Assets received in trust 4,317,527,431,812 168,695,157,224
Other special trust services 6,070,623 6,311,768
45 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
June 30, December 31, 2018 2017 (In bolivars)
Other debtor memorandum accounts Guarantees received 111,558,590,045,600 3,583,794,855,893 Unused lines of credit (Notes 26 and 30) 13,344,198,505,778 252,871,489,055 Valuables received in custody (1) 14,820,616,769,405 18,616,547,959 Collections 204,527,728 205,069,098 Other control accounts Guarantees pending release 95,365,407,592,556 2,711,464,023,377 Returned checks 14,120,395,381,459 1,449,275,885,840 Uncollectible accounts written off 425,964,185,145 5,029,032,770 Unconfirmed letters of credit (Note 5) 19,333,569,271,469 1,719,763,286 Interest receivable 9,690,826,187 989,506,945 Foreign currency purchase commitments 17,031,770,702 1,816,281 Credit card loans granted (CENCOEX) 42,223,081 42,223,081 Real and personal property written off (Note 9) 25,018,942 26,374,785 Foreign currency sale commitments (2,066,151,628) (1,080,915,823) Bonds received 10,697,921,838,439 12,706,559,823 Other 25,143,484,469,546 5,115,284,824 165,111,466,425,898 4,185,289,555,189 304,835,076,274,409 8,040,777,517,194
Other debtor control accounts 3,678,722 3,678,722
(1) Valuables received in custody of the following institutions: BCV, Caja Venezolana de Valores, Clearstream Banking, S.A. and UBS International Bank.
a) Assets received in trust Trust fund accounts include the following balances according to the combined financial statements of the trust:
June 30, December 31, 2018 2017 (In bolivars)
Assets Cash and due from banks 584,649,529,430 85,752,470,513 Investments securities 3,431,315,379,567 19,068,414,541 Loan portfolio 287,991,287,292 63,366,049,642 Interest and commissions receivable 8,075,980,616 261,350,994 Assets received for administration 7,234,457 7,234,457 Other assets 5,488,020,450 239,637,077 Total assets 4,317,527,431,812 168,695,157,224
Liabilities and Equity Liabilities Fees and other accounts payable 11,767,434,005 627,251,937 Other liabilities 10,868,017 1,674,545 Total liabilities 11,778,302,022 628,926,482 Equity 4,305,749,129,790 168,066,230,742 Total liabilities and equity 4,317,527,431,812 168,695,157,224
46 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
Trust fund equity is classified as follows:
June 30, December 31, 2018 2017 (In bolivars)
Trust fund Investment 1,849,819,612,672 713,570,948 Length-of-service benefits 998,334,397,707 147,132,049,484 Administration 727,036,675,468 3,709,774,960 Guarantee and custody 604,575,248,066 1,039,242,521 Savings fund 125,983,195,877 15,471,592,829 4,305,749,129,790 168,066,230,742
Trust fund Private sector 3,716,424,281,196 89,377,004,602 Public sector 589,324,848,594 78,689,226,140 4,305,749,129,790 168,066,230,742
Investments in debt securities in bolivars and foreign currency are recorded at cost, which should be consistent with market value at the time of purchase. Discounts or premiums are amortized over the term of the securities as a credit or debit to interest income, resulting in a lower or greater effective yield on investments. Debt securities in foreign currency are adjusted to the prevailing official exchange rate. Investments in equity securities, in bolivars and foreign currency, are recorded at cost. In accordance with certain trust agreements, investments in debt or equity securities included in these trusts are maintained at amortized cost and adjusted at the prevailing official exchange rate.
At June 30, 2018 and December 31, 2017, trust funds do not exceed five time the Bank’s equity, in accordance with SUDEBAN Resolution No. 083-12 dated May 31, 2012.
At June 30, 2018, trust funds contributed by government entities represent 14%, and those by the private sector 86% (47% and 53%, respectively, at December 31, 2017).
Investment securities included in trust fund accounts comprise the following:
June 30, 2018 December 31, 2017 Book Fair Book Fair value value value value (In bolivars)
1) Securities issued or guaranteed by the Venezuelan government Principal and Interest Covered Bonds (TICC), with 5.25% annual yield, maturing in March 2019, and a par value of US$3,367,138 payable in bolivars at the official exchange rate 387,640,360,724 386,281,786,786 (1) (a) 33,875,584 33,671,380 (1) (a) National Public Debt Bonds, with annual yield at between 8.25% and 17%, maturing between July 2018 and August 2037, and a par value of Bs 18,790,811,216 (yield at between 9.88% and 18%, maturing between April 2018 and August 2037, and a par value of Bs 11,649,599,701 at December 31, 2017) 19,898,804,457 22,289,141,028 (1) (a) 12,723,755,403 14,703,393,915 (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 3,097,237,500 889,681,472 (1) (d) 269,325 88,319 (1) (d) 410,636,402,681 409,460,609,286 12,757,900,312 14,737,153,614 2) Debt securities issued by foreign public and private-sector agencies Debt securities issued and guaranteed by government agencies of the United States of America, maturing between July and September 2018, and a par value of US$5,677,000 (maturing between January and March 2018 and a par value of US$4,875,500 at December 31, 2017) 650,246,212,547 650,187,135,382 (2) (d) 48,580,447 48,567,791 (2) (d) Bonds issued by foreign public-sector agencies Governments of Colombia and Panama, with annual interest at between 5.20% and 11.75%, maturing between January and February 2020, and a par value of US$572,000 (governments of Colombia and Panama, maturing between January and February 2020, and a par value of US$572,000 at December 31, 2017) 68,676,153,110 68,295,497,839 (2) (d) 6,054,510 6,079,034 (2) (d) Bonds issued by Petróleos Mexicanos (PEMEX), with 5.50% and 5.75% annual interest maturing between May 2019 and January 2021, and a par value of US$530,000 (maturing between March 2018 and January 2021, and a par value of US$1,280,000 at December 31, 2017) 63,842,725,681 62,768,202,210 (2) (d) 12,987,873 12,979,975 (2) (d) Bonds issued by ECOPETROL, S.A., with 7.63% annual interest, maturing in July 2019, and a par value of US$400,000 48,003,190,258 48,014,064,000 (2) (b) - - 830,768,281,596 829,264,899,431 67,622,830 67,626,800
47 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
June 30, 2018 December 31, 2017 Book Fair Book Fair value value value value (In bolivars)
3) Debt securities issued by Venezuelan private-sector companies Debenture bonds Preparados Alimenticios Internacionales, C.A. (PAICA), with 26% annual interest, maturing in June 2021, and a par value of Bs 4,000,000,000 4,000,000,000 4,163,400,000 (1) (e) - - Inversiones Selva, C.A., with 24% annual interest, maturing in March 2021, and a par value of Bs 2,200,000,000 2,200,000,000 2,199,837,200 (1) (e) - - Domínguez y Cía., S.A., with 16.49% and 24% annual yield, maturing in March 2020 and 2021, par value of Bs 2,110,000,000 (annual yield of 16.67%%, maturing in March 2020, and a par value of Bs 210,000,000 at December 31, 2017) 2,110,000,000 2,087,960,180 (1) (e) 210,000,000 203,115,570 (1) (e) Mercantil Servicios Financieros, C.A., with 24% annual yield, maturing in May 2020, and a par value of Bs 1,105,000,000 1,105,000,000 1,104,418,770 (1) (e) 1,105,000,000 1,221,200,695 Envases Venezolanos, S.A., with 17.14% and 24% annual yield, maturing in February 2019, and April 2021, and a par value of Bs 580,000,000 (annual yield between 16.77% maturing in February 2019, and a par value of Bs 80,000,000 at December 31, 2017) 580,000,000 576,385,100 (1) (e) 80,000,000 78,857,600 (1) (e) Toyota Services de Venezuela, C.A., with annual yield at between 15.16% and 16.89%, maturing between July 2020 and October 2021, and a par value of Bs 125,250,000 (annual yield at between 13.56% and 16.99%, maturing between February 2018 and October 2021, and a par value of Bs 135,600,000 at December 31, 2017) 125,250,000 105,565,334 (1) (e) 135,600,000 129,542,151 (1) (e) Automercados Plaza’s, C.A., with 16.52% annual yield, maturing in March 2020, and a par value of Bs 120,000,000 (annual yield of 16.91%, maturing in March 2020, and a par value of Bs 120,000,000 at December 31, 2017) 120,000,000 107,799,960 (1) (e) 120,000,000 116,616,960 (1) (e) Commercial paper Automercados Plaza’s, C.A., maturing in July 2018, with a par value of Bs 400,000,000 398,883,579 398,406,400 (1) (e) - - 10,639,133,579 10,743,772,944 1,650,600,000 1,749,332,976 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) (l) 8,922 8,882 (3) (l) Siderúrgica Venezolana, S.A. (SIVENSA), 1,658 common shares, with a par value of Bs 2 each 3,316 858,844,000 (4) (l) 3,316 28,186,000 (4) (l) C.A. Electricidad de Caracas, 1 common share, with a par value of Bs 0.1 - 1 (3) (e) - 1 (3) (e) 12,238 858,852,883 12,238 28,194,883 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) (l) 6) Investments in Venezuelan banks and other financial institutions Certificates of deposit Banco Plaza, C.A. Banco Universal, with annual yield at between 6% and 6,50%, maturing in July 2018, and a par value of Bs 3,012,039,884 (7.50% and 10.50%,annual yield, maturing in January 2018, and a par value of Bs 205,108,085 at December 31, 2017) 3,012,039,884 3,012,039,884 (3) (i) 205,108,085 205,108,085 (3) (i) Bancrecer, S.A. Banco Microfinanciero, with annual yield at between 5.50% and 6.50%, maturing in July 2018, and a par value of Bs 2,104,501,839 (7% and 7.50% annual yield, maturing in January 2018, and a par value of Bs 101,542,033 at December 31, 2017) 2,104,501,839 2,104,501,839 (3) (j) 101,542,033 101,542,033 (3) (j) Banco Nacional de Crédito C.A., Banco Universal, with annual yield at between 0.5%, maturing in July 2018, and a par value of Bs 1,178,313,842 (1% and 4% annual yield maturing in January 2018, and a par value of Bs 2,819,382,930 at December 31, 2017) 1,178,313,842 1,178,313,842 (3) (k) 2,819,382,930 2,819,382,930 (3) (k) 100% Banco, Banco Universal, C.A., with annual yield at between 1.25% maturing in July 2018, and a par value of Bs 199,949,494 (with 2% and 3% annual yield, maturing in January 2018, and a par value of Bs 198,443,867 at December 31, 2017) 199,949,494 199,949,494 (3) (h) 198,443,867 198,443,867 (3) (h) Banesco, C.A. Banco Universal, with annual yield at between 0.05%, maturing in July 2018, and a par value of Bs 41,324,552 (annual interest between 0.05% and 10.50%, maturing in January 2018, and a par value of Bs 1,067,341,803 at December 31, 2017) 41,324,552 41,324,552 (3) (c) 1,067,341,803 1,067,341,803 (3) (c) Banco del Caribe, C.A. Banco Universal, with 11% annual interest, maturing in January 2018, and a par value of Bs 9,740,389 - - 9,740,389 9,740,389 (3) (g) Shares in Venezuelan banks Banco Venezolano de Crédito, C.A. Banco Universal, 48 common shares, with a par value of between Bs 100 and Bs 2,365 27,450 77,156 (5) (l) 27,450 77,156 (5) (l) Banco de Venezuela, S.A., Banco Universal, 378 common shares, with a par value of Bs 0.1 each 38 20,223,000 (4) (e) 38 717,444 (4) (e) 6,536,157,099 6,556,429,767 4,401,586,595 4,402,353,707 7) Investments in foreign banks and other financial institutions Certificates of deposit Mercantil Banco, S.A., with annual yield at between 0.75% and 2.75%, maturing between July 2018 and March 2019, and a par value of US$13,496,203 (maturing between January and October 2018 and a par value of US$13,697,330 at December 31, 2017) 1,548,183,157,959 1,548,183,157,959 (3) (f) 136,630,867 136,630,867 (3) (f) Black Rock Merrill Lynch Investment Managers, maturing in July 2018 and a par value of US$4,433,300 (maturing in January 2018 and a par value of US$4,416,640 at December 31, 2017) 508,554,948,045 508,554,948,045 (3) (b) 44,055,980 44,055,980 (3) (b) UBS International Bank, with 1.90% annual yield, maturing in July 2018, and a par value of US$1,011,200 (maturing in January 2018 at December 31, 2018, and a par value of US$1,002,441 at december 31, 2017) 115,997,280,000 115,997,280,000 (3) (m) 9,999,349 9,999,349 (3) (m) 2,172,735,386,004 2,172,735,386,004 190,686,196 190,686,196 3,431,315,379,567 3,429,620,007,008 19,068,414,541 21,175,404,869
(1) Based on the present value of estimated future cash flows. (2) Market value based on confirmation from custodian. (3) Shown at par value. (4) Market value based on prices listed on the Caracas Stock Exchange. (5) Delisted from the Caracas Stock Exchange; last quoted price used.
Custodians of investment securities (a) Central Bank of Venezuela. (b) Merrill Lynch, Pierce, Fenner & Smith. (c) Banesco, C.A. Banco Universal. (d) Clearstream Banking, S.A. (e) Caja Venezolana de Valores, S.A. (f) Mercantil, Banco, S.A. (g) Banco del Caribe, C.A, Banco Universal. (h) 100% Banco, Banco Universal, C.A. (i) Banco Plaza, C.A. Banco Universal. (j) Bancrecer, S.A., Banco Microfinanciero. (k) Banco Nacional de Crédito, S.A. Banco Universal. (l) Other custodians. (m) USB FInancial Services Inc.
48 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
At June 30, 2018, the market value of some securities issued by the Bolivarian Republic of Venezuela is lower than amortized cost by Bs 3,582,147,000 (Bs 15,435,000 at December 31, 2017). The trust fund considers that these losses are temporary since they relate to normal fluctuations of investments in the stock markets. Management expects that these securities will not be realized at a price lower than the book value. In addition, the trust fund has the ability to hold these securities for a sufficient period of time to recover unrealized losses.
Below is the classification of investment securities according to maturity:
June 30, 2018 December 31, 2017 Book Fair Book Fair value value value value (In bolivars)
Up to six months 2,797,676,645,019 2,796,159,390,058 4,892,826,997 4,905,244,705 Six months to one year 458,388,917,083 456,879,017,453 252,036,779 257,276,665 One to five years 157,795,207,762 157,192,261,751 4,725,104,041 5,414,497,659 Over five years 17,454,563,607 18,510,128,014 9,198,400,628 10,569,339,664 Without maturity 46,096 879,209,732 46,096 29,046,176 3,431,315,379,567 3,429,620,007,008 19,068,414,541 21,175,404,869
Investment securities are classified as follows:
June 30, December 31, 2018 2017 (In bolivars)
Non directed 2,349,258,385,792 18,820,838,970 Directed 1,082,056,993,775 247,575,571 3,431,315,379,567 19,068,414,541
Trust fund resources comprise the following:
June 30, 2018 December 31, 2017 Directed Non-directed Total % Directed Non-directed Total % (In bolivars) (In bolivars)
Securities issued or guaranteed by the Venezuelan government 3,338,031,809 407,298,370,872 410,636,402,681 12 154,893,048 12,603,007,264 12,757,900,312 67 Deposits with other Venezuelan financial institutions 27,488 6,536,129,610 6,536,157,098 - 27,488 4,401,559,107 4,401,586,595 23 Debt securities issued by foreign public or private-sector companies 570,163,967,825 260,604,313,771 830,768,281,596 24 48,580,447 19,042,383 67,622,830 - Debt securities issued by Venezuelan public-sector companies 12,238 - 12,238 - 12,238 - 12,238 - Investments in Venezuelan private-sector companies and other investments 6,370 10,639,133,579 10,639,139,949 6,370 1,650,600,000 1,650,606,370 9 Deposits with other banks 508,554,948,045 1,664,180,437,960 2,172,735,386,005 64 44,055,980 146,630,216 190,686,196 1 1,082,056,993,775 2,349,258,385,792 3,431,315,379,567 100 247,575,571 18,820,838,970 19,068,414,541 100
The trust fund’s control environment includes policies and procedures to determine investment risks by entity and economic sector. In accordance with trust agreements, risks associated with investment securities of directed trusts are determined by the trustor.
49 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
The trust fund loan portfolio comprises the following:
June 30, December 31, 2018 2017 (In bolivars)
Loans to beneficiaries of Length-of-service benefit trust funds 287,601,119,567 62,903,564,049 Mortgage loans 389,197,725 461,483,851 Company loans 970,000 970,000 Loans to government agencies - 31,742 287,991,287,292 63,366,049,642
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 95,779,034,000 and Bs 14,000,398,000, respectively (Bs 13,461,675,000 and Bs 2,164,974,000, respectively, at December 31, 2017). The Bank is awaiting a response to a consultation made by SUDEBAN to the Supreme Tribunal of Justice about the obligation to place trust funds for employee termination benefits, as well as collective trust funds of related parties, in other financial institutions.
At June 30, 2018, loans to beneficiaries of length-of-service benefit trust funds include Bs 72,905,874,000 and Bs 11,703,952,000 in respect of loans granted to the Bank and Mercantil Seguros, C.A. employees, respectively (Bs 11,700,083,000 and Bs 1,956,675,000, respectively, at December 31, 2017).
At June 30, 2018, mortgage loans include Bs 388,889,000 in respect of guaranteed loans granted under the administration trust fund using resources from public entities (Bs 461,129,000 at December 31, 2017). This account also includes Bs 309,000 in respect of mortgage loans granted to beneficiaries of the length-of-service trust fund (Bs 355,000 at December 31, 2017).
Trust fund resources used to grant loans to companies (loan portfolio) are directed trusts and are recorded and valued as specified by SUDEBAN.
b) Financial instruments with off-balance sheet risks Transactions with derivative instruments The Bank enters into futures hedges for the purchase and sale of securities at a fixed price based on interest rates. Gains and losses resulting from these contracts for the six-month period ended June 30, 2018 amounted to Bs 60,514,000 and Bs 90,107,000, respectively (Bs 773,609,000 and Bs 459,429,000, respectively, during the six-month ended December 31, 2017), shown in the income statement under other interest income and other liabilities from financial intermediation, respectively.
Current transactions with derivative instruments are as follows:
June 30, 2018 December 31, 2017 In bolivars Maturity In bolivars Maturity
Investment securities under repurchase agreements - - 25,400,000 January 2018
Transactions with derivative instruments Purchase 825,256,353 July 2018 2,468,875,656 January 2018 Sales - - 246,264,727 January 2018 825,256,353 2,715,140,383
50 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
The risk to which the Bank is exposed relates to noncompliance by counterparties with the terms laid down in the contracts, as well as variations in the price of securities and interest rates. The Bank’s control environment includes policies and procedures for rating exchange and interest rate risks and monitoring derivative financial instruments, as well as assessing credit risks related to other parties.
c) Debtor accounts from other special trust services (Venezuelan Housing Law) The Venezuelan Housing Policy Law appointed Banco Nacional de la Vivienda y Hábitat (BANAVIH) as the sole administrator of public and private funds to finance housing. Therefore, the financial institutions regulated by the General Law of Banks and Other Financial Institutions shall only act as financial operators that is, they shall collect contributions made to the Mandatory Housing Savings Fund and pay them to the sole administrator, and grant loans after the required financial resources have been approved.
Assets, liabilities and results associated with resources from the Mandatory Housing Savings Fund are recorded under memorandum accounts.
During the six-month period ended June 30, 2018, the Bank recorded income from financial transactions of Bs 28,116,000 shown under income from other accounts receivable (Bs 23,585,000 during the six- month period ended December 31, 2017).
d) Other control accounts Other control accounts are mainly in respect of returned checks and guarantees pending release. At June 30, 2018 and December 31, 2017, these accounts also include Bs 42,223,000 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 1 year and earn annual commissions between 0.50% and 5% of their value. Commissions are recorded monthly while the guarantees are in force.
Letters of credit Letters of credit usually mature within 90 days and are renewable. They are generally issued to finance a trade agreement for the shipment of goods from a seller to a buyer. The Bank charges a fee of 0.50% of the amount of the letter of credit and records the latter under assets once it is used by the customer. Unused letters of credit and other similar liabilities are included under memorandum accounts.
The Bank has trademark license agreements for the use of Visa, MasterCard and Diners Club International credit cards. Visa and MasterCard agreements require the Bank to deposit collateral in foreign financial institutions. In addition, at June 30, 2018 and December 31, 2017, stand-by letters of credit were pledged for MasterCard International and Visa International transactions amounting to US$7,300,000 and US$5,132,000, respectively, recorded under other control accounts (Note 25).
51 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
Lines of credit granted The Bank grants lines of credit to customers subject to prior credit risk assessment and obtention of any guarantees required by the Bank. These agreements are for a specific period, provided that the clients do not fail to comply with the terms set forth therein. However, the Bank may exercise its option to cancel a credit commitment with a particular customer at any time.
Credit cards are issued for 3 years and are renewable. However, the Bank reserves the right to cancel a credit commitment with a particular customer at any time. The nominal credit card interest rate is variable and for the six-month period ended June 30, 2018 and December 31, 2017 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 June 30, 2018, in accordance with the Accounting Manual for Banking Institutions, the Bank has set aside general and specific provisions for contingent debtor accounts amounting to Bs 54,223,957,000 (Bs 10,747,000 at December 31, 2017).
Automatic lines of credit The Bank has obligations with beneficiaries of automatic lines of credit, granted to beneficiaries through an agreement. These commitments are irrevocable.
27. Balances and transactions with related companies
In the ordinary course of business, the Bank conducts commercial transactions with its shareholder, subsidiaries, affiliates and related companies, the effects of which are included in the financial statements. Certain transactions may have taken place on terms other than those that would characterize transactions between unrelated companies.
Below is a breakdown of the Bank’s balances with related companies:
a) Balance sheet
June 30, December 31, 2018 2017 (In bolivars)
Assets Cash and due from banks 906,735,354,793 262,468,396 Mercantil Banco, S.A. 813,663,053,627 113,826,004 Mercantil Bank, N.A. 90,793,504,108 148,442,249 Mercantil Bank (Schweiz), A.G. 2,278,797,058 200,143 Investment securities 22,942,500,000 1,995,000 Short-term deposits (Note 4) Mercantil Bank, N.A. 22,942,500,000 1,995,000
52 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
June 30, December 31, 2018 2017 (In bolivars)
Investments in subsidiaries and affiliates (Note 7) 57,589,810,508 4,586,337,915 Inversiones y Valores Mercantil V, C.A. 36,741,403,957 44,154,395 Proyecto Conexus, C.A. 16,783,976,978 533,027,771 Inversiones Platco, C.A. 4,064,429,573 4,009,155,749 Other assets 11,654,198,029 3,034,584,719 Fideicomiso Mercantil, C.A. Banco Universal 11,629,198,029 626,754,808 Mercantil Financiadora de Primas, C.A. 25,000,000 7,829,911 Inversiones Platco, C.A. - 2,400,000,000 Total assets 998,921,863,330 7,885,386,030
Liabilities Deposits 712,811,104,861 117,819,662,722 Checking accounts 712,770,037,573 117,771,175,524 Non-interest-bearing checking accounts 243,985,414,161 32,037,973,406 Cestaticket Accor Services, C.A. 162,408,804,091 1,921,483,593 Mercantil Seguros, C.A. 23,636,204,073 7,587,775,184 Mercantil Financiadora de Primas, C.A. 12,122,318,923 8,827,074,588 Servicio Panamericano de Protección, C.A. 11,676,199,849 435,649,058 Mercantil Servicios Financieros, C.A. 8,104,361,802 9,383,901,677 Inversiones Platco, C.A. 7,653,843,105 472,742,358 Mercantil Merinvest Casa de Bolsa, C.A. 4,797,588,266 580,066,719 Mercantil Planes Administrados, C.A. 4,011,297,043 2,303,497,701 Fundación Mercantil 2,744,478,465 38,255,065 Mercantil Sociedad Administradora de Entidades de Inversión Colectiva, C.A. 2,667,172,159 22,156,257 Inversiones y Valores Mercantil V, C.A. 1,230,224,246 1,366,764 Mercantil Servicios de Inversión, C.A. 950,792,005 46,265,339 Fundación BMA 798,224,149 308,069,957 Mercantil Inversiones y Valores, C.A. 633,490,337 68,269,950 Mercantil Merinvest, C.A. 248,104,202 23,249,267 Mercantil Arte y Cultura, C.A. 247,090,691 7,661,641 Inversiones y Valores Mercantil VI, C.A. 35,711,843 10,278,723 Servibien, C.A. 19,508,912 175,844 Mercantil Banco, S.A. - 32,888 Innovex, C.A. - 833 Interest-bearing checking accounts 391,684,623,412 85,730,202,118 Fideicomiso Mercantil, C.A. Banco Universal 391,684,623,412 85,730,202,118 Demand deposits and certificates 77,100,000,000 3,000,000 Cestaticket Accor Services, C.A. 77,100,000,000 - Inversiones y Valores Mercantil V, C.A. - 3,000,000 Savings accounts 41,067,288 48,487,198 Fundación Mercantil 37,640,136 45,257,742 Mercantil Merinvest Casa de Bolsa, C.A. 1,895,330 1,786,009 Fundación BMA 1,531,822 1,443,447 Other liabilities 43,628,129,427 2,692,222,775 Inversiones Platco, C.A. (Notes 7 and 16) 42,677,610,822 2,679,519,050 Mercantil Bank (Curacao), N,V, 482,847,855 - Fundación BMA 326,611,083 2,264,406 Fundación Mercantil 140,999,640 10,378,938 Mercantil Inversiones y Valores, C.A. 60,027 60,027 Inversiones y Valores Mercantil V, C.A. - 354 Total liabilities 756,439,234,288 120,511,885,497
53 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
b) Income statement
Six-month periods ended June 30, December 31, 2018 2017 (In bolivars)
Interest income 1,210,638,488 296,284 Income from cash and due from banks 1,210,638,488 289,980 Mercantil Bank, N.A. 1,210,638,488 289,980 Other interest income - 6,304 Mercantil Banco, S.A. - 6,304 Interest expense 6,264,687 3,293,117 Mercantil Inversiones y Valores, C.A. 5,101,776 - Fundación Mercantil 607,007 2,104,030 Mercantil Merinvest Casa de Bolsa, C.A. 475,771 1,063,304 Fundación BMA 79,904 89,804 Inversiones y Valores Mercantil V, C.A. 229 35,979 Operating income 45,066,948,028 1,406,142,786 Proyectos Conexus, C.A. 22,829,500,582 421,612,132 Mercantil Financiadora de Primas, C.A. 9,090,298,271 346,788,678 Fideicomiso Mercantil, C.A. Banco Universal 7,168,131,411 626,710,031 Mercantil Bank, N.A. 3,731,268,043 620,345 Mercantil Servicios Financieros, C.A. 2,181,574,851 537,526 Inversiones Platco, C.A. 55,273,823 - Mercantil Inversiones y Valores, C.A. 9,573,310 7,316,303 Mercantil Merinvest, C.A. 384,122 2,424 Mercantil Planes Administrados, C.A. 343,473 6,034 Servibien, C.A. 188,879 5,282 Mercantil Arte y Cultura, C.A. 188,477 6,357 Inversiones y Valores Mercantil VI, C.A. 137,957 3,421 Inversiones y Valores Mercantil V, C.A. 84,829 56,369 Mercantil Banco, S.A. - 2,470,679 Mercantil Merinvest Casa de Bolsa, C.A. - 6,706 Fundación Mercantil - 499 Operating expenses 256,263,269,821 15,409,817,428 Inversiones Platco, C.A. 197,905,026,958 15,232,918,120 Inversiones y Valores Mercantil V, C.A. 52,159,983,080 119,906,776 Mercantil Bank, N.A. 3,365,879,835 430,381 Mercantil Bank (Curacao), N.V. 2,776,411,836 473,114 Mercantil Inversiones y Valores, C.A. 55,968,112 56,089,037 Extraordinary expenses 7,262,142,081 109,449,375 Fundación Mercantil (Note 28) 7,262,142,081 109,449,375
54 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
c) Trust fund
June 30, December 31, 2018 2017 (In bolivars)
Assets Cash and due from banks 427,094,395,665 85,732,166,584 Mercantil, C.A. Banco Universal (Note 11) 391,684,623,412 85,730,202,118 Mercantil Banco, S,A 34,714,021,440 1,877,646 Mercantil Bank, N.A. 695,750,813 86,820 Interest receivable 3,642,714,939 35,591 Mercantil Banco, S.A. 3,642,714,939 35,591 Investment securities 1,549,288,157,959 1,241,630,867 Mercantil Banco, C.A. (Note 25) 1,548,183,157,959 136,630,867 Mercantil Servicios Financieros, S.A. (Note 25) 1,105,000,000 1,105,000,000 Total assets 1,980,025,268,563 86,973,833,042
Liabilities Fees payable Mercantil, C.A. Banco Universal 11,629,198,029 627,251,937
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 SUNAVAL to provide investment services and manage investment portfolios. The Bank has engaged MSI as a specialist to optimize yields on investments of trustors. For the provision of this service, the trust fund (principal), grants MSI (agent) special powers for portfolio management and disposal. Trustee responsibility is not delegated as part of the service for which MSI charges an annual commission on the portfolio collections. During the six-month period ended June 30, 2018, the Bank paid MSI Bs 384,489,000 in this connection (Bs 45,929,000 during the six-month period ended December 31, 2017).
At June 30, 2018 and December 31, 2017, fees payable include commissions payable to the Bank as set out in trust fund agreements signed by trustors and the trust fund. This commission is calculated on funds deposited in fiduciary funds and is deducted from each trustor’s individual investment; therefore, it is shown net of interest income. During the six-month period ended June 30, 2018, the Bank recorded income of Bs 7,168,131,000 and has Bs 11,629,198,000 receivable in respect of these commissions (Bs 626,710,000 and Bs 626,755,000, respectively, at December 31, 2017).
The other assets and liabilities with Inversiones Platco, C.A. are mainly in respect of services for the processing of electronic payment means.
55 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
28. Fundación Mercantil
The Bank and other subsidiaries of MERCANTIL sponsor “Fundación Mercantil” founded in December 1988 to promote educational, cultural, artistic, social, religious and scientific programs, either directly or through donations and contributions to third parties. During the six-month period ended June 30, 2018, the Bank made contributions of Bs 7,262,142,000 (Bs 109,449,000 during the six-month period ended December 31, 2017), shown under extraordinary expenses (Note 22).
29. Maturity of financial assets and liabilities
The assets and liabilities are classified according to maturity as follows:
June 30, 2018 December 31, June 30, December 31, June 30, December 31, June 30, December 31, Beyond 2018 2019 2019 2020 2020 2021 2021 December 2021 Total (In bolivars)
Assets Cash and due from banks 81,964,703,027,958 ------81,964,703,027,958 Investment securities 2,214,983,662,801 2,328,489,025,741 14,510 2,731,289,265 1,729,989,559 5,926,972,405 2,147,788,000 841,724,069,155 5,397,732,811,436 Loan portfolio 129,651,684,425,147 13,549,243,256,676 1,174,599,951,676 1,056,863,467,010 713,187,878,318 475,676,853,886 101,462,346,050 136,084,268,804 146,858,802,447,567 Interest and commissions receivable 799,114,018,020 ------799,114,018,020 Total financial assets 214,630,485,133,926 15,887,732,282,417 1,174,599,966,186 1,059,594,756,275 714,917,867,877 481,603,826,291 103,610,134,050 977,808,337,959 235,020,352,304,981
Liabilities Customer deposits 211,846,403,976,489 31,189,511 ------211,846,435,166,000 Liabilities with BANAVIH 12,267,589 ------12,267,589 Borrowings 3,797,810,310 ------3,797,810,310 Other liabilities from financial intermediation 424,562,193 ------424,562,193 Interest and commissions payable 11,394,451,979 ------11,394,451,979 Total financial liabilities 211,862,033,068,560 31,189,511 ------211,862,064,258,071
December 31, 2017 June 30, December 31, June 30, December 31, June 30, December 31, June 30, Beyond 2018 2018 2019 2019 2020 2020 2021 June 2021 Total (In bolivars)
Assets Cash and due from banks 8,194,442,652,787 ------8,194,442,652,787 Investment securities 21,967,243,550 33,440,701,698 1,292,036,421 14,870 2,864,668,043 1,735,725,227 5,990,786,815 302,787,342,291 370,078,518,915 Loan portfolio 2,244,413,216,693 993,598,121,338 20,062,104,171 30,969,398,166 26,893,039,041 92,604,877,941 12,651,457,542 134,541,719,504 3,555,733,934,396 Interest and commissions receivable 26,250,294,683 ------26,250,294,683 Total financial assets 10,487,073,407,713 1,027,038,823,036 21,354,140,592 30,969,413,036 29,757,707,084 94,340,603,168 18,642,244,357 437,329,061,795 12,146,505,400,781
Liabilities Deposits 11,455,242,675,307 117,300 ------11,455,242,792,607 Liabilities with ------BANAVIH 7,976,680 ------7,976,680 Borrowings 412,830,423 ------412,830,423 Other liabilities from financial intermediation 40,556,995 ------40,556,995 Interest and commissions payable 7,829,448 ------7,829,448 Total financial liabilities 11,455,711,868,853 117,300 ------11,455,711,986,153
56 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
30. Fair value of financial instruments
Below are the fair values of financial instruments maintained by the Bank:
June 30, 2018 December 31, 2017 Book Fair Book Fair value value value value (In bolivars)
Assets Cash and due from banks 81,964,703,027,958 81,964,703,027,958 8,194,442,652,787 8,194,442,652,787 Investment securities 5,397,732,811,436 5,399,423,975,012 370,078,518,915 371,586,674,253 Loan portfolio, net of provision 143,348,374,813,407 143,348,374,813,407 3,456,163,745,189 3,456,163,745,189 Interest and commissions receivable, net of provision 798,610,138,252 798,610,138,252 26,174,823,792 26,174,823,792 231,509,420,791,053 231,511,111,954,629 12,046,859,740,683 12,048,367,896,021
Liabilities Customer deposits 211,846,435,166,000 211,846,435,166,000 11,455,242,792,607 11,455,242,792,607 Deposits and liabilities with BANAVIH 12,267,589 12,267,589 7,976,680 7,976,680 Borrowings 3,797,810,310 3,797,810,310 412,830,423 412,830,423 Other liabilities from financial intermediation 424,562,193 424,562,193 40,556,995 40,556,995 Interest and commissions payable 11,394,451,979 11,394,451,979 7,829,448 7,829,448 211,862,064,258,071 211,862,064,258,071 11,455,711,986,153 11,455,711,986,153
Memorandum accounts Contingent debtor accounts 10,407,795,574,544 10,407,795,574,544 188,939,949,558 188,939,949,558
In the ordinary course of business, the Bank maintains financial instruments with off-balance sheet risks to meet the financial needs of its customers. The Bank’s main exposure is represented by the following commitments:
June 30, December 31, 2018 2017 (In bolivars)
Unused lines of credit 13,344,198,505,778 252,871,489,055 Guarantees granted 5,422,394,006,455 868,430,418 Letters of credit issued but not negotiated (Stand-by) 1,419,576,679,213 123,641,433 Other contingencies 6,017,234,068 279,957,495 Transactions with derivative instruments 825,256,353 2,715,140,383 Tourism loan commitments 37,106,913 1,088,056,972 Investment securities acquired under repurchase agreements - 25,400,000 20,193,048,788,780 257,972,115,756
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.
57 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
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 (DICOM) of Bs 114,712.50/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.
58 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
To measure interest rate risk, the Bank monitors the variables affecting interest rate movements and financial assets and liabilities. The Bank regularly controls and mitigates existing exposure to risks.
Foreign exchange risk arises from fluctuations in the interest rates of international financial markets and variations in the exchange rates of other currencies with respect to the Venezuelan bolivar. The Bank sets limits on its individual currency and overall foreign exchange exposure, and on maximum and minimum positions.
b) Liquidity risk Liquidity risk is the risk that the Bank may not be able to meet its obligations with clients and financial market counterparties at any time or in any place or currency. To avoid this risk, the Bank conducts a daily review of its available resources.
To mitigate liquidity risk, the Bank sets limits as to the minimum funds that must be maintained in highly liquid instruments and interbank and financing facilities.
The Bank also conducts stress simulation tests to assess the behavior of assets and liabilities under different scenarios.
The Bank’s investment strategy is aimed at guaranteeing adequate liquidity levels. Excess cash is mainly invested in short-term instruments such as certificates of deposit with the BCV, debt securities issued by the Bolivarian Republic of Venezuela and other highly liquid financial obligations, within regulatory regulations.
Operational risk The Bank considers operational risk as the possibility of incurring direct or indirect losses as a result of inadequate or defective internal processes, deficient internal controls, human error, system failures or external events.
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 21,771,000, 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
59 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
courts have not ruled on some of these assessments; those that went in favor of the Bank were appealed by the National Treasury and rulings are pending.
The Bank also received additional bank debit tax assessments amounting to Bs 23,508,000, which were appealed. In the opinion of Bank management and its legal advisors, these assessments are not well grounded in law.
In April 2008, the Bank was subject to a tax assessment of Bs 62,679,000 in respect of the proportional tax on dividends. In June 2008, the Bank filed a discharge claim with the Tax Authorities stating its legal arguments against this assessment. In December 2008, the National Integrated Customs and Tax Administration Service (SENIAT) confirmed this tax assessment and in January 2009 the Bank filed an appeal against the payment forms issued. In June 2011, SENIAT confirmed the tax assessment, which was appealed by the Bank in July 2011. In the opinion of Bank management and its legal advisors, there are legal grounds to uphold the inadmissibility of the assessment.
Bank management identified a maximum risk of Bs 55,279,000 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. In October 2017, the Constitutional Chamber of the Supreme Tribunal of Justice ruled in favor of the appeal filed by BANAVIH and rejected the constitutional protection filed by the subsidiary. The case is, hence, closed.
33. Money laundering prevention and terrorism financing
To comply with the Antidrug Law (formerly the Law on Narcotic and Psychotropic Substances), the Bank makes a contribution to the National Antidrug Fund (FONA) and develops programs or projects for employees and their families, approved by the National Antidrug Office (ONA), for the prevention of legal and illegal drug use (Note 16).
In addition, in compliance with SUDEBAN resolutions, the Bank has a Unit for the Prevention of Money Laundering and Terrorism Financing, and has appointed an Enforcement Officer for the Prevention and Control of Money Laundering and Terrorism Financing and a Committee for the Prevention and Control of Money Laundering and Terrorism Financing, designated by the Board of Directors in conformity with the Risk Management Integrated System (S.I.A.R.). This Unit is responsible for analyzing, monitoring and informing the Enforcement Officer of any possible money laundering and terrorism financing activities. Furthermore, the Bank has also appointed compliance officers for the different areas of the Bank exposed to risk, who are responsible for enforcing and supervising money laundering and terrorism financing prevention and monitoring regulations. Also, the Bank has an annual training program on money laundering and terrorism financing prevention for its employees.
34. Investments and loans granted in excess of legal limits
At June 30, 2018 and December 31, 2017, the Bank has not conducted transactions that exceed the limits set in the articles of the Law on Banking Sector Institutions.
60 Mercantil, C.A. Banco Universal Notes to the financial statements June 30, 2018 and December 31, 2017
35. Legal contributions
Social Bank Deposit Protection Fund (FOGADE) Venezuelan banks regulated by the Law on Banking Sector Institutions are required to pay fees to FOGADE. Among other things, FOGADE, guarantees customer deposits up to a given amount per depositor.
The Law on Banking Sector Institutions set the percentage of contributions to FOGADE at 0.75% of the bank’s total deposits at the previous six-month period closing.
These contributions will be paid through monthly premiums equivalent to one-sixth of this percentage. Contributions in this connection are shown under operating expenses.
Fee paid to the Superintendency of Banking Sector Institutions The Law on Banking Sector Institutions requires Venezuelan banks and financial institutions regulated by this Law to pay a special fee to support SUDEBAN operations.
At June 30, 2018 and December 31, 2017, the biannual fee is 0.08% of the average of the Bank’s assets for the last two months of the previous six-month period; it is payable monthly at one-sixth of the resulting amount for the six-month period. This fee is shown under operating expenses. As from the second quarter of 2018, this fee is 0.1% of the Bank’s average assets for the last two months of the previous six- month period.
Social Contingency Fund The Law on Banking Sector Institutions requires banks to create a trust fund representing 10% of their capital stock through biannual contributions of 0.5% of their capital. The purpose of this trust fund is to guarantee the payment of employee benefits in the event of the bank’s administrative liquidation. At June 30, 2018, the Bank maintains an investment of Bs 31,782,000, which includes contributions and interest at that date (Bs 28,655,000 at December 31, 2017) (Notes 4-d and 23).
Social contribution The Law on Banking Sector Institutions requires banks to earmark 5% of their gross pre-tax income to finance projects developed by communal councils and other forms of social organization. For the six-month period ended June 30, 2018, contributions in this connection amount to Bs 236,988,012,000 (Bs 11,048,784,000 at December 31, 2017).
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