Grupo Financiero Galicia S.A

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Grupo Financiero Galicia S.A.

Tte. General Juan D Peron 456
Buenos Aires, C.F. C1038AAB
Argentina
Telephone: (54) (11) 6329 0000
Toll Free: 0-810-444-6655
Fax: (54) (11) 6329 6100
Web site: http://www.gfgsa.com.ar

Public Company
Incorporated: 2000
Employees: 6,229
Total Assets: ARS 22.89 billion ($7.71 billion) (2003)
Stock Exchanges: Bolsa de Comercio de Buenos Aires NASDAQ
Ticker Symbol: GGAL
NAIC: 522110 Commercial Banking; 522210 Credit Card Issuing; 522291 Consumer Lending; 522310 Mort gage and Other Loan Brokers; 523110 Investment Banking and Securities Dealing; 523100 Securities Brokerage; 523920 Portfolio Management; 523930 Investment Advice; 523991 Trust, Fiduciary and Custodial Activities; 524113 Direct Life Insurance Carriers; 551111 Offices of Bank Holding Companies

Grupo Financiero Galicia S.A. is the holding company for Banco de Galicia y Buenos Aires, S.A., the largest nongovernment bank in Argentina and the only large one that remains in Argentine hands. This bank has a century-long history and offers a full spectrum of financial services for both individual and commercial customers. It has hundreds of branches in Argentina, a subsidiary bank in Uruguay, offices in London, Sao Paulo, Brazil, and Santiago, Chile, and more than 600 correspondents in the world's chief financial centers. Other subsidiaries of Grupo Financiero Galicia include an insurance company.

Rising to the Top in Its Field: 1905–85

The Banco de Galicia y Buenos Aires was founded in 1905 in Buenos Aires by immigrants to Argentina from Spain, especially businessmen from Galicia, the region of Spain in the northwestern corner of the Iberian Peninsula. Its first offering of stock won it 3,295 shareholders. By the end of the year some ARS 4 million had been deposited in more than 2,500 accounts. The bank's shares were first listed on the Bolsa de Comercio de Buenos Aires in 1907. Soon there were three Buenos Aires branches, and in 1910 a bank office was established in Montevideo, Uruguay. Savings accounts for the small saver were established in 1921. Like other Argentine financial institutions, the Banco de Galicia y Buenos Aires endured a bleak period during the Depression of the 1930s, but—again like others—it experienced a boom in the 1940s, when most of the world outside South America was at war.

One of Banco de Galicia's early presidents was Manuel Escasany, an immigrant from Spain's Catalonia region who established a clock and jewelry retail chain. His son Eduardo, an engineer, became president of the bank in 1948 and remained so until his death in 1972. Eduardo Escasany, in the late 1950s, invited two of Argentina's wealthiest families—the Brauns and the Ayerzas—to become major shareholders in the bank. The Brauns controlled La Anónima, the main retail chain in Patagonia, and the Ayerzas were ranchers. The infusion of their investment provided Galicia with the capital to expand. It became the leading private (that is, nongovernment) Argentine bank in 1965. During this period Galicia began offering mortgage loans, and by 1969 it was issuing an average of 20 such loans a day for residences throughout the Buenos Aires metropolitan area. By the mid-1970s the bank had outgrown its 50-year-old headquarters, and an annex was constructed so that the building could house a staff grown to 1,900 employees. Some 2,000 others were working at 93 branches. By now Galicia held nearly one-fifth of all deposits in Buenos Aires private banks. It also opened an offshore banking subsidiary in Uruguay in 1984.

Surviving and Growing in the 1990s

The 1980s, a rocky period for the Argentine economy, began with repeated currency devaluations and related bank failures in 1981 and ended with hyperinflation of nearly 5,000 percent in 1989. Almost all Argentine money fled to offshore banking centers, and if it returned to Argentina, it was in the form of equities, Eurobonds, and bank-debt paper. Eduardo Escasany's son Eduardo Jose became president of Banco de Galicia in October of that year. Although some banks found high inflation profitable by handling funds transfers, buying and selling short-term government bonds, and speculative trading, Eduardo Jose Escasany described himself to David Pilling of Euromoney in 1995 as a "totally conservative" banker and added, "To live through hyperinflation as a banker is a highly disagreeable experience. . . . What appears to be good business is, in the long term, the very death of banking." He supported the dollarization that restored stability to the nation's currency and provided the basis for economic recovery.

Banco de Galicia was the first Latin American bank to enter, in 1993, both the U.S. and European stock markets with a public offering that raised $60 million in the United States. Also in that year it became the first private Latin American bank to raise funds on the U.S. domestic capital market by floating a $200 million, ten-year Yankee bond. The following year it was the first to issue subordinated convertible negotiable obligations on the international securities market. These initiatives enabled the bank to remain in Argentine hands while its closest rivals were being snapped up by Spanish banks. Also in 1994, Banco de Galicia opened a branch in New York City, the center of international banking, including banking in Latin America. That year as well Banco de Galicia took a one-eighth stake in the consortium that established Correo Argentina S.A., the largest unit of the privatized national postal system. This investment allowed the bank to establish mini-branches in Correo's most desirable locations and corral new customers.

When Spanish banks acquired control of Banco de Galicia's two principal competitors—Banco Río de la Plata S.A. and Banco Francés del Río de la Plata S.A.—in 1994, Galicia remained the only bank among the top nine private financial institutions still controlled by Argentine investors. When a recession blunted Argentina's economic recovery in 1995—the so-called "tequila crisis" that gripped Latin America following Mexico's devaluation of its peso—the bank was already embarked on a major expansion drive while its rivals were still adjusting to the changes in ownership. Galicia also used the slowdown in its business to improve its operating and computer systems. In addition, it benefited from experienced local managers in place who had an intimate knowledge of the market and, as the only remaining large locally owned bank in Argentina, it was the one that foreign institutions consulted in order to tap that knowledge. Indeed, Banco Santander Central Hispano S.A., which had acquired Banco Río de la Plata, accumulated a 10 percent stake in Galicia, but Escasany made it clear that he and his partners had no intention of selling their controlling shares.

Banco Galicia established an insurance company in 1996 as a joint venture with Hartford Life International Ltd. It acquired Banco Sudecor Litoral S.A. and merged it into its operations in 1998. By 1ate 1999, when LatinFinance selected it as the best bank in Argentina for the second consecutive year, Galicia had a network of about 300 full-time branches as well as the 100 or so mini-branches in Correo Argentina branches. With the purchase of four credit card companies earlier in the year, the bank now offered consumer banking, credit card, and mortgage services throughout the country. It ranked second to Banco Hipotecario Nacional in generating mortgages. Return on equity was in double digits. About the only negative at this time was the feud between Escasany and his younger sister María Isabel, who demanded—and won—control of her third of the 16.4 percent stake in the bank previously collectively shared by the three Escasany siblings. She also claimed that the bank directors were awarding themselves 15 percent of the profits, and although she did not receive a seat on the board as part of the settlement, her action reduced the share of the bank held by the remaining family partners to 46.34 percent—less than majority control.

Grupo Financiero Galicia: 1999–2003

Control of the bank was the issue that impelled Galicia's management to establish Grupo Financiero Galicia, a holding company for the bank's assets, in 1999. The new entity issued, in 2000, an offer to exchange bank shares for holding company shares in a way that would once again assure management of a voting majority. The ostensible rationale offered was that the new structure would allow Galicia to sidestep regulations that, for example, prevented banks from owning more than one-eighth of insurance companies, but observers noted that the holding company could now raise capital by selling shares in subsidiaries without diluting control of the parent company. As a sweetener, the managers offered a special dividend and said they would reduce their personal take from 12 percent to 6 percent of the profits.

This offer was received poorly by stockholders in both Buenos Aires and New York, some of whom promptly sold their shares. One investment banker told Craig Torres of the Wall Street Journal that the directors "are trying to regain control of the bank while only paying a 7% to 13% premium, while bank takeover premiums are around 25% today." No organized opposition emerged, however, in part because Argentine pension funds—who held about 12 percent of the bank's shares—were unsure of their legal right to act together. The offer was accepted by owners of 93.2 percent of the outstanding shares.

Company Perspectives:

The main objective of Grupo Financiero Galicia (GFG) is to be one of Argentina's leading comprehensive financial services companies while continuing to strengthen Banco Galicia's position as one of Argentina's leading banks. Its holding company structure enhances the opportunity to compete more efficiently and to enter into new finance-related businesses such as Internet-based ventures, to profit from the trends in the financial industry worldwide.

As Argentina tottered in late 2001 toward impending default on its public debt and devaluation of its currency, the government placed severe restrictions on cash withdrawals. Banco de Galicia was particularly hard hit by withdrawals because of fears that it could not survive without a foreign owner to bail it out; the bank's deposits fell by 21 percent between September and November alone. Galicia's troubles were compounded by its large holdings of government debt, which was not yielding interest and hence unsalable. When, in January 2002, the government could no longer support the parity of the peso with the dollar, it fell to less than 30 cents in value. As a result, Galicia's dollar-dominated debt ballooned to $1.8 billion. It began seeking to retire $975 million of the debt in exchange for shares of stock, but without success. In addition, the crisis spread to Uruguay, where the deposits of Banco Galicia Uruguay S.A. were frozen to prevent Argentine clients from closing their accounts. Amid the crisis, Escasany resigned as chairman and chief executive officer of Grupo Financiero Galicia.

During the first half of 2002 Banco de Galicia borrowed billions of pesos from Argentina's central bank, sold holdings from its mortgage and commercial loan portfolios, reduced its branch network by 61, absorbed its mini-branches, and cut its workforce. It showed some signs of improvement in the second half of 2002 but still ended the year with only half the deposits it held at the close of 2000. Galicia reduced its net loss considerably in 2003 and even registered a small gain in deposits but did not succeed in restructuring its debt to creditors abroad and, therefore, still was in default. The Uruguayan bank, however, began making cash payments of 3 percent to its depositors, with the rest to be returned in annual installments over nine years.

The banking services provided by Banco de Galicia y Buenos Aires in 2003 included deposits, checking and savings accounts, automatic teller machines, telephone-operation services, electronic banking, letters of credit, credit and debit cards, residential mortgage financing, foreign currency transactions, investment advisory services, commercial and personal loans, auto loans, electronic collections, mutual fund portfolio management, custody of securities, and travelers' checks. Subsidiaries included the bank in Uruguay, a pension fund management company, a credit card issuing company, and a leasing company. The purchase and sale of real property was available on the bank's web site, e-galicia.com. There were 227 branch offices remaining at the end of 2003. At the end of 2002, Galicia was serving about 2.3 million bank customers and managing more than 1.1 million credit card accounts and more than one million customer deposit accounts. It also maintained 229,000 insurance policies. At the end of 2003, Grupo Financiero Galicia had total assets of ARS 22.89 billion ($7.71 billion) and liabilities of ARS 21.43 billion ($7.22 billion), of which ARS 8.13 billion ($2.74 billion) was owed to the central bank and ARS 5.55 billion ($1.87 billion) was owed to the foreign private sector. Its net loss of ARS 217.06 million ($73.08 million) was much smaller than the 2002 loss of ARS 1.47 billion ($436.2 million). At the end of 2003 the bank held ARS 5.58 billion ($1.88 billion) in deposits. Its revenue for the year was ARS 2.11 billion ($710.43 million).

Net Investment S.A. was the group's incubator for investing and developing Internet-related businesses. By means of its subsidiary B2agro S.A. it was engaged in serving the agriculture and livestock-raising sector, offering help by means of having assembled a network of more than 500 producers and more than 30 providers of goods and services. It was implementing a program that ranged from the search for materials to the sale of grains by means of participation in the Buenos Aires futures market. In addition, B2agro had implemented an alliance with José Manuel Díaz Herrera S.A. to sell farms and ranches. Net Investment was also evaluating other areas of electronic commerce, including wideband and wireless communications.

Sudamericana Holding S.A. was the holding company for life insurance and life-related retirement insurance subsidiaries. It became the sole proprietor of these firms in 2002, following the 2001 purchase of the shares held by Hartford Life Insurance Corp. and Hartford Life Ltd. (Bermuda). In 2003 Sudamericana held nearly 3 percent of the Argentine life insurance market and eighth place among such companies. It was also developing a health plan combining indemnification with medical loans and was pursuing the sale of personal accident policies and others to be sold by independent agents. Galicia Warrants S.A. was offering custodial services to more than 600 enterprises, mainly in the agricultural, industrial, and export sectors.

EBA Holding S.A.—its initials standing for the Escasany, Braun, and Ayerza families—held 26 percent of Grupo Financiero Galicia's Series A shares of common stock in 2003 and 63 percent of its voting capital.

Principal Subsidiaries

Banco de Galicia y Buenos Aires S.A.; Galicia Warrants S.A.; Net Investment S.A.; Sudamericana Holding S.A.

Principal Operating Units

Retail Banking Group, including Customer Contact Center, Galicia Office, and Private Banking; Wholesale Banking Group, including Commercial Department, Corporate Banking Division, International Division, Investment Banking Division, and Treasury Division.

Key Dates:

1905:: The Banco de Galicia y Buenos Aires is founded.
1921:: The bank begins offering savings accounts.
1960:: The Braun and Ayerza families have joined the Escasanys as chief shareholders.
1965:: Galicia has become the largest private (that is, nongovernment) bank in Argentina.
1984:: The bank opens a subsidiary in Uruguay.
1989:: Eduardo José Escasany becomes president of the bank.
1993:: Galicia raises money by selling shares on the U.S. and European stock markets.
1999:: The bank has about 300 branches and 100 or so mini-branches in post offices; Grupo Financiero Galicia is established as a holding company for the bank.
2002:: The group suffers severe losses amid Argentina's economic crisis.