annual report - fsd

ANNUAL REPORT

2012

CONTENTS I. Introduction II. Management Council and Executive Secretariat III. Management Report:

1. FSD Members 2. Financial Standing 3. Deposit Insured by the FSD 4. Maximum Coverage 5. Premium income 6. Claims and Recoveries 7. FSD Resources and Investment Portfolio 8. Reserve Ratio 9. Sundries 10. Frequently Asked Questions (FAQ’s)

IV. Audited Financial Statements

FONDO DE SEGURO DE DEPÓSITOS ANNUAL REPORT 2012

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I INTRODUCTION

The Deposits Insurance Fund The Deposits Insurance Fund (FSD is the Spanish acronym) is a special status private law corporation the purpose of which is to protect depositors in financial institutions comprised in the financial system within the scope of provisions under Law N° 26702, as amended1. The FSD includes a Management Council and a Technical Secretariat whose functions and powers are set forth in their own bylaws. The Administration Council is comprised of:

- A representative from the Superintendency for Banks, Insurance Companies and Pension Fund Management Companies (SBS is the Spanish acronym), appointed by the Superintendent who presides over the Administration Council.

- A representative from the Central Reserve Bank of Peru, appointed by its Board. - A representative from the Ministry of Economy and Finance, appointed by the Minister. - Three representatives from financial system companies, appointed by their Members’ Meeting.

Incorporated by virtue of the General Law of Banking, Financial and Insurance Organizations, Legislative Decree Nº 637, dated 1991, the Deposits Insurance Fund has since its inception complied with its legal mandate to protect savings. In fact, ever since, the FSD has disbursed approximately US$ 308 million to protect over 600 thousand depositors affected by intervention or liquidation processes including Financiera Peruinvest, Banco Hipotecario, Banco Popular, CRAC VRAE, Banco República, CRAC Majes, CRAC Selva Central, Banco Bánex, Banco Orión, Banco Serbanco, Banco Nuevo Mundo, Banco NBK Bank and Banco Latino. FSD OPERATIONS FSD is authorized to: a) Pay insured depositors. b) Rehabilitate financial organizations while in Receivership Regime, whose liquidation may

compromise other financial organizations (systemic risk) and to which neither its shareholders nor other third parties have made any additional contributions.

c) Facilitate the transfer of “healthy” assets from a financial organization subjected to an intervention regime to the rest of the financial system (one or more banks) in return for a cash contribution that will be used to pay back all insured depositors. “Non-good” or “residual” assets are placed in liquidation.

d) To purchase all or part of the insured impositions of a financial organization subjected to an Intervention Regime so that it may subrogate itself to the juridical position of depositors.

e) To create a financial system company that will acquire all or part of the assets and liabilities of financial organizations placed in an Intervention Regime for a maximum period of one year. This period may be extended to three years through annual extensions approved by FSD.

FSD will engage in any or all of these operations when so decided by the Superintendency of Banks, Insurance and Pension Fund Management Companies (SBS).

1 General Law for the Financial System and Insurance System, and Organic Bank and Insurance Superintendency Law.


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MANAGEMENT COUNCIL, 2012

REPRESENTATIVE FROM THE SUPERINTENDENCE OF BANKING, INSURANCE AND FUNDED PENSION SYSTEMS Juan Pablo Klingenberger Lomellini President REPRESENTATIVE FROM THE CENTRAL RESERVE BANK OF PERU Eduardo Costa Bidegaray REPRESENTATIVE FROM THE MINISTRY OF ECONOMY AND FINANCE Rafael Alcázar Uzátegui REPRESENTATIVES FROM BANKS AND FINANCIAL INSTITUTIONS Walter Bayly Llona Eduardo Torres Llosa Villacorta REPRESENTATIVE FROM THE MUNICIPAL AND RURAL SAVINGS AND CREDIT UNIONS Eduardo Morán Macedo EXECUTIVE SECRETARIAT Carlos Carrión Marotta Executive Secretary Marco Antonio Panduro Vera Investments Jose Sato Sato Back-Office


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III MANAGEMENT REPORT

1. FSD Members

In 2012, Banco Cencosud and Financiera Proempresa joined as new members of the Deposits Insurance Fund. Because of the above, FSD membership at year-end 2012 reached 48 organizations, as follows: 16 banks, 8 financial companies, 12 municipal S&Ls, one municipal savings co-op, and 11 rural S&Ls.

Pursuant to article 145º under the General Financial System and Insurance System Law and Organic Law of the Bank and Insurance Superintendency (Law Nº 26702, as amended), hereinafter the General Law, financial system companies join the FSD members from the moment the Superintendency of Banks and Insurance Companies authorizes them to take deposits from the public. Likewise, that article specifies FSD members shall contribute into the Fund (pay premiums) for a period of 24 months before their deposits are fully covered by FSD.


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2. Financial Standing FSD’s total assets at year end 2012 reached S/. 1667 million or 22.9% higher than in 2011. In addition, its liabilities reached S/. 530 thousand or 73.5 % lower.

As of December 31, 2012, revenues reached S/. 321 million or 18.9% higher than in 2011. This change results principally from Premium revenues (16.4% higher) returns on investments (25.6%), windfall revenues from debt collection (27.3%) and revenues from unclaimed deposits in banks and other entities for over ten years (30.8%) Total expenses reached S/. 3.9 million or 3.3% higher than a year before. This result is accounted for by larger administrative expenses, which rose 14.4% The net surplus reached S/. 302 million or 18.5% larger than a year before.


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Available-for-sale-investments accounted for 51.1% of all assets, followed by freely disposable funds (44.2%), premiums receivable (3.8%) and other assets (0.9%) Additionally, almost all the liabilities and shareholder equity are reflected in the shareholders’ equity account (99.9%).


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Premiums are FSD’s main source of revenues (77.3%), followed by returns on investments (14.6%). Compared to 2011, returns on investments increased their relative share (in 2011 they accounted for 13.8% of such), to the detriment of revenues from premiums (which accounted for 79.0% of revenues in 2011). The main expenses include administrative expenses (72.9%), followed by extraordinary expenses (27.1%)


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FSD’s net equity reached S/. 1,666 million or 23.0% higher than in 2011. Such increase resulted from higher revenues from premiums, returns from investments, windfall revenues and income from unclaimed deposits in banks and other entities for over ten years. Return on assets (ROA) reached 18.1%, (18.8% in 2011) while the overhead/total revenues ratio reached 0.88% (0.91% in 2011). If only revenues from returns on investments and debt collection are taken into account, the overhead to total revenues ratio reaches 4.9% (5.4% in 2011)


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3. FSD Insured Deposits As of December 31 of 2012, insured deposits reached S/. 54,887 million or 14.2% higher than in 2011. By currency, 69% of insured deposits were in local currency (25.6% change in 2012); the remainder 31% were in foreign currency (0.4% higher). Insured deposits accounted for 34.8% of all deposits held by member entities (34.3% in December 2011); municipal S & Ls were the organizations with the highest share of insured deposits compared to their total deposits (80.9%), while rural S&Ls reached 70.6%.


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De-dollarization of insured deposits continued along its trend of recent years. As of December 31, 2012, foreign currency-denominated insured deposits accounted for 31% of total insured deposits (82% in December 2000). 4. Maximum Coverage The Maximum Cover Amount (MMC is the Spanish acronym) provided by FSD to insure depositors reached S/. 91,216 in December 2012 – February 2013, or 0.4% lower than a year earlier. Article 153º of the General Law provides the MMC shall be adjusted quaterly, to reflect changes in the Whole Sale Price Index. The changes in MMC are reflected in the following table:


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5. Premium income Premiums in 2012 (paid out in April, July and October 2012, and January 2013) reached S/. 170 million and US$ 30 million, or 25.8% higher (S/. 34.7 million) in local currency, and 3.9% (US$ 1.1 million) in foreign currency.

When examining premium revenues by risk class, we find 74% were paid by A-rated entities; 18% by B-rated entities; 8% by C-rated entities; and the remaining 0.14% by D-rated entities.

Article 148º under the General Law determines premiums are computed based on the average quarterly covered deposits and the interest rate corresponding to the member organization’s risk classification. This rate, as shown in the following table, fluctuates between 0.45% and 1.45%.


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6. Claims and Recoveries

In FY 2012, no FSD member entity was intervened or liquidated by SBS. Consequently, FSD was not party to any resolution operations. However, since it started operating in 1992, FSD has paid out approximately US$ 308 million to cover deposits. Pursuant to article 157º of the General Law, payments made by FSD to cover insured depositors in a FSD–member financial organization create a debt receivable to FSD, which must be paid out by the financial company once its liquidation starts, and in the order of precedence established by article 117º of the General Law. FSD debts with a financial company in liquidation rank in B order of precedence. As of December 31, 2012, FSD debt with organizations in liquidation reached S/. 602 million. This debt is fully provisioned in the balance sheet. Although FSD has gradually recovered some of that debt, the uncertainty concerning the recovery amounts and terms has led the FSD Administration Council to provision 100% of such debt. In 2012, Banco Nuevo Mundo in Liquidation paid FSD US$ 3.9 million, and Banco Hipotecario in Liquidation paid a total US$ 70 thousand.


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7. FSD resources and investment portfolio FSD investment portfolio As of December 31, 2012, FSD’s portfolio reached S/. 1,588 million, which were mainly invested in instruments from Central Bank (83% of the total), and in particular BCRP Deposits Certificates (50%). The main sources of funding were the quarterly premiums earned throughout the year, to the amounts of S/. 160.9 million and US$ 30.5 million.


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Foreign currency funds totaled US$ 55 million (S/. 144 million). Other revenues came from earned premiums and investments sold at maturity throughout the year. These sales were justified by increased revenues from investments in very low risk, short term domestic currency instruments (CD BCRP), compared to their foreign currency equivalents that earned only prevailing low international interest rates. In addition, the significant flow of foreign capitals reaching Peru has led to the appreciation of the local currency.


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Towards the end of 2012, the domestic currency portfolio accounted for 86% of the total portfolio. Their rate fluctuated between the level from banks’ insured deposits by type of currency and the level at micro financial institutions.


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When examining the fixed income market, it is worthwhile mentioning Peruvian companies chose to issue bonds in the international market to benefit from the current appetite for emerging economies’ assets, in particular from those enjoying investment grade, such as Peru, and showing favorable macroeconomic prospects. Likewise, Peruvian companies made issuances for larger amounts abroad at better rates and terms than they could get in local markets,

Consequently, foreign currency–denominated issues in the local fixed income market slipped, while those in domestic currency were mostly for longer terms and mainly by institutions from the national financial system.


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As a consequence of the above, FSD was unable to diversify its investments, given the existing ban to invest its funds in entities of the national financial system, and because its investment policy does not allow taking local currency instruments with terms exceeding 5 years.

In addition, in August 2012, the Issuing Institution’s Board agreed to cap FSD’s CD BCRP holdings at 60% of its liquid assets in domestic currency. The above decision further limits FSD’s investment options, and even more so if the wide gap between yields from the above certificates and term deposits is taken into account.


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8. Reserve Ratio


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FSD’s Reserve Ratio measured as the ratio between Total FSD Funds and Total Insured Deposits reached 2.90% at year-end 2012 (2.70% in December 2011).

9. Sundries

As part of its interest in ongoing improvements, the Administration Council decided to outsource FSD’s accounting. To this end, it retained BDO outsourcing services.

Likewise, the Administration Council asked Ernst & Young to periodically review the FSD’s key internal controls of the organizational processes’ operational risk.

Finally, ADITIVA Company was hired to prepare an investment management system that will allow, among other tasks, to systematize FSD’s processes.

10. FREQUENTLY ASKED QUESTIONS (FAQ’S) As in all previous editions of the Annual Report of the FSD, this edition will include the most frequently asked questions received through the FSD Web page (www.fsd.org.pe), letters, telephone calls and personal visits, so that the benefits and features of the FSD can be more clearly understood. Which deposits made by individuals are covered by the FSD? The FSD covers all nominal deposits made by individuals, such as Demand Deposits, Savings Deposits, Time Deposits, and Term of Service Compensation Deposits. In the case of Certificates of Deposits, only those that are non-negotiable are covered. What happens to the deposits of private not-for-profit entities?


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In the case of private not-for-profit entities, the FSD backs all nominal deposits. Regarding other private entities, the FSD only backs Demand Deposits, except for those that correspond to the entities belonging to the financial system. The FSD covers up to what amount? As of December 31, 2012, the FSD covered up to the Maximum Coverage (MMC) of S/. 91 216 (approximately US$ 35 771 This amount is updated on a quarterly basis according to the Wholesale Price Index. The current MMC and its historic record can be accessed via the FSD Web site (www.fsd.org.pe). How much does deposit insurance cost a depositor? There is absolutely no cost to the depositor. The financial entities authorized by the SBS to receive deposits from the public, such as banks, financial institutions, and municipal and rural savings and loan associations must pay premiums to the FSD every three months so that their depositors are insured. Nonetheless, depositors should keep in mind that the financial entities that become members of the FSD must pay their premiums for 24 consecutive months so that their depositors are covered. Where should a depositor sign up so that his savings are protected by the FSD? The depositor does not have to sign up anywhere to receive deposit insurance protection. When a person deposits his money into savings in a member institution of the FSD, the funds are automatically insured. ¿Are deposits in a financial institution covered by FSD since the beginning of its operations? Although each financial institution becomes an FSD member since it obtains SBS authorization to receive savings from clients, it must pay their premiums for 24 consecutive months so that their depositors are covered. What happens to deposits made in foreign currency? Deposits made in foreign currency are also covered by the FSD. Payment however, is made in national currency at the public exchange rate given by the SBS at the time the list of beneficiaries is made. What happens to joint accounts? In the case of joint accounts, the total amount of the deposit is distributed among account holders, with each receiving, individually, the amount of coverage allotted. What happens to Term of Service Compensation Deposits (CTS), for minors and other(s) if the deposits are not immediately refundable? In regard to Term of Service Compensation Deposits (CTS), the deposits of minors, guaranteed deposits or those withheld in a judicial process, as well as others not immediately refundable, payment will be made by the FSD through its opening an account under conditions similar to those of the original account in the name of the account holder in another financial entity in the sector. What happens to the insured deposits of account holders who have outstanding debts with the bank that was intervened on or liquidated by the SBS? If the holder of an insured deposit has any outstanding debts with an FSD member institution that has been intervened on or liquidated by the SBS, the remaining balance of this debt shall be deducted from the compensation. The remaining balance, if any, shall be paid to the depositor.


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This compensation also holds without limitation for any Term of Service Compensation Deposits (CTS), or any other deposit or intangible belonging to the debtor that cannot be attached. What happens if the depositor has accounts in more than one FSD financial institution member? If the depositor has accounts in more than one FSD financial institution member, all deposits are insured separately in each institution and to the Maximum Coverage. Which of the financial institutions are FSD members? All financial institutions authorized by the Superintendence of Banking and Insurance to accept deposits from the public are member institutions of the FSD. Consequently, FSD member institutions are banks, financial institutions, Municipal savings and credit unions, and Rural savings and credit unions. The list of FSD member institutions as of December 31, 2011 is given in the Management Report section of this Annual Report. Is there any difference between the Maximum Coverage given by FSD member institutions? The Maximum Coverage is the same for all FSD member institutions. What should I do if the financial institution in which I have my savings account goes bankrupt? Once an intervention or liquidation of an FSD financial institution member has been announced, the Superintendence of Banking and Insurance will make sure that, in no more than 60 days, a list of insured depositors, indicating the amount of their compensation is prepared and remitted to the FSD. The FSD will begin payment in no more than 10 working days after receiving said list. Payments will continue uninterrupted. Insured depositors have up to 10 years from the date that payments begin to collect their reimbursement. Once the 10-year limit has expired, all said insured depositors lose their rights to collect payments and the uncollected amount becomes the property of the FSD. What happens if my name is not on the list of insured depositors made by the Superintendence of Banking and Insurance? Those whose names have been omitted from the list of insured depositors may file a claim with the Superintendence of Banking and Insurance within 60 days after the list has been publicly posted in the offices of the financial institution intervened on or liquidated.


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IV ESTADOS FINANCIEROS AUDITADOS

annual report - fsd

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