This article will show the performance carried out by CUBAFIN SA in 2010, all supported by its Financial Statements: Balance Sheet and Income Statement at the end of December 31, 2010. An economic and financial analysis will be performed, showing in each case the most significant items and whose weight is of great value either for a better understanding of the Financial Statements or for future analysis. For this, the following accounting policies are used.
Accounting policies
Regarding the entity's accounting policies, it can be argued that the financial statements have been prepared under the historical cost principle, in accordance with the International Financial Reporting Standards (IFRS) issued by the International Committee on Accounting Standards (IASB). Next, it is considered that it is of great importance to establish bases and assumptions on which the calculation and preparation of the Financial Statements of CUBAFIN SA is based.
The functional currency of the Company is the US dollar (USD), which is also the presentation currency. Transactions in foreign currencies other than USD during the year are converted to this currency according to the exchange rate prevailing on the date of the transaction or to an exchange rate that approximates the real exchange rate. Monetary assets and liabilities in foreign currency on the closing date of the Balance Sheet are converted according to the exchange rates in effect on the shower date. The resulting gains or losses are recognized in the Statement of Comprehensive Income.
The Financial Statements that are prepared in accordance with IFRS require that management make estimates and assumptions that affect the reported amounts of assets and liabilities on the date thereof, and the reported amounts of income and expenses during the reporting period. Actual results may differ from those estimates. The estimates are mainly used in relation to the provision for loan losses.
In the process of applying the Company's accounting policies, management did not make judgments, other than those related to estimates, that could significantly affect the amounts recognized in the Financial Statements.
With respect to the recognition of income, it can be argued that the Interest generated by Loans, by deposits in Banks and by discounted effects are included in the Statement of Comprehensive Income as they mature, unless there are well-founded doubts about the probability of their collection. This practice is known in financial slang as: accrual principle. The charges and commissions, for their part, are recognized at the time of the operation or throughout its existence, depending on the nature of the service provided. Premiums and discounts on fixed-date securities are amortized on a straight-line basis until maturity.
Loans and advances, including discounts, are shown after deductions of provisions. Provisions for loan losses or discounts are created when losses in operations are expected to arise. When there is objective evidence that an impairment loss has been incurred in loans and receivables or investments held to maturity that are recorded at amortized cost, the amount of the loss is valued as the difference between the amount in asset books and the present value of expected future cash flows, discounted at the original effective interest rate of the Financial Asset.
Additionally, the managers, recognizing the risks inherent in any loan portfolio, consider it prudent to maintain a global provision for Loan losses. Loans and advances are canceled when they are considered uncollectible.
Regarding the discounted effects, the book value calculated after paying any premium or deducting any discount is shown. The discount or premium is amortized during the rest of the period until its expiration. Specific provisions are created when potential losses are identified.
As for the Contingency Reserve, the Central Bank of Cuba stipulates that a minimum reserve of 8% of the total profits of each year must be created, until reaching a value equal to that of the paid-in capital. The contingency reserve is used to cover losses and other contingencies and is recognized as an allocation of retained earnings in the period in which they occur. In the event of dissolution of the entity, after covering any contingency, the remaining reserves will be distributed in the same manner established for the distribution of profits after deducting taxes.
Income Taxes are determined in accordance with the Regulations of the Central Bank of Cuba, the entity is subject to taxes at the rate of 30% on taxable income. The liability determined for the recording of income tax is used under this method, deferred taxes are generated by the expected future consequences of temporary differences between the book values and tax bases of assets and liabilities using the tax rate of the tax.
Deferred liabilities are recognized for temporary differences that will result in the tax amount to be paid in future periods. Deferred assets are recognized for temporary differences that will result in the tax amount to be paid in future periods. When there is no guarantee that the deductible temporary difference will be reversed in the future, no deferred asset is established.
The transfer to the Contingency Reserve is considered as a deductible expense for tax purposes. It is treated as a permanent difference and therefore does not generate a deferred tax liability.
1- ANALYSIS OF THE INCOME STATEMENT
Below is the Income Statement of CUBAFIN SA as of December 31, 2010, also showing the comparison of each item with respect to the previous year.
Starting the analysis of the Income Statement, we can see that the Interest Income item, in its entirety, suffered a decrease of 10% from one year to the next, mainly due to the fall of almost 20% of the income obtained from customer financing and documents discounted as the main headings within Total Interest Income, with 67% and 12% respectively; The interest received / productive asset ratio is practically doubled, the latter going from 11.85% to 23% from one year to the next, far exceeding the 12% obtained for the sector.
Income Structure - CubaFin
It is worth noting that Commission Income, which makes up 14% of Total Income, suffered a very significant drop this year. In 2009 the entity achieved a significant increase in obtaining Commission Income. This took place due to the high level of placement and the good competitive position obtained in the sector. Then for 2010, a fall of more than 60% is observed, with a decrease of more than 2 million USD in this item of income, as a direct result of the scarcity of operations carried out in the year, as well as the decrease in operations of opening of Letters of Credit back to back abroad. Within the concepts of Commission Income collected by the entity we can mention:
- Discount commission (generally 1% of the face value of the letter is charged.) Reservation commission (Commission charged to customers for reserving a limit fee within a discount line per determined acceptor before discounting the effect in question). Guarantee fees Commissions of Letters of Credit operations (opening, negotiation, availability and others) Fees for Collection Management.
On the other hand, Interest and Commission Expenses also decreased approximately 10%, as Commission Expenses with similar values and expenses paid for financing received decreased approximately 10%, the latter maintaining a preponderant role within this subtotal., with an 82% incidence on the total game. The ratio of Interest paid / Liabilities with cost decreases barely 1% from one year to the next, registering a value of 7%, remaining below the 9% registered by the Cuban financial sector average.
As a direct result of said manifestations occurred in Income and Expenses, a 35% drop in Gross Profits in Operations was observed, with an approximate decrease of 2.6 million USD, mainly as a direct result of the decrease registered in Interest due to discounts and Commissions. The ratio of Interest paid / Interest earned remained at a similar value of 45% compared to the previous exercise, and some percentage points lower than the sector average (49%).
Administrative Expenses behaved similarly, with very little significant variation in general, there was an increase of USD 56 thousand, 12% over the previous year, caused by the increase in communications, external services and other expenses. This increase was not very productive since if we compare it with the decrease of 10% of the income obtained, we can conclude that there was little monitoring and control of the entity's business management in this period.
Personnel expenses remain the main item within administrative expenses, reaching 49%, followed by leasing expenses with 19%. For better visualization, the following graph (Fig. 2) is offered, as well as the table of values that summarizes the values of Administration Expenses.
Administration Expenses - CubaFin
The provision item, on the other hand, is of particular interest since there is a net recovery of provisions in the order of USD 393 thousand during the year just ended, instead of a provisioning or provisioning of 2.3 million as it happened in the previous exercise. The Provisions / Productive Assets ratio practically doubled, reaching a value of 8.96% compared to 4.68% obtained at the end of the previous year; these values are within the range recommended by theory for these institutions. The following table shows in detail the values and variations experienced in this item.
This behavior has a direct influence on the final result of the year, since, although a decrease of more than 35% in ordinary profits is observed, the same did not happen with the result obtained in operating profits, which behaved very similar to the previous year, with an increase of 1.4%.
After deducting Other Income and Expenses for the period, we arrived at a Profit before Tax result of approximately USD 4.5 million, a value very similar to that obtained in the previous year, just 1.4% decrease, with very similar and favorable rates as well, all marked by a financial intermediation margin of more than 15%, well above the average and of the value obtained in 2009. The Return on Assets index reached 17.71%, compared to 18.17% obtained in the fiscal year. above, both values well above the sector average located at 12%. The Capital Profitability Index followed a similar behavior with values of 5.66% in 2010 and 5.71% in 2009, exceeding the 3% that the Cuban Financial Sector and especially the IFNBs hold on average.
The calculation of Taxes can be seen in the following table, where a contribution to the Cuban State of more than 1,243 thousand USD is observed, consequently very similar to the tax paid in the previous year.
As a final result of the year, a Net Income of USD 3,255 thousand is obtained at the end of 2010, a value that is narrowly lower than that obtained in 2009, with a decrease of only 1.62%. Many factors influenced what is classified as a satisfactory result for the entity, although many operations and financial products remained to be developed in the year just ended. Although in general the results were positive, for the coming period the scope of the results is not predicted, since as was well described above, the results obtained in the previous period have a great influence on this exercise. In the next chapter we will delve further into these questions.
2- ANALYSIS OF THE BALANCE SHEET
The analysis of the Balance Sheet is a fundamental tool for the economic evaluation of an entity, since it shows us exactly the behavior and performance obtained by an entity in a given period, allowing us to value and analyze in depth the items obtained at the end of a period determined.
As a general characteristic of this type of Institutions, it can be mentioned that generally the fundamental weight within the Total Assets is contained in the Productive Assets (between 80 and 90%), as observed at the end of the 2009 fiscal year. However, at the end of the exercise that we are analyzing (2010), unfortunately this structure is not contemplated.
Starting with the behavior of the Cash and equivalents item on the CUBAFIN Balance Sheet, a fairly high value can be observed in this item, reaching a value of USD 42.5 million and a variation of 539% from one year to the next. The following table shows us a closer look at the breakdown of the values included in this item:
As of December 31, 2010, the balance of current accounts in national banks includes ordered transfers to current accounts of the Company abroad, for the payment of obligations with the foreign shareholder for 25,161 thousand USD (including dividends for $ 1,474 thousand USD), as well as transfers ordered abroad for the payment of obligations to third parties for USD 2,076 thousand, all of them pending bank debit, the remainder being freely available. It is worth noting the deliberate increase in cash "availabilities", this item being increased sixfold from one year to the next, with a consequent accumulation of idle funds. This stands out as the main problem in the financial statements of CUBAFIN SA and will therefore be analyzed in Chapter 3.
For a better understanding and enrichment in the analysis of this item, the following Statement of Cash Flows is shown, which was carried out using the indirect method (based on net profits before taxes). The result obtained in your analysis provides a more detailed approach to the cash and cash equivalents item.
If we analyze the Cash Flow in Operating Activities, we see that in fiscal year 2009, there was a decrease in cash of approximately USD 20.6 million, mainly as a result of an increase in the activities of loans to Banks and customers. On the contrary, in the period 2010, although in the activities of loans and deposits in Banks an increase of approximately USD 7.5 million is observed, the effect caused by the decrease in loans and advances to customers for a total value of 43.3 million is decisive. from USD. All this, together with the rest of the items and their respective variations, allows us to arrive at an increase of USD 36.6 million in Cash Flow in Operating activities.
On the other hand, the Flow of Funds in Investment Activities maintained a decrease reduced by half with respect to the 2009 financial year, only USD 9,695 for USD 18,502 respectively. Therefore, its impact on the Cash Flow results for the period is classified as insignificant.
In the case of Cash Flow derived from Financing Activities, there are significant variations, since in 2009 there were financing needs to sustain the consequent increase in the Portfolio's placement and financing was received for 2 items: 1) increase in Obligations with Financial Institutions and 2) Shareholder Contributions. However, in 2010 there was only a decrease in the total Flows in Financing activities, since the algebraic sum of the increase in obligations received and the payment of dividends made showed a balance of just 7,824 USD.
In summary, there was a net increase in cash and cash equivalents of USD 35.8 million, the root cause of which was a sharp drop in the Loan Portfolio. All this caused the cash item to show a total value of USD 42.5 million at the end of the year ended December 31, 2010, liquid asset ratios of 53% and 67% with respect to total Assets, well above the values obtained in 2009 (8% and 12% respectively). In addition, the liquidity index obtained reaches 145%, well above the 82% obtained in the previous year.
On the other hand, Deposits and Loans to Banks also increased, showing an increase of around 79% in this item, almost doubling its value from one year to the next. However, this increase is not very productive since the Bank Loans were actually amortized in full and term deposits (fixed term) were increased by USD 8 million. Taking into account that the fixed terms only have an average return of 0.35% per year, compared to an average of 12.4% per year obtained with the disposition of loans, since we can conclude that this fluctuation did not favor the results of CUBAFIN in the recently concluded exercise. All this can be seen more easily in the following table:
The behavior of Loans and advances to Clients is of great attention, since in general this item suffered a decrease of 66%, concluding 2010 with more than 40 million USD less than the result shown at the end of 2009. The most significant is observed in the discounted documents, which dropped to almost a quarter comparatively; Additionally, loans to clients also decreased by approximately 20%.
The above figures are distributed among the following sector groups:
Sectorial Groups - CubaFin
In summary, the sum of the items previously seen (Loans and Bank Deposits, and Loans and Advances to Clients) make up the CUBAFIN Loan Portfolio, thus constituting the entity's Productive Assets. A considerable deterioration is observed in said Portfolio, which will be further explored in Chapter 3. The Productive Assets indexes with respect to the Total Assets and the Equity fell to half their value from one year to the next (46% and 142% respectively); logically, as the Portfolio decreased approximately 60%, keeping the other values constant, since these unfavorable results are obtained in the aforementioned ratios.
The rest of the Asset items: accounts receivable, prepayments and accumulated income, property, plant and equipment, and other assets, did not vary too much and did not have a great impact on CUBAFIN's Total Assets, grouping together only the one%. Their values and variations can be seen below:
After having analyzed the behavior of the entity's Assets, we will now analyze its Liabilities. Among them, the Financing Received item stands out with 88% of the Total Liabilities. For this reason, we will show below a summary table with the main financial creditors of the entity, whose amounts make up the item Financing Received.
As can be seen, within this item the fundamental weight rests on the Credit Line granted by Bank 1 as the main financial creditor of the entity, reaching 97.4% of the total. This condition is not very favorable from a commercial point of view since it is always more recommended that there be competition and diversify the number of suppliers; however, in the case of CUBAFIN this situation is very favorable since its main financial creditor is also a Partner of the entity, which allows it to receive better conditions in terms of interbank interest rates and financing terms.
The analysis of this item is of great importance, since the fact that there have been no large variations (only an increase of 3.18% from one year to the next) constitutes another of the main problems that CUBAFIN presents at the end of 2010: the accumulation and Sustaining Obligations with third parties in contrast to a significant drop in the Loan Portfolio and accumulation of cash. In other words, it highlights to any shareholder or lender the following questions: in what or what are the transferred resources being used for ?; How efficient is the entity in the use of said resources ?; Will the entity be able to return those funds at some point? In Chapter 3 the development of this item will be analyzed in greater depth.
Consequently, in the table shown below regarding Accounts Payable, a similar behavior is observed as previously exposed. The items Transfers abroad in Transit and Dividends payable hold the predominant role, adding 87% of the total. There are more than USD 2 million in transfers filed abroad pending execution, as well as USD 1.4 million pending payment for dividends with the foreign shareholder.
The Interest payable and Deferred income item shows us the results that we will see below:
Interest payable is calculated at different rates depending on the currency and the maturity of the different provisions, therefore, once they are due, the debt is renegotiated and the interest is attached to the principal of the debt; it also represents approximately 60% of the total. For its part, deferred income is that which is included within the income until the expiration date of the asset in question; This item suffers a decrease of almost 80% for a value of 3.3 million USD, which were added in this period and are responsible in good part for much of the Income of the same, leaving only 845 thousand USD pending for future accounting periods.
The study of this item is of special interest if we take into account the existence of accumulated Income payable for 1,308 thousand USD, that is, if we add this item with the 47,591 thousand USD product of financing received, and we also add 2,075 thousands of USD of Transfers abroad and 1,474 thousand USD of Dividends payable, we see that the entity has financial obligations of more than 51 million USD.
For a better understanding of the evolution of CUBAFIN SA's Equity, the following Financial Statement is shown:
The Statement of Movements in Equity shows in detail the contributions of the partners and the distribution of the profits obtained in the period, in addition to the application of the retained earnings in the previous period. It is observed that there was a capitalization in 2009 reaching a value of USD 21 million of share capital, a situation that showed the high confidence that the Partners had in the entity given the results achieved in that year.
As of December 31, 2010 and 2009, the authorized share capital amounted to USD 21,000,000, consisting of 210,000 shares with a nominal value of $ 1,000 USD each, being fully subscribed and paid (Ref. 18).
In the development of contingencies we will not delve into this work, however, it is worth noting that the performance in this item is very important in the results of the entity, since in these off-balance sheet items the entity controls its firm risk operations, the most important being the Guarantees and the Opening of Letters of Credit, both very influential in obtaining Income from Commissions, which is reflected in the Income Statement. It is observed that there has been a drop of almost 20 million USD in this area, given the lack of operations and little operation with which the entity has remained internationally. This partly reflects the decrease in commission income.
3- RISK ANALYSIS
CUBAFIN SA carries out a risk assessment successfully, carrying out a monitoring process to identify them in an adequate and sustained manner. The entity's objective in this regard is aimed at achieving an appropriate balance between the risk and the benefits achieved. Proof of this is highlighted in the 0% delinquency rate achieved in recent years. To achieve such activity, the entity disaggregates and controls the exposure to risk from different edges or analysis points.
Maximum exposure to credit risk
The following table shows the maximum exposure to risk for each of the components of the balance sheet, without taking into account the gains received:
As is well illustrated in the previous table, the risks corresponding to total assets remained with similar values from one exercise to another; However, structurally there was a very significant change if in 2009 the fundamental weight fell on loans and discounts (which make up the Loan Portfolio) with a total of 70% of total credit risk, in 2010 the fundamental weight is held by the cash item with 52% of the total. In general, the maximum exposure to credit risk suffered a decrease of 19%, mainly influenced by an 88% drop in contingent operations.
Credit risk
The credit quality of financial assets is managed by the entity using the classification parameters established by the Central Bank of Cuba. The following table shows the credit quality of financial assets according to the classification categories established by Banco Central de Cuba:
Carrying out an analysis from another edge, we can argue that the credit risk decreased by approximately 20%, mainly determined by the drop in the items that make up the granting of loans and financing (placement of the Loan Portfolio), and the consequent placement of loans. funds in the cash item that for the purposes of this analysis is considered as minimum risk.
Liquidity risk
The entity is obliged to comply with the liquidity directives set by the Central Bank of Cuba in its regulatory function. CUBAFIN has credit facilities provided by its shareholders, who allow it short-term flexibility in managing its liquidity and has its own resources that cover almost all of its needs.
The analysis of the cash item is closely linked to the country's liquidity situation, which in turn generates delays in the transfer of funds abroad, a serious liquidity problem and the emergence of a closed liquidity scheme at the level of Ministries.. Consequently, although the entity has favorable liquidity ratios, the latter is not entirely real given the restrictions on the availability of Available Funds. However, in terms of parameters and liquidity ratios, the entity does not present a severe risk.
Interest rate risk
Management meets regularly to review the rates charged on loans and advances. The Loan Portfolio is predominantly based on fixed interest rates, therefore, the entity is not subject to a significant risk associated with interest rate fluctuations.
Exchange rate risk
Financing in foreign currency that is not covered by exchange insurance is matched in amounts, terms and rates with the corresponding liabilities. The sum of the Assets and Liabilities denominated in a currency other than the functional currency was as follows:
| 2010 (000's) | 2009 (000's) | |
| ASSETS | 46,224 | 49,989 |
| PASSIVES | 46,253 | 48,175 |
Operational risk
The entity does not aspire to eliminate operational risk, but through an adequate control, monitoring and quick response to potential risks environment, it is able to manage those risks. The controls established include, among others, the following actions: Segregation of responsibilities, accesses, authorizations, conciliations, training and evaluation, including the use of internal audit.
Fair values
Fair values represent estimates designed to approximate the value that would be exchanged in a current transaction between willing parties and the best evidence is the quoted market price. As of December 31, 2010 and 2009, the carrying amounts of Financial Assets and Liabilities were close to their fair values due to their short-term maturities.
Capital Administration
The entity maintains an actively managed Capital base to cover the risks inherent in its business. The adequacy of the entity's capital is monitored using, in addition to other measurements, the rules and ratios established by the Central Bank of Cuba in its capacity as the regulatory and supervisory body of the Cuban financial system. During the last year, the entity has fully complied with the external Capital requirements demanded by Banco Central de Cuba.
The primary objective of the entity's Capital management is to ensure compliance with the requirements established by the Central Bank of Cuba and to maintain an adequate evaluation of credit risk to support its business and maximize shareholder value.
The company manages its capital structure or makes the necessary adjustments based on changes in economic conditions and the risk inherent in its operations. In order to maintain or adapt its capital structure, the entity may adjust the amount of dividends paid to shareholders or the issue of Capital. There was no change in the objectives, policies and processes compared to the previous year.
Back to back Letters of Credit are those that are opened abroad, generally in Bank 1, with guarantees of Letters of Credit opened by Cuban banks (BFI, BICSA, etc.), and with the aim of granting additional guarantees to clients before their suppliers abroad.
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