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2016Sustainability

R e p o r t

2016Sustainability

R e p o r t

Banco Nacional – Sustainability Report 20162


ABOUT THE REPORT

In 2016, Banco Nacional de Costa Rica announced its sustainability model, defined on the basis of three essential pillars: economic growth, proper use of environmental resources, and enhancement of social well-being. Using this formula, the Bank worked towards achieving a threefold gain, based on the performance indicators tracking the bank´s management. In turn, this model was conceived with effective, efficient financial management, and its implementation has created an awareness of the impacts generated by the group’s business.

Our planning has been grounded in a concept of sustainability mainstreamed into each BN area. This

has strengthened the group’s operation, resulting in a sound balance sheet, economic solvency, strengthened environmental actions, enhanced business, SME investment, community investment, healthy finances, more socially valuable transactions, stronger Costa Rican socioeconomic development, and transparent and responsible management.

This Sustainability Report draws upon the measurement and monitoring of the model’s indicators, turning this instrument into an informative document that Banco Nacional and its subsidiaries can use to report their environmental, social and economic performance for the period running from January 1 to December 31, 2016.


KEY IMPACTS

SOCIAL MANAGEMENT: Contribution to the Country’s Development

ACHIEVEMENT: 21,509

ACHIEVEMENT: ¢98,884,417,581$131,208,321

ACHIEVEMENT: ¢184,678,593,168.57

9,324 families

ACHIEVEMENT: ¢17,421,918,726.84

3,360 families

ACHIEVEMENT: ¢500,000, 000

ACHIEVEMENT: ¢21,459,584,098.626 308 families

ACHIEVEMENT: ¢1,211,641,000,000 in deposits

ACHIEVEMENT: ¢149,041,225,128.7838,560 families

ACHIEVEMENT: 2,743 Active BN Servicios

ACHIEVEMENT: 35,852 accounts applied for

ACHIEVEMENT: ¢2,226,348,751,80

178 families

ACHIEVEMENT: ¢15,941,076,252$48,164 007

ACHIEVEMENT: 300,000 customers

ACHIEVEMENT: ¢37,143,366,166.155,680 families

ACHIEVEMENT: 450 ATM ´s

LOGRO: 79,352 Móvil affiliations

ACHIEVEMENT: ¢2,606,235,025.02

932 families

ACHIEVEMENT: ¢179,299,00016 families

ACHIEVEMENT: 86,901 people affected

ACHIEVEMENT: 170 Business offices throughout the country

ACHIEVEMENT: 201,103 BN Móvil / IB affiliations

ACHIEVEMENT: ¢31,334,079,715.24

8,126 families

ACHIEVEMENT: ¢4,216,721,500.70722 families

New Jobs

Financial Services

Housing Investment

Livestock, Hunting and Fishing

Social Investment Teletón

Support for Agriculture and Forestry

Support for Women Entrepreneurs

Consumption

Financial Inclusion

Simplified Account(CES)

Tourism

Investment in Energy

Support for SMECustomers

Services

Financial Inclusion

BN SINPE Móvil

Industry

Construction

Community Undertakings

Business Offices

BN Móvil / IB

Commerce

Transportation, Communications and Sourcing

B A D G E


ECONOMIC MANAGEMENT: Financial Indicators:

SOCIAL RESPONSIBILITY MANAGEMENT: Compliance with the Model

ENVIRONMENTAL MANAGEMENT: Commitment to Sustainable Development

Banco Nacional Income Statement

ACHIEVEMENT: 27,812,839.20 KwH

ACHIEVEMENT: 100%

ACHIEVEMENT: 2,852 cartridges not needed

ACHIEVEMENT: 138,890 m³

ACHIEVEMENT: 24,507 hours

ACHIEVEMENT: 289 RFPs published

ACHIEVEMENT: 43,081.40 liters for 561,177.80 kilometers

ACHIEVEMENT: 14,000 students

ACHIEVEMENT: 8 offices awarded

ACHIEVEMENT: 5,125,000 sheets not used

ACHIEVEMENT: 5,452

Energy Consumption (KwH)

Compliance with the Model

Reduced Ink Consumption

Water Consumption(m³)

See financial statements on page 52

Volunteer Hours

Procurement with Sustainability Criteria (RFPs)

Fuel Consumption

Financial EducationStudents

Blue Flag Branch Offices

Reduced Paper Consumption (sheets)

Group Employees


CORPORATE PROFILE

Banco Nacional de Costa Rica (BNCR) is an autonomous, administratively independent financial institution governed by public law. Founded by executive decree No. 16 on October 9, 1914 as Banco Internacional de Costa Rica, it was the country’s first State-owned bank. Its creation gave rise to Costa Rica’s mixed banking system, since at that time only private banks existed. In 1936 its name was changed by legal decree to Banco Nacional de Costa Rica.

From its inception, BNCR has had the basic principles of sustainability, such as financial access and inclusion of the most vulnerable sectors of Costa Rican society, in its DNA. An example of this is its Rural Credit Board project, with which it sought to provide a response to the agricultural sector’s difficulties in accessing credit. Since then, Banco Nacional has been providing financial services steadily for 102 years and continues to be a major contributor to the country’s growth.

Banco Nacional plays a leading role in the Costa Rican financial sector, earning recognition for such qualities as its soundness,

transparency, profitability, and contribution to the country’s development. As the forerunning financial institution in an ample array of products and services, it offers a variety of housing, car, business, personal, SME, education, and health loans, among other lines of credit. Its robust electronic platform provides swift, safe Internet transaction services such as Internet Banking, BN Móvil and SINPE Móvil. It boasts an extensive network of automatic tellers and commercial offices and has more than 3,000 affiliated BN Servicios establishments that act as extensions of BNCR throughout the country. BNCR offers stock brokerage, pension fund and investment fund services as well as insurance brokerage through its subsidiaries: BN Valores, BN Vital, BN Fondos de Inversión, and BN Corredora de Seguros.

Banco Nacional’s most important asset is the trust deposited by its 1,995,428 customers in more than 5,000 employees making up the Banco Nacional family - a trust that has been earned from generation to generation over the years, thanks to a sound record and transparent management aimed primarily at benefitting each and every one of our target publics.


MISSION AND VISION, VALUES AND STRATEGIC GUIDELINES

MISSIONImprove the quality of life for

as many people as possible by

providing premium financial services

to drive sustainable wealth creation.

VALUESIntegrity, Creativity, Perseverance,

Teamwork, Quality Service

VISIONTo be Costa Rica’s leading

bank in customer service.

STRATEGIC OBJECTIVESChange the business mix in customer segments and products. Foster productivity and efficiency. Enhance the digital experience of customers through digital leadership. Operate as an integrated group. Increase the impact on development and social responsibility.Organizational Health


ORGANIZATIONAL CHART

Approved by the Board of Directors in Meeting 12.039, Article 3, on November 3, 2015.

Office of the Secretary General

Human Development and Organizational Health

Finance

Social Responsibility Institutional Relations

Strategic Planning

Advertising

Office of the Deputy General Manager for Development

and Retail Banking

Office of the Deputy General Manager for Corporate

and Institutional Banking

Office of the Deputy General Manager for

Credit and Risk

Office of the Deputy General Manager

for Operations

Office of the General Manager

Office of the Auditor General

Legal

BOARD OF DIRECTORS

1 Ana Isabel Solano Brenes Chair

2 Víctor Hugo Carranza Salazar Vice Chairman

3 Luis Pal-Hegedüs Secretary

4 Jeannette Ruíz Delgado Director

5 Xinia Herrera Durán Director

6 Víctor Ramírez Zamora Director

7 Jorge Méndez Zamora Director

2016 BOARD OF DIRECTORS


GEOGRAPHICAL DISTRIBUTION

2

1

34

5

7

6

8 9

1011

Liberia Business Zone Offices: 19

Ciudad Quesada Business Zone Offices: 15

Alajuela Business Zone Offices: 12

Heredia Business Zone Offices: 14

Limon Business Zone Offices: 12

Cartago Business Zone Offices: 20

Perez Zeledon Business Zone Offices: 15

Puntarenas Business Zone Offices: 13

East Business Zone Offices: 27

Central Business Zone Offices: 1

West Business Zone Offices: 20

123

567891011

4


SUSTAINABILITY INDICATORS

CONSUMPTION

Certified Eco-efficient OfficesTeleworkingFuelEnergyInkPaperWater

GREEN PRODUCTS

A) BNCRBN PYMES Verdes (green SMEs)Green Credit CardsGreen Debit CardsEco-Marchamo (voluntary vehicle eco-decal)Eco-Technological BN SolutionsBN Vivienda Sostenible (sustainable housing)

B) BN SegurosBN Seguros Verdes Automóviles (green auto insurance)

BN Seguros Verdes Incendio Comercial (green commercial fire insurance)BN Seguros Incendios Casa de Habitación (home fire insurance)BN Seguros Verdes de Vida (green life insurance)

SUSTAINABLE PURCHASINGNumber of purchases made with sustainability criteriaNumber of offices with eco-efficient equipment replacement

• Financial Soundness • Economic Value of Sustainability • Percentage Achievement of Sustainability Budget

ENVIRONMENTAL DIMENSION

ECONOMIC DIMENSION

3

21

PEOPLE AFFECTED

A) New Jobs• External JobsTotal new jobs Jobs for women living in poverty New jobs for people with disabilities New jobs for youths

• Organizational health

B) Positive Impacts• Health and well-being• Food Bank volunteering – Zero Hunger• Quality education• Clean water and sanitation• Access to energy• Infrastructure• Housing• Persons who have received financial

educationSegments that have received financial educationWomen who have received financial educationWomen living in poverty who have received financial educationPeople with disabilities who have received financial educationYouths who have received financial educationPersons of indigenous origin who have received financial education

C) Number of undertakings

Total community undertakings – seed capitalTotal productive undertakings – community undertakingsTotal business undertakingsUndertakings by womenUndertakings by women living in povertyUndertakings by people with disabilitiesUndertakings by youthsUndertakings for indigenous populations

D) Linkages

E) Products for persons living in extremepoverty

QUALITY SERVICE

A) Claims HandledComplaints due to poor operational practices (failure to follow operational procedures)Complaints due to discrimination of any kindComplaints due to poor business practicesComplaints due to poor environmental practicesComplaints due to poor reputational practicesComplaints due to poor practices of suppliersOther complaintsNumber of complaints requiring payment of an economic cost

B) Financial Inclusion • Physical Channel Availability

POSBN ServicesATMsBusiness Offices

• Accessibility

• Number of persons who have been financially included by segments

Other segments that have been financially includedWomen living in poverty that have been financially includedYouths who have been financially includedPersons of indigenous origin who have been financially included

• Number of persons who have been affiliated by channel

Simplified file accounts (CESs)BN SINPE MÓVIL

• Use of channelsBN SINPE Móvil

VOLUNTEER PLAN

Percentage achievement of plan

SOCIAL DIMENSION1

2

3


THE GROUP’S AWARDS AND RECOGNITIONS

Fondos

Valores

Vital

Fondos

Valores

Vital

2016 was a great year of achievements for BN Fondos – such as its ISO 14001-2004 certification. But the most important achievement was its consolidation, maintaining a business model capable of absorbing the coming growth with a solid, efficient structure to the benefit of both customers and the Banco Nacional group, resulting in financial benefits for the Costa Rican public.

INSTITUTIONAL ENVIRONMENTAL MANAGEMENT PROGRAM: BN Valores classified institutionally in the green on the Institutional Environmental Management Program’s implementation stoplight, a classification given by the Ministry of the Environment, Energy, and Telecommunications for scores of over 85 in environmental management (excellent management).

COUNTRY BRAND: BN Valores obtained a license for corporate use of the essential COSTA RICA country brand, which was granted by PROCOMER (the Costa Rican export promotion agency) after a rigorous evaluation process where BN Valores demonstrated its compliance with the five country brand values: excellence, sustainability, innovation, social progress, and Costa Rican origin.

GREAT PLACE TO WORK: On March 10, 2016, BN Valores was certified by Great Place to Work® Central America and Caribbean as a great place to work, receiving the prestigious GREAT PLACE TO WORK 2016 award in the following categories:• Best workplaces with fewer than 100 employees• Best workplaces of Central American origin• Best workplaces in Costa RicaThis award is the result of the culture of shared employee values, leadership and excellence that has fortified us as a company, as well as our efficient processes that make for orderly business management.


Fondos

Valores

Vital

Fondos

Valores

Vital

GREAT PLACE TO WORK: The pension fund operator has been working on this model since 2013 and in 2015-2016 was certified as one of the best companies to work for in Central America and the Caribbean. It should be noted that BN VITAL raised its Trust Index score by 8 points from 2015 to 2016 as a result of reinforcing its comprehensive culture plan to include such topics as the essence of BN VITAL, its four pillars, its ethics plan, corporate governance, and business continuity. It also went one step further in its high performance leadership program by providing training on coaching, which was reflected in the results of the climate survey.

INTE/ISO 9001:2008 RECERTIFICATION: Recertification in ISO 9001:2008 was achieved with the support of senior management and the commitment of all company employees; this standard ensures that strategic management, support and assistance, and value chain processes are all carried out satisfactorily according to a quality management model.

QUALITY RECOGNITION AWARD: In 2016, Banco Nacional was given the Quality Recognition Award by JP Morgan Chase Bank, which ranks first in North America and seventh worldwide. The award, which recognizes the quality of the bank’s Swift messaging, focused specifically on the international transfers shared by both banks.

CARBON NEUTRAL: In 2016, the Ciudad Quesada branch office of Banco Nacional and BN Fondos were winners of this important award. The branch office was piloted as a precursor before starting efforts to make all BNCR carbon-neutral.

BLUE FLAG: The four subsidiaries, BN Vital, BN Valores, BN Fondos and BN Corredora de Seguros, achieved the award through the program.

DATA AWARD: At the Global Banking Alliance (GBA) Annual Summit, Banco Nacional was honored with the Data Award for having participated in the GBA-led program.


MESSAGE FROM THE CHAIR OF THE BOARD OF DIRECTORS

In 2016 the Board of Directors of the Banco Nacional set about creating a sustainability model under the highest quality standards with the firm resolve to develop all of the Bank’s activities according to a sustainable management guideline, boosting the Bank’s competitiveness, safeguarding the environment, and taking into account the needs of the Bank’s target populations.

This sustainability model was designed in such a way as to become one of the pillars supporting the 2016-2021 Strategic Plan, “Together We Are Progress”, which seeks to strengthen Banco Nacional in its role as driver of the country’s environmental and socioeconomic development. It is our conviction that a sustainability model of this nature is the ideal mechanism for consolidating initiatives that are durable over time and beneficial to both the Bank and all our interest groups.

Banco Nacional’s mission is to improve quality of life for the greatest possible number of people. This is achieved with the daily labor of all our employees and superior financial services, making it possible for entrepreneurs to turn productive ideas into

businesses, Costa Rican families to buy houses for making into their homes, retirees to enjoy the fruits of a lifetime of efforts, young people to realize their study goals, workers to invest in their dreams, and the country to invest in environmental resources. This translates into sustainable creation of wealth and prosperity for Costa Rica.

As a responsible institution, we strive for full attainment of our goals, solidifying a human-centered approach and reinforcing our commitment to the environment, all for the firm purpose of achieving a positive impact on the country’s well-being and development and, in particular, of benefitting all those who have deposited their trust in Banco Nacional.

In an awareness of our role in contributing to this country’s progress, we strive to provide a profitable Bank that fosters sustainable wealth creation. Our business model goes beyond actions and declares a serious commitment to the country’s development, where our work is the best proof of our goal to positively transform Costa Rican society.

We are committed to contributing to our

country’s developmentAna Isabel Solano Brenes

CHAIR OF THE BOARD OF DIRECTORS


MESSAGE FROM THE GENERAL MANAGER

With this simple phrase we can describe Banco Nacional and its employees, because we work towards such values and principles as honesty, equality, legality, integrity, transparency, and accountability. This is Banco Nacional, a model in Costa Rica of an ethical, sustainable Bank that invests in social development, economic growth, and biodiversity protection as incentives for actions to enhance the quality of life of Costa Ricans.

The year 2016 brought us great satisfaction. After implementing a speedier, customer-centric business model, we were able to improve our response to our customers’ credit needs for both individuals as well as micro, small, medium and large enterprises. We achieved sustained economic growth as a group, reinforced our branch network to provide closer, more efficient and decisive customer service, and energetically worked on empowering our staff, building their capacity for innovation, teamwork, and decision-making.

2016 also gave us the opportunity to reveal the Banco Nacional group’s sustainability model, which has as its premise to create social and economic value in the markets where we operate, managing social and environmental risks as well as financial ones. This means we have started out on a path to measure our impacts beyond what is strictly financial, integrating social and environmental aspects to achieve a threefold gain.

Our sustainability model was designed as part of the group’s commitment to foster development of a fair and egalitarian economy as well as the democratization and mainstreaming of our services. We strive to encourage best practices to help us maintain an optimum

balance of resources and environment. For this mission, the model proposes a strategy that prioritizes trust and transparency in the relationships between the Banco Nacional group – which includes its subsidiaries – and its interest groups. The model has become a declaration of our commitment to safeguard, based on our values, the economic, social and cultural rights of our different publics: customers, suppliers, employees, and the community in general. The results obtained in 2016 are an indication of good management in terms of efficiency and productivity. They also attest to the financial soundness of the bank and its subsidiaries, which boasted of the strongest earnings in their entire history (¢53,019 million, net). Earnings had grown by ¢16,217 million from December 2015 (44%), surpassing the initial target of ¢51,803million by more than 2%. In a stable international and national economic setting – despite the country’s economic difficulties, marked by a worrying fiscal deficit and slowing credit growth – lending has been on the rise and the quality of the loan portfolio continues to be notably healthy, with a 90+ day delinquency rate of 2.2% and a legal default rate of 4.68%, to the benefit of the country’s development.

As a result of reducing our administrative costs and aligning our efforts to a dynamic, renovated business model, we were able to bolster Banco Nacional’s financial indicators for 2016. Our outstanding results were complemented with actions deriving from the sustainability model. As a group, we know this is an inevitable step that all financial institutions will have to take if they wish to work towards the country’s integrated development.

We’re a bank with ethics at the heart

of our business.Juan Carlos Corrales Salas

GENERAL MANAGER


SUSTAINABILITY MODEL

The model’s methodology is based on the Costa Rican government’s National Development Plan, the Indicarse Model and the Sustainable Development Goals as the primary building blocks.

Mainstream sustainability into the BN group’s strategic plan in line with the

National Development Plan and Sustainable Development Goals, contributing to the

country’s social and economic growth and development, according to the strategic

focus established by the Board of Directors and General Manager.

Enhance the economic value of the BN brand by implementing responsible practices in the value chain and socially and environmentally responsible practices with interest groups.

FOCUSES

GOALS OF THE SUSTAINABILITY

MODEL

Accountability / Reporting

Reference Frameworka. ODSb. National

Development Planc. State of

the NationReport

d. INDICARSEe. Board of

Director Policies

Communicationa. Internalb. External

BNCR management models Sustainability

BNCR Goals, Objectives and Actions

Sustainable development context and challenges

Assessment of environmental,

social, and economic impact

Relationship management

with interested parties

Benchmarking

BNCR MISSION, VISION AND VALUES

SEGMENTS

Financial Inclusion

Financial Education

Financial Deepening

Undertakings

Linkages

Environmental Management

Women Living in Poverty

Youths People with Disabilities

Indigenous Population


CONTINUOUS IMPROVEMENT

SCOPEWhat do we understand?

Assessment of the current context Bank’s current stance on sustainability

Definition of the initiative

MONITORING OF THE PLANWhat have we achieved?

Accountability Progress on action plans

COMMUNICATIONHow do we communicate it?

Sustainability reportCommunication with the parties involved

DIAGNOSTICWhere are we?Preliminary diagnosticsInventory of existing practices

IMPLEMENTATION OF INITIATIVESHow do we make progress?Critical factors for the model’s success

WORK PLANWhat are we going to do?Work plan for the sustainability modelWork plan for sustainability initiatives

The Sustainability Model adopted the definition of interested parties proposed by the United Nations (UNEP-FI), which says they are “groups that either affect or are affected by the company’s activities.” As this was the first attempt at mapping publics, a roadmap was designed for a structured method of guiding the institution in identifying its publics.

TARGET PUBLICS

STEPS FOR INTERACTING

WITH INTERESTED

PARTIES

Monitoring of indicators and assessment of impacts Identify the interested parties and their sub-segmentsIdentify the expectations of the interested parties

The one in line with the interested party’s expectations will be integrated into the

sustainability balances

In response to the interested party’s expectations and the importance to

the institution

According to the type of instrument According to the type of instrument; ideally this should be a person who interacts routinely with the interested party

For managing the expectations of the interested parties

According to the type of rela-tionship desired and the type of interested party

IDENTIFICATION OF INTERESTED PARTIES

SELECTION OF THE INSTRUMENT

DEFINITION OF THE TYPE OF RELATIONSHIP

SELECTION OF THE SPOKESPERSON

MONITORING OF IMPACTS

DEFINITION AND IMPLEMENTATION OF ACTIONS

DEFINITION OF INDICATORS

FREQUENCY OF IMPLEMENTATION


PROGRAMS AND MAINSTREAMING

The Sustainability Model was implemented in two directions, one aimed at carrying out a particular series of projects and the other at mainstreaming sustainability within the institution.

Programs:Drawing on its many years of experience and the expertise of its employees, the Bank designed some of the programs for the purpose of impacting segments defined as priorities for the model.

Mainstreaming:The programs were developed in connection with the Bank’s different strategic areas. The relationship between the focuses and segments is summarized in the following table.

PRESSWritten press

RadioTelevision

CUSTOMERSCorporations and

institutionsLarge, medium and small enterprises

Preferential customers (individuals)

Mass customers

SUPPLIERSStrategic suppliersCritical suppliersBasic suppliers

Replaceable suppliers

FUND PROVIDERSDevelopment Banking

(FINADE)IMAS (FIDEIMAS)

IDB

EMPLOYEESEmployee

associations and syndicate

Occasional personnel

Regular personnel

PARTNERSPublic companiesPrivate companies

NGOs

COMMUNITIESImmediate communitySurrounding population

Public opinion

REGULATORY BODIESSUGEF

SUGESESUGEVAL

SUPENCentral Bank

GOVERNMENTCentral governmentLegislative Assembly

Ministries

COMPETITIONState banks

Private banksCooperatives

INDICATORSWhat has the impact been?

Environmental indicators-Social indicators

MAINSTREAMINGHow have we progressed?

Objectives assigned to the groupProgress on work plans

PROGRAM RESULTS What have we achieved?Environmental Management ProgramFinancial Inclusion ProgramFinancial Education ProgramUndertakings ProgramProduction Linkages ProgramCorporate Volunteering Program


RISK MANAGEMENT

Risk management is an essential component of Banco Nacional’s identity and rigorous risk control has provided the conditions for the steady growth of BNCR’s profits.

1. MARKET RISKThe focus in 2016 was on implementing more frequent monitoring of a broader scope of risks, including investment rate, liquidity, exchange rate, and derivative risks for both the Bank and its subsidiaries. In addition, emphasis was given to generating added value by preparing a strategic capital framework for the Bank and drafting new balance sheet and capital indicators, following the best international practices of Basel III and CCAR – notably comprehensive capital analysis according to CCAR, the net stable funding ratio (NSFR), and the Basel leverage ratio (LR) – as well as implementing a benchmark return for BN Vital funds.

2. OPERATING RISKThree major groups of initiatives started in 2016 had a positive impact on outside interested parties. First, the foundations were laid for fraud prevention and cybersecurity systems which will not only generate greater confidence in but also provide support for and enhance the quality of electronic services.

Secondly, a supplier risk assessment method was defined that

takes into account social responsibility and sustainability, the idea being to not only safeguard the institution’s interests with regard to outsourcing but also foster this culture and raise awareness of its importance.

Finally, a portfolio of social responsibility and sustainability risks was modeled and mainstreamed in the assessments, especially for value chain processes, with the expectation that the result will project a positive image on our customers.

3. MATHEMATICAL MODELSSeveral key tasks were carried out in 2016. Marketwise, a software tool was developed to enable BN Vital to run securities buying and selling simulations for its investment portfolios in order to measure the impact of these transactions on the different return and risk indicators.

Additionally, the base rate projection model was refined for assessing base rate movement scenarios in investment portfolios and setting floor and ceiling interest rates by business activity (see the results of the simulation scenarios).

Finally, quantitative support was given to the determining of benchmark portfolios for managing the investments of each of BN Vital’s funds.


Credit-wise, indicators were generated for tracking the effectiveness of loan readjustments based on observed delinquency. The collection score was recalibrated to give more priority to administrative collections. A method was also defined for calculating expected loss by term, enabling the Finance Division to determine more competitive interest rates for each loan term and business activity. Finally, a review of the FGJ (guarantees and pension fund) actuarial study provided insights to the fund’s managers for deciding on rule changes to ensure the FGJ’s actuarial solvency.

4. CREDIT RISK• The following actions were taken to boost credit card sales

by giving us greater access to borrowers, in line with the strategic objective of changing our product mix:

1. The risk appetite for this product was modified, setting new acceptance thresholds; and calculation of interest rates to achieve improved returns and maintain a high quality portfolio;

2. The rules were adjusted so that when a card application is processed together with a housing or car loan, the resulting score is not binding for card approval;

3. The DTI (debt to income) threshold was increased by 300 base points for the credit card product, exclusively; and

4. An option was programmed in the payment capacity module for when application is made for a consumer or housing loan the limit is automatically calculated for the card to be granted together with the loan. • The risk appetite was modified for consumer loans, setting

new acceptance thresholds, and the rules were changed in order to boost lending and borrower access, especially with regard to the salaried customer profile.

• The development banking score was adjusted. • With regard to the Bank’s capital funds, a model was

created to set concentration limits for economic interest groups and individual customers according to their credit rating.

• A model was created to set lending limits by economic activity in line with allocation of capital.

5.RISK CONTROL AND MANAGEMENTAs part of its job of managing risk integration, in 2016 the Risk Control and Management Division aligned the risk manuals of BN Vital, BN Fondos and FGJ to that of the Banco Nacional de Costa Rica, thus helping to mainstream a risk culture

throughout the institution. Joint work was also undertaken on strategic credit risk initiatives, particularly those concerning modification of risk appetite and product mix.

6. CREDIT DIVISION• In September 2016 the Credit Unit for Sale of Assets received

in Lieu of Payment was set up. An estimated ₡1,709.8 million was recovered from 74 loans totaling ₡2,694.6 million, and account number 151 (Temporary Assets) was reversed by ¢4,199, 2 million.

• Ninety percent of shared credit service procedures and records in all lending cycles were reviewed and updated.

• Implementation of the centralized appraisal payment process was finalized, with 8,385 cases for a transacted amount of more than ¢3,425 million, improving efficiency.

• Approximately 250 merchant contracts were reconstructed and replaced for a balance of more than ¢1,000 million in collateral.

• Automatic supplier payments were implemented, increasing processed case volume efficiency and preventing errors from manual charges.

• Loan portfolio repurchases were made from BICSA and Global Bank for a total of $30.5 million.

• A new model was set up for updating vehicle inspections using Riteve, INS, and agency maintenance shops, where 216 guarantees were updated, averaging 72 per month, for an estimated average savings of ¢1,000 million. By not having to pay outside appraisers, the institution saved some ¢9.5 million in administrative costs.

• A valuation matrix based on market variables was piloted.

• Disbursements increased by 96%.

• Daily processing of disbursements went up from 11 in January to 220 in November, with the same staff.

• A support unit was set up to handle all loan applications entering electronically on different platforms (BN Crédito Virtual).

• All actors in the process for estimating the loan loss provision were mapped, generating a work scheme that significantly reduced the impact of the provision.

93% OF THE CORPORATE CREDIT DIVISION’S WORK PLAN WAS COMPLETED.


Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16Dec-15

Year 2016 3,69 3,70 3,72 3,75 3,80 3,87 3,94 3,94 3,96 3,99 4,04 4,11

Portfolio Balances

Loan Portfolio BehaviorAbsolute and Relative Values January 2015 - December 2016

90,000.00 2.50%

2.00%

1.50%

1.00%

0.50%

0.00%

-0.50%

5.67%6.46%

6.05% 6.22% 6.08%5.30% 5.49%

6.01%5.45% 5.63% 5.51% 5.66%

4.68%

2.38% 2.55% 2.48% 2.49% 2.22% 2.37% 2.33% 2.33% 2.27% 2.29% 2.23% 2.18% 2.20%

80,000.00

70,000.00

60,000.00

50,000.00

40 000.00

30,000.00

20,000.00

10,000.00

-

(10,000.00)

(20,000.00)

jan-

15

feb-

15

mar

-15

apr-

15

may

-15

jun-

15

jul-

15

aug-

15

sep-

15

oct

-15

nov-

15

dec-

15

jan-

16

feb-

16

mar

-16

apr-

16

may

-16

jun-

16

jul-

16

aug-

16

sep-

16

oct

-16

nov-

16

dec-

16

Loan StatusLegal Default and 90+ Day Delinquency 2015-2016

Legal default 90+ day delinquency

• The balance of Banco Nacional’s loan portfolio at the close of 2016 was ¢4,116 billion, representing a relative growth of 11.21% or an absolute growth of ¢414.9 billion from December 2015.

Source: Credit Cubes

Source: Credit Cubes



Year 2016 3,69 3,70 3,72 3,75 3,80 3,87 3,94 3,94 3,96 3,99 4,04 4,11

Portfolio Balances


90,000.00 2.50%

2.00%

1.50%

1.00%

0.50%

0.00%

-0.50%

5.67%6.46%

6.05% 6.22% 6.08%5.30% 5.49%

6.01%5.45% 5.63% 5.51% 5.66%

4.68%

2.38% 2.55% 2.48% 2.49% 2.22% 2.37% 2.33% 2.33% 2.27% 2.29% 2.23% 2.18% 2.20%

80,000.00

70,000.00

60,000.00

50,000.00

40 000.00

30,000.00

20,000.00

10,000.00

-

(10,000.00)

(20,000.00)

jan-

15

feb-

15

mar

-15

apr-

15

may

-15

jun-

15

jul-

15

aug-

15

sep-

15

oct

-15

nov-

15

dec-

15

jan-

16

feb-

16

mar

-16

apr-

16

may

-16

jun-

16

jul-

16

aug-

16

sep-

16

oct

-16

nov-

16

dec-

16





Year 2016 3,69 3,70 3,72 3,75 3,80 3,87 3,94 3,94 3,96 3,99 4,04 4,11

Portfolio Balances


90,000.00 2.50%

2.00%

1.50%

1.00%

0.50%

0.00%

-0.50%

5.67%6.46%

6.05% 6.22% 6.08%5.30% 5.49%

6.01%5.45% 5.63% 5.51% 5.66%

4.68%

2.38% 2.55% 2.48% 2.49% 2.22% 2.37% 2.33% 2.33% 2.27% 2.29% 2.23% 2.18% 2.20%

80,000.00

70,000.00

60,000.00

50,000.00

40 000.00

30,000.00

20,000.00

10,000.00

-

(10,000.00)

(20,000.00)

jan-

15

feb-

15

mar

-15

apr-

15

may

-15

jun-

15

jul-

15

aug-

15

sep-

15

oct

-15

no

v-15

dec-

15

jan-

16

feb-

16

mar

-16

apr-

16

may

-16

jun-

16

jul-

16

aug-

16

sep-

16

oct

-16

nov-

16

dec

-16



Our legal delinquency (loans past due by 1 or more days) and 90-day delinquency (loans past due by 91 or more days) rates were 4.68% and 2.20%, respectively.


7. COMPLIANCE DIVISION AND ANTI-MONEY LAUNDERING EFFORTSBanco Nacional is aware of the country’s money-laundering risk and of the efforts needed for strengthening prevention and detection of potential financing of terrorist acts, even though the region lacks concrete systems for doing so. Throughout its history, the Bank has shown its commitment by working jointly with the competent authorities to manage these risks as best as possible, and has reinforced a culture of compliance in all of its branch offices and related parties.

The maintaining and strengthening of its relationships with foreign correspondent banks has played a key role in this, as these banks are becoming increasingly more demanding with regard to management of risks, specifically those of money laundering and terrorism financing.

For customers, correspondent banks, suppliers and other related parties, Banco Nacional’s efforts to improve, within its scope of action, the quality of life of all those who surround it cannot and should not go unnoticed. As Costa Rica’s leading financial institution, the Bank shoulders the responsibility of supporting all actions that help impede the tentacles of organized crime from invading the country.

Thus Banco Nacional has kept its distance from potential money-laundering cases, reinforcing its prevention and detection systems on a daily basis to the benefit of the country, the organization itself, and its own customers, who seek and require a sound, responsible bank in which to deposit their savings – a bank with superior quality standards that protect not only the money but also the reputation of each and every one of our customers.


8. INTERNAL CONTROL DIVISIONThe internal control system should be dynamic and adaptable to the demands of the environment and the strategic goals defined by upper management in order to provide reasonable security in the meeting of those goals and their sustainability over time, under the principles of efficiency, regulatory compliance, accountability, and asset protection.

In 2016, Banco Nacional reinforced internal controls by allocating exclusive resources to assurance in business zone and central processes, a decision that has enabled the Bank to improve its corporate governance by aligning business goals with internal control responsibilities.

The Bank maintains a “Normal” rating in its qualitative assessment, in accordance with the rating criteria in the SUGEF-2400 regulation, and has defined a specific action

plan for monitoring and strengthening this rating.

As a result of structural changes and adjustments needed for the new 2016-2021 strategic plan, Banco Nacional’s maturity level has gone from “skilled” to “competent” on its internal control system diagnostic, which requires updating risk assessment exercises, adapting control activities, and taking other specific actions that are defined in a detailed improvement plan for implementation in 2017.

The fostering of a culture of control in Banco Nacional is an ongoing effort that reached more than 4,600 employees in 2016 through the “Certifícate” initiative, together with a specialized course for 400 heads of department and face-to-face talks for close to 1,000 head office employees and another 1,000 business zone employees.

Ongoing monitoring of the recommendations and directives of regulators and auditors to ensure their implementation

Updating and restructuring of the internal control system’s diagnostic tool based on the maturity model of the Office of the Comptroller General of the Republic

75% of the country’s business offices were visited in 2016 and 238 specific recommendations were issued to strengthen the internal control function

Definition and alignment of internal control system goals strategically and tactically with the 2016-2021 Strategic Plan

Reinforcement of the Bank’s governance model through analysis of the support committees and accountability

Design and formalization of a common internal control framework for the Group, incorporating COSO principles


OUR SUBSIDIARIES

At year end, BN Fondos still led the financial investment fund industry in net managed assets and number of customer accounts, with a managed asset market share of 26.12%, thanks to due planning and business strategies that paved the way for the great results obtained in 2016.

These strategies were developed together with quality service and environmental impact mitigation policies and helped us trim expenses and raise productivity. In reducing greenhouse gas emissions, we also optimized our energy capacity and cut unnecessary expenses – all of which has helped us achieve our goal of being a socially committed company, working every day according to policy.

Fondos

Valores

Vital1. BUSINESS RESULTS

BN Fondos ended the year with a managed funds balance of US $653 million, ranking it first in managed balances, as seen in the following graph.

The following graph shows the number of customer accounts by fund management company at the 2016 close.

0

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In mil l ions of dol lars

Net managed assets as of 31 de december de 2016Finantial investment funds

In mil l ions of dol lars2012 – 2016

BN Fondos profits

Number of costumer accounts as of 31 de december de 2016Finantial investment funds

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BN Fondos profits


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ions

$

One of BN Fondos’s primary goals has been to bring investment funds to the Costa Rican public and continue its financial literacy policy; thus at year end it had 54,914 customer accounts, the largest market share, with 66.72% of the total financial funds industry, reinforcing still more our mission to bring small and medium investors into the stock market.


0

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BN Fondos profits


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2012 2013 2014 2015 2016

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ions

$2. FINANCIAL RESULTSNet earnings as of the 2016 close were US $2.9 million, and the net return on investment (ROI) was 26.34%, making BN Fondos an extremely profitable subsidiary for the Banco Nacional group. The following graph shows, for the purpose of comparison, net annual profits for the last five years:

PERFORMANCE OF BN FONDOS ENVIRONMENTAL PROGRAMS

Electricity Management

Waste Management

Paper Management

Greenhouse Gas Effect

Volunteer Hours

Financial Literacy

Electricity consumption was reduced by 20% in 2016 to 17.15 kWh/m2.

Annual generation of non-reusable waste (“garbage”) per person was reduced in 2016 to 33.81 kilos/person, while recovery was maintained of reusable waste (0.3 kilos reusable / 1 kilo non-reusable).

The annual number of reams consumed was reduced by 55.17%. Printouts and photocopies were reduced by 35.87%.

BN Fondos continues to be carbon-neutral certified, emitting 24.41 tons of carbon dioxide.

165.55% of the target was achieved, with 394 hours volunteered by 100% of the personnel.

BN Fondos has a presence in the 169 Banco Nacional branches throughout the country, with more than 2,250 certified executives offering this product. Our goal of bringing financial literacy to more Costa Ricans was also reinforced, with more than 50 activities carried out around the country.


1. ECONOMIC ACHIEVEMENTSEarnings:BN Valores’s net earnings for FY2016 were US $4,492,486 (four million four hundred ninety-two thousand four hundred eighty-six dollars), at an average exchange rate of ₡539.45 to the dollar.

Annual Return:As a result of its net profit in FY2016, BN Valores boasted a 15.2% return, calculated on its initial capital assets minus dividend distribution.

Operating Income:In the 2016 period, BN Valores obtained an operating income of US $7,297,358 (seven million two hundred ninety-seven thousand three hundred fifty-eight dollars), at an average exchange rate of ₡539.45 to the dollar, from stock market commissions and brokerage fees.

Financial Results:From management of its own funds, BN Valores’s earnings in FY2016 were US $5,236,231 (five million two hundred thirty-

six thousand two hundred thirty-one dollars) at an average exchange rate of ₡539.45 to the dollar.

Assets and Equity:At the FY2016 close, BN Valores held US $101,530,965 (one hundred one million five hundred thirty thousand nine hundred sixty-five dollars) in total assets and US $32,034,405 (thirty-two million thirty-four thousand four hundred five dollars) in equity, at an average exchange rate of ₡539.45 to the dollar.

2. SOCIAL AND ENVIRONMENTAL ACHIEVEMENTSSocial Achievements

• Volunteer Program: BN Valores participated in the corporate volunteer program in coordination with Banco Nacional. All staff participated, volunteering a total of 260 hours to working with INAMU’s target segment and to planting trees and cleaning up the La Libertad park.

• Training Programs: BN Valores coordinated training for customers on economic subjects, impacting a total of 804 customers with these programs.

Fondos

Valores

Vital


Environmental Achievements

• Water Consumption: Compared to 2015, average monthly water consumption was reduced in 2016 by 29%, equivalent to a monthly average of 38m3 for a total savings of 37,986 liters per month on average for the year.

• Electricity Consumption: Electricity consumption fell by 4.41% from 2015 to 2016, with average monthly savings of 1,393.33 kW.

• Fuel Consumption: Average monthly consumption was reduced by 11.1% in 2016. • Paper Consumption: Compared to 2015, average monthly paper consumption was reduced in 2016 by 21%, equivalent to an

average of 7 reams per month for the year.

1. ACHIEVEMENTS:• Building Competencies in Our Human Talent In 2016, the competencies of each of the pension operator’s

jobs were updated and improved by 100%. The cardinal competencies were broadened to include a customer service culture, which was measured for all employees. A gap-closing training workshop was conducted for employees who needed it in order to firm up BN Vital’s vision of “always exceeding the expectations of our members.”

Technical training needs were diagnosed for all employees to determine the key training courses – those essential for optimum performance of their duties – which employees should take in 2016 and 2017.

The competencies of the members of the Board of Directors were measured and their technical training needs were diagnosed as a basis for designing the training they will receive in 2017.

• Volunteer ProgramSome 1,000 employees participated in the different focuses set

by the group, such as financial education and environmental management.

• Return on Equity BN Vital’s return on equity was the best in the Costa Rican

pension fund industry at close to 35%, after eliminating the effect of the annual transfer of 50% of earnings to members of the mandatory pension fund.

• Best Efficiency Index in its Entire History In 2016, BN Vital obtained the best efficiency index in its

entire history. The following table shows the behavior over the last six years:

Fondos

Valores

Vital

Index = (personal expenses + general expenses)/total income

2015

132.33

31,573.33

189.63

31.50

2016

94.33

30,180.00

168.58

24.87

Environmental Variable

Water (m3)

Electricity (kw)

Fuel (liters)

Paper (reams)

Años

Table 1Comparison of Environmental Variables

Monthly Averages for 2015 and 2016

Period

OPC

BN Vital

Dec -11

1.023

Dec -12

100%

Dec -13

79.4%

Dec -14

91%

Dec -15

75.5%

Dec -16

69.8%

BN Vital Pension Fund Operator (PFO)Efficiency Index

Percentages


• International Market Investments Seeking to diversify its mandatory pension fund portfolio by

market and instrument type and to improve its risk-adjusted return, BN Vital successfully concluded its investments in the international market.

• Budget A score of 95.6% was obtained on the Comptroller General

of the Republic’s audit of the budget process, surpassing the Costa Rican supplementary pension fund industry average by more than 10%.

• Investment Portfolio Management With the help of the Bank’s Risk Division, BN Vital was able

to implement the benchmark as a new tool for managing its administered portfolios as well as its own portfolio.

• System Improvements The new technological infrastructure was definitively

implemented, making it possible to reduce times in practically all processes, and all computer solutions required for batch delivery of funds in the labor capitalization fund were developed – all of which has led to the successful accreditation of its members’ money in a timely and appropriate manner.

• Implementation of WhatsApp as a Communication Channel

With WhatsApp, our members have a novel and alternative way to make inquiries and arrangements quickly using mobile media.

• Video Launch Geared to helping members plan for retirement and long-

term savings, these videos target millennials and baby boomers, explaining in a simple manner how Costa Rican pension schemes work and providing guidance on preparing adequately for retirement.

• Improved Functional Service for Members We have improved member service flows by adjusting the

systems using simple, speedy and controlled processes, substantially improving response times and overall service experience.

• Talks on Facebook Live A series of talks on planning for adequate financial health

through proper retirement preparation were streamed in real time using the Facebook Live technological platform.

• Increased Savings in Voluntary Pension Plans

MONTHLY INDICATOR

Funds

Average

Monthly DepositsNovember

2016

Achievement of Monthly

Target

Accumulated Deposits

2016

Achievement of Annual

Target

Colon Fund A

Dollar Fund A*

Colon Fund B

Dollar Fund B*

445,208,623.96

54,033.00

169,50,433.33

65,422.31

196%

110%

103%

113%

130.63%

4,559,951,392.90

674,329.70

1,664,313,704.66

676,976.06

167%

114%

85%

97%

115.95%


• More Incoming Accumulated Balances from New Members New accumulated balances coming into the mandatory

funds (pension and labor capitalization) rose by 19.5% from 2015, implying an increase of 4,739 million over the year.

• Increased Contributions to Voluntary Plans through Agreements with Companies

As a result of company agreements, monthly collection of contributions by companies increased by 120%, signifying an additional ¢68.9 million per month.

2. OPERATIONS AND ADMINISTRATION:The members of the funds managed by BN Vital receive the benefits stipulated in the Worker Protection Law. In accordance with this law, 136,103 requests by our members were processed in 2016, representing an accumulated amount of ¢112,377.1 million. In addition, 266 requests were processed in the dollar-denominated funds for an accumulated amount of US $4.7 million.

Of special note in this process of benefit payout is the withdrawal of accumulated savings from the labor capitalization fund, due to completion of the fund’s third five-year period, for those members who have worked five continuous years for the same employer. This withdrawal occurs every five years, and this time it was made on April 1, 2016, when 26,616 members withdrew savings of ¢39,413.4 million. This benefit payout, under each fund’s appropriate regulatory conditions, constitutes our pension operator’s greatest contribution to the country’s social well-being.

Furthermore, in the individual capitalization pension plans such as the supplementary pension fund managed by BN Vital, benefits cannot be paid out to members until after a period of fund accumulation. In this period the funds managed in domestic currency received ¢193,502.5 million in new contributions, while the funds managed in US dollars received $6.2 million.

3. RISK-ADJUSTED RETURN RORAC (return on risk-adjusted capital), a tool for analyzing financial return, gives the minimum return limit (income – expenses, last 12 months) needed to cover the economic capital (comprised by market risk, credit risk, legal risk, and operating risk). In BN Vital, net income covered risks by 10.34 times at the December close, meaning that the pension operator is creating value over its control of the risks associated with its operations. It should be noted that the Bank set a minimum target of 1.3 times for this.

4. ENROLLMENT AND PARTICIPATION IN THE ECOLOGICAL BLUE FLAG PROGRAMAs set out in the environmental management plan for the Ecological Blue Flag Program, the first recycling campaign was held with the participation of all pension operator employees. A total of 210 kilograms of plastics, aluminum, and Tetra Brik packaging was collected. Also, in 2016 we reduced electricity consumption by 8.54%, paper ream consumption by 9.44%, and diesel consumption by 33.91% compared to 2015.


Fondos

Valores

VitalCORREDORA DE SEGUROS1. ECONOMIC ACHIEVEMENTS: SUMMARY OF FINANCIAL RESULTS2016 was an excellent year for BN Corredora de Seguros in terms of income from fees.

2. NEW PROJECTS AND SERVICESNew projects were developed in 2016 to extend our added values – such as INS group motorcycle insurance – to our customers. At the same time, several types of insurance were negotiated to take effect in 2017:

• Sagicor loan unemployment insurance• Oceanica auto loan car insurance• ASSA credit card protection insurance• PALIC credit life insurance and credit involuntary unemployment insurance for credit cards• Sagicor Asebanacio Sagicare insurance

3. BN CORREDORA DE SEGUROS FIFTH ANNIVERSARY CAMPAIGNTwo campaigns were conducted for different Banco Nacional customer segments, resulting in excellent insurance sales. • Incentive Plan – self-issue insurance sales• “Let’s Insure” Campaign – to insure the external agent portfolio

2015

Total Income ¢2,934,211,932

¢1,124 824,495

¢763,959,084

2016

¢4,166,441,629

¢2,034,404,495

¢1,376,131,467

Growth

42.00%

80.86%

80.13%

Gross Profit

Net Profit

4. SOCIAL ACHIEVEMENTS: 2016 VOLUNTEERINGA characteristic feature of BN Corredora de Seguros is that it is supportive and ready to help the community and society as much as it can. Everyone, from the general manager on down to all the employees has demonstrated their spirit of support, involvement and dedication, helping the company meet its goal by November 2016.

5. ENVIRONMENTAL ACHIEVEMENTSFor the second year in a row, we have been awarded the Ecological Blue Flagan annual recognition that rewards the volunteer work and effort invested in conservation and development in line with natural resource protection.

6. CAMPAIGNS• “Raising Awareness of Energy Efficiency”, talk given

by CNFL• “Post-consumer Waste Management”, talk given by

FIFCO• “Efficient Use of Water”, talk given by Acueductos &

Alcantarillados• “Efficient Use of Fuel in Vehicles”, talk given by Recope

representatives


2016 was the baseline year for data on the sustainability model and its indicators. Taking this into consideration, we simultaneously worked on making improvements, notably to prices, infrastructure, work schemes, asset management and eco-friendly waste disposal, as well as setting procurement requirements that contribute integrally to improving both institution and country impact.

1. INFRASTRUCTURE AND PROCUREMENT

The goals shown in the figure below were impacted; their monitoring was done using a tool developed for the agencies, branches and administrative offices to enter costs and consumption of items such as water, electricity, fuel, paper and ink, in order to create the 2016 baseline information.

1.1 CONSUMPTIONWe encouraged responsible use of the institutional resources used by the Bank in its operations. We optimized resource use, measuring consumption throughout the year and taking actions to reduce that consumption.

• Electricity and WaterTo obtain monthly water and electricity costs and consumption, a record was prepared by agency, branch, and administrative office, giving a total of 172 reports accounting for an expenditure of ¢3,439.54 million. Our consumption of water was 138,890 m3 for a bill of ¢19.31 million, while we consumed 27,812,839.2 kWh of electricity for a bill of ¢3,248.23 million.

To improve eco-efficiency and reduce water consumption, we remodeled the restrooms in the Bank’s main offices. When the restrooms were put into use there were a total of 21 sets of restrooms, with reduced water consumption as of April 2016. The behavior for the study period shows reduced consumption (liters) and cost of supply (¢/m3), according to the following data:

OUR COMMITMENT TO THE ENVIRONMENT

Waste collection and management

Impact the eco-efficiency indicator by

reducing energy, water, paper, and

toner consumption

Capture data on institutional

resource consumption

from the source

Implement eco-efficiency

criteria in selecting bidders

Replacement with

eco-friendly equipment

Protocol for construction of

eco-efficient buildings


From December 2015 to April 2016, water consumption averaged 2,091,000 liters, while from May to November 2016 it averaged 1,664,250 liters, implying average savings of 426,750 liters from the moment the first restrooms were readied.

It should be noted that there were two scenarios: • The first scenario runs from December 2015 to April 2016.• The second scenario runs from May 2016 to December 2016.

In the first scenario, water consumption averaged 2,128,000 liters for a bill of ¢3.19 million, while in the second scenario consumption dropped by 35% (1,389,000 liters) for a cost of ¢2.08 million, thus generating average monthly savings of ¢1.11 million.

• Fossil Fuels

An analysis was made of the consumption of fuels used in leased cars in terms of mileage, liters needed, and costs.

The mileage for diesel fuel was 226,011.1 kilometers, for which 19,231.96 liters were used at a cost of ¢8.48 million.

200.00

700.00

1,200.00

1,700.00

2,200.00

2,700.00

3,200.00

2,000.00

7,000.00

12,000.00

17,000.00

22,000.00

27,000.00

32,000.00




Diesel Consumption 2016

Distance Fuel L

Distance Fuel L

Distance Fuel L

600.00

1,100.00

1,600.00

2,100,00

2,600.00

3,100.00

3,600.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

35,000.00

40,000.00

45,000.00

Gasoline Consumption 2016

2,000.00

2,500.00

3,000.00

3,500.00

4,000.00

4,500.00

5,000.00

20,000.00

25,000.00

30,000.00

35,000.00

40,000.00

45,000.00

50,000.00

55,000.00

60,000.00

Fossi l Fuels 2016

200.00

700.00

1,200.00

1,700.00

2,200.00

2,700.00

3,200.00

2,000.00

7,000.00

12,000.00

17,000.00

22,000.00

27,000.00

32,000.00





Distance Fuel L

Distance Fuel L

Distance Fuel L

600.00

1,100.00

1,600.00

2,100,00

2,600.00

3,100.00

3,600.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

35,000.00

40,000.00

45,000.00


2,000.00

2,500.00

3,000.00

3,500.00

4,000.00

4,500.00

5,000.00

20,000.00

25,000.00

30,000.00

35,000.00

40,000.00

45,000.00

50,000.00

55,000.00

60,000.00

Fossi l Fuels 2016

The mileage for gasoline was 335,166.7 kilometers, consuming 23,894.44 liters at a cost of ¢12.11 million.

The mileage for 2016, then, totaled 561,177.80 kilometers, consuming 43,081.4 liters of fuel at a cost of ¢20.59 million.

200.00

700.00

1,200.00

1,700.00

2,200.00

2,700.00

3,200.00

2,000.00

7,000.00

12,000.00

17,000.00

22,000.00

27,000.00

32,000.00





Distance Fuel L

Distance Fuel L

Distance Fuel L

600.00

1,100.00

1,600.00

2,100,00

2,600.00

3,100.00

3,600.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

35,000.00

40,000.00

45,000.00


2,000.00

2,500.00

3,000.00

3,500.00

4,000.00

4,500.00

5,000.00

20,000.00

25,000.00

30,000.00

35,000.00

40,000.00

45,000.00

50,000.00

55,000.00

60,000.00

Fossi l Fuels 2016


• Paper and Ink ConsumptionThe information recorded in 2015 was used to obtain data on these resources. A record was created of the consumption of white paper (reams) and ink, generating an expense of ₡149.72 million. In both cases consumption fell by 18%, equivalent to 5,125,000 sheets and 2,852 ink cartridges that were not used.

The total expense for reams of paper in 2015 was ¢168.84; this amount fell in the next year by 44%, giving savings of ¢74.58 million. ¢102.70 was spent on ink in 2015; in 2016 this dropped by 46%, or ¢47.23.

• Waste Collection and Management The baseline was all incoming assets in disuse in the first quarter of 2016; chairs (164) were the biggest contributors and had the greatest impact on storage costs. In second place were filing cabinets (254), with furniture in third place (164).

Electronic assets have the greatest impact on costs due to the final disposal that is needed. They are sent for treatment to the Tecnológico de Costa Rica (TEC) at a cost to the Bank. Moreover, the amount of unused assets sent is significant: 292 CPUs, 268 keyboards, 142 printers, and 106 monitors.

The economic impact represented by management of unused assets was measured, taking into account storage, responsible

waste management, and expertise, giving an average unit cost of ¢352.50. Added to this is responsible waste treatment, for which the average unit cost is ¢197.64 for furniture and other equipment and ¢2,235.26 for electronic equipment (CPUs, monitors, and UPSs).

1.2 INTEGRATION OF SUSTAINABILITY INDICATORS IN BIDDER SELECTION CRITERIA

An analysis was made of the proposed environmental criteria for security, cleaning, courier, technology, marketing/advertising, timely deliveries, construction and maintenance, with regard to eco-efficiency and social responsibility clauses, for a total of 289 RFPs with social responsibility and sustainability indicator clauses.

1.3 REPLACEMENT OF CURRENT EQUIPMENT WITH MORE ECO-EFFICIENT EQUIPMENT

The 2016 plans for replacing – due to obsolescence or new needs – air conditioners, UPSs, portable and desk computers, office servers, and multi-function printers included a schedule for migrating from the current to new, eco-efficient equipment (such as low-consumption processors with Energy Star certification, variable volume and centralized control, etc.) in the medium term.

61

84

38

127

68

217 230

162

89

146

343

35

0

50

100

150

200

250

300

350

400

0

50

100

150

200

250

300


Replacement with Eco-Efficient Equipment 2016

Projected monthly replacement Actual monthly replacement

Some 1,600 items were delivered, successfully meeting the projected goal and surpassing it with

107% compliance.


1.4 PROTOCOL FOR CONSTRUCTION OF ECO-EFFICIENT BUILDINGS

A protocol was proposed for building eco-efficient buildings that incorporate elements for lighting, air conditioning, and water management, are viable for solar panel installation, and, in general, have an environmentally-friendly design.

The scope of the market analysis was defined for identifying best practices and the best eco-friendly accessories and equipment. Under the criteria of rational and efficient resource use, Banco Nacional started several years back to define standards for guiding the basic lines of action in terms of uniformity, eco-efficient maintenance, and spatial relationship for the use, benefit, and conservation of its facilities.

The principle it adopted for this was that of “total integration”, referring to the distribution that integrates and coordinates customers, employees, equipment, ecosystem, documents,

materials and other elements so that the offices perform as complete units.

In view of this, the feasibility was considered of using different electrical devices to help adapt to climate change and mitigate energy consumption in Banco Nacional branches and offices, thereby reducing operating costs and carbon emissions.

Additionally, the Bank is required to comply with MINAE’s Directive 11, in which the government urges the main state-owned companies with high levels of energy consumption to generate environmental management systems and adopt responsible procurement practices using efficiency-enhancing equipment.

Within the scope of its social responsibility policies, the Bank has defined a set of factors that have a positive impact on the environment and imply a joint effort by both individuals and the BN group.


1.1 Recycling Strategy:Training is an important component of a recycling strategy, so a survey was made of offices that needed training in proper waste management. The poll showed that 80% of the Bank needed training in waste management.

Offices were also surveyed to make sure that each had an environmental manager in order to properly monitor waste management. A total of 100 out of 170 Bank offices were enrolled in 2016. During the survey, we made sure all the offices had adequate containers for recycling.

1.2 Institutional Outreach:The program was primarily based on two main events sponsored by Banco Nacional:

“Planet Hour” Sponsorship: This event involved social networks as well as the physical participation of 2,000 people; savings equivalent to the electricity consumption of 5,000 households were recorded when energy was reduced by 30WM during the blackout. Information provided by the Costa Rican Electricity Institute (ICE). Environment Fair Sponsorship: The fair, held at the old customs building in San Jose, Costa Rica, attracted 25,000

people over five days. Banco Nacional was both sponsor and coordinator/host of the event, in partnership with the Ministry of the Environment.

1.3 Carbon Neutrality:Two strategies were crafted for applying carbon neutrality in the Bank, in accordance with ISO 14064:2011 and 120601:2013. The carbon neutral certification process was initiated in BN Vital and BN Valores, and, finally, the Ciudad Quesada branch office developed a pilot plan for certifying in carbon neutrality.

1.4 Environmental Awareness:A communication campaign was conducted in all of the country’s offices and agencies to present a character called “Mundito BN” (“Little BN World”). Aimed at all BN employees, the campaign addressed the issue of awareness in managing institutional resources.

1.5 Blue FlagTraining was conducted in the 36 enrolled offices on the parameters of each of the measurable items in the Blue Flag – Climate Change Category manual. The final result was the submission of 27 Blue Flag reports.

ENVIRONMENTAL MANAGEMENT PLAN:In order to have an orderly, systematic environmental program in place for the period from May to December 2016, the Bank devised a strategy focusing on five strategic areas: The environmental management program was developed in a differentiated manner to order permeate the entire institution.

Environmental Management Plan

Carbon Neutral

Environmental Awareness

Blue Flag

Recycling

Institutional Outreach


SUPPORT FOR WOMEN ENTREPRENEURS

86.7% of the lending goal was achieved, with satisfactory results in all segments except that of medium enterprises, where lending fell off. With the IDB/MIF program we expect to identify the needs of some of these enterprises and address them with a suitable value proposition in order to reverse this trend. As of December 2016 the loan portfolio had a legal default rate (1 to 90 days) of 6.31% and a 90+ day delinquency rate of 2.67%.

2. NON-FINANCIAL SERVICES83 activities were carried out with the attendance of 2,382 women. The activities, which provided business support for women entrepreneurs, were geared to growing their businesses and included training for the affluent and mass segment to improve financial literacy and build ties with the Bank through savings and loans, primarily.

1. FINANCIAL RESULTS

As shown in the table, ¢1,211,641 million were deposited, surpassing the annual goal of ¢1,206,211.69 million – a product of the results for micro, small, and medium enterprises and affluents. 88.5% of the goal was met for the mass segment.

Wom

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Business Data by Segment 2016 - December

Seg Mass Product Base Balance Monthly Balance Monthly Goal Annual Goal Note

Medium Enterprise 74,770.04 80,291.69 78,470.10 78,470.10 100.00 ✔

Small Enterprise 113,516.22 122,901.74 118,821.09 118,821.09 100.00 ✔

Micro Enterprise 237,120.46 263,063,97 258,092.63 258,092.71 100.00 ✔

Affluents 191,210.58 213,740.40 212,869.10 212,869.10 100.00 ✔

Mass 482,959.39 531,644.12 537,958.67 537,958.67 88.52 !

Total 1,099,576.69 1,211,641.92 1,206,211.59 1,206,211.67 100.00 ✔

Medium Enterprise 98,935.99 95,774.36 109,475.51 109,499.33 0.00 8

Small Enterprise 158,862.07 172,195.44 174,163.36 174,192.23 87.14 !Micro Enterprise 210,374.05 231,718.01 232,382.11 232,382.65 96.98 ✔

Affluents 46,917.64 55,018.06 52,628.94 52,628.94 100.00 ✔

Mass 310,788.78 358,681.17 358,200.65 358,200.65 100.00 ✔

Total 825,878,53 913,387.04 926,850.57 926,903.80 86.67 !

Balances OFSA


3. OTHER RESULTSa. IDB-MIF-AED-BNCR ProgramThe interinstitutional agreement signed with IDB/MIF, known as the business case for support of women-led enterprises, entered the implementation phase in the second half of 2016, starting with a few components such as training. The project’s implementing unit, Asociación Empresarial para el Desarrollo (AED), contracted the Instituto Tecnológico de Costa Rica to kick off the Women Leaders 360 Program with a total of 24 businesswomen, who built management and business capacities during the 6-month program that started in November 2016.

b. Big DataIn close coordination with IT and the Innovation and Marketing Department, requirements were defined for developing an information extraction program to help us identify specific needs, preferences and tastes in order to provide a better value proposition for the Bank’s women customers and attract new ones. Due to the complexity of the issue, this took longer than initially expected and planned, but it will serve as a pilot for other areas of the Bank.

Carolina Hernández, businesswoman


VOLUNTEER FORCE

RESULTS: At the end of 2016 the original goal had been surpassed. Under this new modality, actual volunteer hours totaled 24,507, surpassing the goal of 16,576 hours for 148% compliance with the program.

Issues Addressed

Impact by Segment

Youths

Women living in poverty

People with disabilities

Indigenous population

Business segments

Other (mixed)

18%

14%

2%1%

7%

58%

Youths 22,860Women living in poverty 16,768People with disabilities 1,944Indigenous population 1,540Business segments 8,575Other (mixed) 72,088

TOTAL 123,775

Impact by Segment


INVESTMENT FOR DEVELOPMENT

In 2016, Banco Nacional contributed to Costa Rica’s economic and social development through initiatives promoting financial education, infrastructure, job creation, and other necessities for the country’s socioeconomic and environmental growth.

1. INVESTMENT IN INFRASTRUCTURE:Banco Nacional has consolidated its role as a driver of development in Costa Rica and Central America. Its financing of public and private infrastructure has led to investments in such initiatives as private real estate development, construction of public institution buildings, construction of aqueducts and telecommunications networks, and clean energy generation (wind farms and hydroelectric plants, for example) – this last having become the means for mitigating the effects of fossil fuel-fired power generation. All this in response to Banco Nacional’s vision of being the driving bank for the country’s development and supporter of environmentally friendly initiatives.

The Bank has also become an ally of the rest of Costa Rica’s financial sector through the injection of working capital into target segments and businesses where BNCR has not ventured, such as leasing and invoice discounting, bringing business options to sectors unattended by second-tier banks.

Marvin Montero Varela, Director of Caminos del Sol


BNCR resumed management of the Instituto Costarricense de Puertos del Pacífico (INCOP) trust and will soon kick off a new project, “Plaza Esparza”. Furthermore, the managing trust for the National Stadium has continued its plausible self-maintenance management, even to the point of generating a profit at year end.

2. JOB CREATION:In terms of social responsibility, the DGBCE took actions to improve the quality of life of Costa Ricans and its business partners, in general. As shown in Table 1, 100 new loans were closed for a total of ¢268,884.4 million, leading to the creation of 10,007 direct jobs and 11,502 indirect jobs.

3. INTERNATIONAL SERVICESFor its international services, Banco Nacional has a network of direct and indirect correspondent banks through which our customers can transact their business efficiently, reliably,

and safely. Our highly trained officers are happy to advise customers on any questions they may have about international transactions.

Correspondent bank City CurrencyToronto Dominion Bank Toronto CAD

Ubs Ag Zurich CHF

Jp Morgan Chase Bank Londres EUR

Commerzbank Ag Frankfurt EUR

Deutsche Bank Ag Frankfurt EUR

Bbva Madrid EUR

Rabobank Utrecht US$

Commerzbank Ag Frankfurt US$

Bank Of Tokio-Mitsubishi Tokyo US$

Toronto Dominion Bank Toronto US$

Bank Of America Miami US$

Deutsche Bank Trust Company America New York US$

Bank Of New York New York US$

Jp Morgan Chase Bank New York US$

Citibank New York US$

Wells Fargo Bank New York US$

Bicsa Panama Panama US$

Banco Bancentro-Lafise Nicaragua US$

NO. of Loans Amount

TOTAL Colones Dollars Total loans Colones Dollars Translated into colones

DGBE 18 82 100 ¢ 28,552.6 $ 439.9 ¢ 268,884.4

CC 28 87 115 ¢ 163,551.6 $ 533.9 ¢ 455,244.9

DGBCE % Share 64.3% 94.3% 87.0% 17.5% 82.4% 59.1%

Table 1Number of Loan Closings

FY 2016

Activity Drafted in Colones % Colones Drafted in Dollars % Dollars

Energy ¢15,941,076,252 11.20% $48,164,007 22.80%

Industry ¢25,374,500,000 17.90% $76,799 0.00%

Public Works ¢1,901,469,387 1.30% $32,125,469 15.20%

Financial Services ¢98,884,417,581 69.60% $131,208,321 62.00%

Overall Total ¢142,101,463,220 100.00% $211,574,596 100.00%

55.20% 44.80%

Total Amount Drafted 2016 – Translated Into Colones ¢257,568,299,184 The following table shows loan amounts for 2016 aimed at investments in the aforementioned areas; these amounts drove more than 11% of the loan portfolio for the 2016 fiscal year close.


4. COMMUNICATIONSA trust was set up with SUTEL for kicking off the second “Connected Households” program, where the trust subsidizes at-risk populations by installing free Internet access. At year end, more than 12,000 people had benefitted from this program. At the same time, headway was made on Program Three for equipping different public institutions, helping institutions with training and with addressing all their equipment needs, with an average investment of US $9 million.

5. EDUCATIONA trust was set up with the Ministry of Public Education (MEP), and the first two trust-funded schools were built while progress was made on land purchases and more than 40 preliminary designs.

6. GREEN TRUSTSThe “green” trusts have been moving forward and growing. Key projects in this area have been achieved with FONAFIFO and the Fondo de Biodiversidad Sostenible-Fundación Banco Ambiental trust, such as payment of environmental services, thereby obtaining more funding for additional projects. By means of these trusts BNCR issues its “green card” and the eco-marchamo (optional carbon-offsetting vehicle decal),

with which it was able to contribute $280,000 at year end for growing the fund. A trust was also set up with MINAE for administering an expected income of more than ₡3 billion from Manuel Antonio National Park.

The trust that built the Peñas Blancas hydroelectric plant came to a successful completion, paying off all its securities issues and turning the rights to the plant over to the Instituto Costarricense de Electricidad (ICE) at mid-year. The trust that built and continues to manage the Cariblanco hydroelectric plant is still up and running. Some of this trust’s securities, which are very popular, continue to circulate in the securities market.

7. HOUSING / MORTGAGESBy destination economic activity, the largest share of BNCR’s portfolio balance is for housing (29.98%), followed by services (21.54%) and consumer credit (10.82%).

At year end the Bank had 134.9% compliance with its annual goal, achieving its target percentage for housing. This investment takes on significance in that it gives more families access to housing.

Institutional mortgage center (IMC) loan report IMC Annual

Business zone 2016 Target IMC Contribution Accumulated 2016 Achievement

East 17,290,480,542 6,916,192,217 16,157,434,103 233.6%

Heredia 14,976,580,509 5,990,632,203 11,548,613,843 192.8%

West 9,940,690,631 3,976,276,252 6,057,958,781 152.4%

Alajuela 10,156,133,076 4,062,453,230 5,806,202,912 142.9%

Cartago 13,055,894,179 5,222,357,672 5,361,916,276 102.7%

Central 13,216,377,533 5,286,551,013 4,530,887,605 85.7%

Limon 2,576,966,799 1,030,786,720 911,669,825 88.4%

Puntarenas 4,425,016,938 1,770,006,775 407,368,417 23.0%

Ciudad Quesada 2,471,953,020 988,781,208 133,202,000 13.5%

Perez Zeledon 2,611,355,494 1,044,542,198 113,430,000 10.9%

Liberia 4,018,743,007 1,607,897,203 84,344,000 5.2%

Total 94,741,191,728 37,896,476,691 51,113,027,762 134.9%

Source: DGCF


9. MICRO AND SMALL ENTERPRISES

Business Data by Segment 2016-December


Savings 38,836.50 44,057.65 42,441.00 42,441.00 100.00 ✔

TCD 66,828.33 73,690.43 75,195.07 75,197.53 82.02 !Current Account 250,465.59 266,079.09 253,823.58 253,823.58 100.00 ✔

Total 356,130.43 383,827.16 371,459.64 371,462.11 100.00 ✔

Consumer 8,657.58 9,338.07 9,712.61 9,716.23 64.50 8

Development 274,172.54 296,844.18 304,941.80 304,941.80 73.68 8

Business 115,763.99 127,721.95 127,538.86 127,667.34 100.00 ✔

Mortgage 145,768.19 148,540.93 152,504.43 152,504.43 41.16 8

Credit Card 7,540.31 8,568.43 9,646.61 9,646.61 48.81 8

Car 7,913.56 7,560.16 9,621.88 9,621.88 0.00 8

Total 559,816.17 598,573.72 613,966.18 614,098.28 71.57 8

Smal

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Smal

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Dep

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Business Data by Segment 2016-December


Savings 333,551.64 382,697.85 374,491.77 374,491.77 100.00 ✔

TCD 171,593.67 178,235.22 190,885.25 190,885.89 34.43 8

Current Account 222,306.21 241,677.12 224,005.89 224,005.89 100.00 ✔

Total 727,451.52 802,610.19 789,382.91 789,383.55 100.00 ✔

Consumer 38,886.70 48,696.33 46,541.99 46,541.99 100.00 ✔

Development 295,850.09 324,928.88 324,135.31 324,135.31 100.00 ✔

b n st r 2016b n st r 2016 8 organizational chart approved by the board of directors in meeting...

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