Research Report Alex Diaz (Sample)

COSTA RICAN FINANCIAL GROUPS
FOCUS ON THE PUBLICLY TRADED FINANCIAL GROUPS

October, 2001 This research report covers the four private financial groups that have equity listings in the Costa Rican Securities Exchange (BNV): Alberto Camacho 502 339-3171 acamacho@provident-group.com Alex Diaz 502 339-3171 adiaz@provident-group.com
Corporacin Interfin, Corporacin Banex, Corporacin B.C.T., and Grupo Financiero Improsa.
To provide an idea of the context in which these financial groups operate, this report is comprised of the following sections: SECTION I: SECTION II: The Costa Rican Banking System Bank Regionalization
SECTION III: The Costa Rican Financial & Regulatory Framework SECTION IV: SECTION V: SECTION VI: Costa Rican Economic Indicators & Capital Flows The Costa Rican Securities Exchange Valuation
SECTION VII: The Publicly Traded Financial Groups
EXECUTIVE SUMMARY
The Costa Rican banking system is mainly comprised of 3 government banks that represent 53% of the total assets of the banking sector, and 20 privately owned financial groups that account for the remainder of the systems assets. The three Costa Rican government banks have competitive commercial banking activities, unlike other countries in which the government banks operations are mainly of a developmental nature. The government banks growth is constrained by limitations of access to capital, while private financial groups do not face this limitation and have been experiencing relatively high levels of growth. The private financial groups market participation is highly concentrated, with the six largest groups accounting for 78% of aggregate total assets of the private groups. Further concentration among the private financial groups is expected, as under current market conditions the main drivers are size, efficiencies, innovation, and return on equity. The consolidation of the Costa Rican financial system could significantly alter the playing field, since the final determination as to who will be the
October, 2001
leaders is yet to be resolved. Moreover, the increasing regionalization of the banking system should further transform the competitive landscape. The BNV is the most active securities exchange in Central America. Its influence is growing at a regional level during a period in which access to capital is critical for the financial sector. There is a strong demand for new equity issues. Investors seem to prefer to hold on to their investments indicating that they consider these new equity issues to be adequately priced to enable them to achieve expected returns. We base our valuation approach on a price-to-book-value and price-toearnings. The pricing of the four financial groups reflects investors relatively high-growth expectations. We have set price targets for YE 01 and YE 02 for these financial groups.
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SUMMARY TABLE OF CONTENTS

Section I: The Costa Rican Banking System ..................................................................4 Overview ........................................................................................................................4 Public Sector Commercial Banks ...................................................................................4 Background ................................................................................................................4 The Government Banks ..............................................................................................5 Privatization-Not seen as a factor in the near term .....................................................6 High Temporary Investment Portfolio Levels ............................................................6 Fee Income .................................................................................................................7 The Private Financial Groups .........................................................................................7 Background ................................................................................................................7 The Financial Groups .................................................................................................8 Section II: Bank Regionalization...................................................................................11 Overview ......................................................................................................................11 Financial Groups with Regional Presence ....................................................................11 Regional Development .................................................................................................12 Section III: The Costa Rican Financial and Regulatory Framework ........................13 Overview ......................................................................................................................13 Supervisory Guidelines.................................................................................................15 Section IV: Costa Rican Economic Indicators & Capital Flows.................................18 Costa Rican Economic Indicators.................................................................................18 Costa Rican Capital Flows ...........................................................................................18 Section V: The Costa Rican Securities Exchange ........................................................20 Market Capitalization ...................................................................................................21 BNV Index ...................................................................................................................21 Market Demand Overview ...........................................................................................22 Financial Groups ..........................................................................................................23 Corporacin Interfin .................................................................................................24 Corporacin B.C.T. ..................................................................................................25 Grupo Financiero Improsa........................................................................................26 Section VI: Valuation .....................................................................................................28 Price-to-Book Value.....................................................................................................28 Price-to-Earnings..........................................................................................................29 Corporacin Interfin .................................................................................................30 Grupo Financiero Improsa........................................................................................30 Corporacin B.C.T. ..................................................................................................30 Corporacin Banex ...................................................................................................30 High Demand for Stock in a Market with Low Liquidity.............................................31
Section VII: The Publicly Traded Financial Groups.....................................32

Corporacin Interfin .....................................................................................................32 Recommendation......................................................................................................32 Background ..............................................................................................................32 Investment Highlights...............................................................................................33 Business Outlook......................................................................................................35 Corporacin Banex.......................................................................................................38 Recommendation......................................................................................................38 Background ..............................................................................................................38 Investment Highlights...............................................................................................39 Business Outlook......................................................................................................42 Corporacin B.C.T. ......................................................................................................45 Recommendation......................................................................................................45 Background ..............................................................................................................45 Investment Highlights...............................................................................................46 Business Outlook......................................................................................................49 Grupo Financiero Improsa............................................................................................52 Recommendation......................................................................................................52 Overview ..................................................................................................................52 Investment Highlights...............................................................................................53 Business Outlook......................................................................................................56
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SECTION I:
The Costa Rican Banking System

Overview
Government banks control over 50% of total banking sector assets.
The Costa Rican banking system is principally comprised of three government banks that represent 53% of the total assets of the banking sector, and twenty privately owned financial groups that account for the remaining 47%. Unlike several other countries in which the publicly owned banks are dedicated largely to fulfilling specifically determined financing roles, commonly of a developmental nature, these three government owned banks have a firm broad based competitive position in the market. During the past quarter-century, through the progressive liberalization of the banking laws, the private financial entities have been increasingly gaining market penetration, making inroads through the identification of business opportunities, service and efficiencies. Given the strong market position developed throughout the years, the publicly owned banks can be expected to continue to maintain a leadership position. However, in view of the expected capital, operating efficiencies and new product development that will be required going forward, we can expect private banks to continue to gain market share.
Private sector participation is highly concentrated, and consolidation is expected to continue.
The private sector participation has been undergoing a progressive concentration, to the extent that six of the twenty entities control 78% of total private financial group assets. This concentration is expected to continue as size, efficiencies and innovation are among the principal market drivers. As a consequence, it is expected that certain well-managed and well-capitalized financial groups will increasingly gain market share, and in the not too distant future should be expected to challenge the government banks in terms of size, though they should continue to lag in terms of geographical and demographical coverage. Four private financial groups have equity listings in the Costa Rican Securities Exchange (Bolsa Nacional de Valores), positioning themselves to utilize an increasingly active capital market. The Costa Rican Securities Exchange is the most active in Central America, and its influence is growing at a regional level. Going forward, acceptable returns on equity and access to capital will be critical to both public and private banks in an environment in which size and efficiencies are key factors in determining the market leaders.
Regionalization of the financial sector will further influence the competitive landscape.
Another factor that is transforming the competitive landscape is that the Central American financial sector is undergoing the initial phases of a regionalization process. Financial institutions are increasingly penetrating the markets outside their countries, in an effort to expand and diversify their operations. The local financial markets have been developing to the extent that a leadership market position will be determined by its increased participation, and success, in the regionalization process.
Public Sector Commercial Banks

Background
The market significance of the government owned banks in Costa Rica has its origins in the nationalization of the countrys banks in 1949, enabling the banks
October, 2001
to operate and develop throughout several decades with limited competition. Throughout this period the government banks were able to establish firm roots and develop a strong market presence that cultivated their existing market leadership position. Although the banking regulations began a gradual liberalization as of the 1960s, it was not until the 1980s that certain structural adjustments and further law modifications were made, and a meaningful private bank presence began to develop. The government banks continue to benefit from certain advantages over their private counterparts. One of the main benefits is that these public banks have the guarantee of the government, providing a significant advantage over the private banks. This should continue to be a factor in the market. However, historically the government has not been dedicated to injecting capital to support the growth of the public banks. Growth has been largely of an organic nature, which under a protected legal structure did not put at risk their relative competitive market position. This has now changed and the public banks will continue to be exposed to competition, particularly to large banks with access to capital to support growth and innovation.
The Government Banks

Banco Nacional de Costa Rica
Banco Nacional de Costa Rica (Banco Nacional) is by a significant amount the largest bank in the country. It represents 58% of the total government bank assets, and 31% of the banking systems total assets. Its size makes it one of the largest banks in the five Central American countries. With 115 branches and 220 ATMs Banco Nacional provides a wider exposure than any other bank in the country, and has, by far, a larger market coverage than the private banks. The bank has developed into a universal bank offering a wide array of services including banking, brokerage services, as well as investment and pension funds. Throughout the years it has been an integral part of the economic and financial framework of the country. However, the bank is expected to continue to face the capital constraints mentioned above, during a period in which growth is a critical factor. A private bank of this size would likely be focused in becoming a regional force, but this alternative can be practically discarded by it being publicly owned.
Banco de Costa Rica

As of December 2000, the second largest public bank is Banco de Costa Rica (BCR), representing 32% of total government bank assets, while its capital accounts for 56% of total public banks capital. In terms of total assets BCR is 107% larger than those of the largest private financial group, Banex. BCR with 77 branches has a much larger network than any of the private banks, and is more efficient than its government counterparts. Moreover, BCR accounted for 86% of the aggregate profits of the public sector banks, and 36% of combined public and private sector bank profits. Its ROE of 23% in YE 2000 is only matched by Banex. The size of BCR, and its relatively high returns should enable it to sustain a significant growth level, and remain a strong competitor in the existing market environment. However, as with the other government banks, it would also face capital constraints. BCR and Banco Nacional account for 48% of the total assets of the banking system, and the combined banks account for 59% of total ATMs in the system,
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which illustrates their significance in terms of size and geographical coverage. Going forward, Banco Nacional and BCR should continue to maintain their market predominance, and network coverage should also continue to be a key factor, as private banks are not yet in position to match them. But they will continue to be tested in terms of efficiency and capacity to generate capital to support growth.
Banco Crdito Agricola de Cartago

Banco Crdito Agricola de Cartago (Crdito Agricola) is substantially smaller than its two public counterparts, and it is of a size equivalent to the fifth private financial group in terms of total assets. The bank also has a smaller network of 27 branches, which could be matched in a foreseeable future by the larger private banks. Table 1: Government Banks (amounts in millions of colones) Government Bank
Banco Nacional de Costa Rica Banco de Costa Rica Banco Crdito Agrcola de Cartago Total
Assets
829,906 461,553 139,326 1,430,785
Capital
%
36% 56% 8% 100%
Profit
1,607 11,896 294 13,797
%
12% 86% 2% 100%
58% 32,933 32% 50,776 10% 7,339 100% 91,048 Source: SUGEF, Asociacin Bancaria Costarricense.
Privatization Not seen as a factor in the near-term

In Costa Rica there is continuous conjecture on the possible privatization of certain public entities, and the banks are no exception. However, as with the cases of the electrical power and telecommunications monopoly, Instituto Costarricense de Electricidad (ICE), and the countrys sole insurer, Instituto Nacional de Seguros (INS), there does not exist the required political, social and economic consensus at this time to undertake and execute any concrete plans that could lead to the privatization of the state owned banks in the foreseeable future. However, contrary to the ICE and INS, the government banks do operate in an increasingly competitive environment. These banks will continue to be impelled by market forces not yet experienced by most non-financial governmental entities. Moreover, the globalization of the financial systems should continue to propel the Costa Rican system towards commonly accepted international standards and practices, and to an increasingly higher level of competition.
High Temporary Investment Portfolio Levels

Government banks have relatively high temporary investment levels. The relative levels of temporary investments (comprised mainly of secure and rather liquid government securities) of the three government banks are uncharacteristically high by conventional industry norms. This may be partially caused by common governmental bank practice of financing the public sector, but there are indications that it may also be attributable to capital limitations. Temporary investments represent a high level relative to the size of their respective loan portfolios. As shown in Table 2 below, the investment amounts of BCR and Crdito Agricola are larger than their loan portfolios, while the investments of Banco Nacional almost match total loans.
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Table 2: Government Banks Investments and Loans (in millions of colones)
Temporary Investments
Banco Nacional de Costa Rica Banco de Costa Rica Banco Crdito Agrcola de Cartago Total 253,907 210,906 72,784
% Loans
49% 56% 66%
%
265,699 166,837 37,115
51% 44% 34% 47%
Total Loans & Temp Inv.

519,606 377,743 109,899 1,007,248
%
100% 100% 100% 100%
53% 537,597 469,651 Source: SUGEF, Asociacin Bancaria Costarricense.
..which points towards growth limitations due to restricted access to capital.
The relatively high temporary investment level could be expected to an extent, as traditionally Latin American publicly owned banks have been active lenders to their governments. However, it seems that this may be also caused by capital limitations. Loans customarily require a higher regulatory asset risk-adjusted weight allocation than traditional bank temporary investments. Loan portfolio growth is limited, due to constrained capitalization levels, prompting management to shift funds to investments, which require less capital, enabling the institution to comply with regulatory requirements. In YE 00 Banco Nacional had a capital-to-total-assets ratio of 4%, and that of Crdito Agricola was 5.3%; low capitalization figures by conventional measures. Seemingly, with such ratios these banks should have asset growth limitations. BCR had a higher ratio of 11%, but investments almost equal loans, although it would seem that its capital could sustain a considerably higher degree of growth than its government owned counterparts.
.in a market largely driven by asset size.
The historic lack of capital injections to these banks, combined with the limitation to grow its asset base, is a limitation in a market that is increasingly driven by asset size.
Fee Income
In June 2001 Banco Nacional announced that it would be charging customers for certain services that heretofore had been, in general, provided for free by the entire banking sector. Charging fees for services is an internationally accepted business practice that eventually makes its way into most banking systems. But in this case the revealing issue is that the initiative was taken by an entity that is a government owned bank that is by far the market leader. We can expect this to become an accepted business practice and the rest of the banking sector to follow by charging their own fees in an attempt to boost the bottom line. The relative benefit to the banks in the sector will result largely from comparative volumes, as well as capital and cost structures, benefiting those with size, volumes, and products/services diversification.
The Private Financial Groups

Background
The existing Costa Rican private financial group structure is essentially the result of the legal and market developments that have occurred during the past three decades. After the nationalization of the banks in 1949 it was not until the 1960s, and mostly the 1970s, that a gradual, though progressive, legal and regulatory liberalization initiated the formal participation of the private sector in the Costa Rican financial system principally by permitting the creation of finance companies. But, it was in the 1980s when more significant structural
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adjustments were effected that a meaningful private bank presence began to develop. Further reforms to the legal framework governing the financial sector made in the 1990s resulted in the present-day legislature, and regulatory structure of the financial system. Several of the present-day financial groups trace back their origins to finance companies originated in the 1970s, which evolved into commercial banks in the 1980s, and achieved their present day structure as of the late 1990s. In general, the configuration of the groups follows a universal bank model, permitting the formation of financial groups with financial subsidiaries (see Table 3 for a description of the financial groups and subsidiaries).
The Financial Groups

There are twenty private financial groups in Costa Rica that collectively represent only 87% of aggregate total assets of the three government owned banks as of December 2000. It takes the combined total assets of the five largest financial groups to match the size of Banco Nacional. Clearly, there are too many private groups in relation to the assets they represent, and the greater majority of the total assets of the private groups are represented by a few entities.
Financial Groups High level of concentration

Private sector consolidation is expected to continue, as leadership position should be largely determined by size. The financial group participation is highly concentrated on a handful of entities. The six largest financial groups represent 78% of the aggregate total assets of the twenty private groups. Table 3: Private Financial Groups (in millions of colones as of Dec-00)
Financial Groups Grupo Financiero Interfin Grupo Financiero Banex Grupo Financiero BICSA Grupo Financiero BCT Grupo Financiero San Jos Grupo Financiero Cuscatlan Grupo Financiero Citibank Grupo Financiero Metropolitano Grupo Financiero BNS Grupo Financiero Bantec Grupo Financiero Promerica Grupo Financiero Improsa Grupo Financiero Finadesa Grupo Financiero Elca Grupo Financiero Cathay Grupo Financiero Lafise Grupo Financiero Bancrecen Grupo Financiero Coocique Grupo Financiero Pacfico Grupo Financiero Acobo ASSETS 222,464 213,414 195,281 147,217 111,412 84,972 34,584 30,585 27,481 25,620 22,780 22,730 21,040 18,266 16,693 16,550 14,734 11,302 10,588 1,556 %
17.81% 17.08% 15.63% 11.78% 8.92% 6.80% 2.77% 2.45% 2.20% 2.05% 1.82% 1.82% 1.68% 1.46% 1.34% 1.32% 1.18% 0.90% 0.85% 0.12%
NET INCOME
CAPITAL 22,719 22,493 32,509 17,291 11,368 10,749 4,135 3,756 3,073 3,355 3,511 3,133 3,382 3,370 3,640 2,170 2,088 1,563 2,068 642
%
14.47% 14.33% 20.70% 11.01% 7.24% 6.85% 2.63% 2.39% 1.96% 2.14% 2.24% 2.00% 2.15% 2.15% 2.32% 1.38% 1.33% 1.00% 1.32% 0.41%
3,099 16.23% 5,285 27.69% 2,668 13.98% 1,657 8.68% 1,875 9.82% 1,483 7.77% 501 2.62% 317 1.66% 128 0.67% 383 2.01% 290 1.52% 351 1.84% 268 1.40% 121 0.63% 50 0.26% 160 0.84% 193 1.01% 65 0.34% 149 0.78% 46 0.24%
Total: 1,249,269 100% Source: SUGEF, Asociacin Bancaria Costarricense.
19,089
100%
157,015
100%
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This concentration is expected to continue as the largest groups should keep separating themselves from their smaller competitors, and the small entities that remain should be largely limited successful niche players. Moreover, the smaller groups will find it increasingly difficult to contend with both the stronger private and public banks. In general, under current market conditions, size, efficiencies, innovation, and return on equity are the main market drivers. Market leaders.yet to be determined. However, for some players the final determination as to whether they fall among the big or small is yet to be determined. For instance, there are certain groups not in the top six, such as Improsa, Promerica and Bank of Nova Scotia, that are among the viable competitors with access to capital and funding to carve out a firm market position, and sustain growth. The competitive landscape could be readily altered given the existing composition of the financial groups participation. A local merger or acquisition could significantly alter the playing field, and the increasing consolidation of the Central American banking market is surely going to bring about transformations, not only in Costa Rica, but also throughout the region. As a consequence, we can expect the larger institutions to try to make the most of their competitive positions to further distance themselves from the weaker competitors, strengthen their market positions, and strive to be in the most solid position during this period of market reconfiguration. The consolidation is not only taking place in Costa Rica, but also throughout Central America, and we can expect the groups to continue positioning themselves to maximize their options.
Success in the consolidation and regionalization processes will determine the market leaders.
Table 4: Costa Rican Financial Institutions

FINANCIAL INSTITUTIONS
Banks Agentes Corredores de Bolsa Vista SFI Bancrecen Banex SFI Bantec BCT SFI Bantec BCT banex OPC Banex Corp. Financiera CF Bancrecen Caribean Bank of Exports Bantec International BCT Bank International/Commerce Overseas Bank BCT Valores Cuscatlan International Bank Valores Cuscatln Scotiavalores Cathay Valores Citivalores Coocique Elca U.P. Bank & Trust Ltd. Financorp Interfin Valores Lafise West Caribbean Bank Metro Valores Uno Saint Georges Bank & Trust BSJ International Bank Gibraltar Holdings Inc. BICSA Panam: BICSA Miami Off Shore Banks BNCR BCR Safi BCR ISN-Bancrdito Valores INS-Bancrdito SAFI Off Shore Banks Banco Popular Banco Popular SAFI Brokerage Investment Funds Pension Funds BCR BN Fondos BN Vital Brokerage Investment Funds Pension Funds BICSA Valores BICSA SFI Arrendadora Comercial AT Leasing Servims Mxima Insurance Mas x Menos Finance Other San Jos Valores San Jos Valores SFI San Jos Pensiones Arrendamientos Financieros San Jos Uno SFI Arrendamientos Metropolitanos Uno Lafise Valores Metropolitanos SFI Interfin Interfin-Banex Interfin Financorp Corp. Privada de Inversiones Transamerica bank & Trust Financorp Financorp Elca Comercializadora de Seguros Elca Cathay SAFI Fondo Cuscatln OPC Cuscatln Cuscatln Scotiabank Cathay Internationa Bank Citigroup Banex Valores Bancrecen Valores Banex Off Shore Banks Brokerage Investment Funds Leasing Insurance Finance Companies Other Pension Funds
Private Financial Groups
Grupo Financiero Acobo
Grupo Financiero Bancrecen
Bancrecen
Grupo Financiero Banex
Grupo Financiero Bantec Grupo Financiero BCT
Bantec BCT
Grupo Financiero Cuscatlan
Cuscatlan
Grupo Financiero BNS
Scotiabank
Grupo Financiero Cathay
Cathay
Grupo Financiero Citibank
Citibank
Grupo Financiero Coocique
Grupo Financiero Elca
Grupo Financiero Finadesa
Finadesa
Grupo Financiero Interfin
Interfin
Grupo Financiero Lafise
Bancentro
Grupo Financiero Metropolitano Uno
Metropolitano
Grupo Financiero Pacfico
Grupo Financiero Promrica
Promrica
Grupo Financiero San Jos BICSA Banks BNCR BCR
San Jos
Grupo Financiero Improsa
Improsa
Grupo Financiero BICSA
Grupo Financiero Servivalores Government Banks
10
Banks
Banco Nacional de Costa Rica
Banco de Costa Rica
Banco Agrcola de Cartago
Bancrdito
Development Banks
Leasing
Insurance
Finance
Other
Banco Popular y Desarrollo Comunal
Banco Popular
Baco Hipotecario de la Vivienda
BANHVI
OTHER FINANCIAL INSTITUTIONS

Finance Companies Financiera Beln Financiera Brunca Financiera Cafsa Financiera Comeca Cooperative Savings & Loans COOPE-ANDE R.L. SERVICOOP R.L. COOPEASERRI, RL COOPECAJA R.L. COOPECAR R.L COOPECORRALES R.L. COOPEFYL R.L. COOPEGRECIA R.L. COOPEJUDICIAL R.L. COOPEMEP R.L. National Housing System Financial Entities Mutual Cartago Kineret Servicios de Factores Internacionales Mutual Alajuela Factoring Companies Transacciones M&M del Este Transmosa Leasing Companies Kineret Grupo Mercado Valores Arrendadadora Comercial Brokerage Firms Grupo Consolidado Sama Grupo Serfin Grupo Interbolsa Valores Comerciales de CR SFC Factoreo Factores Bantec Banco Interfin Mutual Heredia COOPEMEX R.L. COOPENAE R.L. COOPEOROTINA R.L. COOPESANRAMON R.L. COOPESERVIDORES R.L. COOPESPARTA R.L. COOPETACARES R.L. COOPMANI R.L. COOTILARAN R.L. CREDECOOP R.L. Financiera Desyfin Financiera Multivalores Financiera Trisan La Unin Financiera Aduanera
Compaa Financiera de Londres
Compaa Financiera Miravalles
COOCIQUE R.L.
COOPAVEGRA R.L.
COOPE SAN MARCOS R. L.
COOPEACOSTA R.L.
COOPEALIANZA R.L.
La Vivienda, Mutual de Ahorro y Prstamo
Divisas
Fadesa
El Camino Resources
Grupo Burstil Aldesa
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Source: Provident Group
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SECTION II:
Bank Regionalization
Overview
The competitive landscape is being transformed by the regionalization of the financial sector. Increasingly financial institutions are expanding to other countries in the region in search for size and risk diversification. A market leadership position will be determined to a significant extent by increased participation and success in the regionalization process. We would expect that the institutions that successfully establish themselves throughout the region will command higher valuations, principally based on size and risk diversification. Given the significance of this factor we describe below the main financial institutions that have initiated the development of a presence throughout the Central American region: Table 5: Financial Groups with significant regional presence
Financial Group
Banco Agrcola Red Financiera BAC Banco Cuscatln Primer Banco del Istmo
Costa Rica Nicaragua

Caley Dagnall San Jos Cuscatln Banex Amrica Central
Honduras
Produccin Credomatic
El Salvador
Agrcola Credomatic Cuscatln
Guatemala
Panam
Amrica Central Cuscatln
BAC International
Primer Banco del Istmo Source: Estrategia y Negocios.
Financial Groups with Regional Presence

Banco Agrcola
Banco Agrcola (Agrcola) was founded in 1955 in San Salvador. In the year2000 it became the largest bank in Central America with the absorption of Banco de Desarrollo in El Salvador. Agrcola has been focused in the Salvadorian market, but has taken steps to have a presence in Honduras and Nicaragua, and we can expect further regional expansion. The entities that comprise the financial group are Banco Agrcola in El Salvador, which has a majority equity participation in Banco de la Produccin in Honduras and Banco Caley Dagnall in Nicaragua. We should expect Agrcola to strive to be an active player in the regional market to maintain its leadership position.
Red Financiera BAC

Founded as Banco de Amrica in 1952 in Nicaragua, Red Financiera BAC (BAC) is a financial group with one of the most extensive operations throughout Central American. BAC has a presence in every country of the region and is mainly focused on credit card and private banking operations. The banks that comprise the group are: 1) BAC Florida Bank, in Miami; 2) Banco de San Jos, in Costa Rica; 3) Banco de Amrica Central, in Nicaragua; 4) Banco Credomatic, in Honduras; 5) Banco Credomatic, in El Salvador; 5) Banco de Amrica Central, in Guatemala; 6) BAC International Bank, in Panama; 7) BAC International Bank, in Grand Cayman.
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Grupo Financiero Cuscatln

Founded as Banco Cuscatln in 1972 in El Salvador, Grupo Financiero Cuscatln has developed into one of the largest financial groups in the Central American region. Currently it is the second largest bank in El Salvador, behind Banco Agrcola, which is the largest bank in Central America, but Cuscatln seems to have been more proactive in undertaking its regional expansion. Its expansion into Costa Rica and Guatemala was principally done through acquisitions. In Costa Rica it acquired Grupo Financiero BFA, and in Guatemala Centrica, S.A., a finance company that subsequently converted to a bank. The Cuscatln name has been adopted by all its entities in the three countries, as a measure to unify its franchise name throughout the region. The principal entities that comprise the financial group are Banco Cuscatln & Subsidiaries-El Salvador, Grupo Financiero Cuscatln-Costa Rica, and Grupo Cuscatln Guatemala.
Primer Banco del Istmo

Primer Banco del Istmo (Istmo) had its origin in 1984 in Panama as Banco del Istmo. Istmo has made clear its intention of becoming a major regional player. After establishing a presence in Costa Rica as Banco del Istmo (Costa Rica), it expanded by acquiring Banex, a major bank in Costa Rica. Primer Banco del Istmo is registered in both the Panamanian and Costa Rican securities exchanges. Moreover, Banco del Istmo absorbed Primer Grupo Nacional, owner of Pribanco. Pribanco is a Panamanian bank, which enabled it to become the largest bank in Panama under the name of Primer Banco del Istmo. Although its presence outside of Panama is currently limited to Costa Rica, Istmo has an aggressive approach to penetrate into other markets in the region. In August 2001 it carried out a US$50 million preferred stock issuance, of which proceeds will be partially utilized to support its regional expansion plans. The principal entities of the financial group are as follows: 1) Primer Banco del Istmo (Panama); 2) Corporacin Banex, in Costa Rica.
Regional Development
As mentioned earlier, the ultimate composition of the Costa Rican competitive environment is yet to be determined as relatively small banks are vying to position themselves to maximize their options. However, the main private financial groups are relatively small in size in comparison to financial institutions operating in other countries in the region. The Costa Rican banks have been consolidating in an effort to grow. Their relatively small size puts them in a disadvantageous position with respect to the larger banks throughout the region that might see potential in Costa Rica. This could result in being an obstacle in the Costa Rican financial institutions achieving the required growth. Unlike Costa Rica, the competitive position has been largely determined within the other countries of the region. The leading financial institutions outside of Costs Rica are now being challenged with having to establish a presence in other countries to achieve required growth levels. We believe that a solid competitive position will be mainly determined by developing a strong regional presence, and that ultimately four to six large financial institutions would be able to develop into the regional leaders.
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The four Costa Rican private financial groups that are listed in the local securities exchange have relatively high valuations that revolve around 3x book value. Such high valuations seem to be driven by expected growth, and also reflect confidence in investors achieving expected returns (see Valuation). However, the growth that these financial institutions can achieve in Costa Rica is surpassed by the potential growth of a financial group with a regional focus. Consequently, we would expect that the large regional players should have higher valuations than their non-regional counterparts. In Table 6 below, we observe that the high valuation multiples in Costa Rica compare favorably to other financial institutions in and outside the region. As a result of the acquisition carried out by Citigroup of the Mexican financial group, Grupo Financiero Banacci, Citigroups shares now trade in the Mexican stock exchange. The acquisition was carried out at a P/BV of 2.80x. Moreover, Citigroups shares trade at a price-to-book-value of 2.97x, reflecting high growth expectations including the potential of utilizing the Banamex brand to expand within the Mexican community in the United States. Mexican competitor Grupo Financiero BBVA-Bancomer trades at a P/BV of 1.52x. Bancomer is the largest retail bank with the most extensive branch network in Mexico, and significant growth should be more difficult to achieve. Another strong Mexican financial group is Grupo Financiero Banorte, which trades at a P/BV of 0.79x. Banorte is the only financial institution in the country that is fully Mexican owned. Banortes growth potential is being challenged in a competitive environment that has been altered by the penetration of large international financial institutions. To compare the Costa Rican valuation with those of other banks in the region, we have to rely on anecdotal evidence because they do not trade in a stock exchange. The anecdotal evidence we have been able to compile indicates that valuations range, in general, in P/BV multiples between 1.80x 2.50x. In general terms, banks outside of Costa Rica, limited to their countries, seem to have less growth potential than the Costa Rican banks as well as those developing into a regional franchise. Table 6: Comparable Multiples for Financial Groups
P/BV
Costa Rica
P/E 18.98x 11.56x 27.53x 15.30x 15.60x 14.40x 3.40x N/A
Corporacin Interfin Corporacin Banex Corporacin B.C.T. Grupo Financiero Improsa

Mexico
2.60x 2.48x 2.96x 2.94x 2.97x 1.52x 0.79x 1.80x - 2.50x
Citigroup GF BBVA-Bancomer GF Banorte

Central America
Avg. Anecdotal Evidence
Source: Bolsa Nacional de Valores de Costa Rica S.A., Provident Group, Banamex.
13
October, 2001
SECTION III:
The Costa Rican Financial and Regulatory Framework

Overview
The Costa Rican financial system is regulated by a series of laws enacted by the Legislative Assembly (Asamblea Legislativa) that govern all financial activities. The enactment of the Organic Law of the BCCR (Ley 7558-Ley Orgnica del Banco Central de Costa Rica) in 1995 provides the framework for the current structure of the Costa Rican financial legal and regulatory structure. The Central Bank of Costa Rica, Banco Central de Costa Rica (BCCR), has among its various functions the duty to supervise the systems participants adherence to the financial laws and regulations. The National Supervisory Council of the Financial System (CONASSIF Consejo Nacional de Supervision del Sistema Financiero), is the main entity that oversees the financial, legal and regulatory parameters throughout the system. The CONASSIF, in turn, relies on the three Superintendencies it supervises to carry out the implementation of the legal initiatives. The three Superintendencies are: General Superintendency of Financial Institutions (SUGEF Superintendencia General de Entidades Financieras); General Securities Superintendency (SUGEVAL - Superintendencia General de Valores); Pensions Superintendency Pensiones). (SUPEN Superintendencia de
The CONASSIF and these three Superintendencies have the aim of jointly assuring the consistency and quality of the supervision of the countrys financial system. Figure 1: Structure
CONASSIF CONASSIF
BCCR BCCR
SUGEF SUGEF
SUGEVAL
SUPEN SUPEN
Source: Banco Central de Costa Rica, Provident Group.
CONASSIF
The CONASSIF was created upon the enactment of Law 7732 Securities Market Regulation Law (Ley Reguladora del Mercado de Valores) in 1998.
14
October, 2001
The CONASSIF is comprised by the President of the Central Bank, the Minister of Finance, and five representatives of the private sector, with the aim of providing this institution with autonomy and transparency. This entity designates the three Superintendents (SUGEVAL, SUPEN, and SUGEF) for a five-year period, and is responsible for their supervision. Moreover, it is also responsible for evaluating and authorizing the regulatory initiatives presented by the Superintendencies. The following sets forth a brief description of the three Superintendencies:
SUGEVAL
The SUGEVAL was also created by Law 7732, and it is responsible for the supervision of the Costa Rican securities market. It is also responsible for the transparency of the securities market, the protection of the investors interests, and to assure compliance with all rules and regulations that govern the securities markets.
SUPEN
The SUPEN was created in 1995 upon the enactment of Law 7523 Complementary Pension Private System Law (Ley del Regimen Privado de Pensiones Complementarias), and initiated operations in 1996. Its primary objective is to regulate and supervise the Costa Rican private pension system.
SUGEF
The SUGEF was created by Law 7558 in 1995, replacing the General Bank Auditor (AGB - Auditoria General de Bancos), which reported to the Central Bank and was responsible for the supervision of the financial system banks and related entities. The main objective of the SUGEF is to supervise the Costa Rican financial entities by means of a preventive supervisory system to guarantee its soundness and transparency, as well as to assure compliance with laws and regulations. It is also responsible for fostering the development of the Costa Rican financial system.
Supervisory Guidelines
The SUGEF is responsible for the ongoing supervision of the Costa Rican financial system with the goal of assuring the transparency, soundness and strength of the financial entities that comprise the system. The main guidelines through which it carries out its preventive regulatory supervision of the banking sector are based on CAMELS guidelines. Such guidelines are substantially in conformity with the general criteria set by the Basel Accord, and of which basic make-up has also been incorporated in other Latin American financial systems. These guidelines have been undergoing progressive changes in order to further strengthen the financial system in Costa Rica. The following main supervisory guidelines through which the SUGEF carries out the regulatory supervision are based on the CAMELS guidelines, which are substantially in agreement with those set by the Basel Accord: - Capital - Asset
15
October, 2001
Management Efficiency Liquidity Sensitivity
Under these guidelines the SUGEF undertakes a preventive monthly assessment of the soundness of each entity in the system. This soundness is classified in accordance with a predetermined scale that permits its categorization with regard to each guideline item under CAMELS. The primary regulatory developments directed towards the safeguarding of the financial system (and of major interest to investors) correspond to the capitalization and loan portfolio classification of the financial institutions.
Capital
The banking systems capitalization requirement is substantially in accordance with the commonly accepted guidelines set by the Basel Accord. The current risk-weighted capital ratio minimum requirement is 10%, a capitalization level that was achieved by means of a progressive increase in this requirement. In 1997 the risk-weighted capital requirement was set at 8%, and was increased to 9% in 1998, to finally enable instituting the current 10% minimum requirement in 1999. It is clear that the regulatory authorities have been successful in implementing and assuring compliance with respect to these increases in capitalization requirements. And, going forward the authorities are in position to evolve in accordance to the requirements that may result from the dynamics of the financial system. Figure 2: Risk-Weighted Capital Requirements
Risk-Weighted Capital Requirements
12% 10% 8% 6% 4% 2% 0%
1997
1998
1999
Source: Consejo Nacional de Supervisin del Sistema Financiero.
Loan Portfolio Classification

The Loan portfolio classification requirements are undergoing a progressive change aimed at achieving stricter required benchmarks by May 2002. The timetable established by the SUGEF for the banks to comply with the modified loan classification and corresponding loan loss provisioning requirements are set forth in Table 7 below. As the Table indicates, the authorities are demanding that the financial institutions abide to a progressively stricter nonresidential loan classification and loan provisioning requirements.
16
October, 2001
Table 7: Loan Classification / Provisioning Requirements Timetable

Risk Category A B1 B2 C D E
Applicable May 1, 2001
(days)
Applicable Nov., 2001

(days)
Applicable May, 2002

(days)
0 - 30 31 - 90 N/A 91 - 180 181 - 360 Over 360
0 - 30 31 - 75 76 - 90 91 - 150 151 - 270 Over 270
0 - 30 31 - 60 61 - 90 91 - 120 121 - 180 Over 180
Provision 0.5% 1.0% 10.0% 20.0% 60.0% 100.0%
The timetable that SUGEF has established provides the financial institutions with some flexibility and time to prudentially adapt to the new requirements. Notwithstanding such flexibility, this could have an adverse impact on the banks profit levels and growth capacities as the loan loss provisioning requirements are significantly more onerous. However, this adverse impact will be felt during the initial stage of implementation. The burden should ease as the Banks incorporate new credit policies and procedures to adapt to these new guidelines. The stricter loan classification requirements clearly indicate a desire of the authorities to raise the bar with regard to asset quality throughout the banking system. With regard to residential loans the authorities have set different loan loss provisioning requirements, which reflect a lower risk profile than the nonresidential loans. Table 8: Residential loan classification requirements
Risk Category A B1 B2 C D E
Provision 0.5% 1.0% 5.0% 10.0% 30.0% 50.0%
17
October, 2001
SECTION IV:
Costa Rican Economic Indicators & Capital Flows

Costa Rican Economic Indicators
Table 9 presents the main economic indicators registered for YE 00 and expected for YE 01 and YE 02. Table 9: Main economic indicators for Costa Rica
2000 Nominal GDP (US$MM) Nominal GDP (Bn) Real GDP (% change) Inflation (%) Exchange rate (:US$) M1 (% change) M2 (% change) Services/GDP (%) International reserves (US$MM) GDP per head (US$) Unemployment (%)
Sources: BCCR, Provident Group
2001
2002
15,883 4,895 1.6 11.0 318.30 19.4 17.8 56.8 1,316 4,158 5.2
16,727 5,501 0.6 11.7 339.69 12.6 14.5 58.5 1,275 4,267 5.8
17,796 6,262 3.3 10.2 363.64 13.8 19.3 58.1 1,390 4,404 5.4
Capital Inflows Increasingly Short-term in Nature

The make-up of the investment portfolios originating from capital flows to Costa Rica has been undergoing changes in recent months, as they have become increasingly short-term in nature, to the detriment of longer-term productive investments. During 1990 1999 foreign direct investment (FDI) recorded a 21% p.a. average growth, reaching its maximum level of US$619.5 million in 1999. However, in year 2000 FDI fell significantly to slightly above US$400 million (see Figure 3). The lower FDI figure for 2000 represented only 2.8% of GDP, and contributed to finance 0.6% of the current account deficit, compared to the 4.1% of GDP and the current account coverage of 0.9% it represented during the 1990 1999 period. Figure 3: Foreign Direct Investment in Costa Rica (in US$ millions)
750
611,7 619,5
600 450 300

162,4 336,9 226,0 297,6 246,7 178,4 426,9 406,9 420,9
150 0 1990
1992
1994
1996
1998
2000
Source: Banco Central de Costa Rica.
18
October, 2001
In recent years, the largest foreign direct investor has been INTEL. This multinational invested an aggregate amount of US$420 million during 1997 2000, which accounts for more than a quarter of the total FDI during the period. Nonetheless, recent global competitive market developments have compelled INTEL, as well as other multinationals, to stabilize their direct investment levels.
Foreign Reserve Level Rise, While Volatility Increases

Despite the short-term nature of the capital inflows there has been an increase in the foreign reserves level. The foreign reserve level of US$1,396 million in June 2001 is among the highest recorded in recent years, and represents 3.7 months of imports. While the foreign reserve level has been increasing, its volatility has increased commensurately. Figure 4 describes the variations of the foreign reserve level during the January 1995 June 2001 period, and illustrates that the peaks and troughs of the reserve levels have been progressively larger and more abrupt. The increased volatility can be largely attributable to the shorter time horizon of foreign investments directed to Costa Rica. These short-term investments are motivated by an attractive expected return, and commonly under such intent the capital is repatriated once the return is achieved. Figure 4: Monthly variation in International Reserves (in US$ millions)
300 250 200 150 100 50 0
S Ja ep n (9 6)
S Ja ep n (9 7)
S Ja ep n (9 8)
S Ja ep n (9 9)
S Ja ep n (0 0)
Source: Banco Central de Costa Rica.
Impact on Liquidity
The short-term capital inflows have had an impact on the liquidity of the system. In 2000 M1 rose 19.4% while local and foreign currency savings/time deposits (M2-M1) grew 20.8%. The preference for deposits over currency has prompted an increase in the bank lending multiplier, resulting in an increase in loans extended by the Costa Rican banking system. As a consequence, loans to the private sector grew 30% in 2000. Given that no meaningful shift in the course of the economy is anticipated throughout the near term we can expect continued reliance on the short-term nature of the capital inflows, and their corresponding volatility levels. However, we can expect governmental authorities to continue to implement policies aimed at achieving the required macroeconomic stability to maintain an adequate foreign reserves level and overall stability of the system.
Ja n
-1 0 0 -1 5 0 -2 0 0
19
S Ja ep n (0 1)
(9 5)
-5 0
ay
ay
ay
ay
ay
ay
October, 2001
SECTION V:
The Costa Rican Securities Exchange

The Costa Rican Securities Exchange, Bolsa Nacional de Valores de Costa Rica, S.A (BNV), is the most active and liquid securities exchange in Central America, and has developed into the most significant capital market in the region.
The BNV attracts a growing number of issuers at the local and regional level.
Notwithstanding that the securities exchange is small, in relative terms it is becoming increasingly significant. The increasing participation of Costa Rican commercial, industrial, and financial companies in the BNV has also attracted certain regional companies to list in this securities exchange. This is the case of the Panamanian companies, Cervecera Nacional and Primer Banco del Istmo, which have listed their shares in the BNV. We anticipate that as the BNV continues to develop its potential more companies throughout the Central American region will increasingly participate in this stock market, and the BNV should progressively transform into a regional securities market. Additionally, there is an effort by the General Assembly of The Iberoamerican Federation of Stock Exchanges (Federacin Iberoamericana de Bolsas de Valores FIABV) to increasingly unite the iberoamerican stock exchanges. The foregoing issues will progressively lead to an increase in liquidity and depth in these markets. As of May 2001 the following are the companies with equity listings in the BNV: Table 10: Equity Listed Companies
EQUITY LISTED COMPANIES
NAME OF COMPANY
ISSUES
TICKER SYMBOL
SHARES OUTSTANDING
LAST PRICE (in colones)
P/BV
P/E
Agribusiness Sector 1. Manga Rica S.A. 2. Naranjales Ro Rojo S.A. 3. Banco del Istmo S.A. (Panam) * 4. Banco Improsa S.A. Common Stock Common Stock Common Stock Common Stock Preferred Stock Common Stock Preferred Stock Common Stock Common Stock Preferred Stock 8. Florida Ice and Farm S.A. 9. Industria Nacional de Cemento S.A. 10. Inmobiliaria Enur S.A. 11. Inmobiliaria Comercial del Oeste S.A. 12. Propiedades OGL S.A. * 13. Corporacin Improsa S.A. 14. Dosel S.A. 15. La Nacin S.A. 16. Bolsa Nacional de Valores S.A. 17. Corporacin Banex S.A. 18. Corporacin BCT S.A. 19. Corporacin Interfin S.A. 20. Grupo Financiero Improsa S.A. * 21. SFI Corporation S.A. (Panam) *
Sources: Bolsa Nacional de Valores S.A., Capitales * Issues traded in US$
MRICA NRROJ Banking Sector IST$F
17,381 100,000 29,673,868
09/23/99
72,392.65
N/A
N/A
Not Traded
04/17/01
3,646.35
N/A
N/A
BIMPR 1,841,727,332 PBIMP Industrial Sector ACOMU APCOM CAFES DURMC DURMA 479,139,204 14,500,000 12,000,000 200,000,000 118,000
Trading as GIMPC Trading as GIMPP
5. Atlas Elctrica S.A. 6. Compaa Costarricense del Caf S.A. 7. Durman Esquivel S.A.
09/05/01 08/09/01 09/04/01 09/10/01 08/23/01 09/12/01 09/12/01 09/11/01 08/08/01 09/12/01 06/05/00 09/04/01
33.39 33.50 260.00 375.00 16,350.00 2,289.00 8.90 2,175.00 33,086.00 15.25 275,000.00 7.00
1.65 1.66 1.59 4.20 1.64 6.25 3.61 1.09 N/A 1.39 N/A 2.75
12.65 9.88 12.21 42.18 17.07 28.58 16.06 5.08 N/A 9.39 N/A 33.62
Common Stock Common Stock Common Stock Common Stock Preferred Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Preferred Stock Common Stock Preferred Stock
FIFCO 193,941,560 INC 7,107,218,292 Real-Estate Sector ENUR IPERI POGLA Services Sector CIMP 2,873,318 47,530 30,000 160,000,000
Not Traded
DOSEL 3,193 NACIO 3,010,047,000 Financial Services Sector BNV CBANE CBCT CINTE GIMPC GIMPP SFICO 62,251,900 19,032,996,849 2,414,046,535 14,746,000,000 1,841,727,332 5,000,000 2,000,000
Not Traded
09/14/01 09/14/01 09/14/01 09/12/01 08/10/01 01/14/97

Not Traded
3.13 21.65 4.11 3.20 337.70 221.12
2.48 2.96 2.60 N/A N/A N/A
11.56 27.53 18.98 N/A N/A N/A
20
PROVIDENT GROUP
October, 2001
Market Capitalization
Market capitalization driven by new equity issues. The market capitalization of the BNV grew 26% over the twelve-month period ending May 01, from US$2,350 million to US$2,963 million, with a peak level for the period of US$3,062 million in January 01. Figure 5: BNV Market Capitalization (in US$ MM)
3,100 2,900 2,700 2,500 2,300 2,100

0 01 0 0 0 0 n00 0 b01 0 l- 0 ug -0 -0 1 -0 -0 -0 1 pr -0 A M ct -0 -0 ov ay ec nSe p Ju Ja Fe Ju ay ar -0 1
Source: Bolsa Nacional de Valores de Costa Rica S.A.
The increase in market capitalization is largely due to new company listings in the BNV. Going forward we expect that the BNV will continue to attract new listings of companies from Costa Rica, which should also continue to encourage companies from throughout the region to view the BNV as a regional source of capital.
BNV Index
Ibnv Index reflects impact of new equity issues. The BNV index, ndice de la Bolsa Nacional de Valores (Ibnv), is a weightedindex that takes into consideration any variation in the stock price and assigns a relative weight based on the frequency of trading and the proportion that each particular stock issuer represents in relation to all stocks that actively trade. The Ibnv rose 23.42% year-over-year from 3,425 to 4,227 in May 01. This rise is largely due to the relatively active participation of Costa Rican companies that undertook new stock listings during the period. As indicated in Figure 6 the transaction volumes during most of the twelvemonth period has been quite stable, with sharp fluctuations occurring in the months in which significant new stock issues took place. New issues are the main reason for the large rise in volumes observed in the months of October and December 2000, as well as March 2001.
21
October, 2001
Figure 6: IBNV Index (volume in MM)

7,000 6,000 5,000 4,000 3,000 2,000 1,000 M ay . Ju 00 n. 0 Ju 0 l. A 00 ug . Se 0 0 pt . O 00 ct .0 N 0 ov . D 00 ec . Ja 00 n. 0 Fe 1 b. M 01 ar .0 A 1 pr . M 01 ay .0 1
4,500 Volume Ibnv 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 -
Source: Bolsa Nacional de Valores de Costa Rica, S.A.
The performance of the Ibnv has been significantly influenced by the impact that new stock issues has had on the market capitalization levels. Moreover, the relatively stable low volume level arises mainly from it being a thin market, and seems to indicate that investors have a preference for holding on to their investments, which, in turn, would suggest that investors are satisfied with expected returns. Going forward we expect that the volumes levels and liquidity should gradually rise, as the BNV continues with its development and attracts increased participation from companies throughout the region.
Market Demand Overview

Strong demand for new stock issues. The low trading volumes observed in the BNV are indicative of it being a market with relatively low liquidity, with a rather small number of issuers. There is a strong demand for new market issues, which investors opt to retain, reflecting confidence in expected returns. Except for the months in which new issues took place, we see relatively low and stable trading volumes. There seems to be a strong demand for new issues as indicated by the sharp rise in volumes in the months in which new stock issues took place. Subsequent to the new stock issues we observe that trading volumes drop to lower and stable levels, indicating that investors seem to prefer to hold on to their investment, further influencing the low level of liquidity in the market. Moreover, in this market investors do not seem to have many meaningful buying opportunities other than during the periods in which these new stock issues take place. The limited buying opportunities would also seem to motivate investors to retain investments. Thus, there is high demand for new stock issues that investors are willing to retain, which seems to indicate that investors consider stocks to be adequately priced to enable them to achieve expected returns. In figure 7, we can observe trading volumes to be fairly stable during the MaySeptember 2000 period. However, in October 00 there is a 47% increase in volume relative to September 00 attributed mainly to a new issue related to the
.at relatively multiples.
high
.which investors opt to retain. .reflecting confidence in growth and expected returns.
22
October, 2001
sale of a 20.17% equity stake in Banco Improsa. This transaction represented 38.92% of total trading volume for the month. Another example of the impact that new issues have on the BNV trading volumes is the Corporacion Interfin stock issuance that took place in December 00. This stock issue accounted for an increase of 403% in total trading volume relative to the previous month, and it represented 75.88% of the BNV volume for the entire month. Figure 7: Market Demand Overview
Colones 7,000,000,000 6,000,000,000 5,000,000,000 4,000,000,000
Stocks 1,600,000,000
Colones Volume Stock Volume
1,400,000,000 1,200,000,000 1,000,000,000 800,000,000
3,000,000,000 600,000,000 2,000,000,000 1,000,000,000 400,000,000 200,000,000 -
May. Jun. Jul. Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. 00 00 00 00 00 00 00 00 01 01 01 01 01
Going forward we expect that further development of the BNV will continue to be mainly driven by an increase in the number of issuers as well as a broader investment base. This development should continue to be benefited by an improved perception on the part of issuers of the advantages of listing their shares in the BNV. We expect increasing participation by companies outside of Costa Rica, and the BNV should play a significant role in contributing to the regionalization process that is currently underway.
Financial Groups
The following are the financial groups that trade in the BNV: Corporacin Interfin Corporacin Banex Corporacin B.C.T. Grupo Financiero Improsa/Banco Improsa
The shares of Corporacin Banex have not traded since July 2000, as it seems that its holding company, Primer Banco del Istmo, holds the majority of the shares. Consequently, we are unable to provide a description of this stocks trading pattern.
23
October, 2001
We set forth below a general description of the trading observations of the stocks of Corporacin Interfin, Corporacin B.C.T., and Banco/Grupo Financiero Improsa.
Corporacin Interfin
Figure 8: Corporacin Interfin (price in colones)
Price
5
Ibnv
4,500 4,000
4 3,500 3,000 3
Price
2
Ibnv
2,500 2,000
May- Jun- Jul-00 Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May00 00 00 00 00 00 00 01 01 01 01 01
10 0 0 0 0 0 0
Volum e
10 0 0 0 0 0
10 0 0 0 0
10 0 0 0
M ay00
J un00
J ul00
A ug 00
Sep00
Oc t 00
No v00
De c00
J a n01
Fe b 01
M a r01
A p r01
M ay01
The shares of Corporacin Interfin started trading in the BNV in December 2000 with the issuance of 1,200 million shares. Additionally, in the same month an additional 346 million shares owned by FMO were also traded in the BNV. The total colon amount related with this volume was 4,860 million. The price of the Interfin shares has been fairly stable, with an upward trend. During the six-month period, as of December 2000, the share had a low price of 3.50, and a high of 4.19. As shown in Figure 8 the pattern of the stock has been similar to the Ibvn, reflecting the relative significance that this stock has in the BNV. Figure 9: Multiples for Corporacin Interfin
P/B V
3.5 3 2.5 2 1.5 1 0.5 0 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01
P/E
P /BV P /E
20 19 18 17 16 15 14 13 12 11 10
24
October, 2001
The P/BV multiple of the stock has fluctuated between 2.39x and 3.04x as of its issuance in the BNV, and was 2.71x in May 2001. It reached the high of 3.04x in February 2001, month in which its share price rose 4%, while the Ibvn fell 2%.
Corporacin B.C.T.
Figure 10: Corporacin B.C.T. (price in colones)
Price
33.00 31.00 29.00 27.00 25.00 23.00 21.00 19.00 17.00
Stock Split StockDividend
4 0 0 ,0 0 0 3 50 ,0 0 0 3 0 0 ,0 0 0 2 50 ,0 0 0 2 0 0 ,0 0 0 15 0 , 0 0 0 10 0 , 0 0 0 50 ,0 0 0 -
In May 2000 the shares of B.C.T. traded at 30.00, price which remained relatively stable through July 2000, period in which the acquisition of Corporacin Bancomer was being realized, and Tarjetas B.C.T. was being incorporated into the financial group. In August 2000 there was a stock split that corresponded to the stock conversion ratio related with the acquisition of Bancomer. This split increased the number of shares by 57%, which was accompanied by a corresponding increase in total assets due to the acquisition. Following the split the stock price appreciated in real terms, notwithstanding that it decreased in nominal terms. The number of shares outstanding increased by 57% while the stock price only decreased 22% to 23.49. That is, one share with a previous value of 30 was split into 1.57 shares with a value of 23.49 per share, resulting in a net real increase of 13.39. This is consistent with the observation that investors place relatively high valuations for the Costa Rican financial groups (see Valuation). In October 2000, the share price reached its lowest level of 20.50, which still reflects a high valuation given the stock split. To date the share price has been relatively stable trading within a range of .21.50 to .23.50.
-0 Ju 0 n00 Ju l-0 A 0 ug -0 Se 0 p0 O 0 ct -0 N 0 ov -0 D 0 ec -0 Ja 0 n0 Fe 1 b0 M 1 ar -0 1 A pr -0 M 1 ay -0 1
Volume
May- Jun00 00 Jul00 Aug- Sep00 00 Oct00 Nov- Dec00 00 Jan- Feb01 01 Mar- Apr- May01 01 01
ay
25
October, 2001
Figure 11: Multiples for Corporacin B.C.T.

P/BV
6 5 4 25 3 20 2 1 0 May- Jun- Jul- Aug- Sep- Oct- Nov- De c- Jan- Feb- Mar- Apr- May00 00 00 00 00 00 00 00 01 01 01 01 01 15 10 P/BV P/E 30
P/E
35
Figure 11 describes the P/E and P/BV multiples during the twelve-month period ending in May 2001. As mentioned later on, the Costa Rican financial groups trade at multiples that are in the higher part of the valuation range conventionally applied to financial institutions. And this is the case for B.C.T. which in May 2001 had a P/E and P/BV multiples of 31.32x and 3.0x respectively. The high multiples recorded in August through November 2000, are largely attributable to the commonly utilized method of calculation for the P/E and P/BV multiples, which do not account for the effect of the Bancomer acquisition. The P/E ratio is commonly calculated using 12-month trailing earnings, which will not fully reflect the effect of the acquisition. That is, the split brought about a 22% decrease in the price while maintaining the 12-month earnings exclusively of B.C.T. without incorporating any effect of the Bancomer acquisition. This effect will be progressively eliminated as the combined entities 12-month trailing earnings are accumulated. For example, if we apply the stock price of 23.49 to our projected 12-month trailing earnings as of September 02, the P/E ratio reflects a more normalized P/E figure of 16.70x. The P/BV multiple was affected for similar reasons, and we should expect these multiples to return to pre-acquisition levels once the Bancomer operation is fully absorbed.

The shares of Banco Improsa started trading in the BVN in 1997, and the shares traded under this name up to January 2000. Subsequently, the financial group was formed and trades as Grupo Financiero Improsa as of April 2001. During the twelve-month period ended May 2001 the low and high share prices were 2.15 and 3.38, respectively. Reflecting the BNV, the market for this stock is thin, and rising when there is a new issue. For instance, the sharp increase in volume in October 2000 is largely due to the placement in the BNV of 20.1% of the banks capital, which was purchased by Probanco L.P. (a fund whose capital is owned by Banco Centroamericano de Integracin Economica, and FMO).
26
October, 2001
Figure 12: Grupo Financiero Improsa (price in colones)

Price
3.40 3.20 3.00 2.80 2.60 2.40 2.20 2.00 1.80
May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May00 00 00 00 00 00 00 00 01 01 01 01 01
1, 0 0 0 , 0 0 0 10 0 , 0 0 0 10 , 0 0 0 1, 0 0 0 10 0 10
Ibnv
4,500 4,000 3,500 3,000 2,500 2,000 1,500
Price
Ibnv
1,000 500 -
Volume
M a y- J u n 00 00
J u l00
A ug - S e p00 00
Oc t- N o v - D e c - J a n- F e b00 00 00 01 01
M a r- A p r- M a y01 01 01
During the twelve-month period up to May 2001, the share traded in January 2001, at a P/BV of 2.94, which is the 52-week high, while the low was 1.82x recorded in June 2000. Given the firm market position that Improsa has, we would expect the share to continue trading at the relatively high multiple levels recorded in early 2001. Figure 13: Multiples for Grupo Financiero Improsa
P/BV
4 P/BV 3 2 1 0
May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May00 00 00 00 00 00 00 00 01 01 01 01 01
P/E
19 17 15 13 11 9 7 5 P/E
27
October, 2001
SECTION VI:
Valuation multiples seem to reflect high growth expectations.
Valuation
The price-to-book-value multiples indicate a consistency among the financial groups, with P/BV multiples tending to revolve, in general, around 3.00x. These multiples seem to reflect high growth expectations, which, in general, are also, reflected in the price-to-earnings multiple levels. Valuations can be influenced positively or negatively by the low liquidity of the market. Moreover, it is evident that there is investor demand for new equity issues, and investors tend to hold on to their investment reflecting a high degree of confidence with regard to the expected returns on these investments.
Price-to-Book Value
Table 11 below describes the price-to-book value multiples for three of the four financial groups that trade in the Costa Rican Securities Exchange, Bolsa Nacional de Valores de Costa Rica, S.A. (BNV). The price-to-book value multiples correspond to the months from December 2000 through May 2001 in which trades were recorded, and we do not include a P/BV multiple for the months in which trades did not take place. Banex is treated separately because it last traded in July 2000, and, consequently is not directly comparable with the other financial groups. A review of the table indicates that the financial groups, in general, trade at multiples that are in the higher part of the valuation range, conventionally applied to financial institutions. These multiples seem to reflect a continuation of relatively high growth expectations with regard to the financial groups, and investors demand and desire to retain their investments seem to support such expectations. Table 11: Price to Book Value Name Corp. Interfin Corp. B.C.T. Grupo Fin. Improsa Dec. 00 2.94x 3.40x 2.72x Month With Reported Trades Jan. 01 Feb. 01 Mar. 01 Apr. 01 3.04x 2.39x 2.58x 3.37x 3.26x 3.14x 3.11x 2.94x
May 01 2.71x 3.00x
Moreover, such relatively high valuations are consistent among the groups. All groups evidence high valuations that tend to revolve around the 3x price-to-book value level, and seem to reflect valuation consistency on the part of investors. Furthermore, during the period the multiples remain within a fairly stable range. Interfins price-to-book multiple ranges from 2.39x to 3.04x, while that of B.C.T. spans from 3.00x to 3.4x, and the range for Improsa is from 2.72x to 2.94x. The relatively low variability should be largely influenced by technical factors principally derived from the lack of liquidity of the stocks, and the general lack of depth in the BNV. We consider that the valuations are, in general, consistent. The last trade of the shares of Corporacin Banex took place in July 00 at a price of 9.05 per share which represented a P/BV multiple of 7.18x. Utilizing this last trading price the P/BV for December 00 and March 01 are 7.53x and 7.03x, respectively. However, these multiples are not comparable with the other
28
October, 2001
three financial groups considering that Banex has traded very thinly since its shares are predominantly owned by Primer Banco del Istmo. That is, these multiples were likely not determined by a broad-base market, and given their ownership we can expect them to continue to be very thinly traded. Notwithstanding the concentration of ownership by the Panamanian bank, Banex continues to be listed in the BNV, and, as a consequence, we should not fully discard a future participation in the equities market. The P/BV multiples at which these financial groups have been trading range between 2.70x to 3.00x, and are mainly driven by expected growth, which is a key factor that will determine market leadership position. The continuation of the consolidation of the Costa Rican financial sector combined with the regionalization process currently underway should continue to propel relatively high levels of growth. As a consequence, we would continue to expect P/BV multiples to remain at current levels, as these should be mainly supported by expected growth.
Expected Growth
The financial groups have been growing at a significant pace. The year-overyear 2000 growth in total assets for the four financial groups were as follows: 1) Corporacin Interfin 38%; 2) Corporacin B.C.T. 98%; 3) Grupo Financiero Improsa 46%; and 4) Corporacin Banex 98%. These levels can be expected to remain relatively high, particularly given the existing consolidation. Certain groups achieved such growth levels largely through acquisitions, and once these purchases are fully absorbed we should expect them to continue with aggressive expansion programs. Moreover, our projections indicate that expected profits for 01 and 02 can generate a significant organic growth level. The 2001 projected profit increases for the groups are the following: 1) Corporacin Interfin 27%; 2) Corporacin B.C.T. 69%; 3) Grupo Financiero Improsa 54%; 4) Corporacin Banex 26%.
Price-to-Earnings
Table 12 describes the price-to-earnings multiples for the three financial groups. The price-to earnings multiples correspond to the actual P/E figures for December 00 and March 01, and our expected multiples for December 01 and 02 utilizing the May 01 price. Banex is treated separately because it last traded in July 2000, and is not directly comparable with the other financial groups. Table 12: Price to Earnings Name Corp. Interfin Corp. B.C.T. Grupo Fin. Improsa
Dec. 00 A* Mar. 01 A* Dec. 01 E Dec. 02 E
16.94x 32.65x 16.07x
16.74x 32.78x 15.30x
13.62x 19.91x 9.86x
10.57x 15.39x 8.22x
The December 00 and March 01 price-to-earnings multiples of Interfin and Improsa indicate a certain level of consistency, revolving around 16x. However, the corresponding multiples of B.C.T. are practically twice that of the other two financial groups. The higher multiples of B.C.T. seem to be related to the acquisition of Corporacin Bancomer, and the expected progressive reduction to 15.39x in December 02 reflects the anticipated advances with regard to the
29
October, 2001
absorption of the acquisition. The bank consolidation process that is taking place in Costa Rica can have a sudden impact on the financial groups fundamentals, correspondingly impacting its multiples until the acquisition is fully absorbed. The successful absorption of the acquisition can allow a financial group to revert these effects and return to historical operating levels, while permitting them to fully recover control over its multiples. The December 01 and 02 estimated P/E multiples are based on the corresponding stock prices recorded in December 00 and twelve month trailing expected earnings. As mentioned, the P/E multiples of Interfin and Improsa are relatively consistent at around 16x. In December 00, investors set a P/E ratio of 16.94x for Interfin and 16.07x for Improsa, thus, establishing the valuation at these respective multiple levels.
Corporacin Interfin
Based on December 00 stock prices, the expected Dec. 01 and Dec. 02 P/E figures for Interfin are 13.62x and 10.57x, respectively. The expected Dec. 01 P/E figure of 13.62x is 19.6% lower than the December 00 multiple. Thus, the stock price would be expected to increase 19.6% during the period from 3.55 to 4.26. The Interfin stock price in August 01 was 4.14. Utilizing the same criteria we have a target price for Corporacion Interfin of 4.89 for year-end 02.

Improsa has recorded a P/E ratio of 16.07x in December 00, and we have estimated multiples for Dec. 01 and Dec. 02 of 9.86x and 8.22x, respectively. Based on these multiples we would expect a stock price appreciation of 38.6% above the 2.90 year-end figure, or 4.02. The stock price of Improsa as of August was 3.20, which is 10% above the year-end 00. The expected year-end 02 stock price is 4.32.
Corporacin B.C.T.
The P/E multiples of Corporacin B.C.T. seem to have been affected by the acquisition of Corporacin Bancomer (see Section V, Corporacin B.C.T., page 25). B.C.T. reported a price-to-earnings multiple of 32.65x in December 00 and 32.78x in March 01. These high multiples should be expected to decrease progressively as the acquisition is fully absorbed, and should be expected to settle at historical market levels. We have estimated P/E multiples of 19.91x and 15.39x for Dec. 01 and Dec. 02, respectively. The B.C.T. stock price in December 00 was of 23, and it fell slightly to 21.75 in August 01. We are estimating that as the P/E multiple decreases to historical levels and the earnings per share progressively improve, the stock price should slowly rise to Dec. 00 level of 23, as of Dec. 01. Further improvement would be subject to the speed and success of the absorption of Bancomer and any price targets for 02 would be reviewed by year-end 01.
Corporacin Banex
As previously mentioned, Banex is predominantly owned by its holding company, Primer Banco del Istmo, a Panamanian based financial group. During the period under this analysis Banexs stock last traded in July 00 at a price of 9.05 at which P/E multiples would be of 32.10x in Dec. 00 and 29.36x in Mar. 01. There have been two stock splits since the acquisition of Banex by Primer
30
October, 2001
Banco del Istmo, but since the majority of the shares are held by its holding company there is no market to reflect any pricing effect due to the stock splits of the Banexs shares. It should be noted that under the public stock offering dated August 99, a differed put option was made available to certain shareholders at a price of 2.30x book value, which began being exercised since September 01 at a price of 3.13 per share. The price at which these options are being and will be exercised do not represent a market determined price. However, we could not say that there is a market that is determining these multiples as shares are held by Istmo. Banex continues to maintain its listing in the BNV which could indicate a possibility of future stock issuance which would be assessed when it occurs. Investors should keep in mind that the expected valuation multiples can be influenced positively or negatively by the low liquidity of the Costa Rican stock market, independently of the fundamentals of the stock issues of the financial groups.
High Demand for Stock in a Market with Low Liquidity

Investor demonstrated consistency in assigning relatively high price-to-book valuations seem to point toward high growth expectations. Moreover, the low liquidity of the stock market largely limits the capacity of investors to having meaningful buying opportunities largely upon the occurrence of new stock issues, at multiples determined by the high demand for the stock. Due to a lack of both liquidity and depth, trading in the secondary market is thin, as investors tend to prefer to hold on to the majority of their stock investments. It is evident that the demand for new equity issues is high, as volume traded is significantly higher when there are new equity placements, and, subsequently, trading volumes drop to rather illiquid levels as investors opt to hold on to these shares. Stock prices tend to show a relative stability, and, in general, market capitalizations have shown a gradual increase. This has also been the case with the shares of the financial groups. Demand for the new issues has been high, as volume of the entire BNV rises above day-to-day levels during the placement of these new issues, and then the trading level of the shares gets thinner as investors tend to retain their investments. The low volumes and general price stability tend to indicate a desire to retain investments, reflecting a degree of confidence with regard to expected returns. Investors have a window of opportunity to make meaningful investments during these new equity placements at the multiples determined by the high demand for the stock. The acquisitions at such multiples reflect higher expected returns that could only be achieved when the window of opportunity exists. In the current Costa Rican private group environment such expected increase in returns should be mainly driven by growth. The four financial groups had high growth levels in 2000, with Interfin growing 38% in terms of total assets; B.C.T. grew 98%, Improsa 46%, and Banex 51%. These high growth levels are expected to continue, as the consolidation process advances, and size, efficiencies and return on equity are the market drivers. Additionally, we estimate that these financial groups will continue to have relatively high ROEs, which should support high price-to-book valuation multiples.
31
October, 2001
SECTION VII:
The Publicly Traded Financial Groups

Corporacin Interfin
Recommendation: BUY
CINTE
EPS P/E P/B
Shares Outstanding:
Last Price: Dec. '00
4.14 Mar.'01
52-week range: Jun. '01 Sept. '01
3.50 - 4.19 Dec. '01 Dec. '02
0.21 16.89 2.94
0.21 17.99 2.39
0.21 16.60
0.23 15.43
IBNV:
0.26 13.62
4297.02
0.39 10.57
14,746,000,000
Corporacin Interfin is the largest Costa Rican private financial group with total assets of 222.464 millions, which places it in a strong competitive position in a market that is driven by size and diversification. Interfin has a high net interest income generating capacity, that has been driven by high net interest margin (NIM) and high loan volumes. Although the NIM is expected to decrease because of competitive factors, loan growth should compensate this decrease, permitting the company to continue to generate a high net interest income (NII) to support loan loss provisioning requirements and still maintain high ROE levels. Asset quality has improved significantly during the first five months of 2001, and it should continue to improve supporting a strong interest revenue generation. A large deposit base and wide access to funding from private and multilateral institutions enable it to obtain a relative cheaper source of funding. Moreover, the financial group plans a U.S. Commercial Paper issuance, which should further enhance its funding capacity. The increase in Capital by 54% in 2000, combined with the expected ROE, should enable Interfin to sustain a strong capitalization level and support growth to maintain it in a market leadership position. The high NII generating capacity, improving asset quality, and good levels of capitalization should enable it to continue to generate an attractive ROE. We have set a year-end 01 stock price target of 4.26, which is 19.6% higher than year-end 00 stock price. We have set a target price for year-end 02 of 4.89.
Background
Interfin initiated operations in 1979 with the creation of Corporacin Internacional de Finanzas, S.A., a finance company dedicated to provide financial services to commercial and industrial companies. The growth as a finance company combined with the evolvement of the financial/legal framework prompted its conversion to Banco Interfin in 1982. In 1999 it adopted its current structure as a financial group, Corporacin Interfin. The commercial bank, Banco Interfin, and the offshore banking unit, Transamerica Bank & Trust represent 74.2% of the assets of the financial group. Arrendadora Interfin (leasing), one of the largest leasing companies in Central America, accounts for 10.8% of the groups assets. Interfin Valores (brokerage
32
October, 2001
house) has 1.5% of total assets, and 6 other small entities account for 2.6% of the assets of the group. Figure 14: Corporacin Interfin
Corporacin Interfin
10.9%
Banco Interfin
40.1%
Transamerica Bank & Trust

34.1%
Arrendadora Interfin
10.8%
Interfin Valores
1.5%
Other Entities
2.6%
Source: SUGEF
The Largest Private Financial Group

Corporacin Interfin is the largest private financial group with total assets of 222,464 million as of December 2000, which account for 18% of aggregate total assets of the private financial groups. Moreover, the combined assets of Interfin with Banex, the second largest group, represent 35% of the combined total assets of the financial groups, illustrating the high level of concentration of the system. In the year-2000, Interfins total assets grew 38%, and a continued high growth should be expected going forward. In January 2001, Arrendadora Interfin absorbed Arrendadora Comercial A.T. through a merger, enabling Interfin to be one of the largest leasing operations in Central America. Going forward, we can expect Interfin to maintain a leadership market position, generating satisfactory returns to attract capital and to sustain required growth levels, making it a viable competitor in merger and acquisition plays. Table 13: Interfin Total Asset Growth (in millions of ) Total Assets
Source: Corporacin Interfin.
Dec. 99 161,251
Dec. 00 222,465
Mar. 01 242,725
High Revenue Generating Capacity

Interfin has demonstrated a high net interest income (NII) generating capacity, which has been driven by a higher net interest margin (NIM) and loan volumes. NII rose 36% in 2000 to 6,168 million, and the March 01 figure is in line to meet our estimate of having a NII growth level of 40% in 2001. It should be noted that the NII does not include the interest margin related to leases, as the regulatory authorities require that lease related revenue be reported as other operating income, while the corresponding interest expense (lease funding interest expense) is reflected in the interest margin. As a consequence, NIM is understated, but the overall profit level of the financial group is not affected. As figure 15 indicates, the NIM of Interfin increased during the December 1999 March 2001 period. The diversification of a financial group provides for the capacity of having a higher NIM than if it were limited exclusively to traditional commercial banking activities. Going forward, we expect the NIM to decrease
33
October, 2001
due to the market competition and the slowdown of the economy. However, loan growth, albeit lower than in the past, should compensate for the drop in the NIM, and the group should continue having a strong NII generation. Figure 15: Net Interest Margin
5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 1999
2000
2001*
Loan Portfolio
Total loans grew 32% in 2000, but management expects lower loan growth in 2001 as a result of the slowdown of the Costa Rican economy. This should enable Interfin to be more selective in granting loans, allowing it to focus on managing its existing loan portfolio to the benefit of asset quality. Loan growth and improving asset quality should support a sound interest revenue generation, enabling it to cover loan loss provisioning requirements without significantly affecting ROE. Moreover, the well-diversified loan portfolio will further benefit asset quality. Asset quality improved significantly during the first five months of 2001. Past due loans to gross loans rose from 5.6% in 99 to 7.32% in 00 but dropped markedly to 3.6% as of May 01. Net past due loans to net loans also improved going from 5.6% in Dec. 00 to 1.9% in May 01. Past due coverage rose to 50% in May 01. However, if we consider only loans past due in excess to 90 days, the coverage ratio rose to 130.6% in May 01, reflecting a very good loan portfolio management and conservative loan provisioning that protects Interfins capital base. We believe that management has taken a proactive approach to managing its loan portfolio, which should continue to benefit overall credit quality. Figure 16: Loan Portfolio Composition
Loan Portfolio Breakdown by Business Division Personal 17% Tourism 4% Other 2%
Agriculture 8%
Industrial 23%
Services 18%
Commercial 28%
34
October, 2001
Funding
Corporacin Interfin has a large deposit base that grew 30% year-over-year in 2000, providing it with a relatively cheaper and stable source of funding. Total deposits cover 91% of total net loans. The historically stable Costa Rican environment allows for lower deposit to loans ratios than in other more volatile countries throughout Central America, which, in turn, allows for lower precautionary reserves levels. Interfins leadership market position has enabled it to access funding from private and multilateral institutions on attractive terms. Moreover, its strong fundamentals will allow it to access new sources of funding such as the loan securitization program expected in the second semester of 2001. Interfin has also benefited from its increasing participation in the capital markets, and should be undertaking a U.S. commercial paper issuance towards the end of 2001, making it one of the few Central American entities to access this market. We can expect Interfin to be successful with its planned funding issues and utilize this as a base for further penetration in the international capital markets to support expected growth.
Capital
Interfin has a sound capital base mainly as a result of strong fundamentals and satisfactory returns. In the year-2000, Corporacin Interfin increased its capital by 54%, which included a capital injection of 4,075 million. The capitalization level has increased slightly with average-capital-to-average-total-assets being 9.16% in YE 99, 9.31% in YE 00 and 9.89% in 1Q 01. Going forward, Interfins market leadership position and expected stable ROE levels should continue to be the main drivers in securing the required capital to sustain growth. This continues to provide Interfin with a competitive advantage in a market environment that is driven by size and ROE. Table 14: Capital Dec. 99 9.16% Dec. 00 9.31% Mar. 01 9.89%
Average Capital/Average Assets

Source: Corporacin Interfin
Business Outlook
We estimate that Interfin will continue generating a high level of net interest income that should provide for an increase in loan loss provisioning levels and still generate an attractive ROE. We estimate the net interest margin to average 3.95% from June 01 throughout 02. This combined with a moderate increase in assets should be the basis for increased net interest income generation. Interfins continued participation in the capital markets should allow it to achieve a cheaper and broader source of funding, further supporting margins. Total assets are estimated to grow 21% in 01 and 28% in 02 as Interfin continues to achieve high levels of organic growth in an effort to maintain its leadership position in the market. Asset quality has improved significantly as shown by the figures of May 01 and we would expect this trend to continue. Past due loan coverage should also improve, further supporting the capital base.
35
October, 2001
Table 15: Corporacin Interfin Financial Highlights
Dec '99
Dec '00 (in MM)
Mar '01 (in MM)
May '01 (in MM)
May '01
(in US$ MM)
Balance Sheet
Cash & Equivalents Total Gross Loans Assets Total Deposits Equity
(in MM)
22,513 109,085 161,251 93,842 14,764
34,779 144,448 222,465 129,053 22,716
44,566 145,896 242,725 131,184 23,306
42,890 150,786 242,257 134,875 23,989
131 462 742 413 73
Profitability
Return on Equity Return on Assets Net Interest Margin Operating Expenses / Net Revenue
18.98% 1.74% 3.43% 71.18%
16.54% 1.62% 3.97% 70.08%
13.72% 1.36% 4.69% 69.41%
15.13% 1.52% 5.02% 66.65%
Asset Quality
Past Due Loans/ Gross Loans Net Past Due Loans/ Net Loans Loan Loss Reserve/ Past Due Loans Loan Loss Reserve/ Past Due Loans ( > 90 days )
5.57% 3.82% 32.81% 84.97%
7.32% 5.62% 24.63% 47.08%
6.31% 4.39% 31.77% 47.69%
3.63% 1.85% 50.02% 130.72%
Liquidity
Deposits/ Net Loans Net Loans/ Total Assets Cash & Equivalents/ Deposits
87.63% 66.41% 23.99%
90.98% 63.76% 26.95%
91.76% 58.90% 33.97%
91.10% 61.11% 31.80%
Leverage
Avg. Assets / Avg. Capital Avg. Capital / Avg. Assets Avg. Capital / Avg. Net Loans
10.9 9.16% 13.79%
10.7 9.31% 14.69%
10.1 9.89% 16.16%
10.3 9.75% 16.25%
Source: Corporacin Interfin, Provident Group
36
Table 16: Financial Model Corporacin Interfin *
Corporacin Interfin, S.A. and Subsidiaries Consolidated Income Statement (in millions) Dec-99A Dec-00A Mar-01A May-01A Jun-01E Sep-01E Dec-01E Mar-02E Jun-02E Sep-02E Dec-02E
F/X rate (05/31/01): 326.64 / US$1
Financial Income: 13,064 2,372 289 15,726 2,937 8,270 11,207 4,519 170 1,552 338 2,826 211 4,927 1,755 2,498 2,471 6,723 2,552 119 210 2,223 579 2,802 158 305 2,781 319 3,099 3,243 914 68 134 712 78 789 2,537 3,412 3,634 9,584 913 1,335 1,358 3,606 1,495 2,160 2,209 5,864 1,618 159 148 1,311 162 1,472 1,793 2,585 2,634 7,012 1,899 161 228 1,510 182 1,692 2,302 377 3,990 838 7,508 646 307 2,029 45 3,027 1,042 459 3,366 28 4,894 1,337 468 4,061 100 5,966 849 675 1,316 1,596 1,876 2,222 494 6,148 100 8,965 2,688 3,859 3,908 10,454 3,145 267 377 2,500 202 2,702 6,168 2,167 3,904 4,541 6,511 8,646 2,156 3,108 521 8,235 100 11,964 3,583 5,132 5,181 13,896 4,557 387 547 3,622 222 3,844 4,279 10,341 14,621 1,405 2,974 4,379 2,246 4,959 7,204 2,268 320 1,001 140 2,306 100 3,547 1,055 1,583 1,420 4,058 1,436 122 172 1,142 20 1,162 4,695 640 2,001 235 4,612 100 6,948 2,110 3,165 2,840 8,116 2,887 245 346 2,295 40 2,335 17,578 3,078 132 20,788 5,092 1,455 6,546 8,601 2,507 11,108 7,286 960 3,002 330 6,917 100 10,350 3,165 4,748 4,261 12,173 4,503 10,051 1,280 4,289 420 9,223 100 14,032 4,336 6,504 5,837 16,676 6,127 521 735 4,871 383 540 3,580 60 3,640 80 4,951
From Loans From Investments Other financial income Total Financial Income Financial Expenses:
On Loans On Borrowings Total Financial Expenses Net Interest Income
37
Loan Loss Provision
Banking services commissions-net Brokerage commissions-net Leasing Other income (net) Total Non-Interest Income
Personal General and administrative Depreciation and Ammortization General & Administrative Expense
Operating Income
Income & Assets Tax Profit Sharing Income before currency translation adjustment
Currency translation adjustment Net Income
October, 2001
* The financial model has been prepared by Provident Group in an independent manner based on our own assumptions and criteria.
October, 2001
Corporacin Banex
Recommendation: N/A
CBANE
EPS P/E P/B
Shares Outstanding:
9.05 Mar.'01
9.05 1 Dec. '01 Dec. '02
0.28 32.10 N/A
0.31 29.36 N/A
0.32 28.42
0.34 26.64
IBNV:
0.35 25.52
4297.02
0.39 23.46
19,032,996,849
Corporacin Banex has a strong parent company in Primer Banco del Istmo (Panama) that has made clear its intention of becoming a major player throughout the Central American region. Banex is experienced in successfully undertaking acquisitions, while maintaining good control over the fundamentals. Banex has the management and access to capital to further undertake acquisitions. Banex was the most profitable bank in the year-2000, and is expected to continue to generate ROE in the mid-20% level. Banex is a strong competitor of Interfin in becoming the largest private financial group in terms of assets. Banex has effectively managed its acquisitions, demonstrating a good control over asset quality, and improving operational efficiencies. Banexs shares are predominantly held by its parent company Primer Banco del Istmo (Panama), and within the period under analysis its stock last traded in July 00 1. For this reason, any valuation of Banex is not being determined by a market. We have neither made a recommendation nor set a target price. However, the company has strong fundamentals that will be evaluated once we can assess them within the context of a market.
Background
The regional development of Primer Banco del Istmo (Panama) led them to establish a presence in Costa Rica as Banco del Istmo (Costa Rica). As a step towards achieving growth through acquisitions, Primer Banco del Istmo acquired the shares of Corporacin Banex. And, at the subsidiary bank level the union was undertaken by Banco Banex absorbing Banco del Istmo (Costa Rica), with the merged entity adopting the name of Banco Banex. Then in 2001 Banex acquired Banco Metropolitano increasing significantly its total assets. This aggressive strategy will allow Corporacin Banex to take advantage of acquisition opportunities in the Costa Rican market, as size has become a determining factor for achieving success not only in the country, but regionally. Corporacin Banex is a financial group principally engaged in commercial banking operations. The commercial bank, Banco Banex and the offshore banking unit, Caribbean Bank of Exports account for 86.4% of the assets of the financial group. The other units of the group are Banex Valores Puesto de Bolsa (brokerage house), which represents 2.9% of the groups assets, and Banex
The only other date in which Banexs stock traded was September the 14th at a price of 3.13, but this occurred outside the period under analysis and was a result of the exercise of a differed put option and does not represent a market determined price.
38
October, 2001
Operadora de Pensiones Complementarias (BOPC) 2 with 0.5% of total assets. Four other small units account for 0.74% of the assets of the Group. Figure 17: Corporacin Banex
Corporacin Banex
9.46%
Banco Banex
52.7%
Caribbean Bank of Exports

33.7%
Banex Valores Puesto de Bolsa

2.9%
Banex Operadora Pensiones Complementarias

0.5%
Other Entities
0.74%
Source: SUGEF
Investment Highlights
Banex Part of a Growing Regional Player
Primer Banco del Istmo has made clear its intention of becoming a major regional player, and has the capital base and management know-how, combined with a broad spectrum of products and services to continue developing its regional presence. We can expect them to continue to grow in the Costa Rican market and Corporacin Banex should be its leading vehicle to assure the maintenance of a leadership position in the country. Primer Banco del Istmo (Panama) has also registered its equity in the Costa Rican stock market, illustrating the significance the BNV is taking on a regional level. We would expect Banex to also maintain its registration in the BNV, as it remains an attractive vehicle to raise capital. Corporacin Banex is a close competitor to Interfin in becoming the largest private financial group. Banex represents 17% of total private group assets, while Corporacin Interfin accounts for 18%. As of December 00 the financial group had total assets of 213,414 million which is almost one-half the size of Banco de Costa Rica, the second largest bank in the country. Given the recent growth rates Corporacin Banex should start closing the gap in terms of size and increasingly become a stronger competitor with the government banks. Table 17: Banex Total Assets (in millions of ) Total Assets Dec. 99 141,304 Dec. 00 213,936 Mar. 01 219,692
Source: Corporacin Banex.
Experience in Undertaking Acquisitions

Prior to being acquired by Banco del Istmo (Costa Rica) in 1998, Banex acquired Banco Continental, which further enhanced its position as one of the largest private banks of the system. Then in 1999 Primer Banco del Istmo acquired the shares of Corporacin Banex. Subsequently, the subsidiary Banco Banex absorbed Banco del Istmo (Costa Rica), and the combined entity adopted the Banex name, reflecting the high significance of the Banex franchise in Costa Rica. In the year 2001, Corporacin Banex acquired the assets of American International Holdings, Ltd., who in turn was the owner of the shares of
In June 01, BOPC merged with Interfin OPC resulting in the creation of Interfin Banex OPC, with an equity participation on a 50%/50% basis.
39
October, 2001
Corporacin Metropolitano, the financial group that in turn is the holding company of Banco Metropolitano. Banex has developed an experience in undertaking acquisitions, absorbing their operations while managing day-to-day business, maintaining an adequate control of asset quality, and contributing to the generation of a high ROE. Moreover, the acquisitions have provided an expansion in terms of assets, as well as a broader more diversified client base. Banex originally had a corporate banking focus that was expanded to a meaningful middle market presence through the acquisitions of Continental and Metropolitano. This experience provides Banex with a competitive advantage in growth and diversification through acquisitions in comparison to the majority of its competitors. This local competitive advantage is further enhanced by the regional significance that its parent Primer Banco del Istmo, brings to the table in a market that is undergoing a consolidation.
High Profit Level

Corporacin Banex had the highest level of profitability among the private financial groups in YE 2000, recording a net income figure of 5,366 million, which represents 28% of the combined profits of the twenty private groups. Moreover, the net income figure is significantly ahead from the second highest profit figure of 3,099 million reported by Interfin, which is similar in size to Banex in terms of total assets and capital. Banex also had the highest ROE, 25.8%, and ROA, 3%, among the private financial groups. Table 18: Profitability (in millions of ) Return on Average Equity Return on Average Assets
Source: Corporacin Banex
Dec. 99 15.63% 2.07%
Dec. 00 25.81% 3.02%
Mar. 01 27.36% 2.99%
The net interest margin has been increasing in recent years as shown in Figure 18 below. The acquisitions have allowed Banex to further penetrate the medium size company sector, which provides higher margins. Also, the rising NIM reflects the success they had in undertaking and absorbing the two acquisitions. Although the NIM is expected to decrease because of market conditions, we believe that loan growth will enable the company to continue to generate a strong net interest income. Net interest income grew a strong 82% in 2000, rising to 8,959 million from 4,921 million in 1999. The larger loan portfolio, good asset quality and rising NIM drove net interest income generation. Moreover, the sound net interest income enabled the group to undertake the required loan loss provisions to maintain good asset quality and still record the high level of profitability. Going forward Banex should continue to produce a sound net interest income, as loan growth and good asset quality should be the main drivers to enable it to continue generating a ROE in the mid-20% level.
40
October, 2001
Figure 18: Net Interest Margin

7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 1999 2000 2001*
Source: Corporacin Banex, Provident Group
Asset Quality
Gross loans grew 67% in 2000 and Corporacin Banex continued to demonstrate a capacity to control asset quality levels, particularly considering its aggressive expansion and increased penetration into the riskier middle market. As of December 00, past due loans represented 5.6% of gross loans, while, net past due loans to net loans were 4.05%. Past due loans to total loans rose to 6.3% and net past due loans to net loans were 4.34%, in March 01. However, these figures should be considered within the context of the three acquisitions it has undertaken in recent years, and are indicative that management can control asset quality during the absorption process. Going forward, we should expect a progressive improvement in asset quality. Banex should continue to manage well its loan portfolio, and its high revenue generation capacity should enable it to meet loan loss provisioning requirements to support capitalization, while maintaining high ROE levels.
Efficient Operations
As of YE 00 there is a marked improvement in the efficiency ratio falling from 63.22% in December 99 to 47.70% in YE 00 and 44.92% in March 01. The merger with Banco del Istmo (Costa Rica) provided the synergies that established new operational efficiency benchmarks. Moreover, this merger also supported the net interest margin, and avoided incurring a burdensome cost structure during a period of acquisitions. Going forward, this experience in absorbing acquisitions should prove beneficial to the bottom line. Table 19: Efficiency Ratio Dec. 99 63.22% Dec. 00 47.70% Mar. 01 44.92%
Admin. Expense/Net Revenue
Capital
Banex has maintained a high level of capitalization notwithstanding the acquisitions. Average capital to total assets has been high during recent years,
41
October, 2001
reporting a 13.23% figure in YE 99, 11.71% in YE 00, and 10.93% in March 01. These capitalization levels provide a margin for further growth. Moreover, Banex is expected to continue to generate ROE levels in the mid-20% range. Having a strong parent company in Primer Banco del Istmo (Panama) further supports the capacity for Banex to access capital. Table 20: Capital Dec. 99 13.23% Dec. 00 11.71% Mar. 01 10.93%
Average Capital/Average Assets
Business Outlook
Going forward, Corporacin Banex should continue generating an ROE in the mid-20% p.a. principally driven by its relatively good portfolio management, and operational efficiencies. We are estimating an average net interest margin of 5.28% throughout 2002, reflecting a slight progressive decrease from 5.25% in 2001 and 4.8% in 2002. However, this decrease in the NIM is expected to be compensated by the growth in interest earning assets. Non-interest income is estimated to represent about a third of net banking income. The foregoing combined with the expected good operational efficiency levels should allow Banex to remain among the leaders in generating high ROE levels. Total Loans are estimated to grow 18% in 2001 and 20% in 2002. Loan loss provisions are estimated to increase 56% in 2001 reflecting the provisioning required as a result of recent acquisitions and increased penetration in the riskier middle market, but such growth in provisioning requirements is lowered to 11% in 2002. The financial group should continue to generate the revenue to meet provisioning requirements while maintaining high returns. The investor should be aware that the regional strategy pursued by Primer Banco del Istmo could bring about further growth through acquisitions in the Costa Rican market. We expect continued high ROE targets under any such acquisition process, providing an attractive expected return based on a higher absolute asset and capital base.
42
October, 2001
Table 21: Corporacin Banex Financial Highlights*

Dec. '99 Balance Sheet
Cash & Equivalents Total Gross Loans Assets Total Deposits Equity (in MM)
Dec. '00
(in MM)
Mar. '01
(in MM)
Mar. '01
(in US$ MM)
38,813 92,174 141,304 75,454 18,697
48,113 153,907 213,936 123,985 22,887
53,762 153,066 219,692 123,746 24,514
166 473 679 383 76
Profitability
15.63% 2.07% 3.76% 63.22%
25.81% 3.02% 5.38% 47.70%
27.36% 2.99% 5.76% 44.92%
Asset Quality
Past Due Loans/ Gross Loans Net Past Due Loans/ Net Loans Loan Loss Reserve/ Past Due Loans
2.86% 1.44% 50.38%
5.60% 4.05% 28.76%
6.30% 4.34% 32.54%
Liquidity
83.06% 64.29% 51.44%
81.88% 70.78% 38.81%
82.54% 68.24% 43.45%
Leverage
7.6 13.23% 20.58%
8.5 11.71% 17.16%
9.2 10.93% 15.73%
Source: Corporacin Banex, Provident Group. * In June 30, 2001 the absorption of Metropolitano was completed increasing Banexs Total Assets to 248,873 MM , equivalent to US$ 760.1 MM.
43
Table 22: Financial Model Corporacin Banex *
Corporacin Banex, S.A. and Subsidiaries Consolidated Income Statement (in millions)
Dec-99A Dec-01E Dec-00A Mar-01A Jun-01E Sep-01E Mar-02E Jun-02E Sep-02E Dec-02E
F/X rate (03/31/01): 323.45 / US$1
3,613 10,083 237 13,933 8,940 72 9,012 4,921 530 14,075 106 14,182 8,959 1,521 374 3,769 294 4,436 6,390 5,485 80 227 5,792 67 360 1,798 1,628 119 1,747 33 92 1,042 18 1,060 172 2,202 102 2,476 3,755 3,313 23 173 3,509 70 211 236 3,672 117 4,026 5,657 2,760 64 411 3,235 67 246 3,812 2,943 577 5,769 1,177 8,660 1,777 344 3,362 185 3,891 5,711 5,062 47 226 5,335 107 320
4,516 18,621 4 23,141
6,754
11,726 2,377 515 4,523 268 5,307 7,667 6,988 70 279 7,337 147 440
2,934 660 180 1,413 73 1,667 2,262 1,679 28 76 1,783 36 107
6,006 1,320 361 2,261 146 2,768 4,524 2,930 57 152 3,138 63 188
9,220 1,980 541 3,957 218 4,717 6,786 5,171 85 227 5,483 110 329
12,585 2,640 722 5,653 291 6,666 9,048 7,563 113 303 7,979 160 479
44
2,922 5,366 1,621 3,228
Financial Income: From investments From loans Other financial income Total Financial Income Financial Expenses: On loans and borrowings Other Total Financial Expenses Net Interest Income Loan Loss Provision
Exchange rates differences-net Banking services commissions-net Other income (net) Total Non-Interest Income
General & Administrative Expense
Operating Income Non-recurring Income-net Currency translation adjustment Income before taxes and profit sharing Income Tax Profit Sharing
Net Income
4,908
6,750
1,640
2,887
5,045
7,341
October, 2001
October, 2001
Corporacin B.C.T.
Recommendation: HOLD
CBCT
EPS P/E P/B
Shares Outstanding:
21.70 Mar.'01
20.5 - 31.0 Dec. '01 Dec. '02
0.68 33.92 3.40
0.78 28.90 3.14
0.83 27.64
0.99 23.33
IBNV:
1.16 19.91
4297.02
1.49 15.39
2,414,046,535
Corporacin B.C.T. is the fourth largest private financial group in terms of assets, which represents 12% of the aggregate total assets of all the private financial groups. B.C.T. acquired Corporacin Bancomer practically doubling its size in the year-2000. Through this acquisition B.C.T. formed part of the consolidation process of the Costa Rican financial system and positioned itself among the largest Costa Rican financial groups. B.C.T. is being tested in absorbing the Bancomer loan portfolio, which it expects to have successfully integrated by mid-2002. Once this is achieved, B.C.T. should be in position to sustain further growth. In the past, B.C.T. has been very successful in maintaining an efficient operation. Improving operational efficiencies have been a key issue during the initial phase of the acquisition, which, in turn, has already brought about improvement in profitability. B.C.T. had a stock price of 23 in Dec. 00, and its price in Aug. 01 fell slightly to 21.75. For the remaining part of 2001, we estimate that the price will gradually increase to the year-end 2000 level of 23, based on continued progress in the absorption of Bancomer. We are not issuing a target price for year-end 2002, as it would be significantly dependent on the development of the absorption of the acquisition and will be reviewed in year-end 2001.
Background
Corporacin B.C.T. had its origin in 1981 with the creation of B.C.T. de Finanzas, S.A., a finance company, which developed into the commercial bank, Banco B.C.T. in 1984. Corporacin B.C.T. de facto was structured and operated as it is today since 1994, and with the enactment of the corresponding laws it formalized its structure as a financial group in 1998. Of total assets, 84.8% are related to banking units, which include B.C.T. Bank International (B.C.T.s original offshore banking operation) which accounts for 40.2% of total assets; Banco B.C.T.-Panama, (offshore bank obtained in the acquisition of Bancomer with an original name of Commerce Overseas Bank, and is an entity with a Central American regional business orientation) for 26.2%; and Banco B.C.T. (Costa Rica banking operation) for 18.4%. The other units are small in comparison, with Tarjetas B.C.T. (credit card) representing 1.5% of total assets, B.C.T. Valores (brokerage house) 0.5%, B.C.T. Arrendadora 0.6% (leasing), and eight other entities whose combined assets account for 2.4% of the groups assets. Corporacin B.C.T. is the fourth largest private financial group with 147,704 million in total assets, which represents 12% of the aggregate total assets of all
45
October, 2001
the private financial groups. Its position as one of the largest groups in the country was substantiated by the acquisition of Corporacin Bancomer. Total assets grew 98% in 2000, an increase that was mainly attributable to this acquisition, which has also allowed B.C.T. to increase meaningfully its lending activities in the middle market. Figure 19: Corporacin B.C.T.
Corporacin B.C.T.
10.2%
B.C.T. Bank International

40.2%
Banco B.C.T Panama

26.2%
Banco B.C.T.
18.4%
Tarjetas B.C.T.
1.5%
B.C.T. Valores
0.5%
B.C.T. Arrendadora
0.6%
Other Entities
2.4%
Source: SUGEF
Absorption of Corporacin Bancomer

The absorption of Corporacin Bancomer is an example of the growth through acquisitions that the Costa Rican financial system has been undergoing in recent years. B.C.T. is still experiencing the commonly observed challenge of successfully integrating an acquired operation and loan portfolio that practically doubled its size. Table 23: B.C.T. Total Asset Growth (in millions of ) Total Assets
Source: Corporacin B.C.T.
Dec. 99 74,546
Dec. 00 147,704
Mar. 01 149,078
Despite the increase in total assets net income fell 23% for the same period, relative to 1999. The drop in profits is mainly due to one-time expenses related with the absorption of Bancomer, and to the under-performance of the acquired loan portfolio. In 2000, B.C.T. incurred a total of 1,150 million of nonrecurrent expenses related to this acquisition. Net interest income rose only 19% during the period, a rate substantially below the increase in assets. Operating results are expected to improve as the acquisition is fully absorbed, operational efficiencies are entirely incorporated, and the quality of the portfolio is progressively upgraded. Improvements arising from managing the absorption of Bancomer are already evident in the first-quarter 2001. B.C.T. reported a net interest income figure of 1,120 million, which is in pace to meet our YE 2001 projection of 4,965 million, which would represent a 36% increase year-over-year, and a 62% rise from that of 1999. Management states to be having success in incorporating and administering the purchased loan portfolio, and plans on having it fully integrated by 2002.
46
October, 2001
Figure 20: Net Interest Margin

5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 1999 2000 2001*
Source: Corporacin B.C.T., Provident Group
B.C.T. has been very successful in managing the operating expenses notwithstanding the acquisition. The administration expense was 675 million in 1Q01, and is in line with our YE 2001 administration expense projection of 2,935 million, a 10% reduction over the previous year. The implementation of operational efficiencies is one of the main accomplishments after the purchase of Bancomer. Net income results for the first quarter 2001 also indicate that management is having success in incorporating a bank that practically doubled its size. The 1Q01 annualized ROE is 17.01%, compared with the 11.92% in YE00, and pre-acquisition figure of 20.63% in YE 99. Moreover, the ROA also reflects an improvement, rising from 1.47% in YE 00 to 2.0% in March 01. Although there have been improvements as evidenced by the results of March 01, B.C.T will continue to be tested by the integration of the acquired loan portfolio. As this is successfully achieved, B.C.T will strengthen its capability to manage a substantially larger asset base, providing the means to remain as one of the main institutions in the Costa Rican financial system.
Significant Improvement in Efficiency

Traditionally B.C.T. has been successful in maintaining a high level of efficiency. In 1999 it recorded a very good efficiency ratio of 29.46%, which deteriorated upon the purchase of Bancomer, reaching 59.46% in YE00. However, management has focused on reducing expenses and fine-tuning the merger of the two units, and as of March 01 the efficiency ratio improved significantly to 41.59%. Going forward, we expect the efficiency ratio to be a strong point. Table 24: B.C.T. Efficiency Ratio Dec. 99 29.46% Dec. 00 59.46% Mar. 01 41.59%
Admin. Expense/Net Revenue
47
October, 2001
Loan Portfolio
Prior to the acquisition, B.C.T. was mainly focused in lending to the corporate sector. The acquisition resulted in an increase in gross loans of 120% in YE 00, which enabled B.C.T. to diversify into the higher margin middle market sector. However, the absorption of the loan portfolio has posed a challenge. Past due loans to gross loans are at high levels representing 16.75% in YE 00, improved significantly to 10.01% in March 01, and 10.23% in June 01. The slight improvement in net interest income as of March 01 seems to indicate progressive improvement in the loan portfolio area. Although we can expect that this improvement will continue, it will take time and effort to restore business operations to pre-acquisition levels. Management estimates that the loan portfolio will be fully assimilated and its status normalized by mid-2002. While this occurs we should expect the loan portfolio growth to remain modest. A gradual improvement on net interest income levels should be mainly forthcoming from improvements in the net interest margin. Figure 21: Loan Portfolio
Loan Portfolio Breakdown by Business Division
Personal 7% Tourism 6%
Other 5%
Agriculture 7%
Industrial 32%
Services 24% Com m ercial 19%
Improved Deposit Base

In YE 00 B.C.T. reported a 126% YOY increase in total deposits. Approximately 90% of deposits correspond to corporate clients and high net worth individuals, and we would expect this composition to remain. We can expect B.C.T. to further enhance this deposit base, and as the loan portfolio absorption is normalized, this deposit base should be among the main factors behind a progressively higher net interest margin.
48
October, 2001
Table 25: B.C.T. Deposits (in millions of ) Demand Deposits Time Deposits Total Deposits
Dec. 99 6,795 40,629 47,424
Dec. 00 18,948 88,270 107,218
Mar. 01 16,468 90,455 106,923
Capital
In absolute terms, the capital ratios shown in Table 26 would indicate a good capitalization level. However, viewed within the context of the situation of the loan portfolio, the past due loan levels pose a challenge. As indicated before, management estimates that its loan portfolio situation should be normalized by mid-2002, and consequently, we should expect a progressive improvement. The difficulties associated with the Bancomer acquisition are further illustrated in the drop in the ROE from 20.63% in Dec. 99 to 11.92% in Dec. 00, and its recovery to 17.01% indicates that appropriate steps are being taken to successfully absorb the acquisition. Table 26: Capital Dec. 99 13.78% 20.63% Dec. 00 12.36% 11.92% Mar. 01 11.74% 17.01%
Average Capital/Average Assets Return on Equity
Business Outlook
We estimate the net interest margin to remain flat at a 3.4% average throughout 2001 and 2002. Although, this may be conservative, particularly with regard to 2002, B.C.T. will continue to be tested in managing its loan portfolio and restoring the net interest margin to historical levels. We expect a higher loan loss provisioning level will be required, and estimate a 58% increase for 2001. This level will be reduced in the second-half of 2002, as the acquired portfolio is successfully integrated and B.C.T. improves overall loan portfolio performance. Non-interest income is estimated to increase an average of 31%, a figure that could be higher given the recent introduction of new bank service fees. We expect that good administrative expense management will remain a strong point and is estimated to fall 10% in 2001, and grow below 10% in 2002. Gross loans are estimated to remain fairly stable in 2001 as the company absorbs the loans it acquired. We expect loan portfolio growth to be restored in 2002. We estimate gross loans to grow 8% in colones in 2001, which should provide for the devaluation of the dollar loan portfolio. In 2002 we estimate gross loans to grow in the 18% - 20% range as B.C.T. restores organic growth levels. We should expect a progressive restoration of the net interest margin, which combined with the existing operational efficiency level, should enable B.C.T. to generate an ROE at an acceptable level relative to the Costa Rican private banking sector and its historical level.
49
October, 2001
Table 27: Corporacin B.C.T. Financial Highlights

Dec. '00
(in MM)
Mar. '01
(in MM)
Jun. '01
(in MM)
Jun. '01
(in US$ MM)
16,389 54,794 74,546 47,424 10,270
16,751 120,745 147,704 107,218 17,193
18,700 121,846 149,078 106,923 17,636
28,435 123,074 159,493 110,308 18,191
88 381 493 341 56
Profitability
20.63% 2.84% 4.30% 29.46%
11.92% 1.47% 3.49% 59.46%
17.01% 2.00% 3.22% 41.59%
14.47% 1.68% 2.78% 51.52%
Asset Quality
Past Due Loans/ Gross Loans Net Past Due Loans/ Net Loans Loan Loss Reserve/ Past Due Loans
16.75% 15.14% 11.32%
10.01%
10.23%
Liquidity
87.81% 72.45% 34.56%
90.51% 80.20% 15.62%
89.51% 80.12% 17.49%
91.47% 75.61% 25.78%
Leverage
7.3 13.78% 19.02%
8.1 12.36% 15.92%
8.5 11.74% 14.64%
8.6 11.61% 14.93%
50
Table 28: Financial Model Corporacin B.C.T.*
Corporacin B.C.T., S.A. and Subsidiaries Consolidated Income Statement (in millions) Dec-99A Dec-00A Mar-01A Jun-01E Sep-01E Dec-01E Mar-02E Jun-02E Sep-02E Dec-02E
F/X rate (03/31/01): 323.45 / US$1
51
790 1,135 2,202 2,202 12 1 70 2,119 1,707 43 1,750 25 10 78 1,637 3,275 675 718 22 741 741 127 646 780 314 1,868 33 (5) 248 225 502 68 51 496 302 917 1,428 1,434 31 1 1,466 29 15 59 1,363 103 106 743 379 1,332 2,181 2,179 40 1 2,221 44 22 89 2,065
Financial Income: From Investments From loans From past due loans Other financial income Total Financial Income Financial Expenses: On loans and borrowings Other financial expenses Total Financial Expenses Net Interest Income Loan loss provisions 7,266 4,204 3,062 514 138 161 991 456 1,747 2,935 2,948 49 2 2,999 60 30 120 2,789 1,253 13,825 297 518 15,894 12,246 8 12,254 3,640 526 438 3,584 234 4,255 3,117 18 3,135 1,120 229 2,374 429 3,658 629 4,965 829
1,342 204 52 43 334 159 589 822 905 14 1 920 18 9 37 856
2,747 408 78 86 535 319 1,018 1,643 1,713 29 1 1,743 35 17 70 1,621
4,218 571 121 128 937 478 1,664 2,465 2,846 43 2 2,890 58 29 116 2,688
5,757 734 173 171 1,338 638 2,320 3,521 3,821 57 2 3,880 78 39 155 3,608
Brokerage commissions-net Exchange rate differences-net Banking services commissions-net Other income-net Total Non-interest Income
General and administrative expenses
Operating Income Non-recurring income-net Currency translation adjustment Income before taxes and profit sharing Income tax Assets tax Profit sharing Net Income
October, 2001
October, 2001

Recommendation: BUY
GIMPC
EPS P/E P/B
Shares Outstanding:
3.20 Mar.'01
2.15 - 3.38 Dec. '01 Dec. '02
0.19 14.96 2.72
0.20 15.30
0.22 14.05
0.24 13.08
IBNV:
0.30 10.54
4297.02
0.36 8.79
1,841,727,332
Improsa has the capacity to generate high net interest margins (NIM), particularly given its reliance in the medium/small size companies. Improving asset quality and high NIM should be the main factors behind sound profit generation. Going forward, asset quality should continue being a strength particularly since 69% of the portfolio is backed by guarantees/collateral. The capital base rose 70% in the year 2000 reflecting its ability to attract capital. The high level of capitalization combined with expected ROE provides the base to support future growth. In the year-2000 Probanco invested US$ 2.5 million to acquire a 20% equity participation. Probanco is a fund sponsored by Neatherlands Development Finance Company and the Central American Bank for Economic Integration. Notwithstanding that Improsa is the twelfth largest financial group, its management, high-income generation and its potential for growth make it an attractive investment. We have set a year-end 01 stock price target of 4.02 and for year-end 02 of 4.32.
Overview
The origin of the operations of the financial group arose from the diverse business activities provided by related entities, which included real estate and bonded warehousing among others, that developed into the set of companies of what is now known as Corporacin Improsa. The business activities of these companies provided the initial opportunity to participate in financing activities. For instance, their warehousing activities permitted it to penetrate into the financial services sector particularly asset backed lending. Their success prompted the creation of an independent structure exclusively dedicated to the development of its financing activities enabling Improsa to delve into the financial sector. Improsa initiated operations in 1986 as a finance company (Financiera Improsa S.A.). As the financial laws were liberalized it transformed itself into Banco Improsa during the 1994-1995 period. In subsequent years the Bank acquired market share through the extension of financial services. The success of these operations enabled it to list its shares in the Costa Rican Securities Exchange in 1997, and finally become a financial group in 2000. As of December 2000, Improsa is the twelfth largest financial group in terms of assets, with 108 employees and three branches. Its relatively small size does not reflect its significance and potential. In 2000 total assets grew by 46%, and capital rose 70%. We are projecting a further 41% growth in total assets in 2001.
52
October, 2001
As one of four financial groups listed in the BNV, Improsa has access to a source of capital that is not available to the majority of its competitors. Moreover, in 2000 Probanco, a fund sponsored by the Netherlands Development Finance Company (FMO) and the Central American Bank for Economic Integration (CABEI) acquired a 20% equity participation in the group. Its expected capacity to generate an attractive level of profitability, combined with its access to capital should enable them to continue to grow and maintain a firm competitive position. Figure 22: Grupo Financierto Improsa
11.5%
Banco Improsa 88.3%
Gibraltar Holdings 0.2%
Source: SUGEF
Investment Highlights
High Net Interest Margin
Improsa has been able to generate a high net interest margin (NIM), which rose from 5.4% in YE 1999 to 5.6% in 2000, and further increased to 6.2% in 1Q01. The capacity to lend to the medium/small business sector, while maintaining good asset quality has allowed it to benefit from these higher margins. Going forward, we would expect the NIM to decrease, but the decrease should be compensated by asset growth, which we estimate to increase by 41% in 2001. The growth and relative good quality of the loan portfolio should enable Improsa to continue to generate high net interest income (NII), which should support high ROE levels. Figure 23: Net Interest Margin
6.40% 6.20% 6.00% 5.80% 5.60% 5.40% 5.20% 5.00% 1999 2000 2001*
Source: Grupo Financiero Improsa, Provident Group
53
October, 2001
Good Loan Portfolio Management

Improsa has been successful in managing the asset quality of its loan portfolio. Past due to total loans were 3.7% and 2.6% in YE 99 and YE 00, respectively, while dropping to 1.2% in May 01. Moreover, the quality of the interest earning assets has enabled Improsa to generate past due loan coverage of 50.18% in 1999 and 69.21% in 2000. The remaining uncovered portion of the loan portfolio can be considered of a high credit quality given that 69% of total loans have guarantees/collateral. Improsa has been successful in lending to the medium/small size company sector where it benefits from higher spreads, while maintaining good asset quality. Loans to medium size companies represent 44% of the portfolio, loans to small companies 19%, while those of corporations account for 37% of the portfolio. Going forward we can expect Improsa to maintain a good asset quality level to continue generating the required earning levels to sustain future growth. Figure 24: Loan Portfolio Composition
Loan Portfolio Breakdown by Business Division
Other 15% Agriculture 5% Industrial 15%
Personal 4%
Services 12% Commercial 49%

Source: Grupo Financiero Improsa
Table 29: Loan Portfolio Classification

Loan Classification
A B C D E Total Loans
Dec. '99 12,724 975 227 88 6 14,020
% 90.8% 7.0% 1.6% 0.6% 0.0% 100.0%
Dec. '00 18,349 1,744 560 112 45 20,810
% 88.2% 8.4% 2.7% 0.5% 0.2% 100.0%
Mar. '01 18,848 2,413 597 76 73 22,008
% 85.6% 11.0% 2.7% 0.3% 0.3% 100.0%
Improved Operational Efficiencies

Improsa has demonstrated a sound management of its administrative expenses. Notwithstanding, that the group has been able to attain a high growth level in total assets it has improved its operating efficiency levels. Total assets grew 46% year-over-year as of December 00, and 26% in the five month period ended May 01, while the efficiency level ratios improved from 66.9% to 54.9% over the same period. Clearly Improsa has been able to manage operating
54
October, 2001
expenses which can be expected to continue contributing to the profitability of this institution. The sound loan portfolio, combined with the capacity to operate efficiently, are Improsas key strengths.
Probanco Acquires Equity Stake

In the year 2000, Probanco invested US$ 2.5 million to acquire an equity participation in Banco Improsa of slightly over 20%. These shares were swapped for shares of the financial group (Grupo Financiero Improsa) in March 2001. Probanco is a fund sponsored by Netherlands Development Finance Company (FMO) and the Central American Bank for Economic Integration (CABEI), which is dedicated to invest in significant minority positions in Central American financial institutions. This investment illustrates that notwithstanding that Improsa is not ranked among the largest private financial groups, it has the potential to attract the interest of important regional investors. This further indicates that the smaller financial groups can have access to required levels of capital to maintain them as viable competitors in the existing financial environment.
Funding
As shown in Table 30 below, the majority of Improsas funding is provided by financial institutions, which accounts for 69% of loans plus total deposits. Improsa has been successful in establishing relationships with financial institutions to obtain funding, and yet manage to generate a high net interest margin. With regard to total deposits 61% are provided by small companies, 27% by medium sized companies, and corporations account for the remaining 12%. Additionally, because Improsa is largely focused on lending to small/medium size companies, it has been able to obtain term funding from multilateral institutions. For instance, in the year 2000 it obtained a US$6 million long-term loan from the Interamerican Investment Corporation (IIC). Improsa should be able to continue to obtain the required funding with the current financing structure to support the expected growth levels. Table 30: Deposits (in millions of ) Demand Deposits Time Deposits Total Deposits Loans Dec. 99 1,214 3,210 4,424 8,896 Dec. 00 1,832 4,856 6,688 12,394
Capital
Improsa has a strong capital base. Its capital-to-total-assets ratio of 12.00% in Mar. 01, is high for the industry and supports further growth. Capital rose 70% in year 2000, mainly as a result of an injection of capital, which includes the US$ 2.5 million investment made by Probanco. Going forward, high levels of capitalization and expected ROE levels should enable Improsa to sustain further growth. Table 31: Capital to Assets Ratio Average Capital/Average Assets
Dec. 99 11.76%
Dec. 00 12.99%
Mar. 01 12.99%
55
October, 2001
Business Outlook
Going forward, we would expect Improsa to sustain an adequate interest revenue generation level as increased interest earning asset levels should more than compensate expected decreases in the net interest margin. Moreover, lending to the medium/small business sector should also enable it to support a relatively higher NIM. We are estimating that the net interest margin should remain basically flat through the year-end, and average 5.06% throughout 2002. Noninterest income is expected to be bolstered by the introduction of new banking service fees in the second semester of 2001, which combined with operational efficiencies should further support the profitability level that we are estimating. We estimate 41% growth in loans for 2001, and 18% in 2002. Improsa should also be expected to continue to maintain a good asset quality level, with relatively stable loan loss provisioning requirements. The quality of the loan portfolio and good operational efficiencies should continue to be the main profit drivers. This earnings generation capacity combined with high capitalization levels should support further growth. Table 32: Grupo Financiero Improsa Financial Highlights
Dec. '00
(in MM)
Mar. '01
(in MM)
May '01
(in MM)
May '01
(in US$ MM)
1,322 12,741 15,574 4,424 1,841
2,559 18,986 22,730 6,687 3,133
2,996 20,230 24,605 6,074 2,998
3,801 22,623 28,138 6,591 3,114
12 69 86 20 10
Profitability
Return on Equity Return on Assets Net Interest Margin Operating Expenses/ Net Revenue
14.31% 1.69% 5.42% 54.72%
14.13% 1.83% 5.63% 57.60%
16.57% 2.15% 6.23% 57.77%
18.32% 2.25% 5.53% 55.45%
Asset Quality
Past Due Loans/ Gross Loans Net Past Due Loans/ Net Loans Loan Loss Reserve/ Past Due Loans Net Past Due Loans/ Capital
3.71% 1.88% 50.18% 12.80%
2.64% 0.83% 69.21% 4.93%
3.00% 1.27% 58.42% 8.42%
1.21% -0.25% 120.31% -1.79%
Liquidity
35.38% 80.29% 29.89%
35.88% 82.00% 38.26%
30.56% 80.78% 49.34%
29.56% 79.23% 57.66%
Leverage
Avg. Assets/ Avg. Capital Avg. Capital/ Avg. Net Loans
8.5 14.72%
7.7 15.97%
7.7 15.92%
8.6 14.49%
Source: Grupo Financiero Improsa, Provident Group
56
Table 33: Financial Model Grupo Financiero Improsa *
Banco Improsa, S.A. Consolidated Income Statement ( in millions )

Dec-99A Dec-00A Mar-01A May-01A Jun-01E Sept-01E Dec-01E Mar-02E Jun-02E Sept-02E Dec-02E
F/X rate (05/31/01): 326.64 / US$1
Financial Income: 195 2,222 132 165 2,714 1,936 15 1,951 763 141 1,003 111 13 2,350 2,336 214 3,353 120 1,140 1,797 210 2,808 183 1,614 -
57
791 349 34 1,244 1,244 553 66 675 83 1,049 128 77 153 229 543 308 2 310 46 5 127 413 62 408 705 218 126 1 238 51 170 221 27 2 29 120 (8) 112 369 230 9 298 45 155 (3) 152 445 299 (1) 462 69 207 3 210 674 459 3
From Investments From loans From past due loans
Other financial income Total Financial Income Financial Expenses:
On loans and borrowings
Other financial expenses Total Financial Expenses
1,292 142 267 260 9 270 902 634 3 637 96 189 28 50 8 58 235 188 1 424 64 184 16 200 528 421 3 24 291 821 620 5 625 94
1,755 189 334 32 366 1,173 759 6 764 115
Net Interest Income Loan loss provisions
1,439 173
411 47
843 95
Banking services commissions-net Other income-net Total Non-Interest Income
General and administrative expenses
Operating Income
Non-recurring income-net Currency translation adjustment Income before taxes and profit sharing Income tax and profit sharing
Net Income
263
351
127
238
254
393
542
161
360
531
650
October, 2001
October, 2001
For more information on this research report or other Provident Group services please contact:
NEW YORK Steve Carlson, CEO (212) 742-1871 scarlson@provident-group.com
MIAMI Joel Cohen, Managing Director (305) 913-2312 jcohen@provident-group.com
GUATEMALA Rafael Minondo, Managing Director +(502) 339-3171 rminondo@provident-group.com
COSTA RICA Allan Rodriguez, Managing Director +(506) 256-1213 arodriguez@provident-group.com
Information presented in this research report is believed to be reliable but Provident Group does not warrant its completeness and/or accuracy. Opinions and estimates presented herein constitute our judgment and may be subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Provident Group and/or its affiliates and employees do not hold a position or act as market maker in the financial instruments of any issuer discussed herein or act as underwriter, placement agent, advisor or lender to such issuer. The investments and strategies discussed herein may not be suitable for all investors, if you have any doubts you should consult your investment advisor. The investments discussed may fluctuate in price or value. Investors may get back less than they invested. Fluctuations in exchange rates may have an adverse effect on the value of investments.
58

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COSTA RICAN FINANCIAL GROUPS

FOCUS ON THE PUBLICLY TRADED FINANCIAL GROUPS

SECTION VII: The Publicly Traded Financial Groups

SUMMARY TABLE OF CONTENTS

Section VII: The Publicly Traded Financial Groups.....................................32

The Costa Rican Banking System

Government banks control over 50% of total banking sector assets.

Private sector participation is highly concentrated, and consolidation is expected to continue.

Public Sector Commercial Banks

The Government Banks

Banco de Costa Rica

Banco Crdito Agricola de Cartago

Privatization Not seen as a factor in the near-term

High Temporary Investment Portfolio Levels

Table 2: Government Banks Investments and Loans (in millions of colones)

Total Loans & Temp Inv.

53% 537,597 469,651 Source: SUGEF, Asociacin Bancaria Costarricense.

..which points towards growth limitations due to restricted access to capital.

.in a market largely driven by asset size.

The Private Financial Groups

The Financial Groups

Financial Groups High level of concentration

Total: 1,249,269 100% Source: SUGEF, Asociacin Bancaria Costarricense.

Table 4: Costa Rican Financial Institutions

Private Financial Groups

Grupo Financiero Acobo

Grupo Financiero Bancrecen

Grupo Financiero Banex

Grupo Financiero Bantec Grupo Financiero BCT

Grupo Financiero Cuscatlan

Grupo Financiero BNS

Grupo Financiero Cathay

Grupo Financiero Citibank

Grupo Financiero Coocique

Grupo Financiero Elca

Grupo Financiero Finadesa

Grupo Financiero Interfin

Grupo Financiero Lafise

Grupo Financiero Metropolitano Uno

Grupo Financiero Pacfico

Grupo Financiero Promrica

Grupo Financiero San Jos BICSA Banks BNCR BCR

Grupo Financiero Improsa

Grupo Financiero BICSA

Grupo Financiero Servivalores Government Banks

Banco Nacional de Costa Rica

Banco de Costa Rica

Banco Agrcola de Cartago

Banco Popular y Desarrollo Comunal

Baco Hipotecario de la Vivienda

OTHER FINANCIAL INSTITUTIONS

Compaa Financiera de Londres

Compaa Financiera Miravalles

COOPE SAN MARCOS R. L.

La Vivienda, Mutual de Ahorro y Prstamo

Grupo Burstil Aldesa

Source: Provident Group

Costa Rica Nicaragua

Amrica Central Cuscatln

Primer Banco del Istmo Source: Estrategia y Negocios.

Financial Groups with Regional Presence

Red Financiera BAC

Grupo Financiero Cuscatln