FOR IMMEDIATE RELEASE Contacts: Marcelo Icikson Reuters BHI.BA Bloomberg - BHIP AR <Equity> Bloomberg - BHIP <Corporate> Bloomberg BHN <Mortgage> www.e-potecario.com Andrea Zelkowicz Gabriel G. Saidon Capital Markets Chief Financial Officer Tel. (54-11) 4347-5485 Tel. (54-11) 4347-5759/5212 Fax (54-11) 4347-5874 Fax (54-11) 4347-5874/5113 Buenos Aires, Argentina Buenos Aires, Argentina azelkowicz@hipotecario.com.ar gsaidon@hipotecario.com.ar Highlights I. Executive Summary PRESS RELEASE Banco Hipotecario Sociedad Anónima Reports Second Quarter 2002 Results The Bank s net loss for the second quarter of 2002 was Ps. (851.6) million. This loss primarily reflects the adverse effects of inflation, the devaluation of the Argentine peso and the pesification of the Bank s foreign currency-denominated assets and liabilities during 2002. The Bank s monetary loss for the second quarter was Ps. (861.3) million. Monetary loss reflects inflationary impact and is calculated by applying an inflation index to the value of the Bank s peso-denominated mortgage loans. The Bank s loss for the second quarter includes the positive effects resulting from the Bank s option, pursuant to Central Bank Communication No. 3800, to offset in advance Ps. 320.8 million in losses during the quarter by recognizing compensation received from the Argentine government, designed to offset the impact on the Bank s balance sheet of the asymmetric pesification, which is recorded as Differential for unrealized valuation. Differential for unrealized valuation constitutes compensation received from the government, as described below, for the Bank s net financial position of foreign currency-denominated assets and liabilities at December 31, 2001 converted at the exchange rate of Ps. 1.40:US$ 1.00. The Bank s results were also adversely affected by a decrease in net financial income due to a significant increase in interest payments, and the adjustment for inflation in accordance with the consumer price index (CER), on borrowings from the Central Bank, including interest expenses in respect of additional Central Bank advances expected to be incurred in order to finance the acquisition of additional government bonds in the amount of US$ 821.9 million, as described below. Inflation continues to adversely affect the Bank s results of operations, as reflected by the increase in the wholesale prices (general level) index published by INDEC, due to the lose in real value of non-indexed loans. At June 30, 2002, according to this index, wholesale prices had increased 96.3% with respect to December 31, 2001, including 46.2% during the second quarter. The Bank s assets as of June 30, 2002 include amounts reflecting its anticipated right to receive bonds issued by the Argentine government (BODENs) due 2012, pursuant to Decree 905/02, in an aggregate principal amount of approximately US$ 1,226.7 million (US$ 404.8 million in compensatory bonds and US$ 821.9 million in additional government bonds, as more fully described below), plus accrued interest and inflation adjustments from February 3, 2002 to the end of the period. The BODENs expected to be received by the Bank are reflected on its balance sheet as of June 30, 2002 at a value of Ps. 4,665.8 million, based on the exchange rate at June 30, 2002 of approximately Ps.3.80:US$1. Additionally, the Bank s liabilities as of June 30, 2002 include Ps. 1,150.6 million of borrowings from the Central Bank which had not been incurred as of such date but which the Bank currently expects to incur in order to finance its anticipated acquisition of additional BODENs, plus accrued interest and inflation adjustments from February 3, 2002 to the end of the period, for a total of Ps. 1,448.1 million. Notwithstanding the foregoing, at June 30, 2002, the Bank had not yet received compensatory and additional BODENs, and the actual amount of such bonds the Bank may ultimately receive is subject to Central Bank approval. In accordance with Central Bank regulations, the Bank s anticipated right to receive BODENs is recorded at book value, including the accrual of non-cash interest on such bonds which is recorded in the income statements for the first and second quarters of 2002. In conclusion, the losses for the quarter are a consequence of the deterioration of the leading financial indicators, including interest rates, inflation indexes, exchange rates as well as the mismatch resulting from the application of different adjustment indexes (CER and CVS) with respect to the Bank s assets and liabilities, all of which adversely affected the Bank s net financial income.
II. The Impact of the Current Crisis on Banco Hipotecario Argentina s sovereign debt default, the end of Convertibility Law, the resulting devaluation of the Argentine Peso and the asymmetric pesification of the assets and liabilities of Argentine banks has deepened the country s economic and financial crisis during the first half of 2002. The crisis materially affected the Bank s liquidity and solvency, principally due to measures adopted by the Argentine government which adversely affected the Bank s business operations and its balance sheet. These measures include: - pesification of 100% of the Bank s assets denominated in foreign currency; - pesification of only 7% of the Bank s liabilities denominated in foreign currency; - a cap on interest rates on 100% of the Bank s pesified mortgage loans; - restrictions on the purchase and transfer of U.S. dollars abroad for payments with respect to indebtedness; - the fact that approximately 60% of the Bank s mortgage loans are not indexed to inflation, while only about 30% are subject to the wage index (CVS) and 10% to the consumer price index (CER); and - the suspension on foreclosures, originally for 180 days and subsequently extended for an additional 90 days. - The impact of these measures on the Bank have included: - a reduction of the Bank s net worth (before compensation according to Decree 905/2002); - a significant increase in delinquencies and credit deterioration in the Bank s portfolio; - an increase in delinquencies resulted in a rapid decrease in cash flow; and - a substantial currency mismatch resulting from the pesification of the Bank s assets in contrast to its non- pesified cross-border debt denominated in foreign currency, which, coupled with the steep devaluation of the peso, has resulted in the Bank s inability to meet its foreign currency obligations in a timely manner. The crisis has materially impacted the viability of the Bank s historic business model. Consequently, the Bank is actively facing the challenges of adapting to the changes in Argentina s financial system, which have included the following: - concentrating the Bank s efforts on the development of retail and commercial banking services, including collection and payment services, personal accounts, credit cards, time deposits, checking and savings accounts, providing services relating to international trade, the purchase and sale of foreign currency and insurance products; - implementing policies aimed at preserving the asset quality of the Bank s portfolio (At June 30, 2002, the total value of performing loans amounted to Ps. 2,617 million. In addition, of the total amount of principal and interest invoiced to performing clients during the first half of 2002, management estimates that approximately 85% was collected within 30 days of being invoiced.); - improving the Bank s liquidity by encouraging the prepayment of mortgage loans; - restructuring the Bank s business operations by closing sales offices, reducing software and technology expenditures and reducing personnel (During the first half of 2002, the Bank closed seven sales offices and reduced personnel by 3.3%.); and - suspending all originations of new loans. 2
III. Certain Developments During the Second Quarter and Recent Developments On April 17 th 2002, the Bank presented its Regularization Plan to the Central Bank. The basic premises of this plan, which is designed to restore the Bank s liquidity, are: the restructuring of the terms and rates of the Bank s foreign currencydenominated liabilities; the acceleration of cash flow from its financial assets by promoting the prepayment of mortgage loans; the receipt of compensation expected to be granted by the Argentine government in connection with the Bank s losses caused by the pesification of assets coupled with the devaluation of the peso and its impact on the Bank s net worth; and the replacement of the Bank s dollar-denominated liabilities for peso-denominated liabilities in order to diminish exchange rate risk. This proposal is currently under review by the Central Bank. With regards to Decree 905/02, the Argentine government ordered the issuance of Argentine Government Compensatory Bonds (i) to compensate financial entities for the reduction in equity caused by the conversion to pesos, at different exchange rates, of certain assets and liabilities denominated in foreign currency, in accordance with Law No. 25,561 and Decree 214/02 and related norms, as well as (ii) to cover the reduction in equity caused by the currency mismatch between non- pesified cross-border foreign currency debt and pesified assets as a result of these laws. Consequently, on September 16 th 2002, the Bank fulfilled its notice requirements under Decree 905/02, electing to receive the following: - compensatory BODENs: US$ 404.8 million in US$-denominated Argentine government bonds maturing in 2012 (in accordance with Art. 29 b), c) and d) of the Decree, to cover the aforementioned asymmetrical pesification ; and - additional BODENs: US$ 821.9 million of US$-denominated Argentine government bonds maturing in 2012 (in accordance with Art. 29 e) of the Decree, to cover the aforementioned currency mismatch. On September 30 th, the Bank received US$ 344.1 million in BODENs, and the remainder is currently pending. On August 16 th, the Bank suspended payments on all financial indebtedness in anticipation of pursuing a comprehensive debt restructuring plan. In an effort to reach an equitable restructuring with all of its creditors, the Bank announced that it will refrain from making any payments of interest, principal, fees and other similar amounts that may become due and payable with respect to all existing financial indebtedness until the debt has been successfully restructured. The Bank is currently working with its financial advisors to perform a comprehensive review and analysis of the impact resulting from the recent changes in the economic and regulatory environment in Argentina and to develop a voluntary debt restructuring plan that will ensure an equitable and fair treatment of all its creditors. On September 27 th, the Central Bank issued Communication A 3748 extending the maturity of its short-term liquidity advances to January 2003 and re-set the interest rate for such advances to 64% of the average Lebac rates (rates on bonds issued by the Central Bank). On October 1 st, the Argentine government commenced the second exchange for deposits in local banks (Canje II) which included three options for depositors: a) withdrawal of rescheduled deposits (CEDROS) up to a maximum amount of Ps. 7,000 until May 31, 2002; b) exchange of rescheduled deposits for BODENS due 2013 denominated in U.S. dollars which are to be guaranteed by banks up to the amount in Argentine Pesos of the rescheduled deposit plus inflation adjustment based on the consumer prices index (CER); and c) exchange of rescheduled deposits for peso-denominated notes issued by financial institutions with an option for conversion into the original currency of the deposit, which are to be guaranteed by the government. The purchase by financial institutions of BODENS due 2013 to be delivered to depositors that agree to exchange their deposits for government bonds will be paid for by the incurrence of short-term liquidity advances granted by the Central Bank or loans granted by the government. Also on October 1 st, the Central Bank issued Communication A 3762 which establishes that the interest rate for loans subject to the wage index (CVS) shall be the lesser of the annual interest rate in effect at February 2, 2002 and the average interest rates charged by local financial institutions during 2001 as published by the Central Bank. On May 15, 2002, pursuant to Law No. 25,589, foreclosures were suspended for 180 days, and subsequently, in November, the Argentine government reached an agreement with banks which unanimously committed to refrain from foreclosing until February 2003. 3
Selected Statistical Information 1, 2 Buenos Aires, November 20, 2002 - Banco Hipotecario S.A. (Buenos Aires Stock Exchange: BHIP) reports second quarter of 2002 results. The Bank s net loss for the second quarter of 2002 was Ps. (851.6) million. This loss primarily reflects the adverse effects of inflation, the devaluation of the Argentine peso and the pesification of the Bank s foreign currency-denominated assets and liabilities during 2002. The Bank s loss for the second quarter includes the positive effects resulting from the Bank s option, pursuant to Central Bank Communication No. 3800, to offset in advance Ps. 320.8 million in losses during the quarter by recognizing compensation received from the Argentine government which is recorded as Differential for unrealized valuation. Differential for unrealized valuation constitutes compensation received from the Argentine government, as described below, for the Bank s net financial position of foreign currency-denominated assets and liabilities at December 31, 2001 converted at the exchange rate of Ps. 1.40:US$ 1.00. This presentation differs from generally accepted accounting practices in Argentina, however, it has no effect on the Bank s net income for the quarter. The Bank s monetary loss for the second quarter was Ps. (861.3) million. Monetary loss reflects inflationary impact and is calculated by applying an inflation index to the value of the Bank s peso-denominated mortgage loans. This decrease in net income before monetary loss as compared to both the second quarter of 2001 and the first quarter of 2002 was principally caused by: i) a decrease in net financial income resulting from higher financial expenditures, Ps. 302.3 million higher than in the first quarter of 2002 and Ps. 377.3 million higher than in the second quarter of 2001, principally due to the mismatch in interest rates on the Bank s assets and liabilities denominated in both local as well as foreign currency; ii) lower income from insurance activities due to the increase in delinquent payments on mortgage loans; iii) lower net income from services as a result of the continued suspension in the origination of new mortgage loans; and iv) lower net miscellaneous income principally as a result of losses on the Bank s interest in BACS and a write-off of intangible assets related to the suspension of certain software and other technology-related projects. This decrease was partially offset in both periods by lower administrative expenses due to the continuation of strict cost control policies. Financial income 294,682 295,525 219,134 (0.3)% 34.5% Financial expenditures (483,280) (180,985) (105,949) 167.0% 327.0% Net financial income (188,598) 114,540 36,108 (264.7)% (278.0)% Provision for loan losses (37,005) (277,157) (34,388) (86.6)% 7.6% Net Contribution from insurance 11,049 14,991 25,213 (26.3)% (56.2)% Net other income from services (8,705) 1,495 3,516 (682.2)% (347.6)% Administrative expenses (29,946) (39,928) (64,369) (25.0)% (53.5)% Net income from financial operations (253,206) (186,058) 35,921 36.1% (804.9) Miscellaneous income, net (57,920) 34,414 12,971 (268.3)% (546.5)% Income tax - - - - - Offset of losses 320,771 - - NM NM Net income (loss) before monetary loss 9,585 (151,644) 48,892 (106.4)% (80.3)% Monetary loss (861,258) (1,003,846) - (14.2)% NM Net Income (851,614) (1,155,490) 48,892 1.5% NM 1 When used in this report, Pre-91 loans are those originated before 1991 or individual loans derived from construction project loans originated prior to such period, and Pos-91 loans are all loans originated after 1991. 2 Unless otherwise indicated, all financial data presented in tables below are stated in thousands of Argentine pesos. Financial data for the second and first quarter of 2002 and the second quarter of 2001 has been recalculated in constant currency as of June 30, 2002 using the wholesale prices (general level) index published by INDEC, which amounted to an adjustment factor of 1.4617 for the first quarter of 2002 and 1.9629 for the second quarter of 2001. 4
Financial Income Financial income for the second quarter of 2002 amounted to Ps. 294.7 million, an increase of Ps. 75.5 million or 34.5% from Ps. 219.1 million for the second quarter of 2001. This increase was mainly due to: i) an increase in other financial income of Ps. 72.6 million as a result of the indexation for inflation, based on the CER consumer price index, of loans to the pubic sector, both at the national and provincial level; ii) higher financial income of Ps. 50.7 million due to the effects of exchange rate changes on assets and liabilities denominated in foreign currency as a result of the accounting for US$ 1,226.7 of BODENs which the Bank expects to receive, subject to Central Bank approval; and iii) the accrual of interests on such anticipated BODENs in an amount of Ps. 23.6 million. This increase was partially offset by a decrease in interest payments on Pre-91 and Post-91 mortgage loans due to a decrease in the average outstanding principal amounts of such loans and the higher number of non-performing loans as a consequence of the prolonged economic recession in Argentina and the suspension on the originations of new loans. As compared to the previous quarter, financial income for the second quarter of 2002 remained at the approximately same level, amounting to Ps. 294.7 million from 295.5 for the first quarter of 2002. The principal increases in financial income were due to: i) an increase in other financial income of Ps. 67.2 as a result of the indexation for inflation, based on the CER consumer price index, of loans to the pubic sector, both at the national and provincial level; and ii) an increase in income from bonds and other interests in the amount of Ps. 8.5 million, principally due to the effects of exchange rate changes on assets and liabilities denominated in foreign currency as a result of the accounting for US$ 1,226.7 of BODENs which the Bank expects to receive, subject to Central Bank approval. These increases were offset by lower interest payments on Pre- 91 and Post-91 mortgage loans due to the deterioration of the Bank s portfolio resulting from the prolonged economic recession and, to a lesser extent, a decrease in effects of changes in exchange rate as the exchange rate fluctuations were not as severe during the second quarter. Interest on Pre-91 loans 28,548 40,125 72,264 (28.9)% (60.5)% Interest on Post-91 loans 76,500 72,703 100,126 5.2% (23.6)% Income from compensatory and additional BODENs 23,637 15,111-56.4% - Income from Government Securities and other interest 15,744 12,774 19,776 23.3% (20.4) Effects of changes in exchange rate 50,726 122,507 - (58.6)% - Other 99,527 32,305 26,968 208.1% 269.1% Total Financial Income 294,682 295,525 219,134 (0.3)% 34.5% Financial Expenditures Financial expenditures for the second quarter of 2002 were Ps. 483.3 million, Ps. 370.1 million or 327.0% higher than Ps. 113.2 million for the second quarter of 2001 and Ps. 302.3 million or 167.0% higher than Ps. 181.0 million for the first quarter of 2002. The main reasons for this increase with respect to both quarters were: i) a material increase in interest payments and inflation adjustments, based on the CER consumer price index, on borrowings from the Central Bank, including short term liquidity advances from the Central Bank and additional Central Bank advances expected to be incurred in the future in order to acquire additional BODENs; ii) higher losses from securities and other participations, principally from losses registered with respect to certificates of participations in financial trusts; and iii) higher interest payments on pesified other interest liabilities. Interest on external financing 52,789 51,079 80,228 3.3% (34.2)% Interest Central Bank Advances 301,241 95,467-215.5% NM Interest on interbank loans 24,511 11,702 6,087 109.5% 302.7% Other interest liabilities 48,575 7,344 21,447 561.5% 126.5% Losses from securities and other participations 53,177 11,046-381.4% NM Contributions and taxes on financial income 2,987 4,347 5,423 (31.3)% (44.9)% Total Financial Expenditures 483,280 180,958 113,185 167.0% 327.0% 5
Net Financial Income The following table sets forth the impact on the Bank s net income (loss) from financial operations arising from assets and liabilities denominated in foreign currency as of June 30, 2002, including: i) BODENs to be received from the Argentine government as compensation to financial entities; and ii) liabilities which were not pesified. Net loss from financial operations denominated in foreign currency for the second quarter of 2002 was US$ (23.0) million, primarily resulting from: i) an increase in financial income as a result of US$ 6.3 million in non-cash interest income from February 3 to June 30, 2002 in respect of BODENs which the Bank expects to receive, subject to Central Bank approval; and ii) financial expenditures corresponding to the accrual of interest on bonds, floating rate loans and derivatives in an amount equal to US$ 30.0 million. Net income from financial operations denominated in local currency for the second quarter of 2002 amounted to Ps. (188.6) million primarily resulting from: i) Ps. 301.2 million of accrued interest and inflation adjustments on indebtedness to the Central Bank; ii) Ps. 52.8 million of accrued interest on obligations denominated in foreign currency; and iii) losses of Ps. 53.2 million from the Bank s participation in subsidiaries. These negative results were partially offset by: i) income of Ps. 50.7 million due to the effects of exchange rate changes on assets and liabilities denominated in foreign currency as a result of the accounting for US$ 1,226.7 of BODENs which the Bank expects to receive, subject to Central Bank approval; and ii) income resulting from the indexation for inflation, based on the CER consumer price index, principally on loans to the pubic sector, both at the national and provincial level. Financial Income Quarter ended 6/30/2002 US$ 1 Ps. 2 Compensatory and additional BODENs 6,306 23,637 Interests on Pre-91 loans 28,549 Interests on Post-91 loans 76,500 Income from government securities and other interests 15,744 Effects of changes in exchange rate 3 50,726 Other financial income 99,526 Total Financial Income 6,306 294,682 Financial Expenditures Interests from external financing 29,965 52,789 Interests from interbank loans (338) 24,511 Losses from government securities and other interests (290) 53,177 Central Bank Advances 301,241 Other interests liabilities 48,575 Contribution and taxes 2,987 Total Financial Expenditures 29,337 483,280 Net Financial Income (23,031) (188,598) 1 Income expressed in the currency of the transaction or its equivalent in US dollars for transactions denominated in Euros. 2 Income or expenditures from transactions in Argentine pesos or the equivalent in Argentine pesos from income or expenditures in foreign currency at the exchange rates in effect at the time of recognition. 3 Reflects the positive effects of the devaluation of the peso on assets and liabilities denominated in foreign currency. 6
Net Contribution from Insurance As compared to the second quarter of 2001 and the first quarter of 2002, net contribution from insurance activities during the second quarter of 2002 decreased by Ps. 14.3 million or 56.9% and by Ps. 4.3 million or 28.4%, respectively, to Ps. 10.9 million. This decrease was due to lower premiums as a result of an increase in non-performing loans, and, to a lesser extent, a decrease in contribution from insurance due to a drop in the number of loans with respect to which the Bank provides insurance coverage because of the continued suspension in originations of mortgage loans during the quarter. Property damage premium 4,128 5,179 9,542 (20.3)% (56.7)% Life insurance premium 9,051 13,034 19,354 (30.6)% (53.2)% Unemployment insurance premium 636 1,017 1,382 (37.5)% (54.0)% Total Premiums 13,815 19,230 30,278 (28.2)% (54.4)% Property damage insurance claims paid 113 175 251 (35.8)% (55.2)% Life insurance claims paid 2,262 3,325 4,197 (32.0)% (46.1)% Unemployment insurance claims paid 392 738 616 (46.9)% (36.4)% Total Claims 2,766 4,239 5,064 (34.7)% (45.4)% Contribution from Insurance 11,049 14,991 25,213 (26.3)% (56.2)% Insurance reserve provision (included in net miscellaneous income) (183) 183 - (200.0)% - Net Contribution from Insurance 10,866 15,174 25,213 (28.4)% (56.9)% Other Income from Services, Net Other net income from services amounted to Ps. (8.7) million in the second quarter of 2002, reflecting a decrease of Ps. 10.2 million from Ps. 1.5 million in the first quarter of 2002 and of Ps. 12.2 million from Ps. 3.5 million in the second quarter of 2001. The main reasons for this material decrease were the accelerated amortization due to the restructuring process of certain costs related to the offering and issuance of bonds, which had been amortized during the life of the bonds, and, to a lesser extent, lower commissions received for the Bank s services as paying agent of funds administered by FONAVI, an Argentine government housing agency. Other income from services Commissions related to origination and servicing of own and third-party loans 6,738 7,924 12,965 (15.0)% (48.0)% FONAVI service commissions 793 1,193 2,087 (33.5)% (62.0)% Other 587 1,101 1,160 (46.6)% (49.4)% Subtotal 8,119 10,217 16,212 (20.5)% (49.9)% Other expenditures from services Commissions paid in connection with loans 546 519 3,233 5.2% (83.1)% Collection services 619 854 1,268 (27.4)% (51.2)% Structuring and underwriting fees 13,745 5,050 5,541 172.2% 148.0% Commissions on third-party origination 318 580 689 (45.3)% (53.9)% Taxes 630 851 1,113 (25.9)% (43.4)% Other 966 868 852 11.2% 13.4% Subtotal 16,824 8,722 12,696 92.9% 32.5% Other Income (loss) from Services, Net (8,705) 1,495 3,516 (682.2) (347.6)% 7
Administrative Expenses Administrative expenses for the second quarter of 2002 decreased by Ps. 34.4 million or 53.5% to Ps. 29.9 million from Ps. 64.4 million for the second quarter of 2001, primarily because of the continuation of strict cost control policies. This decrease includes a reduction in salaries and social security contributions of Ps. 11.2 million, lower other fees and severance payments of Ps. 7.7 million and lower advertising and publicity expenses of Ps. 3.9 million due to a decrease in business activity as a consequence of the prolonged economic recession. As compared to the previous quarter, also due to the continuation of the Bank s cost control policies, administrative expenses decreased by Ps. 10.0 million or 25.0% million from Ps. 39.9 million in the previous quarter of 2002. This decrease mainly resulted from a decrease of Ps. 7.5 million in salaries and social security contributions and a reduction of Ps. 1.9 million in other expenses. Salaries and social security contributions... 14,625 21,775 25,812 (32.8)% (43.3)% Severance payments... 265 753 5,847 (64.8)% (95.5)% Other fees... 2,527 2,250 4,609 12.4% (45.2)% Advertising and publicity... 153 83 4.024 83.3% (96.2)% Non recoverable VAT and other taxes... 2,225 3,058 6,815 (27.2)% (67.4)% Operating expenditures... 6,869 7,691 11,660 (10.7)% (41.1)% Other... 3,282 4,318 5,602 (24.0)% (41.4)% Total Administrative Expenses... 29,946 39,928 64,369 (25.0)% (53.5)% Administrative Expenses / Total Assets... 1.37% 1.32% 5.11% Miscellaneous Income, Net In the second quarter of 2002, miscellaneous income, net amounted to Ps. (57.9) million, Ps. 92.3 million lower than Ps. 34.4 million in second quarter of 2001 and Ps. 70.9 million lower than Ps. 13.0 million in the first quarter of 2002. This decrease mainly resulted from: i) a decrease in other miscellaneous expenses as a result of the Bank s participation in subsidiaries, particularly from losses on BACS s operations; ii) a decrease in loan recoveries; and iii) a write-off of intangible assets due to the suspension of certain software and other technology-related projects for which the probabilities of recuperating the Bank s investment are low. Penalty interest 2,378 2,298 3,298 3.5% (27.9)% Reversal of provisions 182-2 NM NM Loan loss recoveries 6,322 12,264 19,535 (48.4)% (67.6)% Other 2,074 1,694 4,744 22.4% (56.3)% Subtotal Miscellaneous Income 10,956 16,256 27,579 (32.6)% (60.3)% Other provisions 4,223 13 9,548 NM (55.8)% Insurance reserve provision (183) 183 - (200.0)% NM Taxes 97 132 159 (25.9)% (38.7)% Write-Offs of Intangible Assets 7,792 - - NM NM Other 56,947 (18,486) 4,901 NM NM Subtotal Miscellaneous Expenses 68,877 (18,159) 14,608 NM NM Total Miscellaneous Income, Net (57,920) 34,414 12,971 (268.3)% NM 8
Loan Portfolio The Bank s total loan portfolio at June 30, 2002 decreased by Ps. 1,324.6 million to Ps. 3,766.5 million from Ps. 5,091.1 million (or Ps. 3,483.0 million in nominal terms) at March 31, 2002. This decrease, in nominal terms, was principally due to the prepayments of loans, the amortization of the loan portfolio in the ordinary course of business and the continued suspension of new loan originations during the quarter, and was partially offset by an increase of Ps. 412.2 million in loans to the public sector as a result of the exchange in November 2001 of government securities for government loans guaranteed by tax revenues. The Bank s total loan portfolio at June 30, 2002 decreased by Ps. 3,805.3 million from Ps. 7,571.8 million at June 30, 2001 (although compared with Ps. 3,470.8 million in nominal terms at June 30, 2001, the variation is not significant). Variations were due to: i) an increase in loans to the public sector as a result of the exchange of government securities for government loans; ii) the pesification of loans to the public sector and to the financial sector at the exchange rate of Ps. 1.40:US$ 1.00; iii) indexation for inflation, based on the CER consumer price index, of loans to the public sector, commercial loans and certain loans to individuals; and iv) and were offset by write-offs of non-performing loans, the prepayment and the amortization of the loan portfolio in the ordinary course of business and the continued suspension of new loan originations during the quarter. Loan Portfolio per product Mortgage loans - Pre-91 loans individual mortgages 1,322,345 2,008,139 3,080,446 (34.2)% (57.1)% - Pre-91 loans construction projects 7,196 17,812 12,368 (59.6)% (41.8)% Total Pre-91 loans 1,329,541 2,025,951 3,092,814 (34.4)% (57.0)% - Post-91 loans individual mortgages 1 1,476,791 2,272,141 3,261,097 (35.0)% (54.7)% - Post-91 loans construction projects 273,433 413,559 611,180 (33.9)% (55.3)% Total Post-91 loans 1,750,224 2,685,700 3,872,278 (34.8)% (54.8)% Other loans 2 686,706 379,393 606,721 81.0% 13.2% Total Loan Portfolio 3,766,471 5,091,044 7,571,812 (26.0)% (50.3)% Loan Portfolio - per sector Non financial government sector 715,148 442,828 374,188 61.5% 91.1% Financial Sector 28,883 4,834 388,982 497.5% (92.6)% Non financial private sector - With preferred guarantees 1 2,896,431 3,896,607 2,665,805 (25.7)% (57.0)% - Non-applied collections (20,551) (31,747) (21,719) (35.3)% (55.2)% - Other 2,589 3,384 2,315 (23.5)% (44.8)% - Interests accrued on uncollected loans due to changes in exchange rate 71,836 73,718 50,433 (2.6)% (22.5)% Reserves (577,703) (752,281) (514,662) (23.2)% (38.5)% Total Loan Portfolio 3,116,633 3,637,343 2,488,433 (14.3)% (52.9)% 1 Includes Ps. 401,812 thousands at June 30, 2002, Ps. 604,806 at March 31, 2002, and Ps. 666,552 thousands at June 30, 2001 of individual post-91 mortgage loans conveyed in a trust in anticipation of future securitizations. 2 Other loans includes Ps. 72,135 thousands at June 30, 2002, Ps. 96,614 thousands at March 31, 2002, and Ps. 17,721 thousands at June 30, 2001 of Other receivables included in the Statement of Debtors Status Report recorded in Other receivables from financial operations. 9
Asset Quality The following table sets forth information regarding the classification of the Bank s loan portfolio, according to the Argentine Central Bank s criteria. As of June, 30, 2002 As of March 31, 2002 As of June 30, 2001 Commercial Individual Portfolio Mortgages Portfolio TOTAL Commercial Individual Portfolio Mortgages Portfolio TOTAL Commercial Individual Portfolio Mortgages Portfolio TOTAL Normal 820,736 1,796,424 2,617,160 553,500 2,771,483 3,324,983 897,784 5,049,532 5,947,316 Potential Risk 323 338,095 338,418 14,402 594,916 609,318 10,826 512,397 523,223 Problematic 446 235,811 236,257 5,683 401,327 407,010 21,009 270,662 291,671 High Risk of Insolvency 17,160 273,247 290,407 40,203 330,362 370,564 132,278 306,868 439,146 Uncollectible 115,783 141,644 257,427 177,801 149,815 327,617 209,867 331,728 541,595 Uncollectible for Technical Reasons 5,514 28,014 33,528 8,684 42,867 51,551 17,747 3,315 21,062 Total (1) (2) 959,962 2,813,235 3,773,197 800,273 4,290,771 5,091,044 1,289,511 6,474,502 7,764,013 Non-Performing Loans 138,903 678,716 817,619 232,371 924,372 1,156,743 380,901 912,573 1,293,474 Non-Performing Loans / Total Loans 14.5% 24.1% 21.7% 29.0% 21.5% 22.7% 29.5% 14.1% 16.7% Provisions 109,143 468,560 577,703 164,291 628,917 793,208 227,278 712,301 939,579 Provisions / Non-Performing Loans 78.6% 69.0% 70.7% 70.7% 68.0% 68.6% 59.7% 78.1% 72.6% 1 Includes Ps. 401,812 thousands at June 30, 2002, Ps. 604,806 at March 31, 2002, and Ps. 666,552 thousands at June 30, 2001 of individual post-91 mortgage loans conveyed to a trust in anticipation of future securitizations. 2 Other loans includes Ps. 72,135 thousands at June 30, 2002, Ps. 96,614 thousands at March 31, 2002, and Ps. 17,721 thousands at June 30, 2001 of Other receivables included in the Statement of Debtors Status Report recorded in Other receivables from financial operations. The ratio of non-performing loans over total loans as of June 30, 2002 was 21.7%, 500 bps higher compared to 16.7% as of June 30, 2001. This increase was primarily due to the prolonged economic recession in Argentina, which adversely affected the Bank s mortgage portfolio. These effects are reflected by an increase of 1000 bps in non-performing loans to individuals to 24.1% at the end of the second quarter of 2002 from 14.1% at the end of the same quarter of 2001. This increase was partially offset by a decrease of 1500 bps in non-performing commercial loans to 14.5% as of June 30, 2002 from 29.0% as of June 30, 2001 due primarily to the increase in loans to the public sector as a result of the exchange in November 2001 of government securities for government loans guaranteed by tax revenues, which are classified as performing. The ratio of non-performing loans over total loans as of June 30, 2002 decreased by 100 bps to 21.7% from 22.7% as of March 31, 2002 due primarily to the increase in loans to the public sector as a result of the exchange in November 2001 of government securities for government loans guaranteed by tax revenues, which are classified as performing. This decrease also included a decrease of 1450 bps in non-performing commercial loans from 29.0% at the end of second quarter to 14.5% at the end of the first quarter of 2002, which was partially offset by an increase in non-performing loans to individuals by 260 bps to 24.1% from 21.5%. The Bank s provision policy for the second quarter of 2002 was to maintain the same levels of provisions for total nonperforming loans as in prior quarters. Reserve for Loan Losses For the quarter ended or as of 06/30/02 03/31/02 06/30/01 Reserve for Loan Losses at the beginning of the quarter (793,208) (724,469) (961,990) Provisions charged to income (37,000) (276,402) (34,388) Charge-offs 1,958 22,675 56,798 Monetary gain (loss) 250,547 184,988 - Reserve for Loan Losses at the end of the quarter (577,703) (793,208) (939,579) Reserves for loan losses / total non-performing loans 70.7% 68.6% 72.6% Reserve for loan losses / total loan portfolio 15.3% 15.6% 12.1% 10
Funding Sources On balance sheet funding at June 30, 2002 amounted to Ps. 6,384.3 million, compared to Ps. 6,920.2 million (or Ps. 4,734.4 million in nominal terms) as of March 31, 2002. The increase in funding, in nominal terms, was primarily due to the indexation for inflation, based on the CER consumer price index, of Central Bank advances expected to be incurred in the future in order to acquire additional BODENs, and the impact of the devaluation of the Argentine Peso on dollar-denominated financings obtained abroad. On balance sheet funding at June 30, 2002 amounted to Ps. 6,384.3 million, compared to Ps. 3,699.5 million at June 30, 2001. Comparisons between these periods should take into account the adverse effects of the devaluation of the Argentine Peso and that financial data is presented in constant currency. The increase in funding was primarily due to: i) the incurrence of short-term liquidity advances from the Central Bank as well as the accounting for additional Central Bank advances expected to be incurred in order to finance the acquisition of additional BODENs; ii) in October 2001, the repayment at maturity of EUR 100 million of Series 11 Notes; iii) in December 2001, the repayment of US$ 130.7 million Series 4 Notes upon the exercise of a put option by bondholders; and iv) a significant reduction in deposits, mainly time deposits held by institutional investors, during the second half of 2001. As of June 30, 2002, shareholders equity amounted to 22.9% of assets and the ratio of debt to shareholder s equity was 3.2x. Due to material adverse changes in Argentina this year, and particularly in light of the disruption of the Argentine financial system, on August 15, 2002 the Bank decided to initiate a restructuring process for all of its financial debt, including i) bonds sold abroad, and ii) loans from banks and international entities. In light of this restructuring process and with the intention of providing equitable treatment to all creditors, the Bank also decided to suspend as of August 16, 2002 the payment of principal, interest and any other amounts due with respect to financial indebtedness until a successful restructuring is completed. Deposits 141,396 226,451 869,979 (37.6)% (83.7)% Corporate bonds 3,416,652 3,515,711 2,491,807 (3.6)% 37.1% Central Bank 1,792,871 2,102,069 - (14.7)% NM Interbank loans and international agencies 748,056 733,379 190,476 2.0% 292.7% Other interest bearing liabilities 285,278 312,625 147,218 (8.7)% 93.8% Total Funding 6,384,253 6,920,236 3,699,480 (7.7)% 72.6% Other non-interest bearing liabilities 259,365 1,888,094 2,018,684 (86.3)% (87.2)% 6,643,618 8,808,330 5,718,163 (24.6)% 16.2% 11
Balance Sheet Thousands of pesos As of 06/30/02 03/31/02 06/30/01 Cash and due from banks 137,197 116,867 209,408 Government Securities 119,385 148,493 393,563 Loans 3,292,524 4,389,624 6,887,539 Reserve for loan losses (549,704) (752,281) (897,622) Loans, net 2,742,820 3,637,343 5,989,917 Other receivable from financial operations 5,406,087 7,796,630 2,963,926 Reserve for other receivables from financial operations (27,999) (40,926) (41,957) Miscelleaneous assets 359,247 478,343 370,181 Total Assets 8,736,737 12,136,749 5,035,936 Deposits 141,396 226,451 869,979 Other liabilities from financial operations 6,502,222 8,581,879 4,848,184 Miscelleanous liabilities 91,643 154,638 235,199 Total Liabilities 6,735,261 8,962,968 3,032,942 Shareholder s Equity 2,001,476 3,173,782 3,931,677 Income Statement Thousands of pesos Quarter Ended 06/30/02 03/31/02 06/30/01 Financial income 590,207 295,525 432,478 Financial expenditures (664,265) (180,985) (227,161) Provision for losses on loans (314,162) (277,157) (54,288) Income from services 51,381 29,449 94,782 Expenditures on services (32,551) (12,962) (35,623) Monetary gain (loss) from financial operations (1,896,233) (991,334) - Administrative expenses (69,874) (39,928) (133,791) Monetary gain (loss) from operating expenses 10,702 5,901 - Miscellaneous income 27,212 16,256 43,432 Miscellaneous expenses (50,718) 18,159 (30,439) Monetary gain (loss) from other transactions 20,427 (18,413) - Income tax - - - Offset of losses 320.771 - - Net income (2,007,104) (1,155,490) 89,389 12
Selected Ratios For the Quarter ended as of 03/31/02 12/31/02 03/31/01 Profitability 1 ROAA (Return on average assets) 1 (56.93)% (18.01)% 1.69% ROAE (Return on average shareholder s equity) 1 (127.44)% (27.74)% 4.54% Net interest margin (2.10)% 1.84% 3.88% Efficiency* (124.68)% 29.90% 47.04% Capital Total shareholder s equity / total assets 22.9% 26.2% 39.8% Liquidity Loans / deposits 1,939.8% 1,606.2% 688.5% Asset Quality Non-performing loans / total loans 21.7% 22.7% 16.7% Reserves for loan losses / total non-performing loans 70.7% 68.6% 72.6% Reserves for loan losses / total loan portfolio 15.3% 15.6% 12.1% 1 Based on annualized quarterly results. * Administrative expenses (excluding severance payments and bonuses) over financial income and income from services. Conference Call to Discuss Second Quarter 2002 Results: Banco Hipotecario S.A. will host a conference call to discuss its second quarter 2002 results at 11:00 a.m. (New York time) on Wednesday, November 27th, 2002. To participate in the conference call, please call in to one of the following telephone numbers: USA: (800) 450 0788 International: (612) 332 0923 THIS DOCUMENT MAY CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS CONCERNING THE BANK S OPERATIONS, PERFORMANCE, BUSINESS, FINANCIAL CONDITION AND GROWTH PROSPECTS AND THE ARGENTINE ECONOMY. THESE STATEMENTS ARE BASED UPON BELIEFS OF MANAGEMENT AS WELL AS A NUMBER OF ASSUMPTIONS AND ESTIMATES, WHICH ARE INHERENTLY SUBJECT TO SIGNIFICANT UNCERTAINTIES, MANY OF WHICH ARE BEYOND THE BANK S CONTROL. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, INCREASED COMPETITION, CHANGES IN THE ARGENTINE ECONOMY, INCLUDING THE CURRENCY USED IN ARGENTINA, AND IN THE ECONOMY OF OTHER COUNTRIES, PARTICULARLY EMERGING MARKET ECONOMIES, CHANGES IN THE ARGENTINE BANKING AND INSURANCE SYSTEM, CHANGES IN ARGENTINE TAXATION AND EVENTS IN OTHER FINANCIAL MARKETS. THESE STATEMENTS ARE MADE AS OF THE DATE OF THIS PRESS RELEASE AND THE BANK UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. IN LIGHT OF THESE RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCES THAT THE EVENTS DESCRIBED OR IMPLIED IN THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS DOCUMENT WILL IN FACT TRANSPIRE. 13