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 Third Quarter 2002 Results The Bank s net loss for the third quarter of 2002 was Ps. (512.3) million. This loss primarily reflects the adverse effects of inflation, the devaluation of the Argentine peso and the asymmetric pesification of the Bank s foreign currency-denominated assets and liabilities during 2002. The Bank s monetary loss for the third quarter was Ps. (200.9) 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. Inflation continues to adversely affect the Bank s results of operations, as reflected by the increase in the wholesale internal prices (general level) index published by INDEC, due to the lose in real value of non-indexed loans. At September 30, 2002, according to this index, wholesale prices had increased 121.2% with respect to December 31, 2001, including 12.7% during the third quarter. 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. Administrative expenses reached to Ps. 29.6 million during the quarter, implying a 54% decrease with respect to the same quarter of 2001, in real terms. This amount represents 1.36% of the Bank s total assets, and is significantly lower than the average of the financial system. The Bank s assets as of September 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 September 30, 2002 at a value of Ps. 4,408.3 million, based on the exchange rate at September 30, 2002 of approximately Ps.3.7267:US$1. Additionally, the Bank s liabilities as of September 30, 2002 include Ps. 1,150.6 million of borrowings from the Central Bank which had not been incurred as of such date but which the Bank currently expects to incur in order to finance its anticipated acquisition of additional BODENs, plus accrued interest and inflation adjustments from February 3, 2002 to the end of the period, for a total of Ps. 1,596.4 million (such accruals are included in the first, second and third quarter net results). As of September 30, 2002, the Bank received US$ 344.1 million in BODEN 2012 (Compensatory Bond) from the Central Bank, and the remainder is currently pending. As of September 30, 2002, the Bank had not received the additional BODENs. Notwithstanding the foregoing, the definitive amount of such bonds the Bank may ultimately receive is subject to Central Bank approval. 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 assets and liabilities of Argentine banks have severely affected the Bank s business operations and its balance sheet. In this context, on August 16 th, the Bank s Board of Directors decided to suspend payments on all financial indebtedness in anticipation of pursuing a comprehensive debt restructuring plan. In addition, the Bank is actively facing the challenges of adapting to the changes in Argentina s financial system, concentrating its efforts on the development of retail and commercial banking services; restructuring its business operations by closing sales offices, reducing software and technology expenditures as well as reducing personnel in order to adapt its structure to the current scenario; improving the Bank s liquidity by encouraging the prepayment of mortgage loans; implementing policies aimed at preserving the asset quality of the Bank s portfolio; and suspending all originations of new loans. The Bank is making substantial efforts in order to preserve the asset quality of its portfolio, increasing provisions for losses over total portfolio to 16.3%, which implies a 70% increase if compared with the third quarter of 2001; and 11% on nonperforming loans, reaching to 73.5% as of September 30, 2002. III. Presentation of Information Since January 2002, financial statements have been adjusted by inflation based on the wholesale internal prices index, published by the INDEC. In addition, in order to facilitate a comparative analysis with other periods, financial data has been re-expressed in constant currency as of September 30, 2002 through the application of the above mentioned index. Financial data for the second quarter of 2002 and the third quarter of 2001, has been adjusted by applying indexes 1.1269 and 2.212, respectively. 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 nine month period ended September 30, 2002. Assets and liabilities denominated in foreign currency registered as of September 30, 2002 were converted into Pesos at the exchange rate published by the Central Bank at the closing of such date (Ps.3.7267/US$1.00 and Ps.3.6686/EUR1.00). IV. Certain Developments During the Third 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. On August 16th, 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. 2
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$-denominated Argentine government bonds maturing in 2012 (in accordance with Art. 29 e) of the Decree, to cover the aforementioned currency mismatch. On September 30th, the Bank received US$ 344.1 million in BODENs, and the remainder is currently pending. 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 1st, 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. On November 22, 2002, through Resolution No. 668/02, the Ministry of Economy decided the repeal of outstanding restrictions to the withdrawals of cash with respect to transactional accounts (checking accounts and savings accounts) since December 2, 2002. This measure, which meant the repeal of the so-called corralito financiero, had not material effects over the evolution of deposits and liquidity of the Bank. During December 2002, the President of the Central Bank, Mr. Aldo Pignanelli, resigned and was replaced by Mr. Alfonso Pratt-Gay. 3
Selected Statistical Information 1, 2 Buenos Aires, January 8, 2003 - Banco Hipotecario S.A. (Buenos Aires Stock Exchange: BHIP) reports third quarter of 2002 results. The Bank s net loss for the third quarter of 2002 was Ps. (512.3) million. This loss primarily reflects the adverse effects of inflation, the devaluation of the Argentine peso and the asymmetric pesification of the Bank s foreign currency-denominated assets and liabilities during 2002. The Bank s net 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. 361.5 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 third quarter was Ps. (200.9) 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. Net income, before monetary loss decreased to Ps. (311.4) million, from Ps. 54.3 million and Ps. 11.1 million to both the third quarter of 2001 and the second quarter of 2002, respectively. This decrease, before monetary loss, as compared to both periods was principally caused by: i) a decrease in financial income resulting to lower effects of changes in exchange rate due to the appreciation experienced by the AR$ compared to US dollar during the quarter, ii) lower income from insurance activities due to a decrease in average loan balance, and iii) specifically to the previous quarter, to the accounting of offset of losses of Ps. 361.5 million resulting from the Bank s option above mentioned, pursuant to Central Bank Communication No. 3800. Financial income 174,056 332,077 241,953 (47.6)% (28.1)% Financial expenditures (340,534) (544,608) (133,050) (37.5)% 155.9% Net financial income (166,478) (212,531) 108,903 (21.7)% (252.9)% Provision for loan losses (28,998) (41,699) (34,388) (30.5)% (15.7)% Net Contribution from insurance 9,625 12,657 25,213 (24.0)% (61.8)% Net other income from services (12,361) (9,810) 290 26.0% NM Administrative expenses (29,568) (33,746) (64,106) (12.4)% (53.9)% Miscellaneous income, net (83,638) (65,271) 18,335 28.1% (556.2)% Net income from financial operations (311,419) (350,401) 54,248 (11.1)% (674.1)% Income tax - - - - - Offset of losses - 361,475 - - - Net income (loss) before monetary loss (311,419) 11,074 54,248 - (674.1)% Monetary loss (200,853) (970,545) - (79.3)% - Net Income (512,272) (959,471) 54,248 (46.6)% - 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 quarter of 2002 and the third quarter of 2001 has been recalculated in constant currency as of September 30, 2002 using the wholesale prices (general level) index published by INDEC, which amounted to an adjustment factor of 1.1269 for the second quarter of 2002 and 2.212 for the third quarter of 2001, respectively. 4
Financial Income Financial income for the third quarter of 2002 amounted to Ps. 174.1 million, a decrease of Ps. 67.9 million or 28.1% from Ps. 241.9 million for the third quarter of 2001. This decrease was mainly due to: i) lower interest on Pre-91 and Post-91 loans, in real terms, as a result of lower average loan balances and higher non-performing loans, and ii) a decrease in effects of changes in exchange rate as a result of the appreciation experienced by the AR$ compared to US dollar during the quarter. This decrease was partially offset by the accrual of interests 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) the indexation for inflation, based on the CER consumer price index, of loans to public sector, both national and provincial level. As compared to the previous quarter, financial income for the third quarter of 2002 have decreased Ps. 158.0 million or 47.6%, mainly due to: i) lower accrual of interest of both, Pre-91 and Post-91 loan portfolio as a result of lower average balances due to a campaign carried out by the Bank during the quarter, in order to promote the early cancellation of loans, ii) a decrease in effects of changes in exchange rate as a result of the appreciation experienced by the AR$ compared to US dollar during the quarter, and to a lesser extent iii) a decrease in relative terms, of the CER index during the quarter. Interest on Pre-91 loans 27,665 32,171 76,960 (14.0)% (64.1)% Interest on Post-91 loans 62,314 86,207 114,590 (27.7)% (45.6)% Income from compensatory and additional BODENs 23,094 26,636 - (13.3)% - Income from Government Securities and other interest 13,309 17,742 8,760 (25.0)% 51.9% Effects of changes in exchange rate (16,762) 57,164 - (129.3)% - Other 64,436 112,157 41,643 (42.5)% 54.7% Total Financial Income 174,056 332,077 241,953 (47.6)% (28.1)% Financial Expenditures Financial expenditures for the third quarter of 2002 reached to Ps. 340.5 million, Ps. 207.5 million or 155.9% higher than Ps. 133.1 million for the third quarter of 2001. The main reasons for this increase were: i) a material increase in interest payments and inflation adjustment, based on the CER consumer price index, with respect to 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; and ii) an increase in interests due under inter-bank loans during the nine month period ended September 30, 2002. As compared to the previous quarter, financial expenditures had decreased Ps. 203.8 million or 37.4% due to lower accrual liabilities on Central Bank assistance as a result of a decrease on CER index, and lower losses from the Bank s participation in financial trusts. Interest on external financing 74,549 59,488 89,851 25.3% (17.0)% Interest Central Bank Advances 203,257 339,469 - (40.1)% - Interest on inter-bank loans 38,974 27,621 13,029 41.1% 199.1% Other interest liabilities 2,400 57,740 24,429 (95.6)% (90.2)% Losses from securities and other participations 18,803 59,925 - (68.6)% - Contributions and taxes on financial income 2,551 3,366 5,740 (24.2)% (55.6)% Total Financial Expenditures 340,534 544,608 133,050 (37.5)% 155.9% 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 September 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 third quarter of 2002 was US$ (11.9) million, primarily resulting from: i) financial income of US$ 4.7 million as a result of non-cash interest income from February 3 to September 30, 2002 in respect of BODENs received by the Bank and the remaining balance 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$ 16.6 million. Net income from financial operations denominated in local currency for the third quarter of 2002 amounted to Ps. (166.5) million primarily resulting from: i) Ps. 203.3 million of accrued interest and inflation adjustments based on CER index on indebtedness to the Central Bank; ii) Ps. 74.5 million of accrued interest on obligations denominated in foreign currency; and iii) losses of Ps. 18.8 million from the Bank s participation in subsidiaries. Financial Income Quarter ended 09/30/2002 US$ 1 Ps. 2 Compensatory and additional BODENs 4,702 23,094 Interests on Pre-91 loans 27,664 Interests on Post-91 loans 62,314 Income from government securities and other interests 13,309 Effects of changes in exchange rate 3 (16,779) Other financial income 64,407 Total Financial Income 4,702 174,009 Financial Expenditures Interests from external financing 16,380 74,549 Interests from interbank loans 38,974 Losses from government securities and other interests 221 18,803 Central Bank Advances 203,257 Other interests liabilities 2,383 Contribution and taxes 2,551 Total Financial Expenditures 16,601 340,517 Net Financial Income (11,899) (166,508) 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 third quarter of 2001 and the second quarter of 2002, net contribution from insurance activities during the third quarter of 2002 decreased by Ps. 15.0 million or 60.9% and Ps. 3.0 million or 24.0%, respectively, to Ps. 9.6 million. This decrease was due to lower premiums as a result of an increase in non-performing loans, the campaign carried out by the Bank in order to promote early cancellation of 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 3,591 4,652 10,248 (22.8)% (65.0)% Life insurance premium 8,165 10,200 21,043 (19.9)% (61.2)% Unemployment insurance premium 554 716 1,438 (22.6)% (61.5)% Total Premiums 12,311 15,568 32,729 (20.9)% (62.4)% Property damage insurance claims paid 389 127 876 206.9% (55.5)% Life insurance claims paid 1,940 2,549 5,404 (23.9)% (64.1)% Unemployment insurance claims paid 357 442 841 (19.2)% (57.6)% Total Claims 2,686 3,117 7,120 (13.8)% (62.3)% Contribution from Insurance 9,625 12,451 25,608 (22.7)% (62.4)% Insurance reserve provision (included in net miscellaneous income) - (206) 995 - - Net Contribution from Insurance 9,625 12,657 24,613 (24.0)% (60.9)% Other Income from Services, Net Other net income from services amounted to Ps. (12.4) million in the third quarter of 2002, reflecting a decrease of Ps. 2.6 million from Ps. (9.8) million in the second quarter of 2002 and of Ps. 12.6 million from Ps. 0.3 million in the third quarter of 2001. The main reasons for this material decrease were: i) lower commissions received for the Bank s services as paying agent of funds administered by FONAVI, an Argentine government housing agency, and commissions related to loans, and ii) the accelerated amortization due to the pesification of certain costs previously incurred, related to financial trusts, with low likelihood of recovery. Other income from services Commissions related to origination and servicing of own and third-party loans 6,626 7,593 14,840 (12.7)% (55.3)% FONAVI service commissions 586 894 1,759 (34.4)% (66.7)% Other 496 662 1,223 (25.1)% (59.5)% Subtotal 7,708 9,149 17,822 (15.7)% (56.7)% Other expenditures from services Commissions paid in connection with loans 580 615 4,282 (5.8)% (86.5)% Collection services 657 698 1,438 (5.9)% (54.3)% Structuring and underwriting fees 17,584 15,489 6,895 13.5% 155.0% Commissions on third-party origination 255 358 805 (28.8)% (68.3)% Taxes 528 710 1,172 (25.7)% (55.0)% Other 465 1,088 2,940 (57.2)% (84.2)% Subtotal 20,069 18,959 17,532 5.9% 14.5% Other Income (loss) from Services, Net (12,361) (9,810) 290 26.0% - 7
Administrative Expenses Administrative expenses for the third quarter of 2002 decreased by Ps. 34.5 million or 53.9% to Ps. 29.6 million from Ps. 64.1 million for the third 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. 16.8 million, lower other fees of Ps. 5.1 million and, lower advertising and publicity expenses of Ps. 2.5 million due to a decrease in business activity as a consequence of the current 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. 4.2 million, or 12.4%, from Ps. 33.8 million in the previous quarter of 2002. This decrease mainly resulted from a decrease of Ps. 2.0 million in salaries and social security contributions and a reduction of Ps. 1.8 million in other fees. Salaries and social security contributions 14,460 16,481 31,293 (12.3)% (53.8)% Severance payments 936 299 (2,960) 213.1% (131.6)% Other fees 1,067 2,848 6,191 (62.5)% (82.8)% Advertising and publicity 138 172 2.663 (19.8)% (94.8)% Non recoverable VAT and other taxes 2,525 2,507 6,711 0.7% (62.4)% Operating expenditures 7,218 7,740 11,416 (6.7)% (36.8)% Other 3,225 3,699 8,790 (12.8)% (63.3)% Total Administrative Expenses 29,568 33,746 64,106 (12.4)% (53.9)% Administrative Expenses / Total Assets 1.36% 1.37% 2.38% Miscellaneous Income, Net In the third quarter of 2002, miscellaneous income, net decreased to Ps. (83.6) million, Ps. 102.0 million lower than Ps. 18.3 million in the third quarter of 2001. This decrease mainly resulted from: i) lower loan recoveries, ii) higher charges for provisions related to severance payments as a result of pension requirements paid by the Bank to its employees, and charges to income related to judicial processes filed against the Bank, and iii) the campaign carried out by the Bank during the quarter, in order to promote the early cancellation of both Pre-91 and Post-91loans. Penalty interest 3,106 2,680 3,426 15.9% (9.4)% Reversal of provisions 371 205 900 80.8% (58.8)% Loan loss recoveries 6,951 7,125 14,818 (2.4)% (53.1)% Other 1,206 2,337 6,563 (48.4)% (81.6)% Subtotal Miscellaneous Income 11,634 12,347 25,708 (5.8)% (54.7)% Other provisions 35,116 4,759 1,670 637.9% - Insurance reserve provision - (206) 995 - - Taxes 82 110 190 (25.4)% (56.9)% Write-Offs of Intangible Assets - 8,781 - - - Other 60,073 64,175 4,517 (6.4)% - Subtotal Miscellaneous Expenses 95,272 77,618 7,373 22.7% - Total Miscellaneous Income, Net (83,638) (65,271) 18,335 (28.1)% (556.2)% 8
Loan Portfolio The Bank s total loan portfolio at September 30, 2002 decreased by Ps. 629.4 million, in constant currency, to Ps. 3,615.0 million from Ps. 4,244.4 million at June 30, 2002, including Ps. 478.0 million for inflation adjustment. Excluding the inflation adjustment, the variation was due to the prepayments of loans as a result of the Bank s campaign during the quarter, and to a lesser extent due to an increase of the CER index mainly on public sector loans. The Bank s total loan portfolio at September 30, 2002 decreased by Ps. 4,484.8 million from Ps. 8,099.8 million, in constant currency, as of September 30, 2001, including Ps. 4,438.1 million for inflation adjustment. Excluding such inflation adjustment, these variations were mainly offset by the positive effects of: i) an increase in loans to the public sector as a result of the exchange of government securities for secured 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; and iii) adjustment for inflation, based on the CER consumer price index, of loans to the public sector, commercial loans and certain mortgage loans to individuals; and the negative effects of: prepayments, 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 1,240,976 1,490,151 3,177,675 (16.7)% (60.9)% - Pre-91 loans construction projects 7,354 8,109 15,196 (9.3)% (51.6)% Total Pre-91 loans 1,248,330 1,498,260 3,192,872 (16.7)% (60.9)% - Post-91 loans individual mortgages 1 1,369,146 1,664,196 3,750,747 (17.7)% (63.5)% - Post-91 loans construction projects 278,532 308,132 576,056 (9.6)% (51.6)% Total Post-91 loans 1,647,678 1,972,327 4,326,803 (16.5)% (61.9)% Other loans 2 719,000 773,849 580,143 (7.1)% 23.9% Total Loan Portfolio 3,615,008 4,244,436 8,099,818 (14.8)% (55.4)% Loan Portfolio - per sector Non financial government sector 791,182 805,900 405,665 (1.8)% 95.0% Financial Sector 2,661 32,548 301,266 (91.8)% (99.1)% Non financial private sector - With preferred guarantees 1 2,356,322 3,263,988 7,396,645 (27.8)% (68.1)% - Non-applied collections (27,363) (23,159) (50,407) 18.2% (45.7)% - Other 2,620 2,918 5,632 (10.2)% (53.5)% - Interests accrued on uncollected loans due to changes in exchange rate 46,273 80,952 - (42.8)% - Reserves (562,187) (651,014) (781,575) (13.6)% (28.1)% Total Loan Portfolio 2,609,508 3,512,134 7,277,226 (25.7)% (64.1)% 1 Includes Ps. 377,822 thousands at September 30, 2002, Ps. 452,802 thousands at June 30, 2002 adjusted, and Ps. 981,077 thousands at September 30, 2001 adjusted, of individual post-91 mortgage loans conveyed in a trust in anticipation of future securitizations. 2 Other loans includes Ps. 65,491 thousands at September 30, 2002, Ps. 81,289 thousands at June 30, 2002, and Ps. 41,017 thousands at September 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. Pre-91 Post-91 (1) Others (2) Total Bank Branch Other Construction Private Public Category / (days) Network Network Institutions Sector Sector (In thousands of pesos, except percentages) Normal (0-30) 755.821 215.882 308.495 393.065 166.854 57.089 638.144 2.535.350 Potential Risk (31-90) 138.607 36.339 63.815 37.725 248 0 0 276.734 Problematic (91-180) 98.926 18.290 49.172 28.823 0 0 0 195.211 High Riesk of insolvency (180-365) 152.848 18.744 50.459 31.304 3.493 0 0 256.848 Uncollectible (>365) 90.504 20.385 41.614 40.793 116.974 2.372 0 312.642 Uncollectible for Technical Reasons 18.322 3.262 3.409 7.274 5.505 451 0 38.223 Total 1.255.028 312.902 516.964 538.984 293.074 59.912 638.144 3.615.008 Non-Performing Loans 360.600 60.681 144.654 108.194 125.972 2.823 0 802.924 Non-Performing Loans / Total Loans 28,73% 19,39% 27,98% 20,07% 42,98% 4,71% 0,00% 22,21% Provisions 337.509 29.232 49.754 43.849 122.688 7.154-590.186 Provisions / Non-Performing Loans 93,60% 48,17% 34,40% 40,53% 97,39% 253,42% - 73,50% Non-Performing Loans, net / Total Loans 5,88% 1 Includes Ps. 377,822 thousands at September 30, 2002, Ps. 452,802 thousands at June 30, 2002 adjusted, and Ps. 981,077 thousands at September 30, 2001 adjusted of individual post-91 mortgage loans conveyed in a trust in anticipation of future securitizations. 2 Other loans includes Ps. 65,491 thousands at September 30, 2002, Ps. 81,289 thousands at June 30, 2002, and Ps. 41,017 thousands at September 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 September 30, 2002 was 22.2%, 771 bps higher compared to 14.5% as of September 30, 2001. This increase was primarily due to the prolonged economic recession in Argentina, which adversely affected the Bank s mortgage portfolio, partially offset by a decrease in commercial portfolio due to an increase of loans to public sector as a result of the exchange of government securities for secured government loans, which are classified in normal status. The ratio of non-performing loans over total loans as of September 30, 2002 increased by 51 bps to 22.2% from 21.7% as of June 30, 2002. As a result of the Bank s efforts on its portfolio management, the ratio of non-performing loans over total loans has remained similar to the previous quarter. The Bank s provision policy for the third quarter of 2002 was to maintain the same levels of provisions for total non-performing loans as in prior quarters. Reserve for Loan Losses For the quarter ended or as of 09/30/02 06/30/02 09/30/01 Reserve for Loan Losses at the beginning of the quarter (651,014) (893,866) (1,058,816) Provisions charged to income (29,000) (41,695) (29,037) Charge-offs 16,517 2,206 306,276 Monetary gain (loss) 73,311 282,341 - Reserve for Loan Losses at the end of the quarter (590,186) (651,014) (781,577) 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 September 30, 2002 decreased to Ps. 6,802.1 million, compared to Ps. 7,486.7 million as of June 30, 2002, which included Ps. 158.5 million for inflation adjustment. The decrease in funding, in nominal terms, was primarily due to a decrease in the indexation for inflation, based on the CER consumer price index, on Central Bank advances expected to be incurred in the future in order to acquire additional BODENs, and the impact of the appreciation of the Argentine Peso compared to US dollar during the quarter. On balance sheet funding at September 30, 2002 amounted to Ps. 6,802.1 million, compared to Ps. 6,052.0 million at September 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. Mainly variations 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 September 30, 2002, shareholders equity amounted to 20.1% of assets and the ratio of debt to shareholder s equity was 3.7x. Due to material adverse changes in Argentina this year, and particularly in light of their negative impact on the Argentine financial system, on August 15, 2002 the Bank decided to initiate a restructuring process for all of its financial debt, including bonds sold abroad and 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 132,642 159,339 711,536 (16.8)% (81.4)% Corporate bonds 3,421,564 3,850,225 2,764,016 (11.1)% 23.8% Central Bank 1,972,837 2,020,386 - (2.4)% - Interbank loans and international agencies 790,385 842,984 288,898 (6.2)% 173.6% Other interest bearing liabilities 279,503 321,480 165,900 (13.1)% 68.5% Total Funding 6,596,931 7,194,415 3,930,350 (8.3)% 67.8% Other non-interest bearing liabilities 205,174 292,278 2,121,627 (29.8)% (90.3)% 6,802,105 7,486,693 6,051,977 (9.1)% 12.4% 11
Balance Sheet Thousands of pesos As of 09/30/02 06/30/02 09/30/01 Cash and due from banks 94,517 154,607 355,920 Government Securities 1,434,531 134,535 212,261 Loans 3,171,695 3,710,345 7,077,723 Reserve for loan losses (562,187) (619,461) (734,293) Loans, net 2,609,508 3,090,884 6,343,430 Other receivable from financial operations 3,945,858 6,092,119 3,464,052 Reserve for other receivables from financial operations (27,999) (31,552) (47,282) Miscellaneous assets 617,067 404,834 464,299 Total Assets 8,673,482 9,845,428 10,792,680 Deposits 132,642 159,339 711,536 Other liabilities from financial operations 6,669,465 7,327,354 5,340,441 Miscellaneous liabilities 128,031 103,272 251,903 Total Liabilities 6,930,138 7,589,966 6,303,880 Shareholder s Equity 1,743,344 2,255,462 4,488,801 Income Statement Thousands of pesos Quarter Ended 09/30/02 06/30/02 09/30/01 Financial income 839,143 665,104 729,314 Financial expenditures (1,089,077) (748,560) (389,038) Provision for losses on loans (383,027) (354,029) (90,216) Income from services 77,920 57,901 157,333 Expenditures on services (59,437) (36,682) (64,767) Monetary gain (loss) from financial operations (2,357,748) (2,136,865) - Administrative expenses (108,309) (78,741) (216,690) Monetary gain (loss) from operating expenses 13,177 12,060 - Miscellaneous income 42,299 30,665 74,649 Miscellaneous expenses (124,223) (57,155) (41,674) Monetary gain (loss) from other transactions 13,904 23,019 - Income tax - - - Offset of losses 361.475 361,477 - Net income (2,773,903) (2,261,805) 158,911 12
Selected Ratios For the Quarter ended as of 09/30/02 06/30/02 09/30/01 Profitability 1 ROAA (Return on average assets) 1 (48.6)% (56.9)% 1.8% ROAE (Return on average shareholder s equity) 1 (76.0)% (127.4)% 4.7% Net interest margin (4.4)% (2.1)% 3.9% Efficiency* (45.9)% (124.7)% 48.1% Capital Total shareholder s equity / total assets 20.1% 22.9% 41.9% Liquidity Loans / deposits 1,967.3% 1,939.8% 891.5% Asset Quality Non-performing loans / total loans 22.2% 21.7% 14.5% Reserves for loan losses / total non-performing loans 73.5% 70.7% 66.3% Reserves for loan losses / total loan portfolio 16.3% 15.3% 9.6% 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 third quarter 2002 results at 11:00 a.m. (New York time) on Tuesday, January 14th, 2003. To participate in the conference call, please call in to one of the following telephone numbers: USA: (800) 230 1766 International: (612) 288 0329 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