Reuters BHI.BA Bloomberg - BHIP AR <Equity> Bloomberg - BHIP <Corporate> Bloomberg BHN <Mortgage> www.e-potecario.com FOR IMMEDIATE RELEASE Contacts: Marcelo Icikson Nicolás Vocos Capital Markets Tel. (54-11) 4347-5798 Fax (54-11) 4347-5874 Buenos Aires, Argentina micikson@hipotecario.com.ar nmvocos@hipotecario.com.ar Gabriel G. Saidon Chief Financial Officer Tel. (54-11) 4347-5759/5212 Fax (54-11) 4347-5874/5113 Buenos Aires, Argentina gsaidon@hipotecario.com.ar PRESS RELEASE Banco Hipotecario Sociedad Anónima Reports Third Quarter 2003 Results Highlights I. Executive Summary The Bank s net income for the third quarter of 2003 totaled Ps.1.4 million, an increase of Ps.510.5 million compared to the Ps.509.1 million loss recorded in the corresponding period of the prior year. This positive result, albeit minor in absolute terms, is the first after six consecutive quarters of losses experienced by the Bank in the context of the worst banking and financial crisis in Argentine in recent history. Net income reflects an improvement in net financial income, the Bank s continued efforts to improve asset quality, the recovery of excess provisions and a decrease in administrative expenses. In addition these results reflect the positive effects on the Bank s net worth of certain macroeconomic factors, including the effect of the currency exchange rate on the Bank s net foreign currency position, interest rates and the fluctuation in the Coeficiente de Estabilización de Referencia (CER) and Coeficiente de Variación Salarial (CVS) indexes over a significant portion of the Bank s assets and liabilities which are adjusted by those indexes. The improvements in the Bank s net income for the third quarter of 2003 resulted primarily from: i) lower financial expenditures due to (a) the lower impact of the appreciation of the peso with respect to the euro and the U.S. dollar on the Bank s net foreign currency position, (b) lower interest on foreign currency financing and interest on interbank loans, (c) lower accrual of interest and CER on Central Bank borrowings and (d) lower losses registered with respect to certificates of participation in financial trusts; ii) lower losses from interests in other companies, lower extraordinary charges recorded in liability provisions and increased loan recoveries as a consequence of the improvement in asset quality; and iii) recovery of excess provisions made during the first quarter of 2003 to cover certain contingencies. The results disclosed below should be considered in the light of the negative mismatch still existing between the average rate paid by the Bank on its interest bearing liabilities of 10% and the average rate earned on its interest earning assets of 1.16%, pending the debt restructuring process launched by Banco Hipotecario. Administrative expenses reached Ps. 23.5 million during the quarter representing a 19.9% decrease compared to the third quarter of 2002, and accounted for 1.24% of the Bank s total assets. This decrease was attributable to the Bank s cost reduction measures and corporate restructuring plan introduced during 2002, and reflects the on-going efforts made since the first quarter of 2002, which have led to a significant and sustained reduction in administrative expenses in nominal terms in each subsequent quarter. As a consequence of the sustained improvement in asset quality, the Bank did not establish reserves for loan losses during the quarter, and recovered excess loan loss reserves established during the first quarter of 2003 to hedge against the effects of the floods in the Province of Santa Fe. Such effects resulted in a reversal of reserves for loan losses of Ps.13.9 million, Ps.42.7 million lower than the Ps.28.8 million provision in the same quarter of 2002.
At September 30, 2003, total loan loss reserves reached 99.2% of the Bank s non-performing loans. Non-performing loans decreased by Ps.307.8 million as compared to the same period of 2002 (a 38.6% reduction), the lowest figure recorded during the last twenty-eight months. As of September 30, 2003, the Bank s shareholders equity totaled Ps. 972.1 million. On August 14, 2003 the Bank announced an offer to exchange all its series of notes. On September 12, 2003, the Bank filed with the Commissione Nazionale per le Società e la Borsa or Consob, the Italian securities commission, the documents required for approval of the exchange offer in Italy. On October 13, 2003, after receiving Consob approval, the Bank announced its exchange offer to Italian holders of existing notes. Finally, on October 27, the Bank extended the deadline of the offer to December 3, 2003, to afford Italian holders additional time to examine the offer and consent solicitations, and finalize the Bank s debt restructuring agreements with its bank lenders. On October 24, 94% of the outstanding principal amount of U.S. dollar-denominated existing notes had been tendered for exchange, while 38% of the euro-denominated notes. The percentage of euro-denominated existing notes tendered for exchange as of such date did not include tenders by Italian residents, given the delay in making the exchange offer in Italy. The Bank estimates that Italian holders hold existing notes (mostly denominated in euros) in an amount in excess of US$185 million, representing approximately 56% of the existing notes denominated in euros. II. Present condition During the third quarter of 2003 Banco Hipotecario concentrated its efforts on the development of new services related to the mortgage lending and servicing business and adapting its business model to offer retail banking services, as part of its long-term strategy of playing an active role in the current financial services industry in Argentina. The Bank also continued applying policies aimed at increasing efficiency and reducing costs and implementing short- term measures to improve liquidity. Some of these include the following: Restructuring of existing indebtedness. As stated above, the Bank has launched the restructuring of its financial liabilities aimed at strengthening its financial position in the long term. Reducing cost structure. During the third quarter the Bank continued its strict cost control policy and organizational restructuring plan. Since its the restructuring plan was implemented, the Bank s headcount has been reduced by 384 employees, or 30% of the total as of October 2002. Improving liquidity. In September 2003, the Bank s Board of Directors resolved to extend the plan promoting prepayments of mortgage loans at a discount. In addition, the Bank sold several properties owned by it and housing units in construction projects. Preserving asset quality. As a result of the delinquency management efforts made during this quarter the balance of non-performing loans decreased again during this quarter, both in absolute terms and as a percentage of total loans. In addition, the percentage of collection collected within 30 days of issue of the related invoice averaged of 91.3% during the third quarter. Developing of new lines of business. During the third quarter: i) foreign currency purchase and sale transactions remained stable; ii) the Bank continued performing foreign trade currency exchange settlement transactions; iii) the disbursement of personal loans increased sharply as a consequence of the aggressive origination campaign, and origination channels were expanded by the execution of numerous agreements; and iv) there was a significant increase in the number of accounts opened for the purchase and sale of government securities and equities; and v) the Bank continued accepting time deposits, extended deposit terms and reduced interest rates, and new insurance products were launched. 2
III. Certain events during the third quarter and recent developments On July 25, 2003, under Communication A 3986, the Central Bank promulgated new rules on minimum capital requirements for financial institutions contained in Communication A 3959 will be mandatory as from January 2004. With the purpose of fostering long- and medium-term credit in pesos, the Central Bank issued Communication A 3987 dated July 25, 2003, that authorizes the origination of loans adjustable by the CER. On September 2, 2003, the extension period established by Law 25,737 that suspended foreclosure proceedings on real state property constituting the principal home of debtor ended. The Bank, together with other financial institutions, voluntarily agreed to extend the term of such suspension until a Law proposed by the Government that provides subsidies to mortgage debtors is enacted. On September 21, 2003, the International Monetary Fund approved a stand- by agreement with the Argentine Government to refinance a total of approximately US$21,100 million of debt with multilateral lenders with maturities over the next three years. On September 22, 2003, the Minister of Economy announced a plan for restructuring Argentine Government debt that contemplates, inter alia, an extension of terms, a reduction in principal amount and lower interest rates. Under Communication A 4027, dated October 6, 2003, the Bank is required to file a Business Plan as part of the process for regularization of the financial system and specifying projections for compliance with the minimum capital regime that will become effective next year. On October 30, 2003, the National Congress approved a bill that empowers the Executive Branch to compensate financial institutions for the effects of indexing certain of their assets by the CER index and certain liabilities by the CVS index. IV. Presentation of Information The Bank s assets as of September 30, 2003 include Argentine government bonds (the so- called BODENs) issuable pursuant to Decree 905/ 02 as compensation for the loss suffered by the Bank as a result of the asymmetric pesification of assets and liabilities and the devaluation of the peso in 2002. The Bank s loss suffered as a result of pesification amounted to US$ 1,208.7 million (equivalent to Ps.3,518.6 million, based on the exchange rate at September 30, 2003 of Ps.2.911 per dollar) which is represented by US$404.4 million in compensatory bonds and US$804.3 million in additional government bonds. As of September 30, 2003, the Central Bank had received US$ 344.1 million in compensatory BODEN from the Central Bank. The Bank maintains the right to subscribe for an additional US$804.3 million of additional BODENs, all of which are reflected as assets of the Bank at September 30, 2003. The definitive amount of such bonds the Bank ultimately receive is subject to approval by the Ministry of Economy. In accordance with Central Bank regulations, the Bank s right to receive Compensatory and Hedge Bonds from the National Government is recorded at book value, including the accrual of interest on such bonds during the periods under review, which is recorded as income on the Bank s income statement. Assets and liabilities denominated in foreign currency as of September 30, 2003 were converted into Pesos at the reference exchange rate published by the Central Bank at the closing of such date (Ps.2.911/US$1.00 and Ps.3.39306/EUR1.00). Certain data for the previous quarters has been restated to facilitate disclosure and comparison with the current quarter. 3
Highlights Selected statistical information 1, 2 Buenos Aires, November 7, 2003 - Banco Hipotecario S.A. (Buenos Aires Stock Exchange: BHIP) reports third quarter of 2003 results. The Bank s net income for the third quarter of 2003 was Ps.1.4 million, Ps.206.5 million higher than the Ps.205.1 million loss recorded in the second quarter of 2003. The main reasons for this variation were: i) higher financial income as a result of an increase in the CVS index applied to the Bank s loan portfolio that had been pesified, ii) lower financial expenditures due to the lower variation in the CER index applied to Central Bank advances and lower sales of Compensatory Bonds (BODEN 2012) at market prices, iii) a lower provision for loan losses due to the recovery of a portion of provisions made in excess during the first quarter of 2003 to cover risks related to floods in the Province of Santa Fe, iv) higher miscellaneous income, net, as a result of an extraordinary charge recorded in the second quarter of the year to cover contingencies related to differences in the calculation of the asymmetric compensation granted by the National Government; and v) lower administrative expenses as a result of the organizational restructuring carried out by the Bank since the fourth quarter of 2002. These effects were partially offset by higher expenditures related to the Bank s financial debt restructuring process. As compared to the third quarter of 2002, the Bank s net income for the third quarter of 2003 increased to Ps.1.4 million from a Ps.509.1 million loss as of September 30, 2002, or a Ps.310.4 million loss excluding the effects of inflation. This variation, excluding the effects of inflation, was principally due to: i) lower financial expenditures as a result of the appreciation of the peso with respect to the U.S. dollar and the euro, on financial debt denominated in foreign currency and lower interest rates and adjustments on Central Bank advances, ii) lower provisions for loan losses due an improvement in the quality of the loan portfolio, iii) lower net miscellaneous losses as a result of lower extraordinary charges recorded in liability provisions and iv) lower administrative expenses due to the organizational restructuring carried out by the Bank since the fourth quarter of 2002. These effects were partially offset by a decrease in financial income principally due to lower adjustments by CER on loans to the public sector and scheduled amortization of existing loans in the Bank s portfolio. Quarter Ended Variation (%) 09/30/03 06/30/03 09/30/02 Quarterly Annual Financial income 115,941 90,937 189,639 27.5% (38.9)% Financial expenditures (104,409) (227,954) (355,088) (54.2)% (70.6)% Net financial income 11,532 (137,017) (165,448) 108.4% 107.0% Provision for loan losses 13,866 (8,613) (28,822) (261.0)% (148.1)% Net contribution from insurance 10,688 9,218 9,565 15.9% 11.7% Net other income from services (363) 2,176 (12,285) (116.7)% 97.0% Administrative expenses (23,545) (24,464) (29,386) (3.8)% (19.9)% Monetary income/loss --- --- (198,738) NA NA Miscellaneous income, net (10,775) (46,412) (84,014) 76.8% 87.2% Net income 1,403 (205,112) (509,128) 100.7% 100.3% 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 Post- 91 loans are all loans originated after 1991. 2 Unless otherwise indicated, all financial data presented in the tables below are stated in thousands of Argentine pesos. For comparison purposes, financial data for the third quarter of 2002 has been recalculated in constant currency as of February 28, 2003 using the wholesale price index (general level) published by INDEC: 0,9938. 4
Financial income Financial income for the third quarter of 2003 amounted to Ps.115.9 million, a decrease of Ps.73.7 million or 38.9% from the Ps.189.6 million recorded in the third quarter of 2002. This decrease was mainly due to: (i) lower income from guaranteed loans as a result of a lower variation in the CER index, partially offset by higher investments in this security, ii) lower other financial income resulting from lower adjustments by the CER in certain loans to the public sector, iii) lower income from Compensatory Bonds (BODEN 2012) due to the depreciation of the U.S. dollar with respect to the peso and iv) lower interest on Post-91 loans, as a result of lower average loan balances from the Bank s portfolio of Post- 91 loans. These effects were partially offset by higher income from government securities, as a result of higher investments in Lebacs (short term securities issued by the Central Bank) and the cancellation of certain national taxes with External Securities in default. As compared to the second quarter of 2003, financial income for the third quarter of 2003 increased Ps.25.0 million or 27.5%, mainly due to: i) higher interest on Post-91 loans as a result of an increase in the CVS index, ii) higher income from government securities due to higher investments in Lebacs and the cancellation of certain national taxes with External Securities in default, and iii) to a lesser extent, an improvement in the total mortgage loan portfolio. This increase was partially offset by: i) lower income from guaranteed loans as a result of lower adjustments by CER and ii) lower other financial income as a result of the sale of private securities. Interest on Pre-91 loans 25,543 25,074 26,177 1.9% (2.4)% Interest on Post-91 loans 48,916 23,245 61,953 110.4% (21.0)% Income from Compensatory and Hedge BODENs 7,813 8,176 22,951 (4.4)% (66.0)% Income from Government Securities and other interest 18,256 10,723 5,596 70.3% NA Interests on Guaranteed Loans 12,893 15,749 50,135 (18.1)% (74.3)% Other 2,520 7,970 22,827 (68.4)% (89.0)% Total Financial Income 115,941 90,937 189,639 27.5% (38.9)% Financial Expenditures Financial expenditures for the third quarter of 2003 reached Ps.104.4 million, Ps.250.7 million or 70.6% lower than the Ps.355.1 million recorded in the third quarter of 2002, in real terms. The main reasons for this decrease were: i) the lower effect of the appreciation in the peso compared to the euro and the U.S. dollar on the Bank s net foreign currency position, (ii) a decrease in the interest rate payable on foreign currency financing and interest on interbank loans as a result of the impact of the appreciation of the peso on the Bank s external liabilities denominated in foreign currency, (iii) lower accrual of interest and CER on Central Bank borrowings, and (iv) lower results from government securities and other investments as a result of lower losses recorded with respect to certificates of participation in financial trusts. As compared to the second quarter of 2003, financial expenditures decreased Ps.123.5 million or 54.2% mainly due to: i) lower appreciation of the peso compared to foreign currencies, (ii) lower losses from government securities, due to the sale of Compensatory Bonds (BODEN 2012) in the previous quarter and iii) lower adjustments by CER on Central Bank advances. Interest on external financing 69,806 63,355 169,695 10.2% (58.9)% Interest on Central Bank Advances 17,164 21,248 202,002 (19.2)% (91.5)% Interest on inter-bank loans 19,069 19,325 37,588 (1.3)% (49.3)% Other interest liabilities 323 1,209 2,386 (73.3)% (86.5)% Losses from securities and other participations -- 52,255 19,583 NA NA Effects of changes in exchange rate (*) (2,021) 70,468 (78,701) (102.9)% (97.4)% Contributions and taxes on financial income 68 94 2,536 (27.7% (97.3)% Total Financial Expenditures 104,409 227,954 355,088 (54.2)% (70.6)% (*) For a better understanding the positive effects of changes in exchange rate in the third quarter of 2003 and 2002 have been inversely reclassified as financial expenditures. 5
Net Financial Income The following table sets forth the impact on the Bank s net income (loss) from financial operations resulting from assets and liabilities denominated in foreign currency as of September 30, 2003, including: (i) compensatory BODEN issued to financial institutions as compensation for pesification; and (ii) liabilities which were not pesified. Net loss from financial operations denominated in foreign currency for the third quarter of 2003 was US$22.1 million, primarily resulting from: i) financial income of US$2.7 million as a result of non-cash interest income in respect of BODEN 2012 received as compensation and the right to receive the remaining balance of Compensatory and Hedge BODEN to be received from the Argentine Government; and (ii) financial expenditures corresponding to interest accrued on the Bank s outstanding bonds and floating rate financial loans that total US$24.8 million. Net income from financial operations denominated in pesos for the third quarter of 2003 amounted to Ps.11.5 million primarily resulting from accrued interest and inflation adjustments based on the CVS index on the Bank s mortgage loan portfolio. Quarter ended 09/30/03 US$ 2 $ 1 Financial income Compensatory and Hedge BODENs 2,684 7,813 Interest on Pre-91 loans 25,543 Interest on Post-91 loans 48,916 Income from government securities and other interests 18,256 Effects of changes in exchange rate 3 Other financial income 15,413 Total Financial Income 2,684 115,941 Financial Expenditures Interest from external financing 22,013 69,806 Interest from interbank loans 2,791 19,069 Losses from government securities and other interests --- Central Bank Advances 17,164 Effects of changes in exchange rate 3 (2,021) Other interest liabilities 323 Contribution and taxes 68 Total Financial Expenditures 24,804 104,409 Net Financial Income (Loss) (22,120) 11,532 1 Income or expenditures from transactions in Argentine pesos or its equivalent in Argentine pesos from income or expenditures in foreign currency at the exchange rates in effect at the time of recognition. 2 Income expressed in the currency of the transaction or its equivalent in US dollars for transactions denominated in euros. 3 Reflects the negative 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 2002, net contribution from insurance activities during the third quarter of 2003 increased by Ps.1.1 million or 11.7% to Ps.10.7 million as of September 30, 2003. This increase was mainly due to: i) an increase in the quality of the portfolio and ii) lower claims paid. These effects were partially offset by a reduction in the mortgage loan portfolio as a consequence of prepayments, scheduled amortization and the suspension in the origination of mortgage loans. As compared to the second quarter of 2003, net contribution from insurance activities increased by Ps.1.5 million, mainly due to an improvement in the quality of the portfolio and lower claims paid. Property damage premium 4,069 3,532 3,569 15.2% 14.0% Life insurance premium 7,310 6,986 8,115 4.6% (9.9)% Unemployment insurance premium 484 453 551 6.8% (12.1)% Additional Insurance 513 420 --- 22.1% NM Total Premiums 12,376 11,391 12,235 8.6% 1.2% Property damage insurance claims paid 45 151 387 (70.2)% (88.4)% Life insurance claims paid 1,538 1,890 1,928 (18.6)% (20.2)% Unemployment insurance claims paid 60 83 354 (27.7)% (83.1)% Additional Claims 45 49 --- (8.2)% NM Total Claims 1,688 2,173 2,670 (22.3)% (36.8)% Net Contribution from Insurance 10,688 9,218 9,565 15.9% 11.7% Other Income (Loss) from Services, Net Other income from services, net amounted to a loss of Ps.0.4 million in the third quarter of 2003, reflecting a decrease of Ps.2.5 million from Ps.2.2 million in the second quarter of 2003. The main variations resulted from higher expenses related to the Bank s debt restructuring process and higher structuring and underwriting fees. As compared to the third quarter of 2002, other income from services, net increased Ps.11.9 million during the third quarter of 2003. This increase was mainly due to lower structuring and underwriting fees as a result of the accelerated recording of structuring fees during the third quarter of 2002, due to the suspension of payments on the Bank s financial debt. Other income from services Quarter Ended Variation (%) 09/30/03 06/30/03 09/30/02 Quarterly Annual Commissions related to origination and servicing of own and third-party loans 4,662 5,127 6,586 (9.1)% (29.2)% FONAVI service commissions 715 728 582 (1.8)% 22.8% Other 715 546 493 31.0% 45.1% Subtotal 6,092 6,401 7,661 (4.8)% (20.5)% Other expenditures from services Commissions paid in connection with loans 938 632 576 48.4% 62.8% Collection services 563 542 653 3.9% (13.8)% Structuring and underwriting fees 4,471 2,286 17,475 95.6% (74.4)% Commissions on third-party origination 68 96 253 (29.2)% (73.2)% Taxes --- --- 525 NM NM Other 415 669 462 (38.0)% (10.3)% Subtotal 6,455 4,225 19,945 52.8% (67.6)% Other Income (Loss) from Services. Net (363) 2,176 (12,285) NM (97.0)% 7
Administrative expenses Administrative expenses for the third quarter of 2003 decreased by Ps.5.8 million or 19.9% to Ps.23.5 million from Ps.29.4 million for the corresponding quarter of 2002, primarily because of the continuation of strict cost control measures implemented by the Bank, and the effects of inflation on salaries and social contributions. As compared to the second quarter of 2003, administrative expenses decreased by Ps.0.9 million, or 3.8%, from Ps.24.5 million as of June 30, 2003. This decrease mainly resulted from a decrease in severance payments and payroll expenses mainly due to the Bank s organizational restructuring. Salaries and social security contributions 9,968 10,277 14,371 (3.0)% (30.6)% Severance payments 294 1,529 930 (80.8)% (68.4)% Other fees 1,124 1,440 1,060 (21.9)% 6.0% Advertising and publicity 380 251 137 51.4% 177.0% Non recoverable VAT and other taxes 2,020 1,759 2,509 14.8% (19.5)% Operating expenditures 3,671 3,255 3,587 12.8% 2.3% Amortizations 3,495 2,886 3,587 21.1% (2.6)% Other 2,593 3,067 3,205 (15.5)% (19.1)% Total Administrative Expenses 23,545 24,464 29,386 (3.8)% (19.9)% Administrative Expenses (annualized) / Total Assets 1,24% 1,34% 1,36% Miscellaneous Income (Loss), Net In the third quarter of 2003, miscellaneous income (loss), net decreased to a loss of Ps.10.8 million, Ps.73.2 million lower than the Ps.84.0 million loss recorded in the third quarter of 2002. This decrease resulted primarily from: i) lower losses from participations held in subsidiaries, ii) lower charges in other provisions mainly due to legal actions against the Bank, (iii) higher loan recoveries, mainly due to the improvement in asset quality, and iv) lower charges in other items, basically due to the effects of the Bank s loan prepayment campaign. Miscellaneous income (loss), net decreased by Ps.35.6 million in the third quarter of 2003 to a loss of Ps. 10.8 million from the Ps.46.4 million net loss recorded in the second quarter of 2003, mainly as a result of: i) lower charges on other provisions related to the extraordinary charge recorded in the previous quarter to cover possible objections regarding the calculation of the Compensatory Bonds due to asymmetric pesification, and ii) the reversal of a credit balance for gross income tax recorded in excess in the previous year. These effects were partially offset by higher losses from subsidiaries. Penalty interest 3,940 3,982 3,086 (1.1)% 27.7% Reversal of provisions 706 151 369 NA 91.5% Loan loss recoveries 11,117 13,844 6,909 (19.7)% 60.9% Other 11,811 1,986 1,198 NA NA Subtotal Miscellaneous Income 27,574 19,963 11,562 38.1% 138.5% Other provisions 24,594 56,039 34,899 (56.1)% (29.5)% Taxes --- --- 81 --- --- Other Investments 1,748 65 28,750 NA (93.9)% Other 12,007 10,271 31,846 16.9% (62.3)% Subtotal Miscellaneous Expenses 38,349 66,375 95,576 (42.2)% (59.9)% Total Miscellaneous Income (Loss), Net (10,775) (46,412) (84,014) 76.8% 87.2% 8
Monetary Gain (Loss) By Communication A 3928 the Central Bank, as required by Decree No. 664/03 issued by the Argentine Government, suspended application of inflation adjustment effective as of March 1, 2003. A Ps.198.7 million monetary gain was recorded in the third quarter of 2002, as detailed in the following table: Quarter ended 09/30/03 30/06/03 09/30/02 Monetary gain (loss) from financial operations --- --- 219,538 Monetary gain (loss) from other transactions --- --- (1,110) Monetary gain (loss) from operating expenses --- --- (19,690) Total --- --- 198,738 Loans The Bank s total loan portfolio at September 30, 2003 decreased by Ps.516.0 million to Ps.3,248.8 million from Ps.3,764.8 million at June 30, 2003. This decrease mainly resulted from: i) the draw of short term loans to external institutions, to a special escrow deposit in order to guarantee the payment of interest and cash tender offer under the Bank s debt restructuring process, ii) the exchange of loans from the provincial public sector (basically IPVs from Buenos Aires and Formosa) for bonds guaranteed by the National Government (Bogars) and iii) the scheduled amortization of the portfolio. This decrease was partially offset by an increase of the portfolio by the application of the CER and CVS indexes on pesified loans. In addition, the Bank s total loan portfolio at September 30, 2003 decreased by Ps.343.8 million from Ps.3,592.3 million, in constant currency, as of September 30, 2002, including Ps.22.4 million attributable to the inflation adjustment applicable at that time. Excluding such inflation adjustment, mainly variations were: i) the exchange of loans from the provincial public sector for bonds guaranteed by the National Government (Bogars) and ii) the scheduled amortization of the mortgage loan portfolio. These effects were partially offset by: i) the acquisition of guaranteed loans, ii) an increase in loans to public sector, commercial loans and pesified individual mortgage loans by the application of the CER and CVS indexes and iii) new products offered to the market. Loan Portfolio per product Mortgage loans - Pre-91 loans individual mortgages - Pre-91 loans construction projects Total Pre-91 loans 1,121,304 1,158,081 1,233,282 (3.2)% (9.1)% 1,370 7,836 7,308 (82.5)% (81.3)% 1,122,674 1,165,917 1,240,590 (3.7)% (9.5)% - Post-91 loans individual mortgages 11 1,106,878 1,138,536 1,360,657 (2.8)% (18.7)% - Post-91 loans construction projects Total Post-91 loans 19,441 173,985 276,805 (88.8)% (93.0)% 1,126,319 1,312,521 1,637,462 (14.2)% (31.2)% Other loans 2 999,801 1,286,324 714,542 22.3% 39.9% Total Loan Portfolio 3,248,802 3,764,762 3,592,595 (13.7)% (9.6)% 1 Includes Ps.321,331 thousand at September 30, 2003, Ps.327,511 thousand at June 30, 2003 and Ps.375,480 thousand at September 30, 2002 adjusted, of individual post- 91 mortgage loans conveyed in a trust in anticipation of future securitizations. 2 Other loans includes Ps.63,111 thousand at September 30, 2003, Ps.60,001 thousand at June 30, 2003, and Ps.65,085 thousand at September 30, 2002, adjusted, of Other receivables included in the Statement of Debtors Status recorded in Other receivables from financial operations. 9
Loan Portfolio By Economic Sector Non financial government sector 771,137 909,067 786,277 (15.2)% (1.9)% Financial Sector 6,169 5,934 2,645 4.0% 133.2% Non financial private sector - Advances 139,000 119,112 0 16.7% NA - With preferred guarantees 1 2,213,895 2,312,701 2,341,713 (4.3)% (5.5)% - Personal loans 623 65 NA NA - Non-applied collections (20,449) (15,076) (27,193) 35.6% (24.8)% - Other 25,615 338,080 2,604 (92.4)% NA - Interest accrued on uncollected loans due to changes in exchange rate 49,702 34,876 45,986 42.5% 8.1% Reserves (486,193) (546,421) (586,527) (11.0)% (17.1)% Total Loan Portfolio 2,699,499 3,158,338 2,565,504 (14.5)% 5.2% Asset Quality The following table sets forth information regarding the classification of the Bank s total loan portfolio per product according to the Argentine Central Bank s criteria, as of September 30, 2003. Asset Quality As of September 30, 2003 June 30, 2003 Sep 30, 2002 Pre-91 Post-91 Others Total Total Total Bank Branch Other Construction Private Public Category / (days) Network (1) Network Institutions sector sector (in thousands of pesos, except for percentages) Normal (0-30) 784,933 123,447 272,300 406,222 8,466 228,292 765,574 2,589,234 3,001,201 2,519,631 Potential risk and inadequate performance (31-90) 88,500 15,780 35,123 27,949 2,029 0 0 169,381 184,139 275,018 Problematic and deficient performance (91-180) 44,704 4,709 21,321 16,905 0 0 0 87,639 111,125 194,001 High risk of insolvency and difficult collection (181-365) 69,267 3,178 20,920 17,699 590 0 0 111,654 151,137 255,256 Uncollectible (>365) 137,318 13,040 49,233 50,131 14,375 286 0 264,383 292,365 310,704 Uncollectible for technical reasons 11,826 1,734 3,342 7,309 92 2,208 0 26,511 24,795 37,986 Total 1,136,548 161,888 402,239 526,215 25,552 230,786 765,574 3,248,802 3,764,762 3,592,595 Non performing loans 263,115 22,661 94,816 92,044 15,057 2,494 0 490,187 579,422 797,946 Non-performing loans / Total loans 23.15% 14.00% 23.57% 17.49% 58.93% 1.08% 0.00% 15.09% 15.39% 22.21% Reserves for loan losses 314,709 25,941 46,828 38,911 56,336 3,468 0 486,193 546,421 586,527 Reserves for loan losses/ Total Non-performing 119.61% 114.47% 49.39% 42.27% 374.15% 139.05% 0.00% 99.19% 94.30% 73.50% Non Performing loans, net / Total Loan portfolio 0.12% 0.88% 5.88% The ratio of non-performing loans over total loans as of September 30, 2003 was 15.09%, 30 and 712 basis points lower compared to 15.39% as of June 30, 2003 and 22.21% as of September 30, 2002 showing a substantial improvement during the year. This variation was primarily due to a better payment performance of mortgage loans as a result of the Bank s substantial collection management efforts and analysis of non-performing loans, and due to the origination of short term loans to export companies. 1 Includes Ps.321,331 thousand at September 30, 2003, Ps.327,511 thousand at June 30, 2003 and Ps.375,480 thousand at September 30, 2002 adjusted, of individual post- 91 mortgage loans conveyed in a trust in anticipation of future securitizations. 10
Reserve for Loan Losses Due to the improvement in asset quality, the Bank did not establish extraordinary provisions for loan losses, increasing its ratio of reserves for loan losses over total non-performing loans to 99.2%, compared to 94.3% as of June 30, 2003, and 73.5% at September 30, 2002. In addition, the Bank adjusted excess loan loss reserve provisions that were recorded during the first quarter of 2003 in connection with mortgage properties affected by the floods in the Province of Santa Fe. 09/30/03 30/06/03 09/30/02 Reserve for Loan Losses at the beginning of the quarter (546,421) (576,067) (642,958) Increases 13,867 (8,613) (28,820) Charge-offs 46,361 38,259 16,415 Monetary gain (loss) -- -- 68,837 Reserve for Loan Losses at the end of the quarter (486,193) (546,421) (586,527) Reserves for loan losses / total non-performing loans 99.2% 94.3% 73.5% Reserve for loan losses / total loan portfolio 15.0% 14,5% 16,3% Funding sources On-balance sheet funding at September 30, 2003 increased to Ps.6,442.1 million compared to Ps.6,160.4 million as of June 30, 2003. The increase in funding was primarily due to: the effect of the depreciation of the peso with respect to the US Dollar and the euro during the quarter, and to a lesser extent, an increase in deposits. Funding at September 30, 2003 amounted to Ps.6,442.1 million, 4.6% lower as compared to the Ps.6,760.1 million for the corresponding period of 2002. Variations primarily resulted from: (i) a reduction in deposits, (ii) lower accrued interest on short-term liquidity advances from the Central Bank, and (iii) the effect of the appreciation of the peso with respect to the euro and the U.S. Dollar during the quarter as compared to the same period of 2002. As of September 30, 2003, shareholders equity amounted to 12.76% of assets and the ratio of debt to shareholder s equity was 6.5x. Due to material adverse changes in 2002 and 2003, and particularly in light of their negative impact on the Argentine financial system, on August 15, 2002 the Board of Directors of the Bank decided to implement a debt restructuring plan for its bonds sold abroad and loans from banks and multilateral institutions. On August 14, 2003, the Bank announced an offer to exchange all its series of existing notes. Under the terms of the offer, bondholders may opt to exchange their existing notes for new long term notes in the same currency and identical par value, and additionally, for long term bonds and cash for unpaid interest. Those holders of existing notes who participate in the offer may elect to receive, in a second step of the offer, either a cash payment or new guaranteed notes with shorter maturity, each subject to proration and requiring adjustment in the principal amount which the holders is entitled to receive. On October 13, 2003, after receiving the approval of the Italian securities commission (the Consob), the Bank announced its exchange offer to the Italian residents who are holders of existing notes. On October 27, the Bank extended the deadline of the offer to December 3, 2003, so as to give Italian holders additional time to examine the offer, and conclude the Bank s final debt restructuring agreements with its bank creditors. The table below sets forth the principal funding sources of the Bank for the periods indicated: Deposits 110,652 107,906 131,820 2.5% (16.1)% Corporate bonds 3,162,466 2,925,805 3,400,350 8.1% (7.0)% Central Bank 2,067,979 2,054,836 1,960,605 0.6% (5.5)% Interbank loans and international agencies 771,003 737,922 785,485 4.5% (1.8)% Other interest bearing liabilities 237,934 229,474 277,770 3.7% (14.3)% Total Funding 6,350,034 6,055,943 6,556,030 4.9% (3.1)% Other non-interest bearing liabilities 92,058 104,509 204,078 (11.9)% (54.9)% 6,442,092 6,160,452 6,760,108 4.6% (4.7)% 11
Balance sheet (amounts in thousands of pesos) 09/30/03 30/06/03 09/30/02 Cash and due from banks 302,354 220,734 93,932 Government Securities 1,269,393 1,022,502 1,425,637 Pre-91 Loans 1,122,674 1,165,917 1,240,590 Post-91 Loans 804,996 985,010 1,261,983 Other Loans 936,690 1,226,321 649,457 Reserve for loan losses (458,194) (518,422) (558,701) Loans, net 2,406,166 2,858,826 2,593,330 Other receivables from financial operations 3,099,774 2,959,427 3,921,394 Reserve for other receivables from financial operations (27,999) (27,999) (27,825) Miscellaneous assets 571,245 289,889 613,242 Total Assets 7,620,933 7,323,379 8,619,708 Deposits 110,652 107,906 131,820 Other liabilities from financial operations 6,331,440 6,052,546 6,628,288 Miscellaneous liabilities 206,712 192,202 127,239 Total Liabilities 6,648,804 6,352,654 6,887,347 Shareholders Equity 972,129 970,725 1,732,361 Income Statement (amounts in thousands of pesos) 09/30/03 30/06/03 09/30/02 Financial income 343,097 227,156 656,609 Financial expenditures (668,730) (564,321) (904,994) Provision for losses on loans (31,160) (45,026) (380,652) Income from services 54,252 35,784 77,437 Expenditures on services (19,963) (11,821) (59,069) Monetary gain (loss) from financial operations (9,314) (9,314) (2,343,130) Administrative expenses (71,705) (48,160) (107,636) Monetary gain (loss) from operating expenses 41 41 13,095 Miscellaneous income 71,106 43,532 42,036 Miscellaneous losses (121,142) (82,793) (152,375) Monetary gain (loss) from financial operations 24 24 42,566 Income tax - - - Offset of losses - - 359,234 Net income (453,494) (454,898) (2,756,879) 12
Selected Ratios (amounts in thousands of pesos, except for percentages) 09/30/03 30/06/03 09/30/02 Profitability ROAA (Return on average assets) 1 (7.82)% (11.69)% (48.62)% ROAE (Return on average shareholder s equity) 1 (48.86)% (69.65)% (134.81)% Net interest margin (5.61)% (8.66)% (4.38)% Efficiency* (23.81)% (14.72)% (45.89)% Capital Total shareholder s equity / total assets 12.76% 13.26% 20.10% Funding / Shareholders Equity 6.5 6.2 3.8 Liquidity Current Assets / deposits 1420.44% 1152.15% 1152.76% Loans / deposits 2174.53% 2649.37% 1967.33% Asset Quality Non-performing loans / total loans 15.1% 15.4% 22.2% Reserves for loan losses / total non-performing loans 99.2% 94.3% 73.5% Reserves for loan losses / total loan portfolio 15.0% 14.5% 16.0% 1 Based on annualized quarterly results. *Administrative expenses (excluding severance payments) over net financial income and income from services, net. Conference Call to Discuss Third Quarter 2003 Results: Banco Hipotecario S.A. will host a conference call to discuss results for the third quarter of 2003 at 11:00 a.m. (New York time) on Thursday, November 13, 2003. To participate in the conference call, please call one of the following telephone numbers: USA: (800) 450-0818 International: (612) 332-0637 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