Banco Mercantil del Norte's Ratings Affirmed By Fitch.

Business Editors

NEW YORK--(BUSINESS WIRE)--Sept. 26, 2001

Fitch, the international rating agency, has affirmed Banco Mercantil del Norte's (Banorte) ratings at long-term `BB+' (Rating Outlook Positive), short-term `B' foreign currency ratings, long-term `BBB-', short-term `F3' local currency ratings, individual `C/D' and support `4T' ratings. This follows the announcement by the Instituto para la Proteccion al Ahorro Bancario (IPAB), Mexico's deposit guarantee fund, that Bancrecer has been auctioned-off to Banorte.

While the only other bidder, Canadian-owned Scotiabank Inverlat, pulled out of the auction process, Banorte offered MXP$1,650 million (roughly US$174 million) for 100%-ownership of Bancrecer, which was accepted by IPAB. Bancrecer, a bank that had been taken over by the authorities in 1997 after encountering severe asset quality and capital problems, has a network of 755 branches, 967 ATMs, 6,613 employees, and around 1.7 million accounts. Although it has nationwide coverage, it benefits from a particularly strong presence in the Northwest of Mexico and some central and southern states (including Mexico City). Provided that the relevant approvals by Mexican financial authorities are obtained, which Fitch expects to be the case, the merger of Bancrecer (MXP$68.6 billion in assets) into Banorte (MXP$97.6 billion) will create Mexico's third largest financial institution, with a market share by total deposits of approximately 13%.

For Banorte, apart from the price paid (0.66 times book value), the main attractiveness in this acquisition was to complement its geographical coverage, which is still limited in certain regions in Mexico. In addition, Banorte should be able to achieve the necessary economies of scale to compete with its larger peers and expects the integration to bring cost reductions of MXP$1.4 billion to be realised in a period of two years. Moreover, while Banorte estimates that over half of Bancrecer's deposit base of MXP$57.4 billion is in the form of cheap and stable retail deposits, the costs of those linked to money markets could decline as the market incorporates the strength of the new ownership structure. Lastly, it is of note that Bancrecer is being acquired clean of past-due loans (although published statements show a small amount of MXP$128 million, or 1.4% of total lending, excluding IPAB notes; these are 542% covered by loan loss reserves).

However, although Fitch considers that there are no immediate negative implications to Banorte's ratings deriving from this acquisition, there are a number of issues that will be monitored closely in the next few months, namely:

-- The impact of the acquisition on the institution's capital ratios. Banorte
has stated that the acquisition will be done mainly through current cash
holdings, dividends obtained from subsidiaries and outstanding subordinated
debt, among others. While Banorte's capital to risk-weighted assets ratio of
15.6%, computed according to the stricter 2003 capital rules, should experience
a decline given the size of the assets acquired, this should be limited give
that IPAB notes (67% of Bancrecer's assets) are zero-weighted for the
calculation of the capital to risk-weighted assets ratio;

-- The increased exposure to lower-yielding IPAB in the form of notes and
direct lending, which will amount to MXP$92.8 billion (56% of combined total
assets). Although lending to IPAB is relatively risk-free and carries low
administration costs, this not only increases concentration risk but also
translates into lower net interest margins and the bank's profitability may be
pressured in the future by the increasingly competitive environment. In
addition, there is the risk of prepayment, although Fitch considers this to be
relatively low in the medium-term due to the favourable rate being paid by
IPAB;

-- While there are major challenges in terms of integrating such a large
institution into Banorte, management has a proven track record in dealing
effectively with acquisitions. However, estimated costs of integration of MXP$1
billion in a period of two years, which include the costs of organisational
restructuring, branch equipment and corporate image, may have a negative impact
on Banorte's already perfectible cost efficiency;

-- Perhaps less importantly, inevitably there will be a number of overlapped
customers and there may be a loss of a portion of its customer base. In an
environment where lending in real terms has been declining, it will become
increasingly important to be able not only to maintain current business volumes
but to grow in order to support profitability and efficiency.

Banorte was Mexico's sixth largest commercial bank in terms of total assets at end-June 2001 with a 6.6% market share. It is part of Grupo Financiero Banorte (GFNorte), itself owned by a group of Monterrey-based Mexican investors. GFNorte has subsidiaries involved in insurance, pension fund management (Afore), annuities (the three in conjunction with Assicurazioni Generali, the Italian-based insurance group that owns 49% of their operations), stock broking, leasing, factoring, warehousing and banking. While GFNorte previously had three separate banks, it restructured its activities in 2000 so that traditional banking is now carried out by Banorte while recoveries and mutual and pension fund management were left at Bancen. Banpais had been merged into Banorte in 2000. GFNorte's banking business (which comprises Banorte and Bancen but excludes the Afore) accounted for 96% of the group's total assets at end-June 2001 while contributing 91% of net income in the first half of the year.