Banco de A Edwards Rtg Outlk Chg to Stable; Indiv Rtg On Rtg Watch Pos.

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 18, 2001

Fitch, the international rating agency, has affirmed Banco de A Edwards' (Edwards) foreign currency long-term ratings at 'A-' and short-term at 'F2'; local currency long-term ratings at 'A-' and short-term at 'F2'. Fitch has also affirmed the individual ratings at 'C' and support ratings at '2'. The Rating Outlook on the bank's long-term rating has been changed from Negative to Stable and the individual rating has been placed on Rating Watch Positive. This action follows the recent announcement by Chilean financial authorities that it has approved the merger proposal between Edwards and Banco de Chile (BC) and the strong likelihood that the merger will be endorsed by each of the banks' shareholder meetings. Although the endorsement of Edwards' and BC's shareholders is still pending, as well as the approval by the Securities and Exchange Commission in the U.S., these are considered imminent and should be granted in the short-term. The merger, which is expected to take place officially in January 2002, will give birth to the country's largest financial institution, with a market share of around 20%. Although Fitch considers that there is no immediate impact on Edwards' individual rating resulting from the prospective merger, it is likely that this will be positively influenced given BC's superior performance indicators, which are among the best in the Chilean financial system. However, the final structure of the merger, i.e. whether it is accounted for as an acquisition or by the pooling of interests method, as well as the merged entity's performance, will also be taken into consideration.

In August 2001, the Lucksic group, majority owner of both institutions, announced its intention to merge BC and Edwards. It was agreed that BC would constitute 66% of the equity of the merged entity, while Edwards will represent 34% of equity. The combined entity will operate under the Banco de Chile name, although the Banco Edwards brand may be retained for its high-income client banking business. It is expected that the combined institution, through greater revenue generation, will be in a better position to meet the dividend payments to SAOS (see below), which in the past two years had accounted for 100% of net income and were hindering internal capital generation. In addition, while there will be one-off expenses related to the merger in the near term, management estimates cost savings of 15% of the combined institutions in the medium-term. Also, the merger will bode favourably on Edwards' weaker asset quality as it should benefit from BC's conservative risk management approach. On the other hand, the capital base of the combined entity should be adequate and both BC and Edwards have maintained similar risk adjusted capital ratios, which were 11.7% and 11.6% at end-August 2001, respectively.

The Superintendency has set several conditions on the merger, including the requirement that the combined entity holds a minimum risk adjusted capital ratio of 10% (instead of the usual 8%) and that BC reverses CLP4.25 billion voluntary reserves that will have to be recorded as income in 2001. At the same time, Edwards is required to create a similar amount of voluntary reserves prior to the merger.

At end-June 2001 Edwards was Chile's fifth largest bank in terms of total loans with a market share of 8.2%. It operates through a network of 86 branches and is a universal bank with a solid positioning on medium-sized corporates and high net worth individuals. Edwards owns subsidiaries involved in securities broking, mutual and investment fund management, insurance broking, financial advisory, factoring and a securitization company. Edwards is 51.2% owned by Chile's Luksic group (one of the country's largest business conglomerates) with Jacob Ergas being the second largest shareholder with a 26% stake. The remainder of the shares is widely held, including around 6% represented by ADRs.

At end-June 2001, BC was the second largest bank in Chile by total loans with a market share of 12.5%. It operates through a nationwide network of 176 branches and provides a wide range of banking services. BC owns subsidiaries involved in mutual funds management, securities broking, financial consulting, insurance broking and factoring. In common with other Chilean banks, as a result of the 1983 banking crisis, BC became burdened with a central bank subordinated debt liability, which resulted in a large portion of its net income being used to service the debt. At end-1996, BC agreed with the central bank to transfer the legal obligation of the debt, and 63.6% of its shares to SAOS, a wholly owned company of BC's parent SM-Chile (which holds 29% directly in BC). SAOS is repaying the debt in 40 equal annual instalments of CLP 51 billion from dividend income receivable from BC. In early 2001, LQ, an investment company part of Lucksic group acquired a controlling 51% stake in SM-Chile.