Fitch Sees Challenges for Guatemalan Banks & Regulators After the Intervention of Bancafe.

NEW YORK -- Fitch Ratings comments on the recent intervention of Guatemala's fourth largest bank, Banco del Cafe (Bancafe) and the potential implications for the national banking system.

Last week, the Banking system regulator announced the intervention and planned liquidation of Bancafe, the fourth largest bank at end-August 2006 by total assets (roughly USD 1.022 billion - 8% market share) and deposits (USD 889m - 9%). The problems at Bancafe initiated in October 2005, when Refco Ltd. declared bankruptcy. This event harmed Bancafe's unconsolidated related off-shore entity domiciled in Barbados, since this had roughly USD204 million of its assets managed by one of Refco's problem subsidiaries, which have been frozen since then. While the stand-alone performance of Bancafe in Guatemala had remained reasonable, its efforts to aid the liquidity of its related offshore entity weakened Bancafe to the point of its intervention by the Guatemalan authorities.

While the deposit insurance fund (FOPA - Fondo para la Proteccion del Ahorrante) guarantees deposits for up to GTQ 20,000 (roughly USD 2,630), the banking regulator decided to distribute Bancafe's deposits among three local banks (Banrural, Agromercantil and Reformador, ranked third, fifth and sixth in the national system, with a joint market share of 23% of deposits at end-August 2006). In turn, these banks will be beneficiaries of trust certificates drawn on a trust that will hold and liquidate Bancafe's assets, as well as the liquid resources available at FOPA, roughly USD180 million. This Friday, October 27, Bancafe's depositors would be able to request or renew their deposits at the respective institution where the account was transferred to. The country's two largest banks, Banco Industrial and Banco G&T Continental, did not participate in the scheme to distribute Bancafe's domestic deposits.

While the direct exposure of other Guatemalan banks to Bancafe was insignificant at the time of the intervention, Fitch remains concerned about the potential negative effect of this situation on the banking system's liquidity and public confidence. Particularly, Fitch will closely monitor the reaction of Bancafe's depositors once they are allowed to withdraw their deposits. Since only a small portion of Bancafe's assets is liquid, the ability of Banrural, Agromercantil and Reformador to preserve these accounts, or alternatively, to honor these deposits, is a critical factor to maintain public confidence in the banking system. The Guatemalan Central bank could provide temporary liquidity support, if required. Fitch anticipates that even larger banks could see their liquidity somewhat pressured, if their off-shore banks eventually face a deposit run or a decrease in other funding sources, and they attempt to access short term liquidity provided by their related Guatemalan bank.

Fitch also notes that, while under local regulation Bancafe was the 'responsible company' of the entities comprising Grupo Financiero del Pais (including the off-shore bank), the intervention meant the dissolution of the financial group and the cancellation of any inter-company responsibility. Fitch has expressed in the past its concern about the sizeable off-shore banking activities of the Guatemalan banks. In Fitch's view, the intervention of Bancafe highlights the risks associated with these entities, which are inherently less regulated and perhaps less supervised, given the legal limitations for most banking regulators in the region regarding extra-territorial supervision. Positively, this event could over time improve the awareness of depositors, creditors and other stakeholders in regard to riskier off-shore banks. Fitch also highlights the need to further disclose financial information of the off-shore banks and the consolidated or combined financial groups.

Bancafe's total deposits at end-August 2006 accounted for 2.4% of Guatemala's forecasted GDP for 2006, while the liquid resources available to FOPA were equivalent to 0.6% of GDP. In the event that FOPA's assets are extinguished or considerably absorbed to honor Bancafe's deposits, domestic banks could be required by the authorities to make extraordinary contributions for up to 50% in excess of regular contributions (0.1% p.a. of total deposits, at present).

Fitch maintains an Issuer Default rating (IDR) to the Republic of Guatemala at 'BB+' (local and foreign currency) with a stable outlook, while the country ceiling is 'BBB-'. For domestic banks, Fitch maintains the following ratings for Banco Industrial, the largest bank in the country:

-- Long-term Foreign and Local Currency IDR: 'BB';

-- Short-term Foreign and Local Currency rating: 'B';

-- Individual rating: 'D';

-- Support rating: '3';

-- National-scale ratings: 'AA-(gtm)' and 'F1(gtm)';

-- Outlook: Stable.

With the information currently in hand, Fitch does not anticipate an impact on these ratings in the short term, which explains their outlook stable. However, we will monitor relevant events in the upcoming days and any rating action that could arise will be announced promptly.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.