Fitch Takes Rating Actions on Salvadorian Banks.

Business Editors

NEW YORK--(BUSINESS WIRE)--July 3, 2003

Fitch Ratings, the international rating agency, has downgraded the ratings of a number of banks in El Salvador as indicated below.

This action is explained by the gradual deterioration of the operating environment for banks over the past few years, which has resulted in relatively low profitability, asset quality concerns given the industry's high levels of non-performing, restructured and foreclosed assets, as well as tight capital bases, given the high levels of non-earning assets tied up in equity.

The ailing state of the coffee sector in El Salvador, to which many banks had significant exposure, resulted in the State initiative of establishing a special support program (Ficafe), to pool weak bank loans from the sector and exchange them for Ficafe bonds, which provides significant medium term relief for banks but portrays the underlying asset quality of the system.

Additionally, the relatively slow economic growth of the past few years in El Salvador, coupled with low interest rates, has resulted in a number of banks increasing foreign exposure to companies operating in other countries in the region. While in Fitch's view this increases loan portfolio diversification, it also brings about higher transfer and credit risk, as most other countries in the region have lower ratings than El Salvador.

While in 2001 and 2002 GDP growth was slow (1.8% and 2.3%, respectively), the economic outlook for 2003 is blurred by the slow U.S. economy, which is the main recipient of El Salvador's exports, as well as the main provider of remittance flows from Salvadorian nationals working in that country. Fitch's forecast is that at 2-2.5% for 2003, El Salvador's economic growth will continue to be relatively subdued, although the uncertainty of the upcoming presidential elections in March 2004 could potentially hinder further growth. In the meantime, banks will have to continue contending with a low interest rate environment, which has resulted in significantly narrower net interest margins. The changing environment has forced banks to tighten cost control and to begin charging fees for services rendered, although there is still more to be done in this regard.

Other important trends are the shift in loans outside El Salvador, as low interest rates give local banks a competitive advantage versus other banks in the region, which operate in more fragmented and inefficient banking systems. This, coupled with low credit demand locally given the slow economy, has pushed banks to lend to companies operating in countries like Honduras, Guatemala, Nicaragua and Costa Rica. On the other hand, profitability has weakened in the past two years as a result of the slow economy and the decline in coffee prices, one of El Salvador's main exports. This has had a negative impact on non-performing assets, which have been on the rise and also prompted the authorities to establish a support program for some banks called Ficafe.

As to capital adequacy, in general ratios have improved, aided by tighter regulations, which will take the minimum credit risk-weighted capital ratios to 12% by 2005, although in our view, the underlying capital strength of the equity bases of banks is hampered by the high proportion of non-earning assets on their balance sheets. Full reports on each of the banks in the following list, which deal with the particulars of each institution, will be published in due course.

Banco Agricola

-- Long-term foreign currency to 'BB' from 'BB+';

-- Outlook remains Negative;

-- Short-term foreign currency affirmed at 'B';

-- Individual affirmed at 'D';

-- Support affirmed at '5T'.

Banco Cuscatlan de El Salvador

-- Long-term foreign currency to 'BB' from 'BB+';

-- Outlook remains Negative;

-- Short-term foreign currency affirmed at 'B';

-- Individual affirmed at 'D';

-- Support affirmed at '5T'.

Banco Salvadoreno

-- Long-term foreign currency to 'BB' from 'BB+';

-- Outlook remains Negative;

-- Short-term foreign currency affirmed at 'B';

-- Individual affirmed at 'D';

-- Support affirmed at '5T'.

Banco de Comercio de El Salvador

-- Long-term foreign currency affirmed at 'BB';

-- Outlook remains Negative;

-- Short-term foreign currency affirmed at 'B';

-- Individual affirmed at 'D';

-- Support affirmed at '5T'.