Banco Internacional (BITAL)



_Banco Internacional (BITAL)

Introduction

At the end of 1993, Banco Internacional (BITAL) had just finished its first year of operations as a fully integrated institution. The Bank's Administration planned to finish implementing the strategy throughout 1994, which consisted of a new image, aggressive growth and providing better banking services in a fully automated and efficient way. The specific goal was to target three specific market segments: retail banking, small-sized and medium-sized companies. Due to increasing competition within the Mexican banking industry, BITAL's Administration felt that margins in the industry would suffer. Therefore, the Bank's goals were to reduce expenses and start a healthy growth of the loan portfolio.

The Mexican government's decision to devalue the peso in December 1994 caused additional stress to the Mexican banking system, which had already been facing problems following privatization. The devaluation of the Mexican peso and the economic recession that accompanied it caused increases in interest rates, foreign exchange losses, liquidity shortfalls, capital withdrawals and an overall deterioration of the bank loan portfolios. The commercial banking system in Mexico became extremely fragile and, in many cases, in need of Government support and sustained improvement in the macroeconomic situation, particularly in domestic demand.

For BITAL, the crisis highlighted many uncertainties about future value, growth and the overall outcome of the strategy. What would be the net impact on the Bank's value? What impact would the devaluation have on BITAL's loan portfolio? How long would it take BITAL to re-adapt its strategy in face of the new challenge? How would the Bank be able to recover? The purpose of this case is to provide answers to questions like these. The key factors affected by the crisis will provide a means to analyze the future situation of the company.

Mexico - Economic Background

Mexico has experienced several financial crises since 1976. The last major crisis before 1994 was in 1982, when Mexico was unable to meet its obligations to service $80 billion in mainly dollar denominated debt obligations to the U.S. and foreign banks. At that time, the United States led an assistance package that also included assistance from central banks in Japan and Europe, and prepayment by the U.S. for Mexican oil.

By the late 1980's, Mexico had largely resolved its debt crisis and was able to resume economic growth. The country relied to a great extent on foreign investment to finance growth. Actions taken by the Mexican government to attract foreign investment included privatizing state-owned enterprises, removing trade barriers, removing restrictions on foreign investment, and reducing inflation and government spending. Mexico entered the North American Trade Agreement (NAFTA) in 1994 with the United States and Canada. NAFTA improved foreign investors' confidence in Mexico and gave long-term prospects for stable economic development.

In addition, Mexico had adopted an exchange rate policy intended to help stabilize the economy. In 1988, nominal exchange rate of the peso was fixed temporarily in relation to the U.S. dollar. Because inflation in Mexico was greater than that of the U.S., a peso nominal depreciation was needed to keep the real exchange rate of the peso from increasing. Since the nominal exchange rate was fixed, the real exchange rate appreciated during this period. In 1989, the fixed exchange rate system was replaced by a system under which the peso/dollar exchange rate was adjusted daily to allow a slow rate of nominal depreciation. In 1991, the system was changed again. This time a band would permit the peso to fluctuate. The ceiling of the band was adjusted daily to permit some depreciation of the peso. The Mexican government used the exchange rate system as an anchor for economic policy and used it as means to reduce inflation, encourage disciplined fiscal policy and provide a more predictable climate for foreign investors.

Mexico's strategy of adopting sound monetary and fiscal policies appeared to be having the intended effect. Inflation had been steadily reduced, government spending was down and foreign capital investment was large (from 1990 to 1993, Mexico's net capital inflows totaled US$ 91 billion, more than half of all the flows to Latin America). Unlike years before, most foreign capital was being attracted by Mexico's private sector, rather than used by the government to finance budget deficits.

Although Mexico was experiencing a large current account deficit, this did not appear as an immediate problem. Mexico's foreign currency reserves were plentiful, exports were growing rapidly and there did not seem to be a significant risk of trouble in retaining foreign investment. This situation changed in late 1994.

Mexican Banking System

Background

Since the 1980s, the policies governing Mexico's banking system had undergone significant changes. From nationalization in 1982, to consolidation immediately thereafter, followed by re-privatization, the system had operated in a changing environment. In 1990, the Mexican Congress changed the legal and regulatory framework governing the banking and financial systems, paving the way for conglomerate banking.

Nationalization and Consolidation

In 1982, at the beginning of the debt crisis, Mexico nationalized 58 of the 60 private commercial banks, giving the government complete power over banking and credit services. By 1983, the government had already consolidated 20 regional financial institutions with other major banks. By 1986, a round second of consolidation left only 18 commercial banks (6 national banks, 7 multi-regional banks and 5 regional banks). The Mexican government directly or indirectly allocated almost 100% of credit. This government control resulted in crowding out credit to the private sector as bank investments were primarily made in government securities and loans to state enterprises rather than the private sector. In 1986, the private sector accounted for only 25% of total commercial bank credit.

Re-privatization

In June of 1990, privatization rules became public. Investor groups involved in brokerage or insurance were the principal purchasers of banks auctioned for privatization. Between 1991 and 1992 18 banks were re-privatized. Proceeds from the re-privatization exceeded $12 billion[1]. The re-privatization process was accompanied by changes in the legal framework governing the financial sector. The intent was to gradually increase competition in financial services from foreign institutions while allowing domestically controlled institutions to adopt new strategies, technologies and internal infrastructure and services.

Demand for credit in the private sector resulted in a significant expansion in loan portfolios immediately following re-privatization. Banks started to offer new products such as credit cards and expanded consumer lending. Aggressive lending led to sub-optimal credit standards with poor collateral and rising exposure to risk.

Legal and Institutional Reforms

The Financial Groups Law, enacted in 1990, allowed conglomerate banking whereby a single holding company could carry out separate commercial banking, brokerage, and other financial services activities. However, regulatory and supervisory practices needed for conglomerate banking were absent. Conglomerates were no even required to produce consolidated financial statements. Credit exposure rules likewise were not applied on a conglomerate-wide basis. Regulatory changes in this area were needed to be complemented by the ability and will to enforce restrictions on excessively risky or other irregular practices.

The Credit Institutions Law, also enacted in 1990, provided a legal framework for the capital structure and operations of the banking system. This law set maximum foreign investment levels for domestically controlled financial institutions as well as the capital structure and operations of foreign controlled commercial banks. The law established the Bank Fund for Savings Support (FOBAPROA) to provide support to troubled banks. FOBAPROA's day-to-day activities are administered by the Central Bank. Policy decisions are made by a Committee composed by members of the Ministry of Finance, the Central Bank and the National Banking and Securities Commission (CNBV). Its funding comes from annual contributions from banks and special allocations by banks and the Central bank.

The Central Bank was given more authority in the conduct of specific functions, namely the foreign exchange system, bank regulation and supervision, and monetary policy. Both the Central Bank and the CNB (at that time, instead of the CNBV, there were two institutions, the National Securities Commission or CNV, and the National Banking Commission or CNB), were responsible for bank supervision and enforcement of regulations.

Mexican Banking System Prior to Devaluation

In the period before the peso crisis, the banking system was characterized by asset and loan growth, subsequent deterioration in the loan portfolio and insufficient loan loss reserves. These weaknesses suggested gaps in reporting and in the enforcement of banking regulations.

Inter-bank borrowing through lines of credit from foreign banks to the large domestic banks was the basis for loan portfolio funding. This meant that much of the borrowing was denominated in foreign currency. The growth in domestic credit to the banking system led to losses in international reserves, which were accelerated by the reversal of capital inflows.

Growth in lending to the private sector increased exposure to risk and led to a decline in the quality of loan portfolios. The growth in consumer loan, credit cards and car loans was explosive in late 1992 and carried on to 1993. This huge expansion of credit occurred while banks had inadequate capacity for credit analysis and implementation; the amount of aggregate past due loans soon began to increase. The ratio of loan exposure to stockholder equity increased from 23% in 1991 to 50% in 1994[2]. Banks increased loan loss provisions to cover potential losses from N$5 billion to more than N$13 billion from the end of 1991 to the end of 1993. This was still not enough, the ratio of provisions to past due loans declined from 51% to 42% during the same period.

The current banking supervision, monitoring guidelines and procedures were inadequate and not enough for the fast pace of privatization, and loan portfolios were weakening. In April of 1994, after the appointment of the new elected President, the CNBV increased its regulations even while lacking adequate capacity. Bank regulators in the U.S. and Canada advised the CNBV on issues related to organizational structure, management and strengthening supervision. Portfolio quality was already deteriorated and financial authorities had already allowed the expansion of weak institutions, which should have been under more strict supervision.

Grupo BITAL

Background

Grupo Financiero Prime Internacional (Grupo BITAL) emerged from the union of two institutions: Grupo Prime and Banco Internacional. Grupo Prime worked with a number of non-banking financial companies at the time banks were state owned and had more than 70 years of experience within the financial area. Banco Internacional was incorporated to the Group in July of 1992, during the re-privatization process. From the acquisition of Banco Internacional, the Group redefined its policies and objectives.

Banco Internacional had vast distribution channels and was chosen as the entity through which integrated financial services would be offered. The Group's subsidiaries complemented the Bank's products and services, all marketed through the different areas of Banco Internacional. This integration of services facilitated concentration of human resources, technology and administration.

The acquisition of Banco Internacional marked the beginning of an intensive effort to improve all areas of the bank, aimed at improving the efficiency of its operations. The new Administration also committed to improve growth in new market segments, particularly in the Retail Banking sector. To achieve all this, a modernization process, which cost over 280 million dollars, was implemented. The investment directly targeted at improving technology for systems and telecommunications, re-directing marketing efforts, diversifying the deposit mix, changing the focus of the Group's personnel towards meeting client's needs and developing a new image. In addition to the intensive restructuring, the modernization processes, and the growth in market coverage, other measures, which included capital increases, were taken to strengthen the financial condition of the Bank since 1992.

Strategic Alliance

In 1993, BITAL entered into a partnership agreement with Banco Central Hispanoamericano, one of the largest and most solid banks in Spain. With this agreement, the Spanish bank would invest capital in the Group and contribute with experience, knowledge and technology. The benefits would be best reflected in areas that attended individuals and small and middle-sized companies, markets in which they excel.

Capital Structure

At the end of 1994 the Group controlled between 96 and 100% of the shares representing the capital stock of its subsidiaries, with the exception of Seguros Interamericana, of which it held 51%. The other 49% were in hands of American International Group (AIG).

In the case of voting shares (A, B and C), 59.2% was spread between holders that had been related to the Group during the last 15 years. The American International Group held 3.4%, and Banco Central Hispanoamericano (BCH) held 20.0%. The remaining 17.4% was property of other investors. This share distribution confirms that investors that had participation therein had a long term vision and complete confidence in its development.

Business Areas

The new organizational structure was formed taking into account market segmentation. Each business area allowed product design to be directly in accordance with specific customer needs. The Retail Banking Area had the purpose of approaching small savers and satisfying their loan and service requirements. The Patrimonial Area was a specialized service for individuals who had complex financial needs and managed a number of businesses through BITAL, by means of which they would receive additional advantages in products and services from the Group. The Private Banking Area was created to serve the most exclusive market of individuals, as well as shareholders and directors of the Group. This Area provided extensive financial, fiscal and legal counseling. The Small Business and Entrepreneurs Area assisted individuals and businesses whose needs did not require high specialization (e.g. revolving credit lines). The Large and Medium sized Business Area provided services to businesses that required more complete financial services and customized attention. Finally, the Corporate and Government Area offered the traditional banking services under preferential conditions, counseling and services to companies that managed larger and more complex operations.

The new six business areas are shown in Figure 1.

The first step towards segmentation started by taking advantage of Banco Internacional's infrastructure. The bank represented the main distribution channel and the most important promoter of products and services of all companies forming the Group. The Brokerage House, the Foreign Exchange Company, the Warehousing Company and the Factoring Company supported BITAL in the design of products and services for each specialized area. Fianzas Mexico and Seguros Interamericana worked separately from the bank since they offered non-banking services requiring a different infrastructure. However, both companies were completely integrated to the new structure. The segmentation strategy was first implemented in Mexico City and was planned to go national in 1995. The number of BITAL branches in the city of Monterrey represented the Bank's growth throughout the country. By December 1993 there were only 7 branches in the Mexican northern city, placing BITAL tenth among the 16 banks in the locality. One year later BITAL had 32 branches and the fifth place in coverage[3].

In October of 1994, BITAL was the first and only bank offering service from 8:00 to 17:00 hours in all of its branches. Plans to be also the first bank to open all its branches on Saturdays were scheduled for early 1995. The results of this strategy exceeded all expectations. More than 18 thousand new accounts resulted from it3. Figure 2 displays BITAL 's growth in number of branches.

Figure 2

BITAL - December 1994

Deposits

The Bank's total deposits in 1994 were made up of 62% of traditional deposits, in comparison with a 50% of the system[4]. The main differences against the market were in time deposits and in "Cuenta Maestra", where penetration was greater for BITAL (Exhibit 1). Uniform improvement of the attraction mixture was made during the year, which was consistent with the Bank's objectives. BITAL's "Cuenta Maestra", which does not charge commission for account opening, anniversary or check issuance, was the first account of its kind in Mexican banking system. Total deposits in BITAL were distributed as illustrated in Figure 3.

Figure 3

Loan Portfolio

Throughout the last two years, BITAL had followed a moderate growing strategy for granting credits. The total credit portfolio amounted to N$28,500.4 million in 1994, which represented a 30.6% increase for the year (Exhibit 2). Between October and December of 1994, the total loan portfolio increased by 16.7% as result of the effects of the peso devaluation in the dollar denominated portfolio.

During the last quarter of 1994, the balance increased 12.9% due to the effect of the peso devaluation in the dollar denominated past due portfolio. Past due loans and interests at year-end amounted to N$3,025.3 million, which meant a 43.2% increase from the balance recorded at the end of 1993 (Exhibit 3). The past due portfolio index increased from 9.7 to 10.6% at the end of December 1994. It is important to mention that the growth recorded in this index reflects not only the increase in the past due portfolio, but also the lack of the total portfolio growth. Certain provisions worth up to N$343.3 million were created for credit risks. From these, N$96.2 million was set aside from capital reserves while the rest was charge to income. In addition, revaluation of provisions denominated in dollars increased the reserves in the amount of N$136.8 million. On the other hand, N$301.9 million in write-offs was applied during the year, 86% more than the N$162 million applicable for 1993. Thus, the preventive provisions amounted to N$1,231.5 million with a coverage of 40.1% of the past due portfolio (Exhibit 3). Exhibits 4a. and 4b. show the risk and segment compositions of BITAL's loan portfolio at the end of 1994.

Results

The accumulated net profit of Banco Internacional for 1994 amounted to N$194.6 million. However, there was N$12.9 million undistributed subsidiary profits, which helped to amount to N$207.5 million. In comparison with 1993, this period was 51.2% lower due to the creation of preventive reserves for credit risks and a reduction in the financial margin. Profits obtained in foreign exchange operations compensated losses in the money and stock markets. For this reason, the Bank's results were not affected by devaluation. However, expenses for reconstruction, opening of new branch offices and acquisition of new computer equipment had strong impact on results (Exhibit 5). On the other hand, subsidiaries recorded losses of N$169.9 million as result of the market revaluation of its positions in debt instruments and securities, which was reflected in the shareholder's equity. At the end of 1994, in accordance with new rules of the CNB, financial assets and liabilities were assessed reflecting losses in other accounts in the amount of N$22 million. Nonetheless, the amount of liabilities not included in such assessment would have generated a surplus of N$34.6 million, which should have compensated the loss.

The accumulated financial margin presented a 2.8% decrease as result of the reduction of the interest rate differential not compensated by an increase in portfolio volume. Non-financial revenues included N$285.1 million from the cancellation of a portion of the preventive reserves created in 1993. The reserves were created again in 1994, affecting the non-financial revenues and credit provisions. In December, losses in the stock market of N$75 million and losses in the money desk of N$ 20 million to adjust market price positions were recorded. The sum of these amounts affected the income statement (Exhibit 6).

Operation expenses rose 29% in 1994. The increase was attributed to higher personnel, administrative and operation expenses, as well as to taxes and depreciation. The amendment to salaries, replacement of personnel with better academic background and severance payments amounted to a 32.3% increase in human resources. Promotion expenses derived form advertising of the new image and products; the rents paid for new branch offices increased administrative costs. Investment expense for infrastructure of new branches generated increases in taxes and in the effect of depreciation (Exhibit 7).

December 1994 - The Crisis

Along with the benefits of financial integration there are possible reversals of counting on large capital inflows, which are typically triggered by lack of confidence in domestic economic policies. In Mexico, the amount of capital inflows made the country vulnerable to exchange rate depreciation. This was especially so, since the capital inflows were largely short-term funds invested in government securities, the stock market and private sector instruments. The large flows led to overvaluation of the already controlled peso and fueled the current account deficit.

The crisis originated in the inconsistency between the monetary and fiscal policies and the exchange rate system. Due to an upcoming presidential election, Mexican authorities were reluctant to take actions during 1994. Raising interest rates or devaluating the peso could have helped reduce the inconsistency. Several economic and political events, including the assassination of presidential candidate Luis Donaldo Colosio, created investor concerns about currency devaluation. In response, the Mexican government continued to issue large amounts of short-term, dollar-indexed notes (tesobonos). Tesobono financing effectively transferred foreign exchange risk from investors to the Mexican government. By December of 1994, Mexico was vulnerable to a financial market crisis because its foreign exchange reserves had gone down since March from $24.4 billion to $12.5 billion while tesobonos obligations maturing in 1995 were $30 billion (obligations were $3.1 billion at the end of March).

Following the 1994 presidential election, foreign investment flows did not recover to the extent expected by Mexican authorities. This was credited to an interest rate decline in August that maintained rates at that level until December. Furthermore, renewed fighting in the Mexican State of Chiapas and a scandal surrounding the assassination of the General secretary of the Institutional Revolutionary Party, increased investor concerns about the political stability.

In December, Mexican authorities announced a widening of the peso/dollar exchange rate band. The widening devalued the peso by about 15%. However, no new fiscal or monetary measures to accompany the devaluation were announced (e.g. raising interest rates). The "inaction" caused further losses of more than $4 billion in foreign reserves. By December 22, Mexico was forced to freely float its currency. These events contributed to loss of confidence in the newly elected government and growing fear that default was imminent. By early January 1995, investors realized that tesobonos redemption could soon exhaust Mexico's reserves and that the country might default on the dollar-indexed and dollar-denominated debt. Local investors were the firsts to take money out of the country, trend that logically was soon followed by the foreign investors.

After the exchange rate crisis, Mexican interest rates shot upwards. The difference between the U.S. Treasury bill and the rate on Mexican denominated bonds indicated the additional cost of Mexican default risk. By January of 1995 the risk premium amounted to 13 percentage points. The difference between the rates on Mexican dollar-denominated debt and Mexican peso denominated debt indicated the cost of expected peso depreciation. After the currency crisis, shifts in the world interest rates were dwarfed by risk premiums demanded for Mexican bonds. Figure 4 compares annualized rates of U.S. T-bills, Tesobonos and Cetes with three-month maturities.

Valuation - 1994

Risk Factors

Country Risks

• Currency devaluation & Economic forecasts.

The peso devaluation created a deep economic crisis. After the devaluation, the Mexican economy suffered a sharp setback-an increase in inflation from 7% to 52% and fluctuations of interest rate in the range of 17% to 88%. Both inflation rates and interest rates forced borrowers to reduce or stop paying back their loans. Conditions were severe, but worse than that is to project how long these impacts are going to last.

• Income Inequality

Although almost 50% of the population are above extreme poverty conditions, income is distributed unequally (Exhibit 8). In addition, the education levels are still low, despite of showing major improvements throughout the last decades (Exhibit 9).

• Social Insecurity

Reflections of the unequal wealth distribution in Mexico are the increasing crime rates. This trend is most notorious in large cities (e.g. Mexico City, Monterrey, Guadalajara). The conflict generated by the Ejercito Zapatista in the State of Chiapas is also an example of the social instability that could keep affecting Mexico's economic conditions.

• Political Stability

The Mexican government is going through a transformation phase. Democratic opening is ending the near-authoritarian power of the President and introducing real debate on government policies. Government positions are beginning to be occupied by opposition parties. However, the time and the outcome of the change in the Mexican political environment are both unpredictable. Political reforms are firmly in place, elections are cleaner than ever, and opposition parties are reinvigorated

Business Risk

• Openness in the Industry

Before 1995, locally owned establishments enjoyed an approximate 97% market share in respect to total demand because Mexican financial regulations severely limited foreign financial companies' operations. Foreign banks (except for Citibank) could have representation offices only. Under the new, deregulated environment, those locally owned financial companies are expected to lose market share in the next few years however as foreign-owned companies now are in a better position to expand operations. Compared with local banks, they have advantages of better automation, lower operating costs, and better control of credit extension. Despite the overwhelming market share of the locally owned financial companies, their only competitive advantage is customer base. Most of those customers have difficulties in retaining their assets and it is virtually impossible for them to increase these assets. With no new money coming into the financial system, locally owned businesses would need to attract income from foreign investors. But, many foreign investors lack confidence in Mexico and prefer to invest in other countries.

• Quality of loan portfolio

After the privatization of Mexican banks in 1991, the banks started increasing lending at double-digit rates. Even as the quality of loan portfolios deteriorated, bankers paid dividends to mollify shareholders instead of fortifying their capital. The root of low quality of loan portfolio is a structure problem. Government was challenging in improving the underlying structure of the Mexican banking system. Continued improvement in government regulation and supervision of banks are needed to strengthen self-regulation related to capitalization, valuation of assets, risk management, portfolio classification, deposit insurance and accounting principles.

• Non-performing loans

The banking industry's problems may be worse than they may appear, because Mexican banks account for non-performing loans differently than in many other countries. When a borrower misses a payment in the U.S., the entire amount of that loan is considered non-performing, and banks must take a reserve against that ailing credit. In Mexico, only the total amount of interest owed is considered past due. Mexican regulators say that past-due loans equal about 17% of the total loans in the banking system -- but, using more rigorous accounting standards, the percentage could be roughly twice that.

Main Assumptions

The value of Equity per share obtained in the valuation was based on a discounted cash flow analysis. Years 1995 to 2004 were projected and a terminal value was computed for years beyond 2004. The purpose of this valuation is to calculate the value of Bital’s equity before the crisis. Thus, it does not consider in its projections the possible effects of the crisis; on the contrary, it is based on the “good” economic environment present in Mexico in 1993 and most of 1994. The main assumptions are discussed in more detail.

• Interest Income

Interest income represents the most important cash inflow for Bital. Although it invested heavily during 1994 to increase its customer base, its interest income for 1994 remained almost constant. We believe that Bital will keep investing heavily to increase its number of branches, and thus, its customer base. This will increase its interest income in the near future; however, increasing competition from local and foreign financial institutions will hinder Bital’s growth. We are forecasting a 20% growth in the first three years, then a 15% growth for the following three years and a 10% growth for the last two years.

• Interest Expenses

Interest expenses have been stable in the last three years, representing approximately 65% of Interest Income. Thus, we would use this same percentage in the model for our projections.

• Loan Loss Provisions

In the last three years loan loss provisions have ranged between 1% and 2% of the total loan portfolio. For our model, we would be using a 1.6%, which assumes that most debtors will keep paying its debts in the future.

• Commissions and fees

This is another important cash inflow for Bital. Most of this income comes from the premiums earned in repurchase agreements. In the last two years, it has represented approximately 2% of the loan portfolio, which is what we would use for our projections.

• Personal Expenses, Administrative & Operational Expenses

The new image launched during 1993 presented a new bank, with more branches and better customer service. In order to accomplish this better customer service, Bital has been recruiting new personnel with higher educational background, which is more costly to have. In addition, Bital has increased its training expenses, to ensure that the employees are well prepared to meet customer needs. Bital has also increased its administrative and operational expenses to ensure that the employees have the right support to accomplish the service. Thus, we would use 2.0% and 1.5% of total assets for Personnel Expenses and Administrative & Operational Expenses, respectively.

• Loan Portfolio

The loan portfolio will keep increasing in the following years, but, as it is the case of the interest income, its growth will be hampered by the strong competition of local and foreign Financial Institutions. Thus, we are assuming a three year 20% growth, then a three year 15% growth, and finally a four year 10% growth.

• Cost of Capital

To compute an appropriate cost of capital for Mexico, we used the Model suggested in the paper “The International Cost of Capital and Risk Calculator” of Campbell R. Harvey. The cost of equity of 36.5% assumes that Mexico will maintain its credit rating of 46.1 (Institutional Investor Credit Rating). We did not make any beta adjustment to the model, because our estimate of Bital’s beta is close to one. We assumed that Bital would be paying an interbank interest rate on its long term debt of 15.3%, which is the average interbank interest rate in 1994. The projected Debt to Value ratio used was 41%, which seems reasonable in comparison to 1993 D/V of 35%. From all these values, we computed a weighted average cost of capital (WACC) of 27.7%.

• Terminal Growth

The inflation rate in Mexico for 1994 was approximately 7%. Assuming that the inflation rate will not change much in the projected years, it is reasonable to suppose a 10% growth rate beyond the forecasted horizon.

The main assumptions discussed above generated a value of equity per share of $17.90.

Conclusions

The 1994 Mexican crisis brought many new uncertainties to the business environment. For BITAL, this meant a re-evaluation of its strategy and long-term vision. An evaluation of the key factors affecting the Bank would help determine steps needed to limit the impact and prepare for any future effects. Impacts on BITAL's value, impact on loan portfolio, the time needed to re-adapt its strategy and recovery measures are examples of the issues that BITAL's valuation needs to address.

The lessons learned from this case could be found instructive for companies that experience a similar situation. Perhaps it could prompt to establish adequate safeguards that could limit the impact of future financial distress.

Exhibit 2

Exhibit 3

Exhibit 4a.

Exhibit 4b.

Exhibit 5

Exhibit 6

Exhibit 7

Exhibit 8

Exhibit 9b.

Exhibit 10

Exhibit 11

Exhibit 12

Exhibit 13

Exhibit 14

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_ This case was prepared by Fuqua MBA students Darika Amornvatana, Shilpa Kulkarni, Larry Hou, Juan Carlos Mier y Teran and Mauricio Almagro under the supervision of Professor Campbell R. Harvey. (February 1999)

[1]

[2] Sri-Ram Aiyer, "Anatomy of Mexico's Banking System Following the Peso Crisis" (December 1996)

[3] 1994 BITAL Financial Statements

[4] 1994 BITAL Financial Statements

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[pic]

0

Jan. 92

Dec. 92

Dec. 93

Dec. 94

300

400

500

100

BITAL

200

Number of Branches

Figure 1

Small Business and Entrepreneurs

Retail

Patrimonial

Private

Corporate and

Government

Large and medium

Sized Business

Jan. 1994

Dec. 1994

Jan. 1995

0

5

10

15

20

25

30

35

40

% Per annum

Figure 4

Individuals

Companies

[pic]

Exhibit 1

Source: Division of Economic and Social Studies of Banamex

Average Years of Education in Mexico

(1960 - 1995)

1995

1990

1980

1970

[pic]

[pic]

[pic]

[pic]

[pic]

[pic]

[pic]

[pic]

1960

7.2

6.5

4.6

3.4

2.6

Exhibit 9a.

Source: Division of Economic and Social Studies of Banamex. Corresponds to percentages of population older than 15 years of age.

Education Level of Mexican Population

1970 - 1995

None

Incomplete Primary School

Primary School

Incomplete High School

High School

College

31.6%

10.5%

38.9%

21.2%

16.8%

19.0%

6.5%

22.2%

4.0%

16.9%

2.2%

10.2%

1970

1995

[pic]

[pic]

[pic]

[pic]

Income Statement

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