Attachment_2 _Annual_Loan_Review.pdf

Attachment #2

ANNUAL LOAN REVIEW REPORT –

Banco South America) June 30, 2015

(“BSA-BAMER”, “BSA” the “Borrower”, the “Bank”)

I. EXECUTIVE SUMMARY

OVERALL ASSESSMENT: Banco de South America (BSA) is one of the largest banks in the country with $1.87 billion in assets. BSA substantial deposit base, which constitutes 76% of its funding source, supports its loan portfolio. The bank is well-managed; retains low NPLs (1.32 at December 31, 2014); and is both well-capitalized and has liquid assets to absorb shocks (Capital Adequacy level of 12.92 % and Quick Assets to Total Deposits 40.79% at December 31, 2014. All aforementioned ratios are well within the requirements of the Credit Agreement and substantially better than the respective country averages. Provisions as a percent of NPLs at 157% is above the 100% required per the Credit Agreement. The OPIC loan is secured by a pledged pool of mortgages and corporate loans valued at all times at 120% of the outstanding balance. BSA-BAMER is able to fully service its debt from cash flow.

RECOMMENDED ACTION: Normal monitoring.

Implementation Status: Operational

Disbursement Status:

522-09-538-IG - $20 million; “Tranche A” fully disbursed and repaying.

522-09-539-IG - $17.5 million; “Tranche B” fully disbursed and repaying

Principal Outstanding (as of 6/16/2015 ):

522-09-538-IG - $4,224,137.84

522-09-539-IG - $ 12,280,701.82

OPIC Pricing:

Rate: Floating based on 91-day T. Bill OPIC Spread: 522-09-538-IG - 2.85%

522-09-539-IG – 2.75%

Maintenance Fee: $5,000 p.a.

Payment Status: Current Accrual Status: Accrual

Current Reserve: 3.0% Proposed Reserve: 3.0%

Rating:

Old Method New Method Current Satisfactory N.A.

Proposed Satisfactory 5

Justification: BSA-BAMER remains profitable, with more than sufficient cash flow to cover debt service.

BSA-BAMER is both well-capitalized and has liquid assets to absorb shocks. The Bank is well-managed and retains low NPLs. PMD downgraded the Project in December 2010 from Strong to Satisfactory as a result of GE’s divestiture in Banco BSA’s parent.

Project Description:

Tranche A of $20 million supports increased Borrower lending to low-middle income mortgage recipients.

Tranche B of $17.5 million supports expansion of BSA – BAMER’s lending portfolio to Small and Medium Enterprises (SMEs).

Completion Status: NA.

Borrower: Banco South America)

Sponsors: BSA BAMER is a subsidiary of BSA International Bank, Panama, which is 100% owned by Banco de Bogota. Banco de Bogota is a subsidiary of Grupo Aval, a Colombian financial conglomerate.

Guarantors: None

Level of Support: None

Originating Team Team Leader: Tracey Finance Officer: Karl Lawyer: Peter

Monitoring Team Team Leader: Barbara Monitoring Officer: Brenda Lawyer: Peter

Last ALR Report: May 20, 2014 Last Site Visit: NA

Loan Matures: Tranche A: March 15, 2024 Tranche B: March 15, 2017

II. RISKS

Risk Reason Mitigating Factor(s) Credit Risk Risk due to a debtor’s non-payment of a loan or line of credit.

BSA’s internal credit risk analysis structure follows basic, well-established principles of prudent credit risk management. Risk management includes growth strategies according to country risk, based on frequent review of political, social and economic factors.

BSA also performs qualitative and quantitative analysis of industrial business sectors for the purpose of determining asset allocation plans. BSA- BAMER has performed well and made all payments as scheduled to OPIC and Citibank. The OPIC loan is secured by a pledged pool of mortgages and corporate loans valued at all times at 120% of the outstanding balance.

Liquidity Risk of not being able to satisfy claims on liabilities with available assets.

BSA-BAMER performs maturity gap analysis whereby assets and liabilities are aggregated by maturity and limits are defined for the accumulated gaps at short and longer time intervals. These levels determine the amount of short-term deposits that can be employed to make longer-term investments.

Interest Rate Risk

Risk of losses caused by fluctuations of interest rates for assets and liabilities.

Sensitivity analysis is employed for changes in U.S. and local currency interest rates and a maximum exposure limit is set as a percentage of net income for a period of time.

Foreign Exchange Risk

Risk that changes in foreign-exchange rates will cause-- losses.

BSA-BAMER maintains a consolidated long U.S. dollar position (USD assets minus USD liabilities must be positive) pursuant to BSA’s risk management policy (for tenors over one year).

Country Risk Political instability or economic downturn impairs repayment ability.

After a sharp economic downturn in 2009 due to the international financial crisis and domestic political crisis, Honduras experienced moderate economic growth in 2010-2012. In 2012, GDP growth was 4%, inflation was 5.7%, and foreign direct investment recovered to the pre-2009 levels. For 2013 and 2014, GDP was 2.8% and 3.1%, respectively. GDP growth is expected to be strong in 2015, driven primarily by remittances and lower oil prices (allowing for improved internal consumer spending, as well as higher export demand (primarily from the US) and higher FDI).

The Honduran government is open to FDI, as established in the 2011 Investment Law as well as the CAFTA-DR Agreement. However, investors continue to experience long delays for regulatory and other government approvals. Additionally, the government has yet to improve its investment dispute settlement procedures and address the high level of crime and corruption.

Honduras is one of the least developed countries in Latin America, and agriculture continues to be the most important economic activity, contributing to about 15% of GDP. Since, 2004, Honduras has received financial support from the IMF, the Paris Club, and other developed nations because of its improvements in macroeconomic policies and poverty reduction efforts. In December 2014, the IMF provided a standby credit facility for $188.6 million to support macroeconomic stability. The country also relies heavily on remittances, which also represent about 15% of GDP.

Risk Reason Mitigating Factor(s) The country continues to lack macroeconomic reforms to improve the financial system and energy sector, and lacks diversification of its economic activities to improve its export sector and become less dependent on the U.S economy. Rising crime and violence continue to hurt the investment and business environment.

Since the military coup in 2009, ousting former president Manuel Zelaya, Honduras held its second successful general election in November 2013, bringing President Juan Orlando Hernandez into power with a newly formed party, the right-of-center National Party (“NP”). The government’s priorities include financial reforms, addressing the high level of crime and corruption, and improving relations with its neighboring countries. However, the NP faces challenges since no one party dominates the 127-seat Congress, and it is faced with the lack of economic reforms, crime and corruption issues. Two main issues for the president include improving the role of the military police (to improve security) and constitutional reform (to permit for presidential re-election).

On June 7, 2012, Standard & Poor's raised its long-term foreign and local-currency sovereign credit ratings on Honduras to 'B+' (stable) from 'B' and affirmed the 'B' short-term foreign and local currency ratings. The upgrade was based on the improved environment and progress in fiscal and pension reform, as well as gradual exchange rate flexibility. Subsequently, on February 27, 2013 S&P lowered Honduras’ outlook from “stable” to “negative”, citing continued deterioration in the country’s economic stability. On August 7, 2013, S&P lowered Honduras’ credit rating to ‘B’/“stable” to reflect the country’s rising debt burden (roughly 6% of GDP) and its limited ability to fund deficit spending.

III. COLLATERAL

Description Current Value (Cost) Valuation Method/Date

Pledged pool of mortgages and corporate loans valued at all times at 120%

Tranche A (OPIC) $12.98MM Tranche B (OPIC) $5.43MM Total debt $18.41MM

Total loan balances pledged:

$33.45MM

Coverage: 182%

Current outstanding balance of pledged mortgages and corporate loans in pool reported as of 12/31/2014 by BSA BAMER. Pool of mortgages is shared pari passu with Citibank.

IV. SOURCES OF REPAYMENT

1) Bank’s cash generated from operations.

2) Enforcement of collateral (outside of bankruptcy): Pledged pool of mortgages and corporate loans valued at all times at 120% of outstanding loan. Pool equivalent to 182 % of outstanding balance as of December 31, 2014.

V. COMPLIANCE

Insurance:

Coverages: Each borrower in the pledged pool is required to maintain appropriate insurance customary under applicable banking practices and regulations.

Providers: Various dependent on borrower.

Current Policy Expires: N/A OPIC is Beneficiary: Proceeds of insurance are assigned to the OPIC Trust

Cash Collateral: N/A

Reporting: In Compliance.

Financial Covenants: As of December 31, 2014 all Financial Covenants are in compliance:

Required: Actual:

Gross PDO/Total Loans <4% 1.32% Provisions/Total Loans >100% 168% Capital Adequacy Ratio >10% 12.92% Quick Assets/Total Deposits >20% 40.79% Collateral Coverage Ratio >120% 182%

Recent Credit Actions: None.

Policy Issues: None

VI. PROJECT BSAKGROUND

Pursuant to a Credit Agreement signed by Banco de America Central Honduras and OPIC and Citibank, as Lenders, OPIC issued guaranties for loans of $20,000,000 for Tranche A and $17,500,000 for Tranche B. Further to the Agreement, Citibank provided financing for Tranche C for $4,687,500. Tranche A supports increased Borrower lending to low-middle income mortgage recipients. Tranches B and C support expansion of BSA-BAMER’s lending portfolio to Small and Medium Enterprises (SMEs). All three Tranches have been fully disbursed.

The original BSA Honduras was incorporated in July 1997. In February 2008, Banco Mercantil (BAMER) and BSA Honduras merged. Legally, the former bank absorbed the latter (i.e., BAMER acquired all the assets, liabilities, rights, and obligations of BSA Honduras). The absorbing bank then changed its legal name BSAk to Banco de America Central Honduras, SA and is allowed by its regulators to use the trade name BSA-BAMER.

BSA-BAMER is a subsidiary of BSA International Bank, Panama. On December 6, 2010, GE Capital sold all of its shares in BSA International Bank, Panama to Banco de Bogota. The Borrower sought and received OPIC consent for the aforementioned ownership change, documented in a November 12, 2010 Front Office memo. OPIC consented to the ownership change since continued support is consistent with U.S foreign policy and development goals in Honduras. OPIC originally underwrote this loan as part of a 2007 OPIC/U.S. Treasury/Inter- American Development Bank initiative to promote lending to Central American SMEs and to further OPIC’s housing initiative.

BSA-BAMER is now 100% owned by BSA International Bank, Panama a wholly-owned subsidiary of Banco de Bogota, the oldest bank in Colombia founded in 1870 (itself a wholly-owned subsidiary of Grupo Aval). Grupo Aval is the largest financial conglomerate in Colombia, with over 30% of the market share in the financial system. It operates through its subsidiaries Banco de Bogotá, Banco de Occidente, Banco AV Villas, and Banco Popular. Grupo Aval’s holding company trades in the Bogota Stock Exchange with a market capitalization of $10.67 trillion as of December 2014. Banco de Bogota maintains a BBB-/StableA-3 rating from Standard & Poors as of June 15, 2014.

BSA-BAMER offers commercial, mortgage and industrial loans, savings and checking accounts, time deposits, brokerage services, direct deposits, payroll services, wire transfers, and ATM services, amongst others. Overall, about 66% of BSA-BAMER’s loans are to consumers, 18% are mortgage loans, and the remaining 16% are loans to agricultural and industrial clients.

As of June 16, 2015, OPIC exposure to all the BSA-International Bank’s indirect subsidiaries include the following:

VII. MAJOR RECENT DEVELOPMENTS

• BSA-BAMER Honduras maintained its sound performance in 2014.

• From year-end 2010 until year-end 2014 the Bank increased its loans and deposits by

44.5% and 3.8%, respectively.

• Net income increased significantly from $16.8 million in 2010 to $20.07 million in 2014, while decreasing non-performing loans from 2.1% to 1.32%.

• The Bank is in compliance with all OPIC covenants.

• There were no requests for waivers or addendums in 2014.

VIII. HISTORICAL OPERATING AND FINANCIAL PERFORMANCE

BSA-BAMER is a fairly typical deposit-taking bank, with a loan portfolio of over $1.9 billion (at year end 2014) funded largely by deposits. For 2014, deposits constitute 80% of the bank’s funding source, providing a steady base of funding) are from both local and foreign sources; and borrowed funds of $252 million (16% of total funding) are from local and foreign insitutions. Over

(USD) Balance as of June 16, 2015 Panama 525-09-542IG BAC INTERNATIONAL BANK,INC. (TRANCHE A) 3,157,901

525-09-543IG BAC INTERNATIONAL BANK,INC. (TRANCHE B) 689,653 3,847,554

Costa Rica 515-09-534IG BANCO BAC SAN JOSE, S.A. (TRANCHE A) 30,701,745

515-09-533IG BANCO BAC SAN JOSE, S.A. (TRANCHE B) 2,413,784 33,115,529

Honduras 522-09-539IG BANCO DE AMERICA CENTRAL HONDURAS, S.A.(TR A 12,280,702

522-09-538IG BANCO DE AMERICA CENTRAL HONDURAS, S.A.(TR B 4,224,138 16,504,840

Guatemala 520-09-535IG BANCO DE AMERICA CENTRAL, S.A. (TRANCHE A) 6,347,364 6,347,364

Nicaragua 524-09-544IG BANCO DE AMERICA CENTRAL, S.A. (TRANCHE A) 6,315,781

524-09-545IG BANCO DE AMERICA CENTRAL, S.A. (TRANCHE B) 689,653 7,005,434

66,820,721 half of the Bank’s borrowed funds are from Banco Centroamericano de Integracion Económico (BCIE). OPIC’s loan is the second largest source of borrowed funds, while BSA-BAMER has smaller borrowings from the Netherlands Development Finance Company. Given the sources and the tenor of these obligations (maturities between 2014 and 2034), roll over risk in the near term is not an issue.

BSA-BAMER submitted year-end 2014 financial statements audited by KPMG and prepared in accordance with the local accounting standards, as required per the Credit Agreement.

Balance Sheet (Amounts in millions of USD)

2007 2008 2009 2010 2011 2012 2013 2014

Gross loan portfolio 573 986 905 920 975 1,076 1,164 1,329

Total assets 782 1,343 1,313 1,336 1,441 1,598 1,744 1,867

Deposits 564 997 943 947 1,007 1,151 1,226 1,267

The yearly growth of the balance sheet from 2007 to 2008 are a result of the Banco BSA – Banco Mercantil merger. From December 2008 to December 2010, the gross loan portfolio contracted by 7% and deposits decreased by 5%. Given that the political crisis in Honduras exacerbated the financial crisis, BSA BAMER’s performance during this period in fact underscores the Bank’s resilience. Since that time, the Bank’s portfolio ha3s recovered to levels well beyond the 2008 high. The gross loan portfolio is currently at $1.3 billion as loans increased by 14% in 2014, supported by deposits of $1.27 billion. Loan growth was driven by increased corporate lending (primarily commercial, food industry and services).

The Bank’s strategy is to fund expansion primarily from its ample deposit base, representing roughly 95% of total loans as of December 31, 2014. Since 2013, the Bank began issuing bonds to diversify its funding sources, represented by its $53 million outstanding as of December 31, 2014.

Asset Quality

Non-Performing loans

2007 2008 2009 2010 2011 2012 2013 2014

BSA BAMER - NPLs (over 90 days) 2.3% 3.0% 2.8% 2.1% 1.7% 1.6% 1.8% 1.32%

Honduran Average (NPLs at 90 days) 3.2% 4.6% 3.9% 3.8% 2.9% 3.0% 2.9% 3.0%

As reported by the Borrower, as of December 31, 2014, the Bank’s ratio of non-performing loans (NPLs) as a percent of all obligations stood at 1.32%, substantially below the less than 4% required by the Credit Agreement. Not surprisingly, in 2008 NPLs increased somewhat as a result of deteriorating economic conditions as well as the merger with Banco Mercantil. NPLs have since dropped considerably from a high of 3.0% in 2008. The timing of the merger coincided with the period during which GE Capital held a substantial ownership stake. GE Capital instituted credit reforms and policies that diminished appetite for sectors of higher risk. Of further note, BSA BAMER’s NPLs of 1.32% for year-end 2014 compare favorably to the Honduran average of 3.0%1 for the same year.

1 Fitch Ratings, “2015 Outlook: Central America and Dominican Republic banks”, January 8, 2015 (Figure is as of June 2014).

Loan charge offs for 2014 totaled $28.6 million, equivalent to 1.2% of the gross loan portfolio.

Annual loan losses have now returned to the low levels experienced prior to the economic and political crisis. As of December 31, 2014, the Bank had 158% provisions for PDOs over 90 days, well above the 100% requirement of the OPIC Credit Agreement.

Capital Adequacy

2008 2009 2010 2011 2012 2013 2014

Capital Adequacy Ratio (%) 11.2% 13.1% 13.3% 13.6% 14.1% 13.7% 12.9%

BSA-BAMER remains well-capitalized with a Capital Adequacy Ratio (CAR) of 12.92% at December 31, 2014, which is in excess of the 10% CAR required by Honduran law established by the National Banking and Insurance Commission and, correspondingly, the level required by the Credit Agreement. CAR is the ratio between the Bank’s core equity capital and its risk weighted assets. The bank’s capital is classified as Tier I or Tier II for the purposes of determining capital adequacy.

Profitability

2007 2008 2009 2010 2011 2012 2013 2014 BSA-BAMER -Net income (millions of

USD) 11.3 16.5 16.5 16.8 23.6 29.7 20.4

20.07

BSA-BAMER Net interest income (millions of USD) 37.3 73.9 85.5 97.5 109.9 123.4 130.4 143.8

BSA-BAMER Net Interest Margin (%)2 n.a. n.a n.a. n.a. n.a. 4.1% 4.6% 5.2%

BSA-BAMER - Return on assets (%) 1.4% 1.2% 1.3% 1.3% 1.6% 1.8% 1.2% 1.08% Honduran Average – Return on Assets (%) 1.9% 1.7% 1.2% 1.4% 1.4% 1.8% 1.5% 1.4%

BSA-BAMER - Return on equity (%) 16.0% 12.4% 11.0% 10.6% 13.4% 16.4% 10.5

% 9.95% Honduran Average - Return on equity (%) 20.5% 17.1% 11.4% 12.8% 13.1% 15.6%

13.6 % 13.1%

BSA-BAMER’s profitability held steady with an upward trend in net income from 2009 through 2012, before slipping to $20 million in 2013 and $20.07 million in 2014. Net income dropped significantly in 2013 due to an 11% increase in personnel expenses and a 15% increase in administrative expenses; and in 2014 due to a further 10% increase in personnel expenses and 17% increase in administrative expenses. As measured by return on assets and equity, profitability has edged upward over the last several years, though dropped somewhat in 2013 and 2014 due to rising operating expenses. BSA-BAMER’s profitability metrics have dropped slightly since 2013 vis-à-vis other banks in Honduras when comparing return on assets and return on equity.3

BSA-BAMER’s net interest income has continued to climb steadily since the merger, from $37.3million in 2007 to $143.8 million in 2014. BSA-BAMER’s net interest margin has also grown as a result of rising interest rates, coupled with the growth of its lower-cost deposit funding base.

2 Defined as Interest Earned – Interest paid/ ave earning assets 3 Ibid – figure is as of June 2014.

Liquidity

BSA-BAMER’s liquidity position is strong as evidenced by the Quick Assets to Total Deposits Ratio of 40.79 %4 at December 31, 2014, more than double the 20% required by the Credit Agreement. BSA-BAMER’s liquidity position has improved in terms of this metric, increasing from 36.2% at September 30, 2009 (the date the Bank first began reporting this ratio to OPIC).

VIII. Country and Market Analysis

Since the military coup in 2009, ousting former president Manuel Zelaya, Honduras held its second successful general election in November 2013, bringing President Juan Orlando Hernandez into power with a newly formed party, the right-of-center National Party (“NP”). The government’s priorities include financial reforms, addressing the high level of crime and corruption, and improving relations with its neighboring countries. However, the NP faces challenges since no one party dominates the 127-seat Congress, and needs cross-party support to pass reforms. The government still faces the lack of economic reforms, crime and corruption issues. Two main issues for the president include improving the role of the military police (to improve security) and constitutional reform (to permit for presidential re-election).

After a sharp economic downturn in 2009 due to the international financial crisis and domestic political crisis, Honduras experienced moderate economic growth in 2010-2012. In 2012, GDP growth was 4%, inflation was 5.7%, and foreign direct investment recovered to the pre-2009 levels. For 2013 and 2014, GDP was 2.8% and 3.1%, respectively. GDP growth is expected to be strong in 2015, continued to be driven primarily by remittances and lower oil prices (allowing for improved internal consumer spending, as well as higher export demand, primarily from the US) and higher FDI.

The country still lacks macroeconomic reforms to improve the financial system and energy sector, lacks diversification of its economic activities to improve its export sector and become less dependent on the U.S economy. Rising crime and violence continue to hurt the investment and business environment.

Honduras is one of the least developed countries in Latin America, and agriculture continues to be the most important economic activity, contributing to about 15% of GDP. Since, 2004, Honduras has received financial support from the IMF, the Paris Club, and other developed nations because of its improvements in macroeconomic policies and poverty reduction efforts. In December 2014, the IMF a standby credit facility for $188.6 million to support macroeconomic stability. The country also relies heavily on remittances, which also represent about 15% of GDP.

On June 7, 2012, Standard & Poor's raised its long-term foreign and local-currency sovereign credit ratings on Honduras to 'B+' (stable) from 'B' and affirmed the 'B' short-term foreign and local currency ratings. The upgrade was based on the improved environment and progress in fiscal and pension reform, as well as gradual exchange rate flexibility. Subsequently, on February 27, 2013 S&P lowered Honduras’ outlook from “stable” to “negative”, citing continued deterioration in the country’s economic stability. On August 7, 2013, S&P lowered Honduras’ credit rating to ‘B’/“stable” to reflect the country’s rising debt burden (roughly 6% of GDP) and its limited ability to fund deficit spending.

4 Reported by the Borrower and calculated per terms of Credit Agreement.

VIII. Collateral

OPIC and Citibank’s loans are secured by a portfolio of residential mortgage loans and corporate loans that have been pledged to a trust for the benefit of the Lenders. At the beginning of each month, the value of the pool of mortgages must equal at least 120% of the outstanding amount of the loan balances. All loans must be classified as “Category A”. Per the December 31, 2014 monthly report, the value in this pool of mortgages is $ 33.45 million, equivalent to 182% of the combined OPIC-Citibank outstanding loan balance of $18.4 million as of that date. Should any loan in the pool drop below the “A” classification, it must be substituted with another loan or loans that qualify.

Attachments

Attachment 1 – Project and loan information.

Attachment 2 – BSA-BAMER Honduras spreads.

Reviewed By: _________________________ Date: ____________________ Managing Director, AM/OCFO

Attachment 1

PROJECT AND LOAN INFORMATION

PROJECT

Started Operating: March 2009

Principal Markets: Honduras

Off-take Arrangements: None

Sponsor: Banco de Bogota (no US Sponsor post GE Capital sale of shares)

Total Sponsor Exposure:

Banco BSA Costa Rica $33.1MM Banco BSA Guatemala $6.3MM Banco BSA Honduras $16.5MM Banco BSA Nicaragua $7.0MM Banco BSA Panama $3.8MM Total Outstanding $66.8MM (as of 6/15/2015)

LOAN

Numbers: 522-09-538-IG and 522-09-539-IG

Committed Amount: 522-09-538-IG - $20 million 522-09-539-IG - $17.5 million Total: $37.5 million

Undisbursed: none

Outstanding Balance: 522-09-538-IG - $14.0 million 522-09-539-IG - $7.2 million Total: $21.2 million (as of 4/16/2015)

Canceled: $0 Written Off: $0

Term: Final maturity – Tranches A: March 15, 2024; Tranche B: March 15, 2017

Repayment Schedule: Tranches A: 57 equal quarterly installments ($350,877 in principal) each

March 15, June 15, September 15, and December 15.

Tranche B: 29 equal quarterly installments ($603,448 in principal) each

March 15, June 15, September 15, and December 15.

Both Tranches were interest only for 12 months, ending March 15, 2010.

Next Payment Date: December 15, 2015

Interest Rate: Floating based on 91-day Treasury Bill

OPIC Spread: 522-09-538-IG - 2.85%

522-09-539-IG – 2.75%

OPIC Maintenance Fee: $5,000 p.a. for both tranches

OPIC Insurance: None

Other Lenders: Citibank Tranche C of this loan is fully repaid as of 3/15/2014