““Highly-Rated” Public Banks Around The World: Highly-Rated” Public Banks Around The World: What Makes Them Stand Out?What Makes Them Stand Out?

- - FIRA’s ExperienceFIRA’s Experience - -

February 25, 2005February 25, 2005

Presentation prepared by:

Francisco Meré

1. Evolution to success

2. Case studies on financial innovation

3. Final remarks

Agenda

• FIRA´s loan portfolio was heavily subsidized

• Original assumption was that enhanced funding would encourage an increase in credit to farming

• Loans were concentrated in the primary sector (commodities)

FIRA is a second-tier trust fund created by the Mexican government within the Central Bank 50 years ago

• Bank Privatization

• Financial Market Liberalization

• Market Oriented Policies in Ag.

• Tequila crisis

• Lending to productive sector practically disappeared

• FIRA ´s products not attractive to banks

• Agricultural commodities challenged by trade liberalization, thus risk perception increased

• From development banking to banking development

1954 – Early 1990

Early 1990 - 1998

1999 - Today

Restructuring and a turnaround strategy were needed in order to survive in a new environment

Value-added products

Client-driven

Evolution in focus

Agriculture Fin. Sys.dev.

From market players to market makers

Investment banking

Corporate governance realignment

•Downsizing

•Process-driven design

•Performance-based reward

•Internal control fostering

•Staff professionalization

Subsidy-based operation

Product-driven

A comprehensive approach was used for implementing the new model

Products Channels Organization

• Elimination of red-tape

• Value added for clients (users & distribution network)

• Improved targeting of market-friendly subsidies

• Smart subsidies

• Markets development

• Banking diversification

• New intermediaries

• Strategic alliances

• Reorganization to eliminate conflicts of interest

• Adoption of a process-oriented organization

• Corporate Governance & Internal Control strengthening

• Performance-based employee rewards

• Cost-cutting strategy

Loan Portfolio Composition(Percentage)

NBFI3%

BBVA16%

HSBC14%

Bajío14%

Santander Serfin7%

Scotiabank Inverlat7% Other Banks

20%

Banorte19%

3 non bank banks

2 Factoring companies

4 Leasing companies

1 Warehouse

-486,0

588,0638,0

324,0

112,020,0

-164,0

-600

-400

-200

0

200

400

600

800

1998 1999 2000 2001 2002 2003 2004

4.124

3.327 2.649

2.928 2.185

1.800 1.632

1.848

2.265 2.234

1.385

1.018846

824

791

599

541

0

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

With our new approach, FIRA has achieved higher private sector engagement (double digit growth for six consecutive years)

Commercial banking Lending and Lending to low income producers

Change in credit stock by commercial banks using FIRA´s funds

CAGR 16.7% 1998-2004

CAGR 17% 1998-2004

Interest rate subsidies Million USD

2001 2002 2003 2004

Subsidies 82 83 54 50

As a % of subsidized loan portfolio

5.4 4.8 2.7 2.3

As a % of total loan portfolio

3.5 3.2 1.9 1.4

Source: FIRA. All figures in million usd

1. Evolution to success

2. Case studies on financial innovation

3. Final remarks

Agenda

Gradual phase-out of interest rate subsidies has been coupled with the development of innovative financial solutions through our new

investment banking practice

Value chain integration

Value creation for participants (income )

Development of analytical capabilities for financial

intermediaries

Financial market development/lower

transation cost

Examples

FIRA’s structured finance model offers value to agribusiness community and supports institutional development in the financial system

Before FIRA’s financial innovation, shrimp producers were using costly suppliers´ credit

Feed companiesFeed companies

Financial schemes before structured credit :

Shrimp producers

Shrimp producers

50% cash 50% 7 month

credit

Ocean GardenOcean Garden

Shrimp producers

Shrimp producers

Feed delivery

Result:

•High borrowing cost to shrimp producers

•Liquidity constraints to OG and suppliers

•Thus limitations to industry growth

Working capital loans

Future delivery of shrimp

Mexico exports US$264.1 million of frozen shrimps per year to the US; this industry employs over 176,000 persons.

• Profiting from successful experiences in other sectors, FIRA designed a securitization of

account receivables (working capital loans for shrimp producers) that was privately placed

by FIRA among the banking sector

• FIRA provided enhancement (with a low VaR) to provide confort to investors

In 2003, FIRA acted as structuring and distribution agent for a structured finance facility that helped to overcome limitation for growth and developed

new financial markets

SPV

INVESTOR

1. Supply agmt.

2. Loan

Transfer of rights

Debt issueFunding and partial enhancement

1. Senior tranche

2. Junior tranche with cash collateral sinking fund

Ships and firms

• Shrimp producers obtained a 30% discount in price of feed (which

accounts for 70% of COGS)

• Suppliers and OG freed-up their balance sheets and reduced their

credit exposure

• A new investment opportunity with low VaR, low transaction cost and

high RAROC was offered to FI

• FIRA contributed to financial system development

Development Financial Institutions are able to foster development with a market approach

• Alliance with world-class partners, with right expertise

• Warehousing sector development

• Creation of risk assessment capabilities in financial sector

• Broad acceptance of structure

• Low VaR linked to price of underlying commodity

• Commodities such as sugar, corn, wheat, sorghum, shrimp and live cattle

• Portfolio has accounted for 10% of total loans

Structuring of an ABS financing mechanism for commodity inventory financing has been a key factor for financial innovation as well as for market

and institutional development

ServicerRepo of CD Other Investors

(Rabobank, Deutsche bank)

Portfolio sale

Mexican Banks

Credit derivativeOTC hedge

Warehouse company

FIRA’s incursion in the derivatives market allows it to offer market risk hedging products to small producers and to improve FIRA’s portfolio yields

Source: FIRA

• FIRA trades in the OTC market interest rate swaps in MXN to hedge risk in fixed interest rate lending and cross currency swaps to synthetically fund its USD credit portfolio

• There is not additional risk in FIRA’s balance sheet because all derivatives positions are matched by FIRA’s credits disbursed

• Both programs have allowed to reduce subsidies and to generate profitability through derivatives operations

• Gives low income farmers access to sophisticated financial instruments

Saldo de posición de derivados en MX. PS.(fin de mes)

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Outstanding book value in Mx. Ps.(End of month)

Saldo de posición de derivados en USD(fin de mes)

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1. Evolution to success

2. Case studies on financial innovation

3. Final remarks

Agenda

FIRA´s new activity aims to solve market failures/imperfections with a market approach and a clear vision of financial market development

• FIRA evolved from a traditional development credit institution to a

financial innovation entity that creates value for the agricultural sector

and develops ag. financial markets

• Through a market development approach, the small producers are able

to access sophisticated financial instruments, such as interest rate risk

hedging

• FIRA’s innovative approach has allowed it to growth at a double-digit

digit rate, which is significantly higher than agriculture GDP growth

• FIRA has contributed to increase the number of FI serving the

agribusiness sector

Leading Business Magazine in Mexico

"Formidable Organization” January 2004

“Innovative Enterprise”November 2004

Credit Bank for the Reconstruction

Latin American Association of Development Financial Institutions

The World Bank

Leading Business School in Latin America

FIRA is considered around the globe as…

“The Best Partner in Business”May 2004

“Strong and Dynamic Organization”April 2004

“An example of best practices in financial

development institutions”September 2004

“Organization guided by financial innovation”

November 2004

www.fira.gob.mx

01 800 800 FIRA