DAVIVIENDA I

completed

Davivienda has approached IFC for a subordinated debt (tier 2 capital) enhancement facility to help the bank grow and diversify its operations following Colombia''s financial sector crisis. While the bank is adequately capitalized today (15.8% at December 31, 2001) its management recognizes the need to strengthen its capital for the following reasons:Davivienda intends to grow its assets 4-5% annually in real terms over the next five years thereby increasing its capital needs. In addition to growing its asset base, the bank is trying to diversity its assets and loan portfolio to achieve the following two goals.First, to become the "bank for the family". To this end, Davivienda intends to increase its consumer and auto loan portfolio while maintaining a strong presence in the mortgage industry. These new lines of business are expected to have higher capital requirements.Second, portfolio diversification is a means to improve the significant maturity and interest rate mismatches which resulted after the regulated change in mortgage indexation (mortgage loans are long term and indexed to inflation while liabilities are short term with market based rates). By extending the duration of the maturities, IFC will also contribute to reducing this mismatch on the liabilities side.Davivienda expects to take additional provisions in the future to cover for market, operational, and legal risks according to new regulations from the Banking Superintendence which will be according to Basel II.The proposed tier two equity facility would be the first of its kind to be implemented in Colombia since the regulations were established in August 2001. Based on IFC''s legal and financial due diligence, the investment will be structured to ensure that it achieves the goals of 1) qualifying for tier two capital and 2) having the ability to be replicated in the financial system.This project will also have the following impacts:- Strengthen Colombian banking system after the recent economic recession;- Develop Colombian capital markets by providing a new type of financial instrument.