Banco GyT Project The proposed investment consists of the subscription of Tier I capital in a locally-owned Guatemalan bank through an IFC injection of up to $68 million in preferred shares to be issued by Banco GyT Continental S.A. (Banco GyT or the client).  

Like all other Guatemalan banks, Banco GyT has a portion of subordinated debt, which the client and the regulatory authorities consider as Tier II capital and include it in the calculation of regulatory capital ratios.  However, when rating agencies assess a banks adjusted risk capital, this subordinated debt is currently not being included as Tier I capital, leading to substantial undercapitalized ratios and excessive penalization of the clients credit rating.  Based on preliminary discussions between the client, IFC and the rating agencies, preferred shares can be considered as Tier I capital and, consequently, improve capitalization ratios.  Currently, the clients Tier I/Total Assets ratio, is 6% (as of October 2007). With the proposed investment, Banco GyTs ratio would increase to above 8.35%. 

Given its closed shareholding structure and its centralized decision making, the client does not prefer to open up its common shareholding to external investors at this stage and prefers to materialize this capital injection through preferred shares. The objective of IFCs proposed investment in Banco GyT will address some of the Guatemalan banking sectors deficiencies, thereby creating the following development impacts:

- Recapitalization:  

One of the financial sectors most pressing needs is the infusion of fresh Tier I capital into the system.  The proposed investment will help recapitalize a major player and will go a long way to improve the systems solvency issues.

- Restoring the Banking Sectors Credibility:  

The need for intervention of Bancomer and Bancafé put the regulatory authorities in an awkward position and has partly undermined the sectors credibility, even though the authorities managed to reduce wide spread damage.  The fact that a foreign institution will invest in Tier I capital will enhance Banco GyTs credibility and bolster the sectors overall image.

- Reducing Fragmentation: 

Given its size, Guatemalas banking industry has too many players, and they therefore have not been able to reach the crucial size to achieve efficiency levels common in this sector in other countries.  The investment in a leading players Tier I capital will equip it to grow its balance sheet and have the means to acquire smaller competitors in the domestic market.  Thus, the proposed investment will contribute to further consolidation.

- South-to-South Investments:  

As part of its strategic plan, Banco GyT intends to further expand into neighboring countries through merger and acquisitions.  A stronger capital base will facilitate the implementation of the clients expansion.

- Access to Finance:  

Guatemala is one of the most under-banked markets in Latin America, but banks with economies of scale and higher efficiencies are better prepared to provide access to financial services to underserved regions.  While certain areas of Guatemalas urban centers are well penetrated, large swaths of rural areas are poorly or not at all served.  A strong capital base will provide the means to a player with a strong market presence to reach the unbanked.